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Can City Office REIT Deliver The Goods?

Jul. 11, 2018 7:00 AM ETCity Office REIT, Inc. (CIO)28 Comments


  • City Office is one of our New Money portfolio picks.
  • I am becoming more convinced that the company is a gem to own.
  • We are maintaining our STRONG BUY recommendation and we believe that as CIO’s dividend becomes safer (payout ratio under 100%) and the valuation gap should tighten.

My first article on small-cap REIT, City Office (NYSE:CIO) was back in June 2016, and my initial research concluded,

“…bargains are sometimes inexpensive because they have no shelf space…As CIO continues to grow, we believe the diversification will enhance the safety of the dividend and the company will be able to generate dividend growth.”

Recognizing shares were cheap, I made a “modest” investment in CIO shares, hoping to build confidence over a few quarters of results. Then in February 2018 CIO shares took a nose dive, and I subsequently increased my exposure, as I explained:

“The lack of Wall Street coverage and investor interest can result in shares remaining undervalued - especially in down markets - for extended periods of time. I purposely designed my Small Cap REIT portfolio with a clear mission of reducing volatility (through diversification) and to generate better than average risk-adjusted returns. I decided to upgraded CIO to a STRONG BUY suggesting that “investors could see outsized returns”.

A screenshot of a cell phone Description generated with high confidence

As my newsletter (Forbes Real Estate) subscribers know, “we added a new portfolio in May 2018 consisting of only STRONG BUY picks. Recognizing that the portfolio is designed for deeply-discounted REITs, we are targeting annualized returns of 25% or greater.”

The top performers in June were Kimco Realty (NYSE:KIM), with a total return of 14.1%, Brixmor Property Group (NYSE:BRX), gaining 14.0%, Tanger Factory Outlet Centers (NYSE:SKT), up 12.4% and Kite Realty Group (NYSE:KRG), returning 10.7%. Their performance helped to boost the portfolio results for the month—gaining 4.6% in June.

City Office is one of our New Money portfolio picks and this means that we are monitoring shares closely in hopes of owning this outlier, betting that shares could return 25% in 12 months. Since inception, the New Money Portfolio has returned 10.9%, on target to achieve our targeted results, and hopefully City Office will

This article was written by

Brad Thomas profile picture

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 175,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) iREIT on Alpha (Seeking Alpha), and (2) The Dividend Kings (Seeking Alpha), and (3) Wide Moat Research. He is also the editor of The Forbes Real Estate Investor

Thomas has also been featured in Barron's, Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. 

He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022 and 2023 (based on page views) and has over 111,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley) and is writing a new book, REITs For Dummies (Wiley/Amazon).  

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College, and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha. To learn more about Brad visit HERE.

Analyst’s Disclosure: I am/we are long ACC, AVB, BHR, BPY, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CTRE, CUBE, DEA, DLR, DOC, EPR, EQIX, EXR, FRT, GEO, GMRE, GPT, HASI, HT, HTA, INN, IRET, IRM, JCAP, KIM, KRG, LADR, LAND, LMRK, LTC, MNR, NNN, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, PTTTS, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, TRTX, UBA, UMH, UNIT, VER, VNO, VNQ, VTR, WPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (28)

Brad, CIO Investor Relations confirmed currently no assets in Austin. Also liked the suburban Las Colinas submarket but had been unable to obtain properties that fit their valuation model. Thanks.
13 Jul. 2018
Brad, please publish your sell and trim recommendations frequently else we run out of cash.
papaone profile picture
Priced at a significant premium to values.
I think I've said this before, but I'll say it again. If CIO is in all these desirable locations, as they seem to be, in a growing economy, why is the occupancy rate only 88%? That is a bigger red flag for me than the non-covered dividend. Even if the occupancy rate reaches the predicted 93% max, will this really be enough to cover the dividend? Finally, I wonder if this company is sufficiently seasoned to produce the big returns that everyone predicts, at least for the moment.
You have an typo ("despite seven years of remaining term") regarding the Scottsdale transaction, although a sentence or two earlier you had specified that it was a 70 year ground lease.

For this transaction, it's not really relevant since it is so far off, but it did get me to thinking- what happens when you reach the end of the ground lease? If the lessee and the land owner are not able to come to agreement, does the building simply revert to lessor? Is there some type of language in the lease to protect the lessee initial investment to build the structure? Or because the very long expiration of ground leases, do the parties simply discount the issue? In other words are there some great grandchildren that could really benefit from great grandpa's shrewd negotiation?
TigerMoney profile picture
Was lucky enough to grab a few shares at $10.15. Sure wish I had bought more....!!

