City Office REIT
(CIO, $13.49): “Previous Patience has Begun to Pay Off”
By: Michael
Kashian, 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:
·
CIO is a real estate investment trust
headquartered in Vancouver Canada which holds 5.9 million square feet of office
space in primarily the Southern and Western United States.
·
In the past 25 months It has grown 2.6
million square feet in additional 14 buildings since its induction into the
fund.
·
CIO has followed through on its driver of
potential growth by consistently growing its top line 38% over the past four
years, and it on pace to grow at a similar rate for 2019.
·
Dividends have remained constant for the
past two years.
Key Items:
CIO is, “focused on acquiring, owning
and operating high-quality office properties for lease to a stable and diverse
tenant base.” (10-Q 11-1-2019) This can be seen most vividly in their sales.
Since March of 2018, they have only sold three properties, netting a total gain
of $47.5 million between them. With 91.2% of their 66 buildings being leased,
their business strategy of purchases and leasing has grown their market share
and top line. As well, in the past two years, their assets have increased
22.75% and 35.52% in 2017 and 2018 respectively. They have also managed to do
this while keeping their debt to asset ratio at a stable 60%, 30% below
industry average, leaving them further room to lever their business.
CIO has acquired six new properties in the nine months
ending in September, accumulating in 131 million USD through the issuance of
22.5 million in debt. It can be expected in the years to come this trend will
continue as CIO expands its control in the South and West United States and
moves into new regions. Since the original write up, CIO has purchased properties
for the first time in Seattle, and, while there are no plans of new
acquisitions for the rest of 2019, administration is focused on filling up
existing buildings.
What has the stock done
lately?
Due to their continuing success the REIT met earnings
expectations, landing at an EPS of $0.07. This has resulted in their stock
remaining around their current price of $13.49, up $1.61 over the past 6 months,
and up $0.45 since its induction into the fund. The stock’s 52-week range of $9.73
- $14.50 shows volatility, but it can be explained by a Q4 2018 earnings miss
and recent FFO misses. As its stands today, investors seem confident in the
Vancouver based real estate firm, but Q4 performance will be key to look at to
see if they can fill vacancies in their 66 properties.
Past Year Performance
As stated earlier, the stock has done
well in the past year, up 19.9%. However, it is still well below its intrinsic
value of $16.77 as calculated two years ago. Earnings misses paired will
overall questions about the firm’s ability to succeed in the market have driven
the stock down, but recent successes have led to dramatic increases in price.
CIO has seen a growing source of revenue, a bump in net income, and a constant
dividend in the past 24 months, reaffirming a sense of stability in investors –
something the firm desperately needs.
Source: FactSet
My Takeaway
City Office REIT was pitched to the AIM
International Portfolio with a target price of $16.77 on October 6, 2017 with
22% upside, and while they have not reached that yet, they are showing signs of
fulfilling their potential very soon. Lower interest rates have turned one of
their risks into a driver, and they have utilized their drivers to the best of
their ability, doubling their properties in the previous 25 months. Q4 will be
key to watch, to see if they are able to keep all 66 of their buildings at an acceptable
vacancy rate, something that was stressed heavily in their Q3 report. As a
result, I am recommending that the AIM International Portfolio hold City Office
REIT as of 11/3/19.
Source: FactSet
