8-K: City Office REIT Agrees to $1.1 Billion Acquisition by MCME Carell, Common Stockholders to Receive $7.00 Per Share

City Office REIT, Inc. has entered into a definitive merger agreement to be acquired by MCME Carell for $7.00 per common share in cash, a transaction valued at approximately $1.1 billion, alongside the sale of its Phoenix portfolio.

Summary

• City Office REIT, Inc. (CIO) entered into a definitive Agreement and Plan of Merger with MCME Carell Holdings, LP and MCME Carell Merger Sub, LLC for an all-cash acquisition.
• Common stockholders will receive $7.00 per share in cash, representing a 26% premium to the prior day's closing price and a 39% premium to the 90-day volume-weighted average price.
• Holders of 6.625% Series A Cumulative Redeemable Preferred Stock will receive $25.00 per share plus any accrued and unpaid distributions.
• The total transaction is valued at approximately $1.1 billion, including the assumption or repayment of indebtedness, preferred stock redemption, and the sale of the Phoenix portfolio.
• CIO's indirect subsidiaries also entered into an agreement to sell their Phoenix portfolio (seven properties) to SWVP Acquisitions LLC for an aggregate purchase price of $296 million.
• The Phoenix portfolio sale includes a $20,000,000 non-refundable earnest money deposit and is scheduled to close on August 14, 2025.
• Potential delays exist for the closing of the Block 23 Asset (up to 365 days) and the Pima Center Asset (up to 210 days) within the Phoenix sale, contingent on third-party ground lease approvals.
• Proceeds from the Phoenix sale are expected to be used to repay property-level and corporate indebtedness and for general corporate purposes.
• The merger is expected to close in the fourth quarter of 2025, subject to CIO shareholder approval and other customary conditions, and is not contingent on buyer financing.
• The Company's Board of Directors unanimously approved the merger agreement.
• The employment agreement for CEO James Farrar was amended, extending post-termination restrictive covenants in exchange for a $25,000 lump sum cash payment post-closing.
• Common stock dividend payments are suspended through the expected close of the transaction, but regular quarterly dividends on preferred stock will continue.

Sentiment

Score: 8

Explanation: The sentiment is highly positive for common shareholders due to the significant premium offered and the immediate cash payout in a challenging market. The strategic divestiture of the Phoenix portfolio also strengthens the company's financial position. While there are standard closing risks and potential delays for the Phoenix sale, the overall financial terms and strategic rationale are favorable.

Positives

• Common stockholders are receiving a substantial premium of 26% over the prior day's closing price and 39% over the 90-day volume-weighted average price.
• The transaction provides immediate liquidity and significant value to shareholders in a challenging office sector environment.
• The merger is not conditioned upon the buyer's receipt of financing, which reduces closing risk for the Company.
• The concurrent sale of the Phoenix portfolio for $296 million provides substantial proceeds that are expected to be used for debt repayment and general corporate purposes.
• The Company's Board of Directors unanimously approved the merger, indicating strong internal support for the transaction.
• Existing directors and officers liability insurance will be maintained for six years post-merger, providing continued protection for former personnel.

Negatives

• Common stock dividend payments are suspended through the expected close of the transaction, impacting income-focused common shareholders.
• The merger is subject to various closing conditions, including shareholder approval and third-party consents, which could delay or prevent completion.
• There are potential significant delays (up to 365 days for Block 23 Asset and 210 days for Pima Center Asset) in the closing of the Phoenix portfolio sale due to third-party ground lease approvals.
• A termination fee of $16,000,000 is payable by the Company to Parent under specified circumstances, such as accepting a Superior Proposal.
• The CEO's employment agreement amendment includes a $25,000 lump sum payment, which is an additional cost associated with the transaction.

