Intrinsic value of City Office REIT - CIO

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$12.74

  Intrinsic Value

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  Value-price divergence*

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$12.74

 
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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
  26.70
  24.53
  22.58
  20.82
  19.24
  17.81
  16.53
  15.38
  14.34
  13.41
  12.57
  11.81
  11.13
  10.52
  9.96
  9.47
  9.02
  8.62
  8.26
  7.93
  7.64
  7.37
  7.14
  6.92
  6.73
  6.56
  6.40
  6.26
  6.14
  6.02
Revenue, $m
  72
  70
  87
  106
  129
  153
  181
  210
  243
  278
  315
  354
  396
  440
  487
  535
  586
  639
  694
  751
  810
  872
  937
  1,003
  1,073
  1,145
  1,220
  1,298
  1,380
  1,464
  1,552
Variable operating expenses, $m
 
  58
  73
  89
  107
  128
  151
  176
  203
  232
  263
  296
  331
  368
  407
  447
  490
  534
  580
  628
  677
  729
  783
  839
  897
  957
  1,020
  1,085
  1,153
  1,224
  1,298
Fixed operating expenses, $m
 
  5
  5
  5
  6
  6
  6
  6
  6
  6
  6
  7
  7
  7
  7
  7
  7
  8
  8
  8
  8
  8
  9
  9
  9
  9
  10
  10
  10
  10
  10
Total operating expenses, $m
  73
  63
  78
  94
  113
  134
  157
  182
  209
  238
  269
  303
  338
  375
  414
  454
  497
  542
  588
  636
  685
  737
  792
  848
  906
  966
  1,030
  1,095
  1,163
  1,234
  1,308
Operating income, $m
  0
  6
  9
  12
  16
  19
  24
  29
  34
  39
  45
  52
  58
  65
  73
  81
  89
  97
  106
  115
  125
  135
  145
  156
  167
  179
  191
  203
  216
  230
  244
EBITDA, $m
  30
  34
  44
  55
  67
  81
  96
  113
  131
  150
  171
  193
  216
  241
  267
  294
  323
  352
  383
  415
  448
  483
  519
  556
  595
  636
  678
  722
  767
  815
  864
Interest expense (income), $m
  14
  13
  17
  21
  26
  32
  38
  46
  53
  62
  71
  80
  91
  101
  113
  125
  137
  151
  164
  178
  193
  209
  225
  241
  259
  277
  295
  315
  335
  356
  378
Earnings before tax, $m
  0
  -7
  -8
  -9
  -11
  -13
  -15
  -17
  -20
  -22
  -25
  -29
  -32
  -36
  -40
  -44
  -49
  -53
  -58
  -63
  -69
  -74
  -80
  -86
  -92
  -98
  -105
  -112
  -119
  -126
  -134
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
  -7
  -8
  -9
  -11
  -13
  -15
  -17
  -20
  -22
  -25
  -29
  -32
  -36
  -40
  -44
  -49
  -53
  -58
  -63
  -69
  -74
  -80
  -86
  -92
  -98
  -105
  -112
  -119
  -126
  -134

