St Petersburg Redevelopment And Sunbelt Leasing Will Shape Future Prospects

Key Takeaways

• Strong leasing dynamics in Sunbelt markets and property enhancements are expected to boost occupancy rates, rental income, and revenue growth.
  
• Redevelopment projects and spec suite leasing strategies indicate potential for increased property values, high occupancy, and improved earnings.
  
• Higher impairment charges and tenant costs, along with reliance on uncertain redevelopment projects and rising interest rates, pose risks to earnings and revenue growth.

Catalysts

City Office REIT, Inc. (the “Company”) was organized in the state of Maryland on November 26, 2013.

• The favorable supply-demand dynamics for office leasing, particularly in Sunbelt markets, are expected to drive occupancy rates higher and potentially increase rental income, impacting future revenue growth positively.
  
• Renovations and amenity enhancements undertaken at key properties are aimed at attracting tenants and capturing growing rents, which could lead to higher net operating income and improve net margins.
  
• The redevelopment plans at City Center in downtown St. Petersburg, Florida, with a new multi-use development project, have the potential to significantly increase property values and revenue streams, impacting earnings positively once completed.
  
• The company's strategic focus on Sunbelt markets, which have strong leasing dynamics and demand, is expected to result in increased occupancy and rental growth, supporting revenue and core FFO per share growth.
  
• The proactive leasing and construction of modern spec suites, with a current leasing rate of over 75%, indicate potential for continued high occupancy rates and rental income growth, contributing to earnings improvement.

City Office REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming City Office REIT's revenue will grow by 1.5% annually over the next 3 years.
• Analysts are not forecasting that City Office REIT will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate City Office REIT's profit margin will increase from -14.7% to the average US Office REITs industry of 8.6% in 3 years.
• If City Office REIT's profit margin were to converge on the industry average, you could expect earnings to reach $15.4 million (and earnings per share of $0.39) by about May 2028, up from $-25.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from -8.3x today. This future PE is lower than the current PE for the US Office REITs industry at 64.8x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.96%, as per the Simply Wall St company report.

City Office REIT Future Earnings Per Share Growth

Risks

• The company's net income was negatively impacted by an $8.5 million non-cash impairment charge related to the sale of a property, which could signal challenges in realizing asset values in underperforming markets, affecting future revenue and earnings.
  
• Despite improvements in leasing activity, elevated tenant improvement costs and leasing commissions have led to a reduction in AFFO, which could pressure net margins if such costs persist.
  
• The company's focus on Sunbelt markets implies a potential risk of underperformance in non-Sunbelt regions, where rent growth and occupancy gains may lag, potentially impacting overall revenue growth.
  
• Given that only limited improvement in capital markets is being observed, rising long-term interest rates could increase financing costs, potentially impacting earnings and net margins.
  
• The reliance on redevelopment projects, such as the one in St. Petersburg, involves significant uncertainty and conditions beyond the company's control, which could delay or impact future cash flow and revenue projections.

Valuation

• The analysts have a consensus price target of $6.167 for City Office REIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $5.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $178.9 million, earnings will come to $15.4 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 10.0%.
• Given the current share price of $5.15, the analyst price target of $6.17 is 16.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.