Good work
I found 2525 McKinnon, which is an 8 story office building in Uptown, just north across Woodall Rogers expressway from downtown Dallas but did not see Austin office assets on CIO's website.
I also querried CIO's IR.

Thanks for the excellent updated analysis of CIO. zI got in a bit early in 4th qtr 2017 @$12.80 and nibbled
additinal shares @ $10.65.
I also like the CIO assets and mid-market targets.
Dane also covered recently. I was unable to locate the Dallas highrise and downtown Austin building
after reviwing the recent analysis on SA. Are both the Dallas Uptown and Austin downtown (on or near Congress Ave. still in
CIO's office portfolio? Thanks.
r_bart profile picture
Thank you for another great article, Brad! Long CIO - among other excellent long positions based on your advice and others from SA!
arson profile picture
dittodat! I'm also long STAG due to Brad's and others' analysis. Good places to hang some cash-heavy hats until I have more reasons to worry about swapping out to better REITS, or into different sectors. For now, it fits in nicely, adding to my diversification since I don't have competing positions in this REIT style. Up 2%.
mjcx1spt profile picture
Brad is right-on with CIO. But the "action" is not in the numbers -which are good- but the fact that the next decades of growth are in these medium/moterate/emerging regions not Boston, NYC, LA, or SF... population growth and quality- of- life are growing Boise, San Diego, out-side Denver (Boulder, Golden) etc... And these places what to grow!!!
FYI San Diego is one of the largest cities in the country, densely populated, bad traffic, great weather.
Preserve & Prosper profile picture
The small size adds to the risk level but the high current yield makes up for that. it looks like an attractive REIT to won, thanks for the report. I needed something to replace STAG after I sold it recently.
Bought CIO a while back on Brad’s recommendation. So far, it has worked out great.
I thought AFFO would be higher than FFO... After Adj for non cash charges... What am I missing?
Guy Ausmus profile picture
Look at these adjustments to FFO: Net recurring straight line rent adjustment, Recurring CAPEX, and Amortization of above/(below) market leases. For the last 5 quarters, the adjustments have resulted in a reduction of FFO (to get to AFFO).

Will be VERY interested to see how CIO pulls the rabbit out of the hat for AFFO > than dividends. Hard to see how that happens if you really do the math.
Brad Thomas profile picture
storkdoc - One of the reasons that I decided to write this article is in anticipation that I am visiting San Diego soon. I want to spend time there looking at the portfolio there (and in Arizona). I;m not concerned with a recession short-term (seekingalpha.com/...). Yes, trade wars is another topic, that I hope to cover soon....All the best. Brad
How would a recession impact their markets?

I've never considered buying an office REIT during the latter stages of an economic expansion.

Trump's trade war provides yet another headwind.
Brad Thomas profile picture
Bob Williamson - correct. Thanks for reading & commenting. Brad
Just for me to be clear, although based in Vancouver, Canada, CIO is a Maryland corporation (according to their website). So no tax issues for owners of US IRAs -- correct?
Why would there be tax issues for US IRA’s if it were Canadian?
BT - Why do you think the preferred yields less than the common?
Brad Thomas profile picture
Xwords59 - The answer is more of a function of the returns preferred buyers seek. In exchange for a liquidation priority ahead of the common, preferred holders generally take a lower return. Many of CIO's preferred holders are large institutions and the lower yield is typical for their mandate. This has been the case since the company issued the preferred in 2016 at a lower coupon than the common. Hope this helps. All the best. Brad
CIO-A at 24 is a decent buy. Diversification in the same security.
It all depends on the ratio of preferred equity to common.

If the capitalization includes very little preferred and lots of common, the preferred shareholders will still get theirs if the common is slashed.

If there's a substantial amount of preferred, the preferred is at risk if the common is eliminated.

It also matters if the preferred is cumulative or noncumulative.
Brad, I have owned this for nearly 2 years now. I agree that this a good buy and that we should see that reflected in the 4th quarter or 1st quarter 2019. They need to execute their planned acquisitions over the 90 days for that to happen however. Thanks for the good write-up.
Brad Thomas profile picture
Big Bad Bulls - Thanks for reading, and all the best. Brad
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