8-K: City Office REIT Supplements Merger Proxy Amid Lawsuits

City Office REIT has issued supplemental disclosures to its merger proxy statement to address stockholder lawsuits alleging omitted material information, aiming to avoid delays in its acquisition by MCME Carell Holdings.

Summary

• City Office REIT, Inc. (CIO) filed an 8-K to provide supplemental disclosures to its definitive proxy statement concerning its merger with MCME Carell Merger Sub, LLC, a wholly owned subsidiary of MCME Carell Holdings, LP.
• The merger agreement was entered into on July 23, 2025, with the special meeting of stockholders scheduled for October 16, 2025, to vote on matters necessary to complete the merger.
• The company has received thirteen demand letters and two complaints from purported stockholders alleging that material information was omitted from the original proxy statement.
• The complaints are captioned as Eric Johnson vs. City Office REIT, Inc., et. al (Case No. 655681/2025) and Andrew Thompson v. City Office REIT, Inc., et. al (Case No. 655671/2025), naming the company and its board of directors as defendants.
• City Office REIT believes its original disclosures comply with applicable law and exchange rules, and that the allegations are without merit.
• The supplemental disclosures are being made voluntarily to moot disclosure claims, avoid nuisance, cost, distraction, and preclude efforts to delay the merger, without admitting culpability or materiality.
• Supplemental disclosures include details on non-disclosure agreements with Bidder A and other potential investors, clarifying that they did not contain 'don't ask-don't waive' standstill provisions.
• It was clarified that Morning Calm's proposal did not include management participation, and management's employment will terminate upon the merger's closing.
• Updates were provided to JLL Securities' discounted cash flow analysis, including a mid-point terminal value of $709 million, a discount rate range of 7.2% to 8.2%, and an implied per share equity value reference range of $606 million to $752 million, based on approximately 42 million fully diluted shares.
• Raymond James's discounted cash flow analysis was updated, showing an implied terminal value of approximately $824 million (at a 10.0% cap rate) and a present value of approximately $512 million, based on approximately 43 million fully diluted shares in 2030.
• Raymond James disclosed prior investment banking services to Morning Calm Parent, lending services to the Company (less than $100,000), and compensation of approximately $435,000 from Morning Calm Parent for sourcing debt capital, along with personal investments by senior deal team members in Morning Calm affiliated funds.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the ongoing legal challenges and the necessity of issuing supplemental disclosures, which introduce uncertainty and potential costs to the merger process. While the company maintains confidence in its original disclosures, the situation indicates increased scrutiny and potential for disruption.

Positives

• The company is proactively addressing legal challenges by issuing supplemental disclosures to keep the merger process on track.
• Management explicitly states the belief that the original proxy statement complied fully with applicable law and that the allegations are without merit, indicating confidence in their position.

Negatives

• The company is facing thirteen demand letters and two lawsuits from purported stockholders alleging material omissions in the merger proxy statement.
• The need for supplemental disclosures, even if voluntary, indicates a potential vulnerability or increased scrutiny regarding the merger process.
• Management's employment is set to terminate upon the closing of the merger, which could signal a complete change in leadership post-acquisition.

Risks

• The occurrence of any event, change, or other circumstances that could give rise to the termination of the Merger Agreement or the pending Pima Center disposition.
• The outcome of any legal proceedings that have been or 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.
• 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 pending Pima Center disposition on the Company's relationships with tenants, operating results, and business generally.
• Changes in global, regional, or local political, economic, business, competitive, market, regulatory, and other factors beyond the Company's control.

Future Outlook

The company's primary forward-looking statement is the expectation of completing the proposed merger, contingent on shareholder approval and satisfaction of other closing conditions. It aims to preclude any efforts to delay the closing of the Merger by issuing these supplemental disclosures.

Management Comments

• "The Company believes that the disclosures set forth in the Proxy Statement comply fully with applicable law and exchange rules, that no further disclosure beyond that already contained in the Proxy Statement is required under applicable law or exchange rules and that the allegations asserted in the Demand Letters and the Complaints are entirely without merit."
• "However, in order to moot these disclosure claims, to avoid nuisance, cost and distraction and to preclude any efforts to delay the closing of the Merger, and without admitting any culpability, liability or wrongdoing and without admitting the relevance or materiality of such disclosures, the Company is voluntarily supplementing the Proxy Statement."
• "As of the date hereof, Morning Calm and the Company’s management have agreed that management’s employment shall terminate as of the closing of the Merger."

Industry Context

The filing notes that in recent years, there were limited groups interested in the office building space due to the impact of COVID-19, providing context for the company's strategic alternatives exploration and the eventual merger agreement.

Comparison to Industry Standards

• JLL Securities reviewed publicly available financial and stock market information of four selected REITs comparable to City Office REIT: Cousins Properties Incorporated (CUZ), Highwoods Properties, Inc. (HIW), Piedmont Realty Trust, Inc. (PDM), and Brandywine Realty Trust (BDN).
• Comparable Public Peers EV / 26E EBITDA: CUZ (12.2x), HIW (12.5x), PDM (10.6x), BDN (11.2x).
• Comparable Public Peers P / 26E FFO: CUZ (9.9x), HIW (8.6x), PDM (5.0x), BDN (5.7x).
• Comparable Public Peers P/(D) to NAV: CUZ (-5.8%), HIW (-4.0%), PDM (-29.3%), BDN (-47.9%).
• Comparable Public Peers Implied Cap Rate: CUZ (7.9%), HIW (8.6%), PDM (10.1%), BDN (11.6%).
• Raymond James analyzed four publicly traded domestic REITs with market capitalizations below $5 billion: Highwoods Properties, Inc., Brandywine Realty Trust, Piedmont Realty Trust Inc., and Franklin Street Properties Corp.
• Raymond James Comparable Company Implied Cap Rate: Highwoods (8.5%), Brandywine (11.6%), Piedmont (10.0%), Franklin Street (11.3%).
• Raymond James Comparable Company FFO Multiple 2025E: Highwoods (9.1x), Brandywine (6.9x), Piedmont (5.3x), Franklin Street (18.2x).
• Raymond James Comparable Company FFO Multiple 2026E: Highwoods (8.6x), Brandywine (5.9x), Piedmont (5.3x), Franklin Street (20.5x).
• Raymond James Comparable Company AFFO Multiple 2025E: Highwoods (14.9x), Brandywine (12.0x), Piedmont (11.5x), Franklin Street (NMF Not Meaningful Figure due to negative estimates).
• Raymond James Comparable Company AFFO Multiple 2026E: Highwoods (14.7x), Brandywine (9.0x), Piedmont (13.0x), Franklin Street (NMF Not Meaningful Figure due to negative estimates).

Management Changes

Corporate Governance

Legal Proceedings

• Thirteen demand letters received from purported stockholders alleging purportedly material information is omitted from the Proxy Statement.
• Two complaints filed in the New York Supreme Court: Eric Johnson vs. City Office REIT, Inc., et. al (Case No. 655681/2025) and Andrew Thompson v. City Office REIT, Inc., et. al (Case No. 655671/2025).
• The complaints name the Company and its board of directors as defendants, asserting allegations similar to the demand letters.

Related Party Transactions

• Raymond James provided investment banking services to Morning Calm Parent (the acquirer's parent) for which it received fees.
• Raymond James is a lender to City Office REIT, Inc. for which it received fees of less than $100,000.
• Raymond James was engaged by City Office REIT, Inc. in connection with an at-the-market offering (no compensation received yet).
• Raymond James was engaged by Morning Calm Parent for sourcing debt capital in connection with a real estate project, receiving approximately $435,000 in compensation.
• A senior member of the Raymond James deal team representing City Office REIT, Inc. in the merger has invested approximately $600,000 in funds affiliated with Morning Calm Parent.
• Another senior member of the Raymond James deal team is a co-investor in a building managed by funds affiliated with Morning Calm Parent.

Stakeholder Impact

• Shareholders: Required to vote on the merger, subject to legal challenges and supplemental disclosures. The lawsuits could impact their perception of the merger's fairness or process.
• Employees (Management): Current management's employment will terminate upon the closing of the merger, indicating a significant change in leadership.
• Acquirer (MCME Carell Holdings, LP): Faces potential delays and increased scrutiny due to the legal challenges, despite the target company's efforts to mitigate them.

Next Steps

• Stockholders will vote on the merger at a special meeting on October 16, 2025.
• The company anticipates the closing of the merger, subject to shareholder approval and other closing conditions.
• The company may receive additional demand letters or complaints, which it may not disclose unless new material allegations or disclosure obligations arise.

Key Dates

Recommendation

The filing indicates that the merger is proceeding, but the existence of multiple demand letters and lawsuits from stockholders, alleging material omissions in the proxy statement, introduces significant legal and operational uncertainty. While the company is taking steps to address these challenges through supplemental disclosures, the situation could lead to delays or increased costs. A 'hold' recommendation is appropriate as investors should await the outcome of the special meeting and monitor the legal proceedings to assess the merger's certainty and potential impact on the stock price before making further investment decisions.

Keywords

Merger, SEC Filing, Proxy Statement, Shareholder Lawsuits, Real Estate Investment Trust, Office REIT, Corporate Governance, Financial Analysis, Discounted Cash Flow, Comparable Companies, CIO, MCME Carell Holdings