City Office REIT's Phoenix Portfolio Sale and Merger Strategy: A Catalyst for Value Realization and Shareholder Returns?

The office REIT sector has long grappled with headwinds from remote work trends and shifting corporate real estate demands. Yet, City Office REIT (CIO) has positioned itself as a potential outlier in this narrative through its aggressive Phoenix portfolio sale and impending merger with MCME Carell Holdings. This strategic pivot raises a critical question: Does the completion of the Phoenix portfolio sale and the subsequent merger justify a re-rating of CIO's valuation in a sector where traditional metrics often fail to reflect intrinsic value?

Strategic Rationale: Phoenix Sale as a Merger Catalyst

City Office REIT's decision to divest its Phoenix portfolio—comprising six properties and a pending $30 million sale of Pima Center—has directly accelerated the $1.1 billion merger with MCME Carell Holdings. The sale of the Phoenix portfolio, valued at $296 million, satisfies a key condition in the merger agreement, which is structured to close in Q4 2025. By offloading non-core assets in a market with weaker demand for office space, City Office is streamlining its portfolio to focus on Sun Belt markets, where population growth and economic resilience offer long-term upside.

The Phoenix portfolio sale also unlocks significant capital efficiency. The $266 million in proceeds from the first closing, combined with the $30 million pending for Pima Center, will reduce the company's debt load and provide liquidity to fund the merger. This is critical in a sector where deleveraging is often a prerequisite for re-rating. The $102.2 million impairment charge on the Phoenix portfolio, while a short-term drag on earnings, reflects a realistic adjustment to the properties' fair value and underscores the company's commitment to transparency.

Valuation Implications: A Premium in a Discounted Sector

The merger price of $7.00 per share for CIO's common stock represents a 26% premium to its closing price on July 23, 2025, and a 39% premium to its 90-day volume-weighted average. This premium is particularly notable given the company's trailing financials: a Core FFO of $0.28 per share and an AFFO of $0.07 per share in Q2 2025. At $7.00 per share, the implied P/FFO ratio is approximately 25 times, and the P/AFFO ratio is a staggering 100 times. While these multiples appear elevated, they are justified by the merger's structure, which includes the assumption of debt, redemption of preferred stock, and the Phoenix portfolio sale.

The company's net asset value (NAV) also warrants scrutiny. As of June 30, 2025, CIO's book value per share was $15.23, derived from $614.9 million in equity and 40.36 million shares outstanding. However, the merger price of $7.00 per share is a discount to this book value. This discrepancy is explained by the Phoenix portfolio impairment and the company's focus on Sun Belt markets, where properties are likely to trade at a premium to book value. The $1.1 billion merger valuation, which includes the Phoenix sale proceeds and debt restructuring, suggests that the market is pricing in future cash flows and operational synergies that are not yet reflected in CIO's standalone metrics.

Sector Context: A Re-Rating in a Challenging Environment

The office REIT sector has historically traded at a discount to NAV due to concerns over demand. However, CIO's merger with MCME Carell Holdings introduces a compelling narrative: a private equity-backed buyer acquiring a REIT at a premium while committing to a capital-efficient restructuring. This structure is rare in a sector where public REITs often struggle to attract buyers. The merger's unconditioned financing terms further reduce execution risk, a critical factor in a market where financing uncertainty can derail deals.

Moreover, the merger's focus on Sun Belt markets aligns with broader demographic and economic trends. These regions, characterized by population growth and business expansion, are increasingly seen as safe havens in a post-pandemic economy. By exiting Phoenix—a market with lower growth potential—and retaining Sun Belt assets, CIO is positioning itself to benefit from these trends, potentially justifying a re-rating as the new entity gains traction.

Risks and Considerations

While the Phoenix sale and merger offer a clear path to value realization, investors must remain cautious. The pending Pima Center closing is contingent on ground lease approvals, which could delay the merger timeline. Additionally, the suspension of common dividends—while necessary to preserve liquidity—may weigh on investor sentiment in the short term. The merger's success will also depend on MCME Carell's ability to integrate CIO's portfolio and execute its growth strategy.

Investment Thesis

City Office REIT's Phoenix portfolio sale and merger with MCME Carell Holdings represent a strategic masterstroke in a sector starved for catalysts. The $7.00 per share merger price, while a discount to book value, is justified by the capital efficiency of the transaction, the premium paid for common stock, and the alignment with Sun Belt growth trends. For investors, the key question is whether the new entity can leverage its streamlined portfolio and private equity backing to outperform sector peers.

Given the merger's premium pricing, the Phoenix sale's completion, and the sector's undervaluation, CIO presents a compelling case for a re-rating. However, the investment is not without risks. Investors should monitor the Pima Center closing, the integration of the merger, and the new entity's operational performance. For those willing to accept the execution risk, the potential for a 26% immediate premium and long-term Sun Belt exposure makes CIO a high-conviction opportunity in a challenging sector.

Final Recommendation: Buy for investors with a medium-term horizon who are comfortable with the merger's execution risks and the sector's macroeconomic challenges. Hold for those prioritizing dividend income or seeking lower-volatility alternatives.