City Office REIT, Inc. (CIO)

Executive Summary / Key Takeaways

• The Merger as Liquidity Lifeline: City Office REIT's pending $7.00 per share cash acquisition by MCME Carell Holdings represents more than a take-private transaction—it is the culmination of a deliberate three-year strategic retreat from challenged markets, reducing debt from $647 million to $398 million while shrinking the portfolio by over 1 million square feet. The 0.6% spread to the current $6.96 stock price suggests the market views completion as highly probable, leaving minimal upside if the deal closes but significant downside risk if it fails.

• Operational Turnaround Meets Financial Distress: Despite sector headwinds, CIO achieved a 35% increase in leasing activity in 2024 (806,000 square feet) and generated positive same-store cash NOI growth of 4.4% in Q1 2025, driven by Sun Belt market outperformance. However, this operational momentum collides with an event of default at the Intellicenter property in October 2025 and a 54% reduction in the corporate credit facility, creating a liquidity vise that makes the merger appear less strategic than necessary.

• Sun Belt Concentration: Asset or Anchor?: The company's portfolio optimization has concentrated 84.5% occupancy and 75% of asset value in high-growth Sun Belt markets like Raleigh, Phoenix, and Orlando. While this positions CIO to capture above-average rent growth and tenant demand, it also leaves the company vulnerable to localized economic shocks and limits diversification when balance sheet flexibility is most needed.

• The Oksenholt Opposition Wildcard: Public criticism from Oksenholt Capital Management, which has called for new leadership and strategic restructuring, introduces merger completion risk. If the opposition gains traction or reveals superior alternatives, the board's decision to accept $7.00 per share could face legal challenges, potentially delaying or derailing the transaction at a time when the company can ill afford uncertainty.

• Critical Variables for Investors: The investment thesis hinges on two factors: whether the merger closes by Q4 2025 as planned, and whether CIO's operational improvements (leasing momentum, spec suite success, same-store NOI growth) are sufficient to support the company's standalone value above $7.00 per share if the deal collapses. The Intellicenter default and reduced credit facility suggest standalone survival would require additional asset sales or dilutive capital raises.

Setting the Scene: A Sun Belt Specialist in Retreat Mode

City Office REIT, founded in 2013 and headquartered in Maryland, is not a typical office REIT story. The company began as a classic roll-up strategy, acquiring well-located office properties primarily in Sun Belt markets characterized by population growth and above-average employment forecasts. The business model is straightforward: acquire, own, and operate office properties leased to a stable and diverse tenant base, capturing rent escalations and occupancy gains in high-growth geographies.

What makes CIO's story distinctive today is how dramatically that model has been inverted. Since 2021, the company has shifted from acquisition mode to active portfolio pruning, selling or transferring six Phoenix properties for $266 million, disposing of its Denver Superior Pointe asset for $12 million, and handing back its Portland Cascade Station property to a lender to eliminate $21 million in debt. This is not growth through acquisition; it is value extraction through strategic retreat.

The company makes money through rental income from full-service gross and net leases, with a portfolio that has been deliberately concentrated into what management calls "18-hour cities"—markets like Raleigh, Orlando, and Dallas that offer lower costs and higher quality of life than traditional gateway cities. As of September 30, 2025, CIO reported 84.5% portfolio occupancy, a slight improvement from 83.4% a year prior, but this headline number masks significant variance: Sun Belt properties are performing materially better than legacy assets in challenged markets like Portland, which management dismisses as a "tiny asset in a really tough market" where they are "not looking to invest capital."

This geographic bifration is central to understanding CIO's competitive position. While larger peers like Brandywine Realty Trust (BDN) maintain significant Northeast exposure and Highwoods Properties (HIW) concentrates on Southeast campuses, CIO's Sun Belt focus should theoretically command a premium valuation multiple. However, the company's small scale—approximately 5.8 million net rentable square feet—creates a permanent cost disadvantage. Operating expenses per square foot run 10-15% higher than at 20-million-square-foot peers like Cousins Properties (CUZ) or Piedmont Office Realty Trust (PDM), erasing the pricing power that geographic focus should provide.

