Orion Properties (ONL)

“What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.” – David Einhorn

In 2021, Realty Income (O), a large-cap diversified REIT, spun nearly all its office assets into a new, independent entity: Orion Office REIT (ONL). For every ten shares of O, shareholders received one share of ONL. But “Office”, once associated with safety, became a four-letter word, and when ONL shares plopped into O investors' brokerage accounts, they were puked. Over the next few weeks, ONL dropped from $25 to $17. And nausea didn’t wane. ONL was purged, and last month, ONL cut its dividend by 80% and took “office” out of the company name. Slack wasn’t cut from investors, however, and Orion Properties’ stock halved from $4 to $2. Such a vicious price capitulation created a highly levered equity and an interesting risk-reward proposition.

A summary of ONL:

Price – $1.85

Shares outstanding – 56.11m

Market cap – $103.8m

Net Debt – $502.3

Enterprise value – $606.1m

Implied capitalization rate – 14.2%

Implied price per square foot – $74.7

A summary of Orion Properties (sq. ft. and dollars in thousands):

Operating Properties – 69

Unconsolidated JV Properties – 6

Rentable Square Feet – 8,112

Annualized Base Rent – $120,293

FY NOI – $102,140

Annualized run-rate NOI – $86,264

Occupancy Rate – 73.7%

Leased Rate – 74.7%

Weighted Average Remaining Lease Term – 5.2 years

Investment-Grade Tenants – 74.4%

NN leases – 62.7%

NNN leases – 13.0%

Net Debt/EBITDA – 7.57x

Interest Expense/EBITDA – 2.7x

Tenant Diversification – Top 10 – (% of ABR, excluding non-operating properties):

General Services Administration – 16.3%

Bank of America – 9.4%

Coterra Energy – 4.9%

Cigna/Express Scripts – 4.0%

MDC Holdings Inc. – 3.7%

T-Mobile – 3.4%

Charter Communications – 3.2%

Banner Life Insurance – 3.1%

Encompass Health – 3.0%

Collins Aerospace – 2.9%

Geographic Diversification – Top 10 – (% of ABR, excluding non-operating properties):

Texas – 16.5%

New Jersey – 12.5%

Kentucky – 8.7%

Colorado – 7.1%

California – 6.8%

Oklahoma – 5.8%

New York – 5.1%

Maryland – 4.0%

Tennessee – 3.9%

Georgia – 3.9%

Lease Expirations (% of rentable sq. ft.):

2025 – 13.5%

2026 – 12.9%

2027 – 13.7%

2028 – 17.5%

2029 – 5.1%

Debt:

Mortgage payable – $355m @ 5.02% (2027)

Credit facility revolver – $119 @ 7.66% (2026)

Unconsolidated JV debt – $26.3m @ 7.17% (2025)

Total – $518,329 @ 5.73%

A single-tenant, suburban office real estate company at 73.7% occupancy, with GSA making up 16.3% of annual rent – yikes. DOGE could terminate those leases at any moment, adding to the collection of vacant and ultimately costly buildings in Orion’s portfolio. More suffering could be on the horizon, too, as a recession looms.

Orion has silver linings, though, with credit tenants locked into long-term leases (3+ years): Bank of America, T-Mobile, NetJets, Cigna, etc. These non-government leases, and others like them, make up 2.8 million square feet (link) of Orion’s portfolio, totaling 25 properties and producing $54.5 million in rent, or roughly $45 million in NOI.

Capitalize these earnings at 10%, and this portfolio segment – let’s call it the “tenderloin” – is worth $450 million. ONL’s current enterprise value is $606.1 million, which values the other 5.3 million square feet of properties and 42.5 acres of land at $156.1 million. The land is $20.7 million on the books, but let’s be conservative and call it $10.3 million. Carve out land, and the remaining 5.3 million square feet – or the “flank steak” portfolio – is being offered at $27.51/sq. Ft.

At the current price, the market is implying that the entire 5.3 million square feet will go vacant – ONL recently sold two vacant properties (164k square feet) for $5.26 million, or $32.07/sq. ft. Assuming the tenderloin remains fully leased, a doomsday scenario for the flank steak portfolio would equate to 65.4% vacancy for Orion as a whole – which seems unlikely.

Now, ONL’s equity is levered, about 6-to-1. If ONL ends up being worth $500 million ($61.73/sq. ft.), shareholders will get wiped out. But leverage works both ways, and ONL is probably worth more than $606.1 million. Net Lease Office Properties (NLOP), a decent comp for ONL and a stock held by some admirable value investors, is trading at an implied cap rate of 12% ($101.70/sq. ft.). ONL, in the event it’s awarded a $100/sq. ft. valuation, would see its equity triple. With a $700 million enterprise value ($86.42/sq. ft.), a 15.5% increase to enterprise value, the stock is a double.

What’s more, usually, a stock that’s left for dead has a disoriented, irrational, and even unethical management team – not ONL, so it seems. They slashed the dividend, a shrewd move that’ll save ONL $17.9 million – vacant properties cost them $19.3 million per year currently. Wall Street hates it, but long-term investors should love it. Further, CIO Gary Landriau announced his retirement and will remain involved as a counselor, resulting in $1 million in savings for the company.

Management has had success transitioning from traditional office to “dedicated-use-assets”, or “DUA”. Here’s CEO Paul McDowell, on ONL’s recent earnings call, regarding DUA: “Our DUA property focus will include medical, lab, R&D, flex and non-CBD government, all property types we already own. A good example of this property type is the Valent Lab and office property that we added in San Ramon, California during the third quarter. As we execute on this shift in strategy, we intend to continue to move away from generic office properties that has already been well underway as we have aggressively sold these types of properties as they have become vacant. At year-end, approximately 32% of our properties measured by annualized base rent or 25% as measured by total square footage, our dedicated use.”

To paraphrase McDowell in a Nareit interview, Orion is focused on rationalizing the portfolio, putting the company on the firmest financial footing as possible, and drudging through a brutal office environment.

Tough times aren’t new to McDowell either. He founded Caplease in 2001, a net-lease REIT, and sold it to American Realty Capital Properties (ARCP) in 2013.

The team bought some stock after the last halving as well.

Gary E. Landriau — 10,746 shares @ 2.444 = $26,266

Reginald H. Gilyard — 40,000 shares @ $2.345 = $93,816

Paul H. Mcdowell — 12,000 shares @ $2.483 = $29,796