City Office REIT Inc. (CIO, Financial) stock has fallen over 5% between Oct. 29 and Nov. 26. The company’s stock is down 15.97% year-to-date, as investors begin questioning the real estate management company’s financial future.
Some analysts are calling the stock a highly risky investment, which is part of the reason for its decline.
The stock’s low valuation makes it an attractive choice for investors, and the 8.6% dividend yield is equally attractive. City Office’s dividend may be too generous, as the company posted a loss of $3.2 million, or 8 cents per share. Revenue beat expectations, at $33.5 million in the third quarter, outpacing estimates of $33.2 million.
Occupancy closed at 90.1%, and the REIT purchased two properties for a combined total of $110.8 million. Exemptions from zoning ordinances also helped the REIT in the most recent quarter.
"Improvements and non-conforming uses may be grandfathered in when they do not comply with zoning ordinances, making them exempt from restrictions that are enacted at a later date," explains The Law Offices of Roger W. Stelk.
Bearish investors are selling the stock off out of fear that the dividend payout is too high. The REIT offered a high dividend payout from the start in an effort to attract investors when the company went public four years ago.
External capital has led to the company’s regrowth, and posting a loss in the most recent quarter is a concern for some investors who fear that the company may be relying on external capital too much for growth.
Rising interest rates are also a concern, with the REIT paying more for financing than in the past.
Shares for the company have fallen over the last four years, a time when the economy continued to grow and most stocks accelerated. Shorter-term leases are also a part of the REIT’s target market, causing many to fear that the REIT may face higher vacancy rates than in the past.
High leverage, when compared to the average REIT, and a high payout ratio, especially when the company has maintained a high dividend yield, may spell trouble for the company when the economy slows.
Quarterly funds from operations (FFO) came out to 28 cents a share in the last quarter, rising from 19 cents a share a year prior.
Older properties and a lack of profitability for the REIT, along with rising interest rates and a high payout, have led to City Office’s stock falling in 2018.
Disclosure: The author does not own any stake in the listed equities.
