Summary
Orion Office REIT’s dividend initiation will be the primary catalyst, with anything over 7% grabbing Average Joe and Jane’s attention.
ONL’s dividend should be well covered regardless. We’re modeling a payout ratio of around 55% based on AFFO.
Orion’s management experience and insight is a key catalyst for this Strong Buy recommendation.
This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Learn More »
3DSculptor/iStock via Getty Images In case you missed it, Orion Office REIT ( ONL ) debuted in the public markets just a few days ago – a newly created real estate investment trust (REIT) spun off from the newly merged Realty Income ( O ) and VEREIT.
Since I was already a Realty Income shareholder, I automatically have shares in Orion. For every 10 shares in the former, I got one share in the latter. (Source: Yahoo Finance)
For the record, I usually don’t jump on newly-listed REITs, preferring to conduct my due diligence first.
However, ONL with its 92 mission-critical and headquarter-office properties, is unique. I feel as though it’s already part of the family, having already (partially) been generating dividend income for me via O.
In addition, Orion’s senior level management team – broken down as follows – is very familiar with its portfolio. CEO Paul McDowell was previously Vereit’s executive vice president and COO of Vereit, a position he held starting in 2015. He was also the founder of CapLease, a former net-lease REIT I covered from 2012-2014 before it was acquired by American Realty.
CFO Gavin Brandon served as chief accounting officer at VEREIT since 2014 before taking on this new position.
CIO Gary Landriau was Vereit’s head of office and industrial asset management for over six years.
COO Chris Day was previously Vereit’s senior vice president and head of portfolio and retail asset management.
All in all, ONL’s management team has over 25 years of experience in the single-tenant, net-lease suburban office market. Meeting with Orion Office REIT’s CEO
Part of my due diligence process with new REITs usually includes meeting with management. And as comfortable as I am with this one, I still spoke with Orion’s McDowell on Friday.
The interview is available to iREIT on Alpha members, but part of it involved him saying: “… we think there’s a spot for us in the net-least marketplace for suburban office. We’ve got 92 properties, which is about 10.5 million square feet… a combination of the office properties from Vereit – which make up about 70% of the overall portfolio – and the office properties from Realty Income, which make up the remaining 30%. The portfolio is quite well-leased, with current occupancy of around 95%.” (Source: ONL Investor Presentation)
The properties are located in high-quality suburban markets. And Orion believes it can: “… provide investors with the unique opportunity to invest in suburban net-lease office given limited public market focus on property type and demographic tailwinds associated with recent suburban migration.” The company (of already established leases) has collected 99% of its rent on a monthly basis through June 30. Moreover, these assets have a strong history of rent collection.
As you can see below, 25% of annual base rents (ABR) are from Sun Belt market properties: (Source: ONL Investor Presentation)
At 72% of its portfolio, ONL has one of the highest exposures to investment-grade (‘IG’) tenants in the net-lease sector. That’s more than double the exposure to investment-grade tenants compared to the sector average, as viewed below.Which explains its 99% rent payment collection year to date. (Source: ONL Investor Presentation) Who Are Orion’s Peers? Being a net-lease REIT that focuses 100% on office properties, here’s the peer group we’re including it in: We could also consider City Office ( CIO ) a peer, but it owns multi-tenant properties. So it doesn’t fit as well as it could into the same category as Orion.Within its immediate peer group, macroeconomic and demographic trends point to a positive outlook for suburban net-lease office properties.De-urbanization has caused population shifts from urban to non-urban communities – creating significant demographic tailwind for suburban offices. That’s been the thesis for investing in CIO and Highwoods Properties ( HIW ).Announcements by big tech companies like Amazon, Microsoft, Google, and Oracle have boosted these area’s profiles even more.(Source: ONL Investor Presentation)Since 2017, suburban office returns have outperformed urban offices’ by an approximate average of 230 basis points.(Source: ONL Investor Presentation)ONL’s CEO told me: “We think there’s some really good opportunity in this sector. […]
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