Intrinsic value of City Office REIT - CIO

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$12.18

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$12.18

 
Intrinsic value

$2.08

 
Up/down potential

-83%

 
Rating

str. sell

 
Value-price divergence* premium content

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Our model is not good at valuating stocks of financial companies, such as CIO.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of CIO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  30.91
  16.70
  15.53
  14.48
  13.53
  12.68
  11.91
  11.22
  10.60
  10.04
  9.53
  9.08
  8.67
  8.30
  7.97
  7.68
  7.41
  7.17
  6.95
  6.76
  6.58
  6.42
  6.28
  6.15
  6.04
  5.93
  5.84
  5.76
  5.68
  5.61
  5.55
Revenue, $m
  72
  84
  97
  111
  126
  142
  159
  177
  196
  215
  236
  257
  280
  303
  327
  352
  378
  405
  433
  463
  493
  525
  558
  592
  628
  665
  704
  744
  787
  831
  877
Variable operating expenses, $m
 
  78
  90
  103
  117
  132
  148
  165
  182
  200
  220
  240
  260
  282
  304
  328
  352
  377
  403
  431
  459
  489
  519
  551
  584
  619
  655
  693
  732
  773
  816
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  73
  78
  90
  103
  117
  132
  148
  165
  182
  200
  220
  240
  260
  282
  304
  328
  352
  377
  403
  431
  459
  489
  519
  551
  584
  619
  655
  693
  732
  773
  816
Operating income, $m
  0
  6
  7
  8
  9
  10
  11
  12
  14
  15
  16
  18
  19
  21
  23
  24
  26
  28
  30
  32
  34
  36
  38
  41
  43
  46
  49
  51
  54
  57
  61
EBITDA, $m
  30
  41
  47
  54
  61
  69
  77
  86
  95
  105
  115
  125
  136
  147
  159
  171
  184
  197
  210
  225
  239
  255
  271
  288
  305
  323
  342
  361
  382
  403
  426
Interest expense (income), $m
  14
  14
  17
  20
  23
  26
  30
  34
  38
  42
  46
  51
  55
  60
  65
  71
  76
  82
  88
  94
  101
  108
  115
  122
  129
  137
  146
  154
  163
  172
  182
Earnings before tax, $m
  0
  -9
  -10
  -12
  -14
  -17
  -19
  -22
  -24
  -27
  -30
  -33
  -36
  -39
  -43
  -47
  -50
  -54
  -58
  -62
  -67
  -71
  -76
  -81
  -86
  -91
  -97
  -103
  -109
  -115
  -122
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -1
  -9
  -10
  -12
  -14
  -17
  -19
  -22
  -24
  -27
  -30
  -33
  -36
  -39
  -43
  -47
  -50
  -54
  -58
  -62
  -67
  -71
  -76
  -81
  -86
  -91
  -97
  -103
  -109
  -115
  -122

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  14
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  661
  757
  875
  1,001
  1,137
  1,281
  1,433
  1,594
  1,763
  1,940
  2,125
  2,318
  2,519
  2,728
  2,945
  3,171
  3,406
  3,650
  3,904
  4,168
  4,442
  4,728
  5,024
  5,334
  5,656
  5,991
  6,341
  6,706
  7,087
  7,485
  7,900
Adjusted assets (=assets-cash), $m
  647
  757
  875
  1,001
  1,137
  1,281
  1,433
  1,594
  1,763
  1,940
  2,125
  2,318
  2,519
  2,728
  2,945
  3,171
  3,406
  3,650
  3,904
  4,168
  4,442
  4,728
  5,024
  5,334
  5,656
  5,991
  6,341
  6,706
  7,087
  7,485
  7,900
Revenue / Adjusted assets
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
  0.111
Average production assets, $m
  501
  585
  675
  773
  878
  989
  1,107
  1,231
  1,362
  1,498
  1,641
  1,790
  1,945
  2,107
  2,275
  2,449
  2,631
  2,819
  3,015
  3,219
  3,431
  3,651
  3,881
  4,119
  4,368
  4,627
  4,897
  5,179
  5,473
  5,781
  6,102
Working capital, $m
  0
  -16
  -19
  -22
  -24
  -28
  -31
  -34
  -38
  -42
  -46
  -50
  -54
  -59
  -63
  -68
  -73
  -79
  -84
  -90
  -96
  -102
  -108
  -115
  -122
  -129
  -137
  -144
  -153
  -161
  -170
Total debt, $m
  370
  439
  513
  593
  678
  769
  864
  966
  1,072
  1,183
  1,299
  1,421
  1,547
  1,679
  1,816
  1,958
  2,106
  2,259
  2,419
  2,585
  2,757
  2,937
  3,123
  3,318
  3,520
  3,731
  3,951
  4,181
  4,421
  4,671
  4,932
Total liabilities, $m
  407
  476
  550
  630
  715
  806
  901
  1,003
  1,109
  1,220
  1,336
  1,458
  1,584
  1,716
  1,853
  1,995
  2,143
  2,296
  2,456
  2,622
  2,794
  2,974
  3,160
  3,355
  3,557
  3,768
  3,988
  4,218
  4,458
  4,708
  4,969
Total equity, $m
  254
  281
  324
  371
  422
  475
  532
  591
  654
  720
  788
  860
  934
  1,012
  1,093
  1,177
  1,264
  1,354
  1,448
  1,546
  1,648
  1,754
  1,864
  1,979
  2,098
  2,223
  2,352
  2,488
  2,629
  2,777
  2,931
Total liabilities and equity, $m
  661
  757
  874
  1,001
  1,137
  1,281
  1,433
  1,594
  1,763
  1,940
  2,124
  2,318
  2,518
  2,728
  2,946
  3,172
  3,407
  3,650
  3,904
  4,168
  4,442
  4,728
  5,024
  5,334
  5,655
  5,991
  6,340
  6,706
  7,087
  7,485
  7,900
Debt-to-equity ratio
  1.457
  1.560
  1.580
  1.600
  1.610
  1.620
  1.630
  1.630
  1.640
  1.640
  1.650
  1.650
  1.660
  1.660
  1.660
  1.660
  1.670
  1.670
  1.670
  1.670
  1.670
  1.670
  1.680
  1.680
  1.680
  1.680
  1.680
  1.680
  1.680
  1.680
  1.680
Adjusted equity ratio
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371
  0.371

