BC Business
City Office REIT owns six million square feet of downtown and suburban office space in second-tier cities in the U.S. South and West including Dallas, Denver, Orlando and Portland. Occupancy in the first quarter of this year was 85 percent—not terrible, given the state of the industry.
A City Office-owned building in Dallas
The stock: As the saying goes, it’s darkest before the dawn. And boy, is it dark in the shadow of downtown office towers these days. With employees still reluctant to come into the shared workplace, post-pandemic, and the ongoing churn in mortgage maturities pushing borrowing costs to the sky, owners of office space are in survival mode. In downtown Los Angeles, where the vacancy rate has hit 30 percent, almost all of the three dozen largest buildings are underwater on their loans, according to broker Colliers International. But for those with a contrarian streak, now might be a time to pick up a pied a terre for the long haul while they’re cheap. Do we really expect employers to continue operating remotely forever? From this perspective, one bargain landlord worth a look might be Vancouver-based City Office REIT (NYSE:CIO).
The drivers: City Office owns 6,000,000 sq ft of downtown and suburban office space in second-tier cities in the U.S. South and West, including Dallas, Denver, Orlando and Portland. Occupancy in the first quarter of this year was 85 percent—not terrible, given the state of the industry. During the quarter, the real estate investment trust sewed up 120,000 sq ft with new or renewed leases and negotiated interest-rate swaps that effectively fixed more than 90 percent of its debt at a weighted average interest rate of 4.5 percent.
Nonetheless, City Office posted a net loss of US$1.2 million (3 cents a share) on revenues of US$46 million for the quarter. After electing to halve its quarterly distribution to US10 cents per unit in late May (still providing an annualized yield of 7.7 percent), its shares are down more than 60 percent over the past year. They closed at US$5.25 as of Tuesday, June 6.
Those of us who’ve been sitting at our desks for 30-plus years will remember the North American office market went through a seemingly existential crash before—in the early 1990s—and eventually recovered. You be the judge of whether this is the bottom of the cycle or not.
Word on the street: RBC Capital Markets analyst Michael Carroll reduced his price target to US$7 from US$10 with a “sector perform” rating following the dividend cut. The average one-year target among analysts is US$7.30, which implies an upside of 39 percent.
Coming & going: Speaking of B.C.-headquartered stocks listed in the U.S., Lululemon Athletica (NASDAQ:LULU) landed on the Fortune 500 list for the first time at the #461 spot this week. (Last year it was just below the cutoff at #509.) Meanwhile, following its acquisition of Chicago-based used vehicle marketplace IAA, Burnaby’s Ritchie Bros. Auctioneers has rebranded itself RB Global (TSX, NYSE:RBA)—not to be confused with other prominent dual-listed tickers RBC (Royal Bank of Canada) and RBI (Restaurant Brands International).