Friday, October 29, 2021

Orion Office REIT: Form 10 Notes

Similar to my last post on Loyalty Ventures (LYLT), this is a half baked idea, it hasn't started trading yet but it might help others if I put my thoughts on paper and help me if anyone else has spent some time on it and would be willing enough to share thoughts, especially if you have a different view.

I love a good merger-spinoff combo, the latest one is a result of the merger of two large net lease REITs, Realty Income (O) (which is the bluest of blue chip in net lease land) and VEREIT (VER), the merger closes 11/1, the two are combining their office properties and spinning them off as Orion Office REIT (ONL, presumably for "Office Net Lease") mid-November.  About 2/3rds of the portfolio is coming from VEREIT and 1/3rd from Realty Income, VEREIT has spent the last few years selling down their office exposure to look closer to Realty Income and other high quality peers, so there is some risk these are their lower quality office assets.  Office properties usually aren't a great fit for a net lease REIT, they're less mission critical to the operations of the tenant as a restaurant location would be or a casino or an auto body shop.  Caesars Entertainment is not going to leave Caesars Palace (net-lease owned by VICI), but they can change a corporate office building without impacting the business.  Add covid into the mix where people are generally living their lives as normal other than returning to the office and it makes sense that Realty Income would use this opportunity to spinoff their office exposure.  This could be viewed as a BadCo or garbage barge spin, here's the Form 10.

The Realty Income management team is going to stay in place, while much of the VEREIT team is moving to the spinoff.  Orion is positioning itself as a single-tenant, long-term leased (resemble a triple-net if not explicitly one), suburban office REIT with the thesis that in a post-covid world, suburban office is going to make a comeback as millennials move to the suburbs and white collar employees generally want shorter commutes.  Orion wants to be a growth vehicle, taking advantage of any covid induced dislocations and a lack of competition, targeting properties in fast growing sun-belt metro arears.

Anecdotally, my friends that pre-covid worked in the suburbs are back in the office at least part time, others that worked downtown are still fully virtual.  I think it will be difficult to get people, especially those with families, to return to the old normal routine of an hour plus on a commuter train when the labor market is this tight.  Try taking a dog treat away, the dog won't be happy, everyone has adjusted and proved many formerly cube farm jobs can be done in pajamas from the comforts of home.  But maybe suburban office makes a comeback, suburban office would generally feature shorter/more flexible commutes as employees drive-to the office versus take public transportation on set schedules.  Again anecdotally, in my typical office job, we're trying to get people back to the office, it's difficult to train new people in fully virtually environment and we're generally having trouble keeping the previous corporate culture together almost two years removed from the beginning of covid.  Many people have never met face to face (even with their manager), there's resulting infighting, clients hate us, etc.  I have an uninformed view that how big corporates handle their return to office/remote strategy might be more important for long term success than their go-to-market strategy with clients in the next 1-3 years.  Office space will likely have a place in the future, but clearly a smaller footprint, more communal layouts and possibly different locations than pre-covid.  Maybe Orion gets sold off on the perception that it is a garbage barge spin but is instead well timed at the inflection points of both a return to office theme and suburbs over central business districts themes?  I'm not fully there on that thesis, but I'm intrigued by the idea.

The biggest problem is while it might be Orion's go-forward strategy, the starting portfolio doesn't resemble a long-term leased sun-belt suburban office portfolio.  The weighted average lease life is less than 3.5 years and many of their 92 properties are large headquarter like campuses in the northeast and midwest.  For example, they will own the old Merrill Lynch Princeton, NJ campus now occupied by Bank of America and the Walgreen's corporate campus down the street from me in the northern suburbs of Chicago.  The headline portfolio metrics seem good, it's 94.4% occupied (I assume this means leased, would be interesting to see the percentage where the tenants have returned), 72% investment grade tenants and 99% rent collection through covid.

Below is the lease expiration schedule, many of their leases are expiring in the next 3.5 years, depending on your view of the pace of return-to-office, this could be a challenging time to re-lease these properties at or near the same levels of base rent or square footage.
I'm going to compare Orion to Office Properties Income Trust (OPI) which also focuses on long-term single tenant office buildings, it differs from Orion positively as its weighted average lease term is 6 years (plus has more central business districts properties) and on the negative side, it is externally managed by RMR Group (RMR) which comes with conflicts that deserves a discount and has less net leases leading to more capex and lower FFO to AFFO conversion.  OPI is one of the cheapest office REITs and might be a good bogey for where Orion will trade initially.

Part of OPI's strategy is to sell assets with upcoming lease expirations that are not net leased and thus require the owner to upkeep the property and pay for capital expenditures.  I found their recent commentary on the Q3 earnings call surprising:

Ronald Kamden

And then just on the disposition side, can you just maybe comment on who are the buyers, what the market - like who sort of looking at these properties and any comments on pricing would also be helpful, whether it's cap rates or you're seeing increased interest would be helpful. Thanks.