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
  549
  683
  838
  1,012
  1,207
  1,422
  1,657
  1,911
  2,185
  2,478
  2,790
  3,119
  3,467
  3,831
  4,213
  4,612
  5,028
  5,461
  5,912
  6,381
  6,868
  7,375
  7,901
  8,448
  9,017
  9,608
  10,223
  10,863
  11,530
  12,224
Adjusted assets (=assets-cash), $m
  647
  549
  683
  838
  1,012
  1,207
  1,422
  1,657
  1,911
  2,185
  2,478
  2,790
  3,119
  3,467
  3,831
  4,213
  4,612
  5,028
  5,461
  5,912
  6,381
  6,868
  7,375
  7,901
  8,448
  9,017
  9,608
  10,223
  10,863
  11,530
  12,224
Revenue / Adjusted assets
  0.111
  0.128
  0.127
  0.126
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
  0.127
Average production assets, $m
  501
  404
  503
  616
  744
  887
  1,045
  1,218
  1,406
  1,607
  1,823
  2,052
  2,294
  2,549
  2,818
  3,098
  3,392
  3,698
  4,016
  4,348
  4,693
  5,051
  5,424
  5,811
  6,213
  6,631
  7,066
  7,519
  7,989
  8,480
  8,990
Working capital, $m
  0
  -10
  -13
  -15
  -19
  -22
  -26
  -31
  -35
  -40
  -46
  -51
  -57
  -64
  -71
  -78
  -85
  -93
  -101
  -109
  -118
  -126
  -136
  -145
  -156
  -166
  -177
  -188
  -200
  -212
  -225
Total debt, $m
  370
  442
  559
  692
  843
  1,012
  1,198
  1,402
  1,622
  1,860
  2,113
  2,383
  2,668
  2,969
  3,285
  3,615
  3,961
  4,321
  4,696
  5,087
  5,493
  5,915
  6,353
  6,809
  7,283
  7,775
  8,287
  8,820
  9,375
  9,952
  10,553
Total liabilities, $m
  407
  475
  592
  725
  876
  1,045
  1,231
  1,435
  1,655
  1,893
  2,146
  2,416
  2,701
  3,002
  3,318
  3,648
  3,994
  4,354
  4,729
  5,120
  5,526
  5,948
  6,386
  6,842
  7,316
  7,808
  8,320
  8,853
  9,408
  9,985
  10,586
Total equity, $m
  254
  74
  92
  112
  136
  162
  190
  222
  256
  293
  332
  374
  418
  465
  513
  565
  618
  674
  732
  792
  855
  920
  988
  1,059
  1,132
  1,208
  1,287
  1,370
  1,456
  1,545
  1,638
Total liabilities and equity, $m
  661
  549
  684
  837
  1,012
  1,207
  1,421
  1,657
  1,911
  2,186
  2,478
  2,790
  3,119
  3,467
  3,831
  4,213
  4,612
  5,028
  5,461
  5,912
  6,381
  6,868
  7,374
  7,901
  8,448
  9,016
  9,607
  10,223
  10,864
  11,530
  12,224
Debt-to-equity ratio
  1.457
  6.010
  6.100
  6.170
  6.220
  6.260
  6.290
  6.310
  6.330
  6.350
  6.360
  6.370
  6.380
  6.390
  6.400
  6.400
  6.410
  6.410
  6.420
  6.420
  6.420
  6.430
  6.430
  6.430
  6.430
  6.440
  6.440
  6.440
  6.440
  6.440
  6.440
Adjusted equity ratio
  0.371
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134
  0.134

