tag:blogger.com,1999:blog-2080506270244832638.post5389739426709357694..comments2024-03-28T07:17:13.573-05:00Comments on Clark Street Value: Orion Office REIT: Form 10 NotesMDChttp://www.blogger.com/profile/10679835609782815537noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-2080506270244832638.post-91475008727817815422022-03-26T22:28:50.478-05:002022-03-26T22:28:50.478-05:00Yeah, I'm slightly disappointed in myself for ...Yeah, I'm slightly disappointed in myself for buying into this, was sort of a "love the setup, but iffy on the actual company/assets" type idea. But I haven't sold, seems very cheap and I do think that companies need a return-to-office strategy, things are close to breaking at a lot of firms, just hard to train people and keep a culture together with everyone remote.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-16084128398582817662022-03-24T19:49:42.546-05:002022-03-24T19:49:42.546-05:00ONL finally came out with earnings after being tot...ONL finally came out with earnings after being totally quiet. Looks pretty ugly at first glance. I guess I'll need to do some homework to figure it out. First dividend only 10 cents so most small O holders will be puking this out of their portfolio tomorrow I imagine.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-49680933814940111942021-12-01T07:14:48.316-06:002021-12-01T07:14:48.316-06:00Good catch, I at least didn't factor them in, ...Good catch, I at least didn't factor them in, mistake on my part.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-34151601112142152072021-11-30T22:43:00.172-06:002021-11-30T22:43:00.172-06:00"Orion expects to incur $8.0 million to $10.0..."Orion expects to incur $8.0 million to $10.0 million of annual costs, in addition to the corporate and shared costs historically allocated to Orion. However, since such costs are part of ongoing structuring and strategic discussions, the historical financial statements of Realty Income Office Assets and VEREIT Office Assets have not been adjusted for these future incremental expected stand-alone operating costs of Orion, and continue to reflect only the allocation of Realty Income’s and VEREIT’s corporate and shared costs." p.94 Form 10. So I guess the historical FFO/AFFO doesn't factor these in?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-30965261313919476062021-11-22T10:15:23.452-06:002021-11-22T10:15:23.452-06:00Thanks Supernova, one more qualitative thing, ONL&...Thanks Supernova, one more qualitative thing, ONL's properties are better than average for suburban office as well, so they could be sort of a beneficiary, companies use the down market to upgrade their spaces in the next couple years. Even the junkier of the big REITs will have higher quality assets than the average retail investor thinks, its not the run down Class C office building on the wrong side of town.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-3307930497785740452021-11-22T09:14:15.285-06:002021-11-22T09:14:15.285-06:00...and relevering by $300MM at a 2% ROIC-WACC spre......and relevering by $300MM at a 2% ROIC-WACC spread adds $.10, so call it $2.10 FFO and $2.00 FFO. Office REIT comps are trading at 13x '22e FFO. Suburban and triple net would call for a premium to that. But just 12x normalized FFO of $2.10 gets you to $25, ~35%.Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-44364629323956816602021-11-22T09:06:36.693-06:002021-11-22T09:06:36.693-06:00Occupancy for office space nationally is down 15% ...Occupancy for office space nationally is down 15% from pre-COVID. Lease rates were down 1% in 2020 and are down ~8% this year. I think its reasonable to hold these flat in '22 and then see a gradual recovery over the next few years. I would expect most of Orion's tenants to size up their long-term office space needs in 1H22 as we return to office, and then try to re-negotiate a new lease (whether their lease is coming up or not). For a normalized AFFO I'm starting with an "uneffected" AFFO of $2.75/share and then assuming a 20% hit to revenue at a 100% incremental margin and arrive at $1.90 AFFO for a normalized 2022, then a gradual recovery. That might be too harsh but WFH & return to office seems to be a big unknown and the supply/demand imbalance could really crush renewal rates.<br /><br />I would expect a lot of office space consolidation activity in 2022. I would think companies would favor consolidating into HQ and regional HQ office space and downsizing elsewhere, which would benefit Orion.<br /><br />Another take on valuation. Orion is trading at $155/sq.ft., which is far below replacement cost.<br />Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-295861634209491802021-11-21T08:29:59.435-06:002021-11-21T08:29:59.435-06:00Thanks for the link. I suspect when they raise CM...Thanks for the link. I suspect when they raise CMBS we'll get slightly more complete information on the portfolio.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-33658523032105540022021-11-20T18:36:51.378-06:002021-11-20T18:36:51.378-06:00This discussion is great, thanks so much. I found ...This discussion is great, thanks so much. I found the link below. It seems to suggest that their largest property will go vacant (1500 American Boulevard) but haven't seen that info on the Form 10 or anywhere else. Anyone have any additional information? Where can one get leasing data like that?<br /><br />https://www.capitalcommercial.com/wp-content/uploads/2021/10/Historical-Deal-Summary_Hopewell-VI_v10-2021.pdfAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-71009381675316412532021-11-20T11:07:06.916-06:002021-11-20T11:07:06.916-06:00Yep. The other thing on my mind is what's the...Yep. The other thing on my mind is what's the occupancy versus leased? I keep mentioning it, but for example, the Walgreen's HQ campus might be fully leased, but they already emptied out many of their buildings prior to covid. So that short WALT could really be an issue, but at this price, probably more than compensated.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-27933887031164293072021-11-20T10:55:26.295-06:002021-11-20T10:55:26.295-06:00ONL is 6.2x FFO while the median multiple within t...ONL is 6.2x FFO while the median multiple within the office REIT sector is 13.2x '22e (using Factset estimates). And 1) suburban is supposed to hold up better than urban, 2) ONL is net lease while the peer group isn't, and 3) ONL is under-levered. Heavy lease renewals the next three years is the main blemish, but a 50% discount for that? Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-76344283187943539632021-11-20T10:14:36.204-06:002021-11-20T10:14:36.204-06:00Agree with everything said here. WFH is concernin...Agree with everything said here. WFH is concerning but looks more than priced in. <br /><br />If they lever up to peer median levels they should have at least $600MM in new debt capacity. If that $600MM is invested at a 2% spread over their cost of debt, it will add $.25 to AFFO, or 9%. That provides a little cushion on the hit they will probably take from lease renewals over the next three years. Buybacks here also make sense as you noted. They have enough capacity to do a tender but I'm guessing management has ambitions to grow via acquisition with their dry powder (human nature). Value looks to be around $27 to me - 10x AFFO, 8% cap rate, .9x book all equal $27. At those levels its still priced with WFH taint, just less so. If WFH fades faster than we expect there is plenty of upside from a re-rating. I also started a small position and am looking at this as more of a trade. As some of the spin dynamics end over the next couple weeks and it finds legs, I'm guessing it may settle higher (thinking mid-$20s). No interest in it as a long-term holding but way too cheap!Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-72683142523725596022021-11-20T07:44:38.371-06:002021-11-20T07:44:38.371-06:00Ha thanks. Yes, its obvious why it is being sold ...Ha thanks. Yes, its obvious why it is being sold off (primarily a retail shareholder base, tiny taxable spinoff) but I just wish I had stronger views on return to office. Maybe it is my personal situation but I'm still working from home full time and have mixed feelings about returning to the office, think its the right thing to do, but going to take several years for things to get back to a new normal. I never like real estate plays where the main thesis is a repositioning, those are tough, office is going to be crazy oversupplied for years. But yes, ONL is very cheap, I believe since its taxable, they can likely buyback stock right away, etc., they have more options than if it was a tax free spin. But I imagine they'll at least try to execute the initial strategy despite where the stock trades.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-72245259145209337442021-11-19T20:50:49.674-06:002021-11-19T20:50:49.674-06:00Happy to see that you were convinced enough to ste...Happy to see that you were convinced enough to step up to the plate and buy an initial stake in Orion Office today. This looks like a textbook case of a Spinoff that was almost predestined to be bombarded with unusual selling pressure in initial trading. It was fascinating to see a story earlier this week on November 15th entitled "Orion Office: Better Sell Now Than Later" from a guy who correctly predicted that Orion Office was going to get slammed as soon as it started trading:<br /><br />https://www.docdroid.net/IBM1sb3/orion-office-onl-better-sell-now-than-later-seeking-alpha-pdf<br /><br />Surprisingly-- only 4 days later-- the exact same author who advised dumping Orion Office as fast as you possibly could when it was first spun-off, came back with a sweet Bear-to-Bull conversion story entitled "Orion Office Looks Like More of a Deep Value Play, Hold ONL" <br /><br />https://www.docdroid.net/Q5SLw7m/orion-office-reit-looks-like-more-of-a-deep-value-play-hold-onl-seeking-alpha-pdf<br /><br />In a world in which the Shiller CAPE is seemingly on the verge of revisiting the same 45x level as March of 2000, and where a stock like Rivian can trade for $150 billion in market cap before selling even a single car, a value buyer can simply tune that out and just buy things like Orion Office where it was simply being indiscriminately cleaned out. There were 29.4 million shares of Orion Office that traded over the past 7 days. That represents more than half of the shares outstanding. Among those who sold 29.4 million shares of ONL in the past 7 days, how many of those sellers would you suppose gave any serious consideration of whether ONL was trading too cheaply relative to Intrinsic Value before they hit the Sell button? <br /><br />Good work, MDC!Serendipitousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-23084913811515704162021-11-19T19:41:56.407-06:002021-11-19T19:41:56.407-06:00Thank you everyone for your thoughts, I think we&#...Thank you everyone for your thoughts, I think we're clearly seeing forced selling and I bought a starter position today (11/19).<br /><br />Here's the deck, I hadn't seen it before:<br />https://d1io3yog0oux5.cloudfront.net/_74f641631da36ef8f603f31a5478ab4f/onlreit/db/2137/19992/pdf/Orion+Investor+Presentation_November+2021.pdfMDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-34844332105155147922021-11-19T10:39:37.935-06:002021-11-19T10:39:37.935-06:00Really want to like this one. There may be another...Really want to like this one. There may be another item to consider for AFFO. If you look at the AFFO calc for the O assets, it deducts recurring capex but the calc for the Vereit assets' AFFO does not even though it has much more capex than the O assetsAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-72967215900235351552021-11-19T10:15:45.383-06:002021-11-19T10:15:45.383-06:00I made the Nov. 14th comments above. :)