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -1
  -9
  -10
  -12
  -14
  -17
  -19
  -22
  -24
  -27
  -30
  -33
  -36
  -39
  -43
  -47
  -50
  -54
  -58
  -62
  -67
  -71
  -76
  -81
  -86
  -91
  -97
  -103
  -109
  -115
  -122
Depreciation, amort., depletion, $m
  30
  35
  40
  46
  53
  59
  66
  74
  82
  90
  98
  107
  116
  126
  136
  147
  158
  169
  181
  193
  205
  219
  232
  247
  262
  277
  293
  310
  328
  346
  365
Funds from operations, $m
  4
  26
  30
  34
  38
  43
  47
  52
  57
  63
  68
  74
  80
  87
  93
  100
  107
  115
  122
  130
  139
  147
  156
  166
  175
  186
  196
  207
  219
  231
  244
Change in working capital, $m
  -15
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
Cash from operations, $m
  19
  134
  33
  37
  41
  46
  51
  56
  61
  67
  72
  78
  85
  91
  98
  105
  112
  120
  128
  136
  145
  153
  163
  172
  182
  193
  204
  215
  227
  240
  253
Maintenance CAPEX, $m
  0
  -30
  -35
  -40
  -46
  -53
  -59
  -66
  -74
  -82
  -90
  -98
  -107
  -116
  -126
  -136
  -147
  -158
  -169
  -181
  -193
  -205
  -219
  -232
  -247
  -262
  -277
  -293
  -310
  -328
  -346
New CAPEX, $m
  -9
  -84
  -91
  -98
  -105
  -111
  -118
  -124
  -130
  -137
  -143
  -149
  -155
  -162
  -168
  -175
  -181
  -189
  -196
  -204
  -212
  -220
  -229
  -239
  -249
  -259
  -270
  -282
  -294
  -307
  -321
Cash from investing activities, $m
  -217
  -114
  -126
  -138
  -151
  -164
  -177
  -190
  -204
  -219
  -233
  -247
  -262
  -278
  -294
  -311
  -328
  -347
  -365
  -385
  -405
  -425
  -448
  -471
  -496
  -521
  -547
  -575
  -604
  -635
  -667
Free cash flow, $m
  -198
  20
  -93
  -102
  -110
  -118
  -126
  -135
  -143
  -152
  -160
  -169
  -178
  -187
  -196
  -206
  -216
  -226
  -237
  -248
  -260
  -272
  -285
  -299
  -313
  -328
  -343
  -360
  -377
  -395
  -414
Issuance/(repayment) of debt, $m
  30
  69
  74
  80
  85
  91
  96
  101
  106
  111
  116
  121
  126
  132
  137
  142
  148
  154
  160
  166
  173
  179
  187
  194
  203
  211
  220
  230
  240
  250
  261
Issuance/(repurchase) of shares, $m
  195
  0
  63
  69
  75
  81
  87
  93
  100
  106
  112
  119
  126
  133
  140
  147
  155
  163
  172
  180
  189
  199
  209
  219
  230
  241
  253
  266
  279
  293
  307
Cash from financing (excl. dividends), $m  
  224
  69
  137
  149
  160
  172
  183
  194
  206
  217
  228
  240
  252
  265
  277
  289
  303
  317
  332
  346
  362
  378
  396
  413
  433
  452
  473
  496
  519
  543
  568
Total cash flow (excl. dividends), $m
  27
  89
  -19
  -22
  -25
  -28
  -31
  -34
  -37
  -40
  -44
  -48
  -51
  -55
  -59
  -64
  -68
  -73
  -77
  -82
  -88
  -93
  -98
  -104
  -110
  -117
  -123
  -130
  -138
  -145
  -153
Retained Cash Flow (-), $m
  -188
  -41
  -44
  -47
  -50
  -53
  -57
  -60
  -63
  -66
  -69
  -72
  -75
  -78
  -81
  -84
  -87
  -91
  -94
  -98
  -102
  -106
  -110
  -115
  -119
  -124
  -130
  -135
  -141
  -148
  -154
Prev. year cash balance distribution, $m
 
