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By: Michael Healy, AIM student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
City Office REIT, Inc. (NYSE: CIO) owns
and operates properties in the Southern and Western United States. As their
name implies, they are targeting quality office properties in mid-sized
metropolitan communities.
•
CIO is domiciled in Canada and falls under the international fund despite
deriving all of its revenues in the United States.
•
CIO has continued their active pursuit of office buildings, adding 1.6 million
square feet since the stock was pitched in early October 2017. They
successfully closed a major deal securing new property in San Diego in late
October.
•
CIO has an experienced management team. While their stock IPO’d only about four
years ago, each of the three head executives have 20 years of experience in the
industry minimum. The board includes the CEO and 5 other independent board
members.
•
In the AIM International portfolio, CIO has been a laggard. It is trading below
the price we purchased it for in October.
•
CIO’s original thesis has yet to play out, but it’s still valid. Discussed
below are reasons why the argument is still work and why CIO deserves more time
to experience the growth projected in October.
Key points: City Office REIT has several unique
advantages that other REITs don’t have. For one, CIO’s smaller size means it
has to target smaller properties in the $25 million to $100 million range. In
that area, especially for offices, CIO has found that there is less competition
from larger institutional investors. Additionally, CIO has a wise real estate
investing strategy that makes perfect sense, but isn’t taken advantage of by
everyone in the industry. CIO has strategically picked its metropolitan areas
based on population growth rates and job growth. Targeting healthy markets has
meant CIO seeking properties in cities such as Dallas, Phoenix, Denver and
Tampa. 71% of their portfolio comes from those four cities. The projected
employment growth across their buildings’ cities is 8%, above the national
average of 4.4%, and the population growth for their areas is estimated at 7.1%
through 2023, while the national average is 3.7%.
City
Office REIT sold a property in Q1 2018. Washington Group Plaza in Boise, ID was
sold for $86.5 million, representing an internal rate of return of 22% and
producing a gain of $47.0 million. CIO’s three recent dispositions have total
generated gains over $70 million.
That’s
not where CIO is stopping. The company just acquired Pima Center in Scottsdale,
Arizona. The property is 99% leased already and was purchased for $56.5
million. CIO is also in the process of renovating Park Tower in Tampa, Florida.
CIO has already successfully purchased the property and managed to raise rents
approximately 20% higher than the previous owner. CIO rents to highly credible
tenants including large corporations with adequate capital and government
agencies.
What has the stock done
lately?
The
stock was pitched near it’s all-time high trading price. After we purchased
CIO, the stock price decreased slightly. A more rapid decrease occurred in
February 2018, when CIO released and missed earnings. However, the chairman,
CEO and CFO have bought more shares of the company indicating confidence. This
combined with the announcement of the newly acquired Pima Center have helped
the stock start to rebound.
Source: FactSet
My Takeaway
I
anticipate the original thesis of CIO to play out. They are still trading below
their peers in terms of P/FFO. Additionally, the management team is very
strong. The way they are actively targeting growing markets, but smaller
properties seems to be something other real estate trusts could replicate, but
still haven’t for whatever reason. CIO has made strong gains on the sale of
their properties and I’d expect this to continue with real estate values
rising. Overall, the stock would still be a buy recommendation.
