Orion Properties Inc. (ONL) Should be Liquidated
It makes sense for them to follow NLOP's playbook to maximize shareholder value
Below is my original writeup from around August 2024, with 3 additional updates written after this. My original writeup and thesis was essentially that Orion would weather the post-Covid office storm, get their vacancies filled over time, and the discount it could be purchased at would eventually prove to be a bargain once stabilized.
However, I made an error in how I viewed class B/C office. Turns out, it is far less functional and far more obsolete in today’s market than I realized. What I viewed as somewhat of a temporary impairment is turning out to be permanent. It is pretty funny to read this almost a year later to see how wrong I was on this.
My opinion is that it is in the best interest of shareholders for Orion to liquidate, which I get into at the end of this. Let’s dive into Orion Properties Inc. (ONL).
**Update 6/28/25 - The day after posting this Orion received an unsolicited offer from a group called Kawa Capital Management to be acquired for $2.50/share. More on this at the end of this writeup.
Original writeup from August 2024
ONL is an office REIT spun off of a much larger REIT. In late 2021, VