Assessing the $7.00-per-Share Offer for City Office REIT: Fair Value or Shareholder Undercompensation?

In the world of real estate investment trusts (REITs), mergers and acquisitions (M&A) often spark intense debate over valuation fairness. The proposed $7.00-per-share offer for City Office REIT (CIO) is no exception. This price, which values the company at approximately $1.1 billion, must be scrutinized against the backdrop of a low-interest-rate environment, where REITs typically command higher valuations due to their income-generating potential. The question is whether this offer represents a reasonable premium to intrinsic value or a significant discount that undercompensates long-term shareholders.

The Metrics: NAV, FFO, and the Gap

City Office REIT's financials for Q1 2025 reveal a company with resilient fundamentals. Its Core Funds from Operations (FFO) stood at $0.30 per share, with Adjusted FFO (AFFO) at $0.16. Total assets were reported at $1.436 billion, with equity of $726.54 million. Using these figures, the estimated Net Asset Value (NAV) per share—calculated as total equity attributable to common stockholders divided by shares outstanding—comes to approximately $18.00. This is derived from $726.54 million in equity and 40.358 million common shares.

The $7.00 offer price, therefore, implies a 44% discount to NAV. This is a stark gap, especially in an environment where REITs historically trade at a premium to their NAV. For context, U.S. equity REITs as of June 2025 traded at a median 19.1% discount to NAV, with the hotel sector facing even steeper discounts. CIO's 44% discount is thus an outlier, raising questions about whether the offer fully captures the company's intrinsic value.

FFO Multiples and the Low-Interest-Rate Context

In low-interest-rate environments, REITs are typically valued at higher P/FFO multiples because their dividend yields become more attractive compared to bonds. Historically, U.S. REITs have traded at a 2.7x earnings multiple premium to broad stocks. However, CIO's current P/FFO multiple is far lower. At $7.00 per share and a Core FFO of $0.30, the P/FFO is 23.3x, which appears elevated at first glance. Yet, this metric is misleading without considering the broader context.

The company's 4.4% year-over-year increase in Same Store Cash NOI, coupled with strong leasing activity (144,000 square feet of new and renewal leases in Q1), suggests that cash flows are growing. If we project Core FFO to remain stable or improve, a 23.3x multiple might seem reasonable. However, this assumes no further growth in earnings. If CIO's FFO were to rise by even 5% annually, the P/FFO multiple would compress to 22.2x in 2026, still above the historical average for REITs in low-rate environments.

The Strategic and Operational Risks

While the offer price is low relative to NAV, it must also be evaluated against the company's operational risks. CIO operates in Sun Belt markets—Dallas, Denver, Orlando, Phoenix, etc.—which have shown robust population and employment growth. However, the office sector faces headwinds from the work-from-home trend, which could pressure occupancy rates. The company's full-year 2025 guidance assumes occupancy between 85% and 87%, a slight improvement from Q1's 84.9%, but this margin of error is narrow.

Additionally, CIO's debt structure is a concern. With $648.1 million in outstanding debt and a weighted average interest rate of 5.1%, the company is exposed to rising rates. Though 82.3% of its debt is fixed, the remaining 17.7% could become a drag if rates continue to rise. This risk is exacerbated by the company's low liquidity, which constrains its ability to refinance or invest in growth opportunities.

The Case for Shareholder Acceptance

Despite these risks, the $7.00 offer may still represent a reasonable outcome for shareholders. The company's full-year 2025 guidance includes a net loss attributable to common stockholders between $16.7 million and $17.2 million, which would reduce book value and, by extension, NAV. If the merger closes before these losses materialize, shareholders could lock in value at $7.00, avoiding further dilution.

Moreover, the offer price is 5.8% above the stock's current price of $6.90, which has traded at a 5.8% yield. This premium, while modest, provides a near-term liquidity event that may be more certain than waiting for the market to re-rate the stock. In a low-interest-rate environment, where REITs are often undervalued despite strong fundamentals, the $7.00 offer could be seen as a pragmatic solution for a company facing structural challenges in its sector.

Conclusion: A Tenuous Balance

The $7.00-per-share offer for City Office REIT sits at a precarious intersection of value and risk. On one hand, it trades at a 44% discount to NAV and a P/FFO multiple that may not fully account for future growth. On the other, it provides certainty in a sector marked by uncertainty and offers a premium to the current market price. For long-term investors who believe in the REIT's ability to navigate the work-from-home transition and maintain occupancy rates, the offer is likely insufficient. For those prioritizing liquidity and risk mitigation, it may be a reasonable compromise.

In the end, the decision hinges on one critical question: Is the market's skepticism about CIO's future earnings justified, or is it a temporary dislocation in a sector poised for recovery? As with all M&A valuations, the answer lies not just in the numbers but in the broader narrative of the company's place in the evolving real estate landscape.