City Office REIT focuses on high-quality (Class A and B) office properties located in these markets. The company chooses to focus on so-called "18-hour cities" with above-average job and population growth.
Over the five-year period through 2026, U.S. employment growth is expected to average about 3.7% per year. In City Office REIT's markets, it's expected to be 7.3% -- nearly double the national average. As a result of this elevated job growth, City Office REIT's properties should be the beneficiary of the rapidly rising demand for office properties.
No tenant accounts for more than 3.7% of the REIT's square footage. Some of the names you might recognize on the top tenants list include Ally Financial (NASDAQ: ALLY), Toyota (NYSE: TM) Motor Credit, and Kaplan (the educational services company).
City Office REIT news
The biggest news item affecting most REITs is the COVID-19 pandemic, and office REITs are certainly no exception, as many companies were (and are still) having their employees work remotely.
For one thing, City Office REIT's stock price got hammered, but the company recognized the massive disconnect between the plunging stock price and the REIT's true asset value. Management quickly authorized a $100 million share repurchase plan, and the company used the entire amount to buy back stock at an average price of $8.80 per share (roughly half of its price as of September 2021).
And while many of its offices weren't being used much during the pandemic, City Office REIT's business wasn't hit too hard at all. Even in the second quarter of 2020 (the peak of the pandemic lockdowns), City Office REIT collected more than 99% of its contractual rent.
The biggest impact of the COVID-19 pandemic on City Office REIT was to its growth plans. At the start of 2020, the REIT expected to spend as much as $380 million in property acquisitions; that plan was scrapped when the pandemic started. And even though the work-from-home trend has been going on for more than a year, City Office REIT's occupancy is down a bit, from about 92% at the start of the pandemic but is still at a very healthy 89.7%
Aside from the COVID-19 pandemic, which hasn't been very disruptive to City Office REIT, another big news item recently is the sale of part of the company's portfolio. Specifically, much of the San Diego part of the portfolio is made up of life science office properties. To put it mildly, life science real estate has been a tremendous growth market, and property values have skyrocketed.
Consider what a win this is for investors. City Office REIT has agreed to sell its San Diego life science assets for $576 million, compared to the company's $116 billion cost basis. This is a big sale for a REIT whose entire market cap is about $750 million, especially considering the San Diego properties being sold make up less than 10% of the REIT's square footage.
In addition to bringing a big profit, the sale will dramatically strengthen the REIT's balance sheet and will give City Office REIT's management a massive war chest of capital that can be deployed into higher-yielding office properties. And the $576 million cash infusion is in addition to more than $200 million of available cash and borrowing capacity the REIT already has.
The company also mentioned it could potentially use some of the proceeds to increase the dividend or to make a special distribution to shareholders. This certainly makes sense -- the profit on the sale is equal to $9.75 per share, and the stock only trades for about $17 as of Sept. 9, 2021.
City Office REIT stock price
City Office REIT completed its IPO on April 15, 2014, so it has been public for more than seven years. The IPO price was $12.50, and the stock trades for $17.30 as of Sept. 9, 2021. This represents an overall gain of about 38% in seven years and five months, or roughly 4.5% on an annualized basis. This might not look like a great track record at first glance, especially considering the S&P 500 is up by 149% over the same period.
However, keep in mind that REITs are designed to be total return investments. Most have higher dividend yields than the average stock, and City Office REIT is certainly not an exception, so dividends should be taken into consideration to get a better idea of its performance. As of this writing, City Office REIT has a 3.5% dividend yield, but the payout was considerably higher prior to the COVID-19 pandemic, when the quarterly dividend was cut from $0.235 per share to $0.15, where it remains today.
With that in mind, here's how City Office REIT has performed relative to the S&P 500 if we take a look at total returns (dividends plus stock price gains):