Evaluating the Merger Controversy and Undervaluation Thesis in City Office REIT (CIO)

The recent turmoil surrounding City Office REIT (CIO) has sparked intense debate among investors, particularly regarding its proposed merger with Elliott Capital and the broader question of whether the stock is undervalued. As the real estate investment trust (REIT) sector grapples with valuation dislocations and activist investor interventions, CIO's situation offers a compelling case study in corporate governance and market mispricing.

The Merger Controversy: A Clash of Strategic Visions

City Office REIT's proposed merger with Elliott Capital has become a lightning rod for criticism, particularly from activist investor firm Oksenholt Capital Management. According to a report by Investing.com, Oksenholt has publicly opposed the deal, arguing that the terms are inadequate and fail to reflect the intrinsic value of CIO's assets. The firm has called for a restructuring plan to unlock shareholder value, suggesting that the current merger proposal undercuts the potential of the REIT's portfolio.

Compounding the controversy is CIO's decision to suspend future common stock dividends while the merger awaits finalization. This move, while not uncommon in merger scenarios, has raised concerns about liquidity and investor confidence. The REIT, however, has maintained its commitment to preferred stock dividends, most recently announcing a $0.4140625 per share payout for its 6.625% Series A Cumulative Redeemable Preferred Stock according to the announcement. Such selective dividend prioritization underscores the tension between short-term obligations and long-term strategic goals.

Undervaluation Thesis: A Case for Reassessment

The core of Oksenholt's argument rests on the assertion that CIO is significantly undervalued. As of July 23, 2025, the stock had plummeted to $5.57, a stark contrast to its 2022 high of $21.24, representing a $626.8 million loss in market capitalization. Oksenholt estimates that CIO's intrinsic value aligns more closely with its recent book value of approximately $15 per share, suggesting a potential 180% upside from current levels.

This valuation gap is further highlighted by CIO's market capitalization of $278.5 million as of November 2025, which places it in a competitive but volatile segment of the REIT sector. For context, Franklin Street Properties Corp. (FSP), a peer with a similar business model, had a market cap of $136.3 million during the same period. While direct comparisons are inherently imperfect, the disparity raises questions about whether CIO's fundamentals are being appropriately reflected in its stock price.

Activist Investor Strategy: Pressure for Change

Oksenholt's approach exemplifies the classic activist investor playbook: leveraging public criticism to pressure management and board members into revisiting strategic decisions. By framing the merger as a value-destroying proposition, the firm aims to galvanize shareholder support for alternative restructuring plans. This strategy is not without precedent in the REIT sector, where activist campaigns have historically led to significant corporate overhauls and value creation.

However, the absence of detailed merger terms-such as the proposed offer price, structure, or governance changes-limits the ability to fully assess the merits of Oksenholt's critique. Without transparency on these points, investors are left to speculate on whether the activist's vision is more aspirational than actionable.

Conclusion: Navigating Uncertainty in a Dislocated Market

City Office REIT's merger controversy and valuation debate encapsulate the broader challenges facing the REIT sector in 2025. While Oksenholt Capital's criticisms highlight legitimate concerns about undervaluation and strategic misalignment, the lack of concrete merger details and broader REIT valuation metrics (e.g., P/FFO, NAV premiums) complicates the assessment. For investors, the key takeaway is the importance of monitoring both corporate governance developments and macroeconomic trends that could influence REIT valuations. In a market characterized by dislocation, patience and due diligence remain critical.