Market Commentary | July 29, 2025

Persistence, Perseverance, and Patience Pay Off

Being dedicated REIT investors, we try to cover and analyze every issue in our universe. For City Office REIT (CIO), that has meant a quiet following of the issue since its 2014 IPO. Events of last week give us a rare opportunity to discuss the full life cycle of our investment experience with CIO’s equities.

Back in September 2021, City Office seemed to have stumbled into the burgeoning life-sciences real estate industry with the sale of its San Diego office campus. Dane Bowler described the opportunity here. Based on this information, CIO looked like a bargain relative to peers.  

We believed that newly acquired office buildings (purchased with the enhanced capital of the life sciences sale) would defy the emerging, pandemic-induced, work-from-home trend. That thesis held for about six months, but ultimately the shares succumbed to the growing sentiment shift against commercial real estate. The $16 spring 2022 share price slid to $14, $12, and as low as $10 in the fall of that same year.

We knew the company’s operations well and wanted to use that knowledge to better navigate the pessimistic environment. We looked at CIO’s whole capital stack and thought investors could do well trading in the volatility of the Preferred A shares (CIO-A). City Office REIT, as a company, continued to be profitable, and we measured that assets and income would more than cover the obligations due the senior CIO-A.

The REIT preferred markets struggle with obscurity and reduced liquidity, which might allow nimble traders to move in and out of CIO-A, capturing big dividends, small gains, or both.  As a standard trading procedure, traders would always do well to carefully sell their purchases into any price recovery. Many such traders likely had open orders to sell shares when City Office REIT issued this press release last week.

An investor group has entered into an agreement to take CIO private for cash consideration of $7.00/share (a 24% premium over its unaffected market price). While CIO shareholders may have been pleased to receive a price premium to market, the acquirer is getting the shares at a 42% discount to the median consensus NAV estimate of $12.13/share.

CIO preferred shareholders fared much better in that under the terms of the buy-out, CIO-A shares will receive a $25.00 preferred share liquidation preference. No discount to par and a 30% premium over CIO-A’s unaffected market price.

The Takeaway

Investing through economic cycles will always pose unforeseen challenges and evolving investor perspectives. Being alert, present, and nimble is a must for survival. While you may have to acknowledge that the trends have turned against your thesis and be forced to take losses, you should never abandon the financial knowledge that drew you into the ill-fated investment. If the losses are born as much by market sentiment as by valuation fundamentals, you might do well to re-examine the company’s capital stack for a better opportunity and pursue what you know.

Investment losses teach valuable lessons that we try not to forget. We hope our full cycle experience with CIO will help us mitigate future losses and more quickly identify other opportunities within them.

Notes and Disclosure

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

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Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

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