Strategic Transformation: From Portfolio Growth to Balance Sheet Repair

The three-year strategic pivot that began in 2021 has fundamentally altered CIO's risk profile. The company has constructed 231,000 square feet of modern spec suites across nine properties, achieving over 75% lease-up rates. These amenity-rich spaces command premium rents and have been instrumental in driving the 5.9% cash rent roll-up on renewals in 2024. This is not passive ownership; it is active asset management designed to create competitive differentiation in a sector where generic Class B space faces obsolescence.

The financial implications of this strategy are stark. Rental and other revenues declined 12% in Q3 2025 to $37.3 million, entirely due to asset dispositions. The six Phoenix property sales alone reduced quarterly revenue by $4.2 million, while the Superior Pointe disposition clipped another $0.8 million. Yet same-store cash NOI grew 4.4% in Q1 2025, with Raleigh's Bloc 83 property contributing the largest gains as signed leases took occupancy. This divergence—shrinking overall revenue but growing same-store profitability—is the hallmark of a portfolio purification play.

The balance sheet repair has been equally aggressive. Total debt fell from $647 million at year-end 2024 to $398 million by September 30, 2025, a 38% reduction in nine months. The company used Phoenix sale proceeds to repay property-level debt and reduce its credit facility from $325 million to $150 million. While this deleveraging improves long-term solvency, it comes at the cost of financial flexibility. The credit facility maturity was only extended to January 2026 (with a potential further extension to November 2026), and the reduction in available capacity signals lender caution about the office sector generally and CIO's scale specifically.

Financial Performance: Leasing Wins Masked by Portfolio Shrinkage

CIO's financial results present a paradox that directly impacts the risk/reward calculus. On one hand, operational metrics show genuine improvement. The company signed 806,000 square feet of leases in 2024, a 35% increase over 2023, and maintained this momentum with 144,000 square feet in Q1 2025. Cash releasing spreads on renewals reached 8.5% over the trailing twelve months, indicating pricing power in the right submarkets. Occupancy is projected to increase through 2025 as 143,000 square feet of signed leases commence, representing 2.7% of the portfolio.

On the other hand, the income statement tells a story of contraction. Segment NOI fell 12% in Q3 2025 to $21.7 million, mirroring the revenue decline. For the nine months ended September 2025, NOI dropped 3% to $73.7 million despite positive same-store trends, because disposed properties contributed zero income while carrying costs remained. General and administrative expenses actually increased 5% to $11.8 million due to higher legal costs—likely related to the merger and Oksenholt opposition—creating operating leverage that works in reverse.

The cash flow statement reveals the strategic tension. Net cash from operating activities declined $11.3 million to $38.7 million for the nine-month period, primarily due to working capital changes and lower net income from dispositions. Meanwhile, investing activities generated $235.8 million in cash (versus using $29.8 million in the prior year) from asset sales, and financing activities consumed $269.1 million in debt repayments. This is a company liquidating assets to repay creditors, not reinvesting in growth.

The dividend tells the same story. With a 363.64% payout ratio and a 5.76% dividend yield, the distribution is clearly unsustainable from earnings. The company is funding dividends through asset sale proceeds—a strategy that has a finite lifespan. When the merger closes, this dividend will likely be eliminated, making the 5.76% yield a mirage for long-term holders.

Technology and Differentiation: Spec Suites as a Competitive Wedge

CIO's attempt to differentiate through property upgrades and spec suite development represents a credible competitive response to remote work headwinds. Since 2021, the company has invested in nine properties, constructing 231,000 square feet of modern, amenity-rich spec suites that are now over 75% leased. These spaces feature smaller floor plates, shared amenities, and turnkey buildouts that appeal to tenants seeking flexibility—a direct counter to the WeWork model that has struggled.

