Orion Office REIT: Mr. Market Is Looking Forward

seekingalpha10-12

Orion Office REIT is experiencing a rough start.The stock price often levels out and turns upward to climb a "wall of worry" at some point in the business cycle.Selling now is not advisable as the ...

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Time will tell if the comparisons remain positive in the future.The loan-to-value ratio is very conservative. This allows for considerable flexibility in dumping undesirable properties.   Gary YeowellOrion Office REIT (NYSE:ONL) is off to a rough start. Mr. Market expected a company like this to exactly time the bottom, or the stock would get pummeled. Orion Office REIT Common Stock Price History And Key Valuation Measures (Seeking Alpha Website October 10, 2024)Clearly, the stock got pummeled. One thing about downturns is that the stock price often begins to level off (and hopefully turnaround) while a lot of negative news and opinions still exist. Beginning turnarounds frequently \"climb a wall of worry\". Additionally, the stock price is now likely too low to sell. Besides, selling into the middle of a cyclical downturn is unlikely to generate a lot of funds. There is every chance of a cyclical turnaround that should provide a much better selling experience in the future. Balance Sheet The balance sheet situation is currently satisfactory. But it is also clear that it will need some work. Orion Office REIT Debt Due Schedule And Interest On The Debt (Orion Office REIT Corporate Presentation August 2024)In real estate, the net debt leverage ratio carries some clout with the lending market. Here, that low debt leverage ratio allows the company to off-load some \"lemons\" while allocating any remaining debt to other properties. In this fashion, the company can get out of properties that really have no hope. Even in a cyclical downturn, there are good locations. The goal here is to dump the stuff that is not worth the effort, while maintaining the best properties. This may well materially shrink the REIT. But it will likely allow for profitable growth at some point in the future. Some are worried about other measures like funds flow from operations (or a related measure) to debt reaching sky-high levels. But that would not be all that unusual in a cyclical downturn. What is worth noting is that this company, like much of the industry, is shedding office capacity. As long as the economy is growing, then demand for this kind of asset will grow to help bring demand and supply into balance, after which a leasing price recovery can begin. The stock price, shown before, has obviously stopped declining (not that there is all that far to go in a downward direction). However, there probably needs to be some sign of \"a light at the end of the tunnel\" for a rally to begin. That should only be a matter of time at this point. Last Article The last article noted the experienced management and the balance sheet strength. These are two very important characteristics, as management experience carries some weight with the lending market. This company may therefore have an edge over competitors without that management experience. Key Second Quarter Results Most lenders want to see progress. That progress includes:  \"Funds from Operations (“FFO”) of $10.9 million, or $0.20 per share Core FFO of $14.2 million, or $0.25 per share EBITDA of $13.8 million, EBITDAre of $19.5 million and Adjusted EBITDA of $20.5 million Net Debt to Annualized Most Recent Quarter Adjusted EBITDA of 5.67x and Net Debt to Annualized Year-to-Date Adjusted EBITDA of 4.92x sale of 18 non-core assets totaling 1.9 million square feet since the spin-off bringing our total to 633,000 square feet of leasing activity executed year-to-date, more than doubling our leasing activity for all of last year.\"  These quotes come from the second quarter earnings press release. Probably the major selling point to lenders is the pickup in leasing activity compared to the year before. That can be measured in several ways, even if the company reports a \"big quarter\" due to a major tenant. Management is likely aware of the need to show increasing activity in more than one way as a result. This is where experience comes through in dealing with lenders. If leasing is up, then the debt market and eventually Mr. Market can see higher occupancy rates and of course, more income in the future. Immediate Goal The immediate goal is to continue to reduce debt by selling as many undesirable properties as possible. Orion Office REIT Accomplishments And More Of The Same Is Likely (Orion Office REIT Corporate Presentation August 2024)Probably one of the most important considerations is that new leasing is up compared to the year before. Management has a \"front seat\" view of this in the form of inquiries about leasing office space. That advantage is going to translate to shareholders in the form of further leasing activity as long as it persists. One thing about recoveries is that they are rarely a \"straight line up back to normal\" like many expect. There will be some likely negative activity comparisons along the way. However, even a possible recession in the first year of a new presidential term is highly unlikely to derail this kind of recovery. Although, it certainly could make the recovery a lot more challenging or bumpier for a period of time. Summary This management has built and sold companies before the current attempt. That advantage makes this a contrarian strong buy consideration, even if the perceived risk is higher. Managements with experience are far more likely to survive the current situation. The sales of undesirable properties will undoubtedly shrink the REIT. However, there should still be darn good recovery potential in the future, given that management will likely grow the company to suit the environment and the future. Spinoff companies tend to outperform the market. It is far more likely that Mr. Market has taken the stock price to the usual extreme rather than the company situation is anything close to that dire. The debt ratio alone and the debt due schedule show that there is adequate room to deal with the situation at hand. The increasing pace of leasing indicates that a turnaround is in the future, even if the timing of that turnaround is uncertain. Most cyclical stocks have great returns before anyone ever thinks about flashing the buy signal. When that buy signal happens, oftentimes, the easy money has already been made. Usually, those early returns are worth the wait. As part of a basket of similarly chosen ideas, that basket should comfortably outperform the market over a business cycle. Risks The biggest risk would be that the marketability of some of these properties becomes completely unacceptable so that the company has to continue carrying them. Another risk would be that the current situation marks a breather before the market turns down yet again. However, the fact that the industry is finding uses for these properties other than as office buildings argues that the supply of these buildings is coming down and will eventually equal demand for this type of building. One thing that many do not understand is that once a cyclical downturn is underway, then one way or another, supply and demand will come into balance. The downturn will not last forever. Combine that with the fact that managements like the management here do not just \"sit there and take it\". With the experience that this management has, they will find a way to turn the situation around. This is why management evaluation is so important (because there are some managements out there that very much do \"sit there and take it\"). For this reason, the loss of key personnel could prove to be a material setback to the execution of the company strategy. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ONL over the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2474475550"}