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -1
  -7
  -8
  -9
  -11
  -13
  -15
  -17
  -20
  -22
  -25
  -29
  -32
  -36
  -40
  -44
  -49
  -53
  -58
  -63
  -69
  -74
  -80
  -86
  -92
  -98
  -105
  -112
  -119
  -126
  -134
Depreciation, amort., depletion, $m
  30
  28
  35
  42
  51
  61
  72
  84
  97
  111
  126
  142
  158
  176
  194
  214
  234
  255
  277
  300
  324
  348
  374
  401
  428
  457
  487
  519
  551
  585
  620
Funds from operations, $m
  4
  21
  27
  33
  41
  49
  57
  67
  77
  88
  100
  113
  126
  140
  154
  169
  185
  202
  219
  237
  255
  274
  294
  315
  337
  359
  382
  407
  432
  458
  486
Change in working capital, $m
  -15
  -2
  -2
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
Cash from operations, $m
  19
  101
  29
  36
  44
  52
  61
  71
  82
  94
  106
  118
  132
  146
  161
  176
  193
  209
  227
  245
  264
  283
  304
  325
  347
  370
  393
  418
  444
  471
  499
Maintenance CAPEX, $m
  0
  -22
  -28
  -35
  -42
  -51
  -61
  -72
  -84
  -97
  -111
  -126
  -142
  -158
  -176
  -194
  -214
  -234
  -255
  -277
  -300
  -324
  -348
  -374
  -401
  -428
  -457
  -487
  -519
  -551
  -585
New CAPEX, $m
  -9
  -85
  -99
  -113
  -128
  -143
  -158
  -173
  -187
  -202
  -215
  -229
  -242
  -255
  -268
  -281
  -293
  -306
  -319
  -332
  -345
  -358
  -372
  -387
  -402
  -418
  -435
  -452
  -471
  -490
  -511
Cash from investing activities, $m
  -217
  -107
  -127
  -148
  -170
  -194
  -219
  -245
  -271
  -299
  -326
  -355
  -384
  -413
  -444
  -475
  -507
  -540
  -574
  -609
  -645
  -682
  -720
  -761
  -803
  -846
  -892
  -939
  -990
  -1,041
  -1,096
Free cash flow, $m
  -198
  -6
  -98
  -112
  -127
  -142
  -158
  -174
  -189
  -205
  -221
  -236
  -252
  -267
  -283
  -299
  -315
  -331
  -347
  -364
  -381
  -399
  -417
  -436
  -456
  -477
  -499
  -522
  -545
  -570
  -597
Issuance/(repayment) of debt, $m
  30
  101
  117
  134
  151
  169
  186
  204
  221
  237
  254
  270
  285
  301
  316
  331
  345
  360
  375
  390
  406
  422
  439
  456
  474
  492
  512
  533
  554
  577
  601
Issuance/(repurchase) of shares, $m
  195
  0
  0
  0
  0
  0
  1
  2
  3
  4
  6
  8
  11
  13
  16
  19
  23
  26
  30
  34
  38
  42
  47
  51
  56
  61
  66
  71
  77
  83
  88
Cash from financing (excl. dividends), $m  
  224
  101
  117
  134
  151
  169
  187
  206
  224
  241
  260
  278
  296
  314
  332
  350
  368
  386
  405
  424
  444
  464
  486
  507
  530
  553
  578
  604
  631
  660
  689
Total cash flow (excl. dividends), $m
  27
  95
  19
  22
  24
  26
  28
  30
  31
  32
  33
  33
  33
  33
  33
  32
  31
  30
  28
  27
  25
  23
  21
  19
  17
  15
  13
  11
  9
  7
  5
Retained Cash Flow (-), $m
  -188
  -16
  -18
  -21
  -23
  -26
  -29
  -31
  -34
  -37
  -39
  -42
  -44
  -47
  -49
  -51
  -53
  -56
  -58
  -60
  -63
  -65
  -68
  -71
  -73
  -76
  -79
  -82
  -86
  -89
  -93
Prev. year cash balance distribution, $m
 
  8
  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
 
  87
  1
  1
  1
  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, %
 
  12.90
  13.55
  14.22
  14.93
  15.68
  16.46
  17.29
  18.15
  19.06
  20.01
  21.01
  22.06
  23.17
  24.32
  25.54
  26.82
  28.16
  29.57
  31.05
  32.60
  34.23
  35.94
  37.74
  39.62
  41.60
  43.68
  45.87
  48.16
  50.57
  53.10
PV of cash for distribution, $m
 
  77
  1
  1
  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
  100.0
  100.0
  100.0
  100.0
  99.9
  99.8
  99.6
  99.3
  98.9
  98.5
  98.0
  97.4
  96.8
  96.2
  95.5
  94.8
  94.0
  93.3
  92.5
  91.7
  90.9
  90.0
  89.2
  88.3
  87.5
  86.6
  85.8
  84.9
  84.1

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 -310.6
Price to Sales 4.3
Price to Book 1.2
Price to Tangible Book
Price to Cash Flow 16.3
Price to Free Cash Flow 31.1
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 $55 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 26.7% 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 12.9%, 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 83.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $5 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 3.8% 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 579.1%.

Life of production assets of 14.5 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 -14.5%. 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 - $66 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 29.07 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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