The economic impact is measurable. At the Terraces property in Dallas, a 60,000 square foot lease extension and expansion achieved a 17% rental rate premium on the new space versus the tenant's existing rate. At Greenwood Boulevard in Orlando, a new 66,000 square foot tenant signed a 10-year lease at rates that will backfill a downsizing tenant while extending another 58,000 square feet to 2033, dramatically increasing the property's weighted average lease term.

This strategy directly addresses the competitive threat from co-working operators and remote work trends. While indirect competitors like IWG plc and flexible space providers compete on short-term leases, CIO's spec suites offer a middle ground: professional management, modern amenities, and lease terms that provide stability for landlords and flexibility for tenants. The 48,000 square feet of vacant spec suites as of Q2 2024 were targeted for smaller suite configurations, addressing the market shift toward 10,000-20,000 square foot requirements that now represent the bulk of leasing activity.

However, this differentiation comes at a cost. The company invested approximately $10 million across four renovation projects through September 2024, with $6.4 million already spent. These capital expenditures reduce near-term free cash flow and require high occupancy to generate returns. Larger peers like Cousins Properties, with 20 million square feet and gross margins of 68.2%, can amortize similar investments across a much larger base, achieving better returns on capital. CIO's smaller scale means each renovation dollar must work harder to move the needle.

Competitive Context: Outgunned but Not Outpositioned

CIO's competitive position is defined by a geographic niche that partially compensates for scale disadvantages. In direct comparisons, the company consistently trails larger Sun Belt peers on key financial metrics but leads in market-specific positioning.

Versus Cousins Properties: CUZ's 20 million square feet in Atlanta, Austin, and Charlotte generates mid-single-digit revenue growth and 20.7% operating margins, far exceeding CIO's 19.6% margin on a declining revenue base. CUZ's scale enables materially lower operating costs per square foot—estimated 12-15% below CIO's—creating a permanent cost advantage. However, CIO's pure-play Sun Belt focus avoids CUZ's exposure to slower-growth Atlanta submarkets, and its spec suite strategy is more aggressive than CUZ's traditional build-to-suit approach. The key difference: CUZ wins on financial efficiency, but CIO's portfolio is qualitatively better positioned for migration trends, even if it cannot capture the full economic benefit due to scale.

Versus Highwoods Properties: HIW's 25 million square feet in Raleigh, Nashville, and Atlanta overlaps directly with CIO's core markets. HIW's Q3 2025 occupancy of 88.8% and 26.5% operating margins reflect superior execution and tenant retention. HIW's recent acquisition of CBD Charlotte assets strengthens its Sun Belt concentration while CIO is selling assets. However, CIO's Bloc 83 property in Raleigh has been its strongest same-store NOI contributor, suggesting property-level competition is intense but not insurmountable. HIW's advantage lies in operational leverage; CIO's potential lies in untapped value at specific assets like the City Center redevelopment.

Versus Piedmont Office Realty Trust: PDM's 17 million square feet and record 2.3 million square feet of YTD leasing in 2025 demonstrate superior leasing velocity. PDM's 13.2% operating margins trail CIO's 19.6%, but its revenue growth is positive while CIO's is negative. PDM's ESG-focused tenant appeal and larger tenant base (averaging 50,000 square feet versus CIO's 30,000) provide stability. CIO counters with higher margins on its smaller portfolio and more aggressive asset recycling, but PDM's leasing momentum suggests it is winning the battle for tenant demand in overlapping Dallas and Orlando markets.

Versus Brandywine Realty Trust: BDN's Northeast concentration exposes it to slower recovery markets, while CIO's Sun Belt focus is theoretically advantageous. Yet BDN's 88.8% occupancy and positive same-store NOI growth in Q2 2025 show that scale and diversification matter more than geography alone. BDN's $2.74 billion enterprise value and access to public markets provide capital flexibility that CIO's $661 million enterprise value cannot match. CIO's only competitive edge is its lack of Northeast exposure, but this is insufficient to overcome its balance sheet constraints.