  14
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  62
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Discount rate, %
 
  9.60
  10.08
  10.58
  11.11
  11.67
  12.25
  12.86
  13.51
  14.18
  14.89
  15.64
  16.42
  17.24
  18.10
  19.01
  19.96
  20.96
  22.00
  23.10
  24.26
  25.47
  26.75
  28.08
  29.49
  30.96
  32.51
  34.13
  35.84
  37.63
  39.51
PV of cash for distribution, $m
 
  57
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  86.7
  75.7
  66.6
  58.8
  52.3
  46.7
  41.9
  37.7
  34.1
  30.9
  28.1
  25.6
  23.4
  21.4
  19.6
  18.0
  16.6
  15.3
  14.1
  13.0
  12.1
  11.2
  10.3
  9.6
  8.9
  8.3
  7.7
  7.1
  6.6

City Office REIT, Inc. is an equity real estate investment trust. The firm invests in the real estate markets of the United States. It acquires, own and operate high-quality office properties. City Office REIT, Inc. was formed on November 26, 2013 and is based in the Vancouver, Canada.

FINANCIAL RATIOS  of  City Office REIT (CIO)

Valuation Ratios
P/E Ratio -296.9
Price to Sales 4.1
Price to Book 1.2
Price to Tangible Book
Price to Cash Flow 15.6
Price to Free Cash Flow 29.7
Growth Rates
Sales Growth Rate 30.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 80%
Cap. Spend. - 3 Yr. Gr. Rate 17.6%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 145.7%
Total Debt to Equity 145.7%
Interest Coverage 1
Management Effectiveness
Return On Assets 2.4%
Ret/ On Assets - 3 Yr. Avg. 1.8%
Return On Total Capital -0.2%
Ret/ On T. Cap. - 3 Yr. Avg. -1.2%
Return On Equity -0.6%
Return On Equity - 3 Yr. Avg. -5.3%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 61.1%
Gross Margin - 3 Yr. Avg. 60.2%
EBITDA Margin 61.1%
EBITDA Margin - 3 Yr. Avg. 51.1%
Operating Margin -1.4%
Oper. Margin - 3 Yr. Avg. 2.9%
Pre-Tax Margin 0%
Pre-Tax Margin - 3 Yr. Avg. -9.4%
Net Profit Margin -1.4%
Net Profit Margin - 3 Yr. Avg. -7.4%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio -2100%

CIO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CIO stock intrinsic value calculation we used $72 million for the last fiscal year's total revenue generated by City Office REIT. The default revenue input number comes from 2016 income statement of City Office REIT. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our CIO stock valuation model: a) initial revenue growth rate of 16.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.6%, whose default value for CIO is calculated based on our internal credit rating of City Office REIT, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of City Office REIT.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of CIO stock the variable cost ratio is equal to 93.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for CIO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.9% for City Office REIT.

Corporate tax rate of 27% is the nominal tax rate for City Office REIT. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the CIO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for CIO are equal to 695.8%.

Life of production assets of 16.7 years is the average useful life of capital assets used in City Office REIT operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for CIO is equal to -19.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $254 million for City Office REIT - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 30.509 million for City Office REIT is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of City Office REIT at the current share price and the inputted number of shares is $0.4 billion.


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COMPANY NEWS

▶ City Office REIT reports 1Q results   [May-05-17 06:15AM  Associated Press]
▶ City Office REIT reports 4Q results   [06:23AM  Associated Press]
▶ How City Office REIT Inc (CIO) Ranks Amongst Its Peers   [Dec-19-16 09:53AM  at Insider Monkey]
▶ Downtown Tampa's original office tower sold for $79.75 million   [Nov-04-16 12:59PM  at bizjournals.com]
▶ City Office REIT Improves Transparency with Yardi Voyager   [Oct-25-16 08:00AM  Business Wire]
Stock chart of CIO Financial statements of CIO Annual reports of CIO
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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