I spent ...I made the Nov. 14th comments above. :)<br /><br />I spent a lot of time looking at this. Here is a quick summary of what I came up with. <br /><br />No one can own more than 10% of the parent or spin-off otherwise it messes up the structure so I think ownership aside from the index funds is pretty fragmented. Also, I don't think you'll get a lot of fund managers/hedge fund managers taking excessively large positions as they won't have much room to double up. At a market cap of $1.2 billion now the most you could put in is $120 million which isn't a lot for the larger funds. <br /><br />I took some time looking at the balance sheet and calculate the tangible book value at around $30. The NAV based on a 7% cap rate didn't seem too far off either. <br /><br />In regards to the dividend usually the cash available for distribution is pretty formulaic within a range. It is usually AFFO which is $141 million (after subtracting the $10 million of additional expenses for the new structure) or around $2.50 minus capitalized interest expense and scheduled principal amortization on debt. Debt is around $626 million in the form of mostly a term loan to the parent. At even a 5% interest rate that would cost around $31 million which would leave approximately $110 million of $1.90 per share for dividend payout. They may be a bit more conservative on this number but I think they'll payout at least $1.50 or more. <br /><br />I would have assumed a much lower payout at first as well until I dug into the numbers. Since there isn't much leverage there isn't much debt service or mortgage interest. <br /><br />With a tangible book value around $30 and a current market price around $17 if I were them I'd take out a decent size loan and buy back a significant amount of shares...<br /><br />On another note I saw one analyst just initiated coverage with a price target of $28.50 which is pretty close to book value. <br /><br />As far as the quality of the assets I have no idea. I tried to spent some time around it but came to the conclusion with such a significant discount to tangible book/NAV, based on 94% occupancy coupled with extremely low debt I figured there was a significant margin of safety.... Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-26011067460023346492021-11-18T15:59:15.338-06:002021-11-18T15:59:15.338-06:00No, but based on other REITs divies it should appr...No, but based on other REITs divies it should approximate 50% of FFO, or ~$1.35/share.Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-83540322682453503442021-11-18T14:56:57.812-06:002021-11-18T14:56:57.812-06:00Anyone know what the dividend yield will be? Seems...Anyone know what the dividend yield will be? Seems like they are very vague in the Form 10.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-77126527152123872802021-11-18T13:39:01.732-06:002021-11-18T13:39:01.732-06:00No, the only intel I can give is that Walgreens is...No, the only intel I can give is that Walgreens is almost certainly downsizing from their corporate hq ONL owns, a few of the buildings were already vacated prior to Covid.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-72297221398654085922021-11-18T13:37:31.155-06:002021-11-18T13:37:31.155-06:00Hard to gain comfort given WFH trend and lack of i...Hard to gain comfort given WFH trend and lack of info. My approach is to buy at a price that provides a sufficient return under a worst case scenario (-30% haircut to AFFO?).<br />If I haircut proforma AFFO by 30%, its still trading under 10x. But given the fixed cost nature maybe that's not a sufficient haircut.Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-42756089114475042272021-11-18T13:29:25.794-06:002021-11-18T13:29:25.794-06:00Has anyone gained comfort on the lease renewals?Has anyone gained comfort on the lease renewals?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-17715679519939189292021-11-18T13:15:29.404-06:002021-11-18T13:15:29.404-06:00Proforma YTD numbers annualize at same rate as 202...Proforma YTD numbers annualize at same rate as 2020. But I get your point. Hard to reconcile historical #'s with the proforma #'s.Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-42595669365939805792021-11-18T12:40:57.771-06:002021-11-18T12:40:57.771-06:00Yes we should also note that going forward AFFO is...Yes we should also note that going forward AFFO is lower than the PF 2020 AFFO due to the 2021 YTD revenue declines. I also think its safe to say that G&A will be higher than shown in the pro forma 2020 numbers as those numbers indicate G&A/revenue % in line with Realty Income, which is best in class in the entire REIT space. ONL is smaller so i doubt they will be that efficient. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-17455430625537984842021-11-18T12:25:57.683-06:002021-11-18T12:25:57.683-06:00Summary version - using the Form 10 2020 proformas...Summary version - using the Form 10 2020 proformas I get...<br /><br />EBITDA $175MM<br />FF0/share $2.83 6.5x<br />AFFO/share $2.74 6.7x<br />L-FCF/share $145MM 14.7%<br />U-FCF/share $165MM 10.3%<br /><br />It's also worth noting there should be value created by levering up the balance sheet via acquisitions. This isn't the type of thing most analysts model so probably isn't in models, but they should get some spread between acquisition yield and cost of debt capital Supernovahttps://www.blogger.com/profile/01073461904758612665noreply@blogger.com