Risks

• The occurrence of any event, change, or circumstance that could give rise to the termination of the Merger Agreement or the Phoenix Sale Agreement.
• The outcome of any legal proceedings that may be instituted against the Company and others following the announcement of the Merger Agreement.
• The inability to complete the proposed Merger due to the failure to satisfy the conditions to the Merger, including obtaining the approval of the Company's shareholders and other closing conditions.
• Risks that the proposed Merger disrupts current plans and operations of the Company.
• Potential difficulties in employee retention as a result of the proposed Merger.
• Legislative, regulatory, and economic developments could adversely affect the transaction or the Company's business.
• Risks related to disruption of management's attention from the Company's ongoing business operations due to the proposed Merger.
• The effect of the announcement of the proposed Merger and the Phoenix Portfolio Sale Transaction on the Company's relationships with tenants, operating results, and business generally.
• Changes in global, regional, or local political, economic, competitive, market, regulatory, and other factors, including systemic and structural changes in the demand for commercial office space.
• Should one or more risks or uncertainties materialize, or should any of the underlying assumptions prove to be incorrect, actual results may vary materially from forward-looking statements.
• Damage or destruction of any Owned Property that is not substantially covered by insurance could impact the Company's assets.
• Failure to obtain certain third-party consents related to ground leases required under the Phoenix Sale Agreement could delay or prevent the sale of specific assets.
• The occurrence and continuation of any uncured event of default under certain of the Company's loan documents could prevent the merger from closing.

Future Outlook

The Company expects the merger to close in the fourth quarter of 2025, at which point it will become a private company and its shares will cease trading on the NYSE. The net proceeds received from the Phoenix Portfolio Sale Transaction are anticipated to be used for repaying property-level and corporate indebtedness and for general corporate purposes. The Company will suspend future common stock dividend payments through the expected close of the Transaction but will continue regular quarterly dividends on its Series A Cumulative Preferred Stock.

Management Comments

• "After conducting an extensive process to explore potential strategic alternatives, we are pleased to have reached an agreement with MCME Carell. In light of a challenging environment for the office sector, this Transaction delivers immediate and significant value to our shareholders." James Farrar, City Office's Chief Executive Officer.
• "We are pleased to have reached an agreement with City Office to effectuate this Transaction. This opportunity underscores our partnership's continued belief in the recovery of the office sector and our interest in acquiring high-quality office assets in strong growth markets." Mukang Cho, Chief Executive Officer of Morning Calm Management, LLC.

Industry Context

This acquisition reflects a strategic move by MCME Carell, an affiliate of Elliott Investment Management and Morning Calm Management, to acquire high-quality office assets in strong growth markets, signaling a continued belief in the recovery of the office sector despite its challenging environment. The sale of City Office REIT's Phoenix portfolio concurrently with the merger highlights a broader trend of real estate companies optimizing their portfolios and divesting non-core or underperforming assets to strengthen financial positions or facilitate larger strategic transactions.

Comparison to Industry Standards

• The acquisition premium of 26% to the prior day's closing price and 39% to the 90-day VWAP is generally considered attractive for a REIT in the current challenging office sector, where many companies have seen depressed valuations.
• The suspension of common stock dividends is a common measure taken by companies undergoing significant transactions to preserve cash and facilitate the deal, aligning with practices seen in similar M&A scenarios for REITs.
• The concurrent portfolio sale, like the Phoenix assets, is a common strategy for REITs to streamline operations, reduce debt, and focus on core markets, similar to recent dispositions by other office REITs such as SL Green Realty Corp. or Vornado Realty Trust, which have also been shedding non-core assets to deleverage and focus on prime properties.
• The transaction's valuation at approximately $1.1 billion, including debt, suggests a significant enterprise value, which can be compared to recent private market transactions for office portfolios, though direct public comparisons are difficult given the unique nature of each portfolio and market conditions.

Management Changes

Corporate Governance

Legal Proceedings

• The outcome of any legal proceedings that may be instituted against the Company and others following announcement of the Merger Agreement.
• There is no Action pending or, to the Knowledge of the Company, threatened seeking to prevent, hinder, modify, delay or challenge the Merger or any of the other transactions contemplated by this Agreement.
• The Company shall give Parent the opportunity to participate in (but not control) the defense and settlement of any stockholder litigation against the Company and/or its officers or directors relating to the Merger or any of the other transactions contemplated by this Agreement.
• The Company shall not enter into any settlement agreement in respect of any stockholder litigation against the Company and/or its directors or officers relating to the Merger or any of the other transactions contemplated hereby without Parent's prior written consent.

