I Am Bottom Fishing: 10% Yield From Orion Office REIT

seekingalpha11-21

Income from all sources can play a vital role in your retirement planning.Office REITs have been battered by a weakening economy and high rates.The sector's outlook is rapidly improving, but the best ...

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Gary Yeowell  Co-authored by Treading Softly Have you ever seen individuals who can be thrown into an extremely difficult situation and still seem like they hit the ground running?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4194":"办公房地产投资信托","BK4223":"办公室房地产信托","ONL":"Orion Office Reit Inc"},"translate_title":"我正在抄底：Orion Office REIT收益率为10%","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ONL":0.9},"content_text":"Income from all sources can play a vital role in your retirement planning.Office REITs have been battered by a weakening economy and high rates.The sector's outlook is rapidly improving, but the best time to buy is early.   Gary Yeowell  Co-authored by Treading Softly Have you ever seen individuals who can be thrown into an extremely difficult situation and still seem like they hit the ground running? They hit the ground, and they are off to the races without any sort of stumble or hesitation. They have the immediate ability to assess the situation and find success. This is definitely something to aspire for, but the reality is that for the majority of us if we were thrown into a very difficult or hard-to-manage situation, there's going to be a period where we are floundering, stumbling, and struggling to get our bearings before we start seeing success. There is no exception when it comes to companies. When a company decides to split into two parts, often the piece that gets segregated off gets handed the worst deck of cards. They are given the hardest situation to manage. That management team is thrown into the furnace, and the fire is turned all the way up. This can mean that the willingness of the management team to manage the situation and their ability to do so can come under major stress. Today, I want to look at a company whose management team was thrown into the crucible. Not only did they have to manage a massive number of lease renewals, but they had to do so in an environment where the company's sector was one of the most interest rate-sensitive and one of the worst performing in recent times. The question is, how has management done, and are they finally turning a corner? Let's dive in! Changing Gears To Bring FFO Growth Orion Office REIT Inc. (NYSE:ONL), yielding 10.2%, is an office real estate investment trust, REIT, which was spun off by the ever-popular Realty Income (O). ONL reported earnings last week that were in line with management guidance, with Core FFO of $0.21/share. Management narrowed guidance for the year toward the high end of the range. Previously, it was $0.97-$1.01; it is now $0.99-$1.01: Source ONL Q3 2024 Earnings Release This tight range illustrates a very high level of certainty over the variables that impact earnings. Guidance implies that Core FFO will be $0.18/share +- a penny for Q4. This is consistent with management's prior guidance that FFO will continue to decline as vacancy increases, and they sell properties. Management has suggested that earnings would be bottoming out at the end of the year and that earnings will slowly recover in the second half of 2025. The primary cause of the headwind to earnings has been the rapid pace of lease expirations. At the end of Q2, ONL had 12.7% of its leases expiring in 2024. Now, it has only 2.8% remaining for Q4. It is noteworthy that in Q3, ONL dealt with nearly as many lease expirations as it has for all of 2025. Source   ONL Q3 2024 Supplement If we go back to Q3 2023, we can see that ONL had 27.2% of its leases expiring in 2024. ONL Q3 2023 Presentation We can see that ONL is set up to have a much slower year in 2025 for lease expirations. This means ONL can finally turn its attention to other things, like buying properties. In Q3, ONL bought its first property since becoming a public company. The property is a flex/lab/R&D facility in San Ramon, California that is leased to a Japanese company with an A+ credit rating. ONL Q3 2024 Presentation An acquisition wasn't included in the original plans for ONL, and in the earnings release, management suggested that this acquisition means 2025 earnings will be improved over what was suggested in recent earnings calls: \"We believe that this property not only enhances our portfolio’s weighted average lease term which increased to 5.0 years at quarter end and cash flow but will also modestly offset some of the anticipated and previously communicated financial impacts from asset sales and lease expirations.\" Management has not provided formal guidance for 2025 yet, but based on commentary, we anticipate Core FFO will be in the $0.72-$0.80 range. We expect that ONL's earnings will bottom early in the year, and that ONL will benefit from selling vacant properties and from buying new properties. ONL's occupancy rate is low at 74.6%; however, it is important to note that the vacancy is concentrated in a series of 100% vacant properties. ONL has 70 operating properties; 58 of them are 100% leased, and those properties make up the bulk of their current rent. The fully vacant properties that ONL owns not only fail to provide revenue but also have carrying costs.   ONL Q3 2024 supplement That is approximately $0.245/share in expenses accumulated in the first nine months of 2024. For perspective, ONL has paid out $0.30/share in dividends in the first nine months. So, if those expenses can be eliminated, that is enough savings to significantly increase the dividend. Eliminating the expenses is as easy as selling the property. ONL sold two vacant properties in 2024 for $5.3 million. Selling vacant properties removes the carrying expense, while also providing ONL with a lump sum of cash that can be used to buy new properties or repay debt. The net impact is that ONL reduces expenses, while at the same time gaining new revenue and/or reducing interest expense. ONL's FFO will increase from both sides. Now that ONL has caught up on its leasing efforts, this will be the next big effort. A High level of turnover and rising vacancy drove FFO down, but selling vacant properties and reinvesting in operating properties will drive it back up. We expect to see the beginning of this trend in late 2025, while 2026/2027 are likely to be the years when shareholders really start seeing the benefits. Meanwhile, ONL's $0.10/quarter dividend is very secure, representing a much lower payout ratio than peers and easily covered even by the temporarily depressed cash flow. Conclusion With ONL, we can see that management has been very effective in managing what would otherwise be a disastrous situation. For shareholders of ONL, it has been a wild ride – no doubt about it. For people considering opening up a position today, the question becomes not what was last year's performance like, but what is the future outlook? The future outlook from here looks to be positive. FFO is covering the dividend successfully; properties are currently operational and providing revenues, minus some that remain empty, which constitute the expenses. As empty properties are sold, expenses will reduce. As new properties are added, revenue will climb. We can expect a positive outlook for those willing to buy now for high yield and watch as the company continues to perform. Management has been successful in its steady approach to trying to drive the company in the best direction possible. The fruits of their labor will come to bear in the next few years. When it comes to retirement, buying things that are at a discount is important. You can buy expensive income from wonderful companies that are potentially overpriced with low yields, or you can mix into your portfolio, occasionally, opportunities that have a greater outlook in the future but are in the midst of rough seas now. ONL falls into that second category. I'm a happy holder of Realty Income, but I'm also willing to buy ONL due to its outlook. This way, I get the best of both worlds.  That's the beauty of my Income Method. That's the beauty of income investing.","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/2485460273"}