The broader competitive threat comes from indirect players. Industrial REITs like Prologis (PLD) and data center operators like Digital Realty (DLR) are capturing corporate real estate budgets that once flowed to office landlords. As companies shrink office footprints by 8% while growing headcount by 5%, the office sector faces a structural demand deficit. CIO's spec suite strategy is a direct response, but it competes for a shrinking pie against better-capitalized peers and alternative asset classes offering superior growth.

Outlook and Guidance: Management's Optimism Meets Market Reality

Management's guidance for 2025 reflects confidence that operational improvements will translate to financial recovery. The company projects same-store cash NOI growth of 2.5% to 4.5% and expects occupancy to increase toward 85-87% by year-end, driven by 143,000 square feet of signed leases commencing in Q2 and Q3. This outlook is underpinned by what CEO Jamie Farrar calls a "clear turning point" in office sector supply-demand dynamics, with Sun Belt markets leading the recovery at 95% of pre-pandemic leasing volume.

The guidance assumptions are explicit: no additional acquisitions or dispositions beyond the Superior Pointe sale, continued rent growth on renewals, and successful lease-up of spec suites. Management notes that concessions have stabilized at one month of free rent per year of term, and face rents for quality properties continue to grow. The Greenwood Boulevard backfill lease, which will restore occupancy by year-end after a Q2 dip, is presented as evidence that asset-specific execution can overcome market headwinds.

However, the guidance's fragility is evident in the caveats. The occupancy increase depends on zero additional tenant defaults in a sector where 60% of tenants over 10,000 square feet are still evaluating space reductions. The same-store NOI growth target assumes no further interest rate increases, yet the Federal Reserve's November 2025 rate cut was accompanied by "reigned in expectations for future cuts," suggesting the rate environment may not provide the anticipated relief. Most critically, the guidance predates the Intellicenter default and Oksenholt opposition, events that could materially alter the company's ability to execute its plan.

The merger timeline adds another layer of uncertainty. With stockholder approval secured on October 16, 2025, closing is expected in Q4 2025, but remains subject to third-party consents and the absence of uncured loan defaults. If the Intellicenter discussions fail to produce an extension, the resulting default could trigger cross-default provisions across the remaining $398 million debt stack, potentially scuttling the merger and forcing a distressed restructuring.

Risks and Asymmetries: The Thesis Breakpoints

The central risk is binary: merger completion versus standalone survival. If the $7.00 per share deal closes, investors receive a 0.6% premium to the current price and forego any future upside from the operational improvements management has engineered. If the deal fails, the stock likely trades down to $5.00-$5.50 based on the company's reduced scale, ongoing default risk, and limited liquidity.

Merger Completion Risk: The Oksenholt Capital opposition is not merely noise. Their public criticism of leadership and and call for strategic restructuring suggests they may pursue appraisal rights or litigation that delays closing. The merger agreement's condition that no uncured event of default exists creates a direct linkage to the Intellicenter situation. If the lender refuses to extend maturity, the default could provide MCME Carell an exit path, leaving CIO to face its debt load without a buyer.

Liquidity Crisis Risk: The credit facility reduction from $325 million to $150 million represents a 54% cut in available liquidity. Combined with $115 million in variable-rate debt (28.8% of total debt), a 1% increase in SOFR would add $1.2 million in annual interest expense—material for a company that generated only $38.7 million in operating cash flow over nine months. The 71.2% fixed-rate debt provides some protection, but the reduced facility size limits the company's ability to refinance maturing property loans. Greenwood Boulevard and Intellicenter loans both mature in Q4 2025; if the merger fails, CIO must negotiate extensions without the bargaining power of a committed buyer.

