Orion Workplace REIT: Not Low-cost Sufficient (NYSE:ONL)

Funding Thesis

Orion Workplace REIT (NYSE:ONL) is prone to expertise bother within the subsequent few years due to excessive lease expiration in 2024 and plenty of debt due in 2023 that’s going to need to be refinanced. On prime of that, it’s not properly positioned in direction of its friends and ought to be cheaper.

Overview

Orion Workplace REIT has a portfolio of workplaces distributed throughout the US. The 2 states with a lot of the properties from their portfolio are Texas (15%) and New Jersey (12%). As such the REIT appears to lack a transparent geographical focus which generally is a unfavourable given its comparatively small dimension. I’d a lot somewhat see them give attention to one market. Whereas their publicity to the at the moment unpopular California is barely 3.3%, their New York market publicity (New Jersey + New York) represents nearly 1 / 4 of their ABR. General I’m not a giant fan of their whole geographical allocation, regardless of Texas having the very best publicity.

ONL offered their prime 10 tenants of their investor presentation main with well being care tools and providers (13.4%), authorities and public providers (12.2%), and insurance coverage (10%). Their largest tenant (GSA) accounts for nearly 12% of the ABR, whereas the highest 10 tenants account for over half of all revenues. This makes the REIT fairly dangerous as a single tenant struggling to pay hire can have a serious unfavourable impression on the corporate.

The REIT owns 81 wholly-owned properties with 89% occupancy and 4.1 years because the weighted common of remaining lease. That’s a really low WAULT (weighted common unexpired lease time period) for an workplace REIT. What’s even worse is that in 2023 15.1% of leases are going to run out and that is going to be even greater in 2024 with lease expiration being at 25.1%. Which means they should discover tenants for 1.5-1.9 Million sq. ft of area every year. All of this at a time when workplace leasing is at an all time low (as confirmed by whole 2022 leasing of 800 ths. Sft), many individuals are working from dwelling and corporations making an attempt to chop prices in expectation of a possible recession. This put the corporate underneath immense stress to both renew a few of the leases or to search out new tenants.

Of their earnings release, the corporate states that they see lease maturities as a worth creation alternative for the approaching years however from their present habits it doesn’t appear to be it. Their technique appears to be centered on promoting properties somewhat than renewing leases or discovering new tenants. In 2022 they bought over 1.3 million sq. ft for round $43 million and had an settlement to promote 7 extra properties simply over the past quarter of 2022. Then again, they entered into lease renewals for a bit over 1 million sq. ft throughout 10 totally different properties all through the entire yr a few of that are for a ten yr WAULT. That is good however I do not suppose it’ll be adequate sooner or later. The 2024 lease expirations are in contrast to something they needed to take care of to date and I’m not positive if they’re going to have the ability to cope contemplating that they can not simply proceed to promote all of their properties at this velocity and wish to start out discovering extra tenants. So with 1 / 4 of area changing into vacant subsequent yr, I don’t suppose the corporate will have the ability to ship.

Financials

ONL has a core FFO of $101.8 million and a core FFO per share of $1.80. Based on the steerage offered within the agency’s supplemental the core FFO per share is meant to drop throughout 2023 and be between $1.55 and $1.63. That is based mostly on the assumptions of administrative expense rising by $1 million to $19.75 million and internet debt/EBITDA rising from the present 4.3x to five.3x and considerably unfavourable internet absorption as lease expirations exceed renewals and new leases.

Their stability sheet presents one other drawback. Their debt at the moment stands at $557.3 million with a weighted common rate of interest of 4.42%. That’s not unreasonable, nonetheless, $175 million of debt is due in 2023. That’s rather a lot for an organization with an FFO of about $100 Million and solely about $20 Million in money. I count on the corporate to have a comparatively tough time refinancing this as regional banks appear to be fairly hesitant in direction of financing industrial actual property in the mean time and even when they do handle to miraculously refinance the debt, it will likely be at a considerably greater rate of interest than what they’re paying at the moment.

Valuation

It ought to come as no shock that the corporate is affordable, nonetheless, I don’t suppose it’s low-cost sufficient. Buying and selling at a P/FFO of three.8x, the corporate trades properly under its historic common of 6.06x (as ought to be anticipated), however can’t be thought-about low-cost relative to friends. Take Brandywine Realty Belief (BDN) for instance – a wholesome REIT, which is significantly better diversified when it comes to tenants, has excessive publicity to WFH resistant life sciences and has no debt maturities over the subsequent two years. Nonetheless, it trades at simply 3.1x FFO suggesting that ONL has rather a lot additional to fall. Different friends like SLG (3.78x) or VNO (4.87x) are each bigger corporations with a giant a part of their portfolio in New York, much like Orion. They’re additionally buying and selling at comparable multiples. This as soon as once more means that ONL might be cheaper based mostly on its a lot smaller dimension. And if they don’t take care of the maturities, as is anticipated, they may inevitably fall.

The share at the moment stands at $6.42 with a dividend of simply $0.1 per share per quarter and the dividend yield is 6.23%. The payout ratio is 22% so the dividend is unlikely to get minimize, however can hardly be thought-about as enticing given the general outlook for the corporate. A dividend low cost mannequin with zero ahead development and a ten% low cost fee would counsel a good value of $4 per share. After all, shorting at these valuation ranges is kind of harmful, however I undoubtedly don’t see the corporate as a purchase right here main me to a maintain ranking.

Conclusion

General, the REIT is prone to wrestle within the close to future and goes to be underneath plenty of stress to hire out their areas and repay their debt. Contemplating that their friends are buying and selling at comparable multiples however they’ve a greater diversified portfolio and no debt maturities, ONL is overvalued proper now and can in all probability fall. All of this leads me to a HOLD ranking at this second.