Related Party Transactions

• No director, executive officer, stockholder, partner, member, employee or Affiliate of the Company or any of its Subsidiaries, nor any of such Persons Affiliates or immediate family members, is a party to any Contract with or binding upon the Company or any of its Subsidiaries or any of their respective properties or assets or has any interest in any property owned by the Company or any of its Subsidiaries or has engaged in any transaction with any of the foregoing within the last 12 months, in each case, that is of a type that would be required to be disclosed in the Company SEC Documents pursuant to Item 404 of Regulation S-K that has not been so disclosed.
• No Related Party of the Company or any of its Subsidiaries owns, directly or indirectly, on an individual or joint basis, any interest in, or serves as an officer or director or in another similar capacity of, any supplier or other independent contractor of the Company or any of its Subsidiaries, or any organization which has a Contract with the Company or any of its Subsidiaries, except as set forth in Section 3.22 of the Company Disclosure Letter (which is not provided in the filing).

Stakeholder Impact

• **Shareholders (Common Stock):** Will receive $7.00 per share in cash, a significant premium, providing immediate liquidity and value realization.
• **Shareholders (Preferred Stock):** Will receive $25.00 per share plus accrued and unpaid distributions, ensuring full redemption value.
• **Employees:** Employment of certain executives will be terminated with severance benefits. The CEO's employment agreement was amended with extended restrictive covenants and a lump sum payment. General employees will receive comparable base salary, bonus opportunity, and benefits for 12 months post-closing.
• **Tenants:** Relationships with tenants could be affected by the announcement and change in ownership, though the filing states the company will use commercially reasonable efforts to preserve relationships. The Phoenix portfolio sale involves obtaining third-party consents from ground lease counterparties.
• **Creditors:** Net proceeds from the Phoenix Portfolio Sale Transaction are expected to be used to repay property-level and corporate indebtedness. The transaction includes assumption or repayment of indebtedness.
• **Management:** Management's attention may be disrupted due to the proposed merger.

Next Steps

• Company to prepare and file a preliminary Proxy Statement with the SEC within 30 calendar days of the agreement date.
• Company to set a preliminary record date for the Special Shareholders Meeting and commence a broker search.
• Company to use commercially reasonable efforts to have the Proxy Statement cleared by the SEC as promptly as practicable.
• Company to duly call, give notice of, convene, and hold a special meeting of its Common Shareholders to obtain the Company Stockholder Approval.
• Phoenix Portfolio Sale Transaction is scheduled to close on August 14, 2025.
• The overall Merger Transaction is expected to close in the fourth quarter of 2025.
• Company to announce earnings for the quarter ended June 30, 2025, before market open on July 31, 2025.
• Upon closing, City Office will become a private company, and its shares will be delisted from the NYSE and deregistered under the Exchange Act.
• CEO James Farrar to receive a $25,000 lump sum cash payment within 30 days following the closing of the Merger.
• Company to terminate any Company 401(k) Plan no later than one business day prior to the Closing Date, unless otherwise notified by Parent.

Key Dates

Recommendation

The acquisition price of $7.00 per common share represents a substantial premium of 26% to the prior day's closing price and 39% to the 90-day volume-weighted average price. This offers immediate and significant value to common shareholders, especially in the current challenging office real estate market. The transaction is not subject to a financing condition for the buyer, which reduces execution risk. The concurrent sale of the Phoenix portfolio further strengthens the company's financial position by reducing debt. Given the immediate, attractive cash payout and reduced market exposure, this is a strong opportunity for investors.

Keywords

City Office REIT, CIO, MCME Carell, Merger, Acquisition, Real Estate, Office Properties, Phoenix Portfolio Sale, REIT, SEC Filing, 8-K, Corporate Governance, Shareholder Value, Commercial Real Estate, Sun Belt Markets, Elliott Investment Management, Morning Calm Management