Operational Risk: While leasing activity is strong, the WeWork legacy continues to haunt the portfolio. The company took back 25,000 square feet at The Terraces in July 2024 and expects another 28,000 square feet at Bloc 83 in November 2024, with WeWork ultimately leasing 78,000 square feet of "well-utilized space." This represents 1.3% of the portfolio still exposed to a bankrupt tenant's restructuring. More broadly, the 8% reduction in corporate office footprints since COVID, combined with 5% headcount growth, means tenants are using space more efficiently—reducing future expansion demand.

Valuation Risk: The stock trades at 7.92x EV/EBITDA and 1.71x price-to-sales, multiples that appear reasonable for an office REIT. However, the -74.21% profit margin and 363.64% payout ratio indicate these metrics are distorted by one-time items and unsustainable distributions. On a forward basis, if the merger fails and NOI continues declining, the EBITDA multiple would expand dramatically, making the current valuation a mirage. Peers like CUZ trade at 12.6x EV/EBITDA with positive earnings, suggesting CIO's discount is deserved.

Valuation Context: The $7.00 Question

At $6.96 per share, CIO trades at a 0.6% discount to the $7.00 merger price, indicating high market confidence in deal completion. The valuation metrics reflect a company in transition:

• Enterprise Value: $661.08 million, down from over $900 million pre-disposition, reflecting the shrunken portfolio
• EV/Revenue: 4.04x, below the 5.75-7.86x range of Sun Belt peers PDM, CUZ, and HIW, suggesting the market discounts CIO's smaller scale and higher risk
• EV/EBITDA: 7.92x, below the 12.6-17.9x peer range, but this is misleading given declining EBITDA and one-time impairment charges
• Price/Book: 0.56x, indicating the market values the company at a 44% discount to stated book value, likely reflecting concerns about additional impairments
• Dividend Yield: 5.76% is unsustainable given the 363.64% payout ratio and will likely be eliminated post-merger

The merger valuation of $1.1 billion enterprise value implies a 6.4x multiple on annualized Q3 2025 revenue of $171.1 million, a modest discount to the 6.5-7.0x multiples seen in recent office REIT take-privates. However, this comparison is flawed because those transactions involved growing portfolios, not shrinking ones. The more relevant benchmark is liquidation value: the Phoenix portfolio sold for $266 million (approximately $180 per square foot).

This suggests the merger price may undervalue the remaining assets, particularly the unencumbered properties like Bloc 83 and City Center, where management has discussed placing debt at 275-300 basis point spreads over the reference rate. If these assets could support $100 million in financing at current market terms, the implied value per share could be $8.00-$8.50, making the $7.00 price appear opportunistic.

Conclusion: The Merger as Necessary Exit

City Office REIT's story is one of successful operational adaptation amidst financial necessity. The company has executed a textbook portfolio purification, selling non-core assets, reducing debt by 38%, and concentrating its value in high-growth Sun Belt markets where leasing momentum is tangible. The 806,000 square feet of leases signed in 2024 and 4.4% same-store NOI growth in Q1 2025 demonstrate that management's asset-level strategy is working.

However, this operational success has not translated to financial stability. The Intellicenter default, 54% reduction in credit facility capacity, and unsustainable dividend payout reveal a company that has run out of runway. The $7.00 merger price may represent fair value for a buyer who can provide capital and scale, but it likely undervalues the standalone potential of the purified portfolio. The 0.6% spread to the current stock price offers no margin of safety for investors, while the downside if the deal fails could be 20-30% given the liquidity constraints.

For investors, the critical variables are binary: merger completion and standalone solvency. If MCME Carell closes the deal, shareholders receive $7.00 and the story ends. If the deal fails due to the Intellicenter default, Oksenholt opposition, or financing issues, CIO faces a distressed restructuring that would likely wipe out equity value. The operational improvements, while real, are insufficient to overcome the balance sheet fragility. In this context, the merger is not a strategic choice but a necessary exit—and at $7.00 per share, it may be the only path that preserves any value for common shareholders.