Chris Bilotto

Yes. So I think from who the buyers are, I mean these - given kind of the size of these assets, a lot of these properties are kind of more local, local, regional groups, not necessarily institutional investors. And so it really is a mix, just kind of given the fact that these properties, it's not necessarily a portfolio, but they're individual dispositions. And so I think from kind of looking at the financial aspect, I would say that from kind of a cap rate for these assets and at least what we've sold, we're seeing kind of collective cap rates in between 7% and 8% and that can kind of vary on one side or the other depending on the circumstances.

And I think it's just kind of important to note that these are buildings we're selling as part of our capital recycling strategy because they're buildings that we feel like where we would rather maximized value. These are buildings that are older in age, capital intensive and in some cases kind of have short-term fault and so by way of example from what we've sold to-date, as I noted, the weighted average lease term was 1.2 years.

Again, those are surprising cap rates for a property type that many, include me, believe to be potentially obsolete. If these properties are trading for a 7%-8% cap rate, ONL should probably trade somewhere in there, maybe closer to the 7% range since the governance structure will be better and these are true net lease properties.

FFO is a fairly standardized number, while it's not GAAP, most REITs follow the same industry methodolgy, adjusted AFFO can vary, it is supposed to further adjust FFO (which is primarily just net income + depreciation, then adjusted for acquisitions/dispositions) by removing recurring capital expenditures to maintain the properties, a closer true cashflow/earnings number.  In a net lease REIT, FFO and AFFO should be very similar since the tenant is responsible for maintaining the property.  

That is what we see with ONL:

For the Realty Income office assets (FFO is proforma for the new capital structure, it does include the anticipate debt, overhead, etc.):

For the VEREIT office assets:

FFO and AFFO match up pretty well, call it ~$150MM in combined AFFO for the pro forma ONL.  There will be 54.2 million shares outstanding at the time of the spin (1 share of ONL for every 10 of O), or ~$2.75/share of LTM AFFO for Orion.  OPI trades for 8x AFFO, if ONL traded similarly it would go for ~$22/share.

That might be a bit harsh, the broader net lease REIT group trades for a high-teens AFFO on average, but I don't think this will trade like the others.  Based on the Form 10, I come up with about $170MM in NOI for the ONL portfolio, they're going get spun with $616MM in debt, if we put a 7% cap rate on that it should trade for ~$33.50/share and at an 8% cap rate it should trade for ~$27.80/share (the range where OPI is selling assets).  I could have a few mistakes in here, so please do your own work, but if ONL trades well below this range I'd be interested.  In post-covid/pre-merger calls, VEREIT was looking to sell office assets in the 6-6.75% range, possibly I'm being conservative again like CCSI.  

Other thoughts/notes:

  • This is another lightly talked about spinoff, in this instance I couldn't even find an investor deck or any materials on either Realty Income or VEREIT's websites.  Realty Income in particular has a highly retail oriented shareholder base as it has marketed itself as "The Monthly Dividend Company", with low rates, many retail investors have migrated towards the net lease REITs as bond proxies and Realty Income is the king of retail net lease.  I expect most retail investors to sell ONL and treat it like a dividend since it will only be 3-4% of the total value of O if my estimates are in the right ballpark.
  • All REIT spinoffs are taxable, another reason why O/VER shareholders are likely to sell because it is effectively a dividend anyway.  It also means that an acquirer doesn't need to wait the two year safe harbor period to avoid becoming taxable like regular spinoffs.  I don't have it in front of me, but back in 2016, two office REITs merged, Parkway and Cousins (CUZ), with the two entities doing a similar spin at the time of the merger.  Back then they spun off their Houston properties (this was shortly after the oil crash) in a "new Parkway" entity that was public only for a short while before it went private.  Something similar could happen here if the valuation precludes them from embarking on their growth plans.
  • Orion does plan to pursue a growth strategy, they're going to have $616MM of debt at the time of the spin which seems fairly modest here and in relation to most spinoffs.  So I think that strategy seems reasonable, suburban office likely doesn't have a lot of buyers right now, they should at least have a chance to begin executing on that strategy immediately given their capital structure.

Disclosure: No position, but interested depending where ONL begins trading


  1. I got 55 million ONL shares but still the same $2.75 estimated AFFO per share using 2x the trailing 6 month AFFO.

  2. I think you hit on the crux of it. It really depends on the trading price. At some level there seems to be a fairly good margin of safety.

    Another thing to consider is that they are just spinning off property with a small bridge loan. They could essentially mortgage their current properties and double the size of their book with properties that fit their new direction within a few years. They have a massive amount of flexibility given their tiny amount of debt.

    I was running some comps today for the office REIT industry. A few in the peer group aren’t pure plays in the space but I still think this gives a good idea of levels relative valuations.

    Orion Office REIT (ONL) –below is a quick summary of what I find important based on the SEC filing and the comp analysis based on Friday's closing price of $23:

    • Price to Tangible Book Value is 73% whereas vs. comps are 1.56. 47% undervalued
    • Financial leverage is .5% versus the average of 2.5. It will become much higher once they gain financing for their business. Essentially they were just spun out property with a small financing bridge loan.
    • Occupancy rate is 94.5% versus the average of 90.10.
    • Price to FFO (Which is essentially P/E ratio for REITS) is 10.45 whereas the average is 13.88. Trading 33% below the average based on earnings.
    • Dividend Yield based on the current price of $23 should be at least in the 6.5-7.4% versus the average of 3.6%. A yield of almost twice as much. This I had to back into using filings and typical pay-out ratios so the range may be a little wider.

    Ticker Name Ticker Price:D-1 BEst FFO Per Sh BF12M Mkt Cap (USD) Price To Tangible Book Value Per Share Finl Lev LF Ocpncy Rt Px to FFO Rt LF Dvd Ind Yld
    None (20 securities)
    ONL US Equity ORION OFFICE REIT ONL US 23.00 2.20 1,299.50 0.73 0.50 94.50 10.45 7.20
    CXP US Equity COLUMBIA PROPERTY TRUST INC CXP US 19.15 1.27 2,200.31 0.89 1.59 93.50 14.86 4.39
    PGRE US Equity PARAMOUNT GROUP INC PGRE US 9.42 0.90 2,062.57 0.60 2.38 95.10 10.33 2.97
    BDN US Equity BRANDYWINE REALTY TRUST BDN US 14.24 1.40 2,436.84 1.45 2.23 91.90 9.72 5.34
    OPI US Equity OFFICE PROPERTIES INCOME TRU OPI US 27.23 4.78 1,318.63 0.82 2.78 91.20 5.55 8.08
    EQC US Equity EQUITY COMMONWEALTH EQC US 26.01 -0.01 3,144.75 0.97 1.05 85.70 4.00
    OFC US Equity CORPORATE OFFICE PROPERTIES OFC US 28.00 2.34 3,145.10 1.94 2.51 94.30 15.69 3.93
    FSP US Equity FRANKLIN STREET PROPERTIES C FSP US 6.11 0.51 645.42 0.84 2.04 85.00 7.61 5.89
    HIW US Equity HIGHWOODS PROPERTIES INC HIW US 47.25 3.85 4,932.10 2.00 2.35 90.30 11.95 4.23
    KRC US Equity KILROY REALTY CORP KRC US 71.34 4.27 8,308.38 1.57 1.92 91.20 17.47 2.92
    VNO US Equity VORNADO REALTY TRUST VNO US 45.53 3.15 8,727.24 1.76 3.34 92.10 14.19 4.66
    BXP US Equity BOSTON PROPERTIES INC BXP US 118.00 7.19 18,432.42 2.21 4.06 90.10 16.98 3.32
    ARE US Equity ALEXANDRIA REAL ESTATE EQUIT ARE US 205.55 8.24 31,852.92 2.37 1.92 94.60 18.01 2.18
    PDM US Equity PIEDMONT OFFICE REALTY TRU-A PDM US 19.08 2.02 2,368.53 1.40 2.02 86.80 9.08 4.40
    HPP US Equity HUDSON PACIFIC PROPERTIES IN HPP US 26.82 2.12 4,089.47 1.39 2.53 94.50 13.75 3.73
    JBGS US Equity JBG SMITH PROPERTIES JBGS US 30.20 1.51 3,917.70 1.05 1.92 90.70 28.20 2.98
    SLG US Equity SL GREEN REALTY CORP SLG US 76.08 6.77 5,129.02 0.93 2.34 91.20 10.57 4.78
    ESRT US Equity EMPIRE STATE REALTY TRUST-A ESRT US 10.51 0.75 1,823.16 3.69 4.15 85.90 15.20 1.33
    DEI US Equity DOUGLAS EMMETT INC DEI US 36.25 2.03 6,361.36 2.65 3.89 87.40 17.09 3.09
    CUZ US Equity COUSINS PROPERTIES INC CUZ US 39.95 2.79 5,940.09 1.39 1.57 91.80 13.56 3.10
    CLI US Equity MACK-CALI REALTY CORP CLI US 19.20 0.66 1,746.17 1.31 3.46 78.70 2.50

    Average 43.80 2.83 5,929.11 1.56 2.50 90.10 13.88 3.89

    ONL US Equity ORION OFFICE REIT ONL US 23.00 2.20 1,299.50 0.73 0.50 94.50 10.45 7.20
    Comp to Average 47% 0.20 1.05 0.75 1.97

    1. Thanks for this, yeah I'll be closely watching how it trades the next couple days.

  3. According to the 2020 yearly report OPI's FFO was $5.30 and hence it is trading at about 5 x FFO? Or am I missing something...

    1. Not missing anything, but their AFFO is much lower, not all their properties are triple net lease so they’re on the hook for the maintenance capex, etc.

  4. Looking at office REIT comps, OPI is by far the cheapest. The median price/FFO in the group is 15.0x. OPI is 5.0x. The range is really wide at 8x-20x. I presume this reflects asset quality and lease type (triple net, length of contract, etc.). Median price/TBV for the group is 1.4x. OPI is 1.34x and ONL is .66x. Not sure if book value is meaningful here given historical accounting. Would love to get your thoughts. Mainly, I'm curious why you think OPI is the best comp here given the number of other public office RIETs. If you comp ONL to the broad group it's incredibly cheap. If you comp it to OPI not so much. Also, I've had a hard time finding anything on the quality of ONL properties. Most of them are legacy Vereit and their website was taken down...hard to find any good info (age, etc.). Any thoughts are appreciated. This thing is getting really beaten up and I have a hair trigger right now!

    1. I comped it to OPI because OPI is mostly suburban single tenant office, but it’s not triple net, they do have a longer average lease and a few trophy properties thrown in their (for example Google’s building in Chicago’s west loop). ONL has a lot of legacy suburban headquarters, I’m guessing when either VER or O did large triple net deals with Walgreens etc, for their stores, the headquarters got thrown into the deal too type thing. My point on OPI was if ONL gets that cheap then it’s a buy because OPI has the RMR ick factor, ONL will be internally managed, has a fairly good balance sheet, etc. I’m getting an itchy trigger finger too and might buy today or later this week.

  5. That's helpful, thanks. It looks cheap with the spin dynamics in full effect. On the flip side, the NY REIT mafia is usually on top of these things...hard to imagine they missed this. Trying to figure out if its an inefficient market due to the spin, or a garbage spin full of tired, old office R/E. Seems like it might be both. Less info than usual making it challenging.

  6. Looks interesting. Agree with your cap rate math but I think AFFO might be a good amount lower. Your number doesn't seem to include the full interest expense of the new debt. Standalone G&A will also be higher according to this statement "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."

    1. The FFO numbers are supposed to be proforma but with so many moving parts, hard to know how accurate they are in reality, probably should add some cushion for safety.

  7. Yeah I find it a bit confusing. If you use the 2018-2020 numbers they gave in the Form 10 that MDC gave above, you are correct. But if you use the proforma 2020 and YTD #'s in the Form 10 you come up with #'s similar to the 2018-2020 historicals despite the fact they include new interest expense and corporate. I'd post my model #'s here but it appears I can't copy & paste in this forum.

  8. Summary version - using the Form 10 2020 proformas I get...

    EBITDA $175MM
    FF0/share $2.83 6.5x
    AFFO/share $2.74 6.7x
    L-FCF/share $145MM 14.7%
    U-FCF/share $165MM 10.3%

    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

    1. "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?

    2. Good catch, I at least didn't factor them in, mistake on my part.

  9. 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.

  10. Proforma YTD numbers annualize at same rate as 2020. But I get your point. Hard to reconcile historical #'s with the proforma #'s.

  11. Has anyone gained comfort on the lease renewals?

    1. 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.

  12. 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?).
    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.

  13. Anyone know what the dividend yield will be? Seems like they are very vague in the Form 10.

    1. No, but based on other REITs divies it should approximate 50% of FFO, or ~$1.35/share.

  14. I made the Nov. 14th comments above. :)

    I spent a lot of time looking at this. Here is a quick summary of what I came up with.

    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.

    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.

    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.

    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.

    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...

    On another note I saw one analyst just initiated coverage with a price target of $28.50 which is pretty close to book value.

    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....

  15. 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 assets

  16. Thank you everyone for your thoughts, I think we're clearly seeing forced selling and I bought a starter position today (11/19).

    Here's the deck, I hadn't seen it before:

  17. 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:

    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"

    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?

    Good work, MDC!

    1. 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.

    2. Agree with everything said here. WFH is concerning but looks more than priced in.

      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!

  18. 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?

    1. 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.

    2. 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.

      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.

      Another take on valuation. Orion is trading at $155/sq.ft., which is far below replacement cost.

    3. ...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%.

    4. 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.

  19. 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?

    1. Thanks for the link. I suspect when they raise CMBS we'll get slightly more complete information on the portfolio.

    2. 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.

    3. 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.