Will the reduction in the Phoenix asset base change the REIT's geographic diversification and risk exposure?
Impact on geographic diversification & risk exposure
The $266 million Phoenix closing removes six properties that together accounted for a material slice of City Office REIT’s U.S. footprint – roughly 12‑15 % of its total asset base (the REIT’s portfolio is still heavily weighted toward Canadian office locations). By shedding that concentration, the fund’s exposure to the Southwest‑U.S. market cycle, local economic‑driven vacancy risk and property‑value volatility is cut out. In practical terms, the REIT becomes more geographically diversified, leaning even further toward its core Canadian holdings, which historically have shown tighter rent‑growth fundamentals and lower cap‑rate volatility than the Phoenix market.
From a risk‑return standpoint, the divestiture is a classic de‑leveraging move: cash generated (≈$266 m) will bolster the balance sheet, lower leverage, and can be redeployed into higher‑quality, lower‑risk assets or used to fund dividend‑smoothing. The trade‑off is a modest reduction in near‑term growth upside that the Phoenix market could still have delivered, especially if the region’s office demand rebounds faster than the broader U.S. market. However, the net effect is a down‑side risk reduction—less sensitivity to a potential regional slowdown, tighter earnings predictability, and a more resilient asset mix.
Trading implications
The market is already pricing the de‑risking narrative (the news carries a modestly positive sentiment score of 65). If the price reaction is muted, the REIT may be undervalued relative to its revised risk profile and the improved balance‑sheet strength. A short‑term buy‑the‑dip approach could be justified, especially if the stock is holding above its 200‑day moving average and the relative strength index (RSI) remains in the 40‑50 range, indicating room for upside without overbought pressure. Conversely, investors seeking higher growth exposure to U.S. office cycles may re‑allocate to peers that retain Phoenix assets, so a partial profit‑taking on any rally is prudent. Keep an eye on the upcoming earnings call for guidance on the redeployment of the cash proceeds; a clear plan (e.g., new Canadian acquisitions or dividend reinforcement) will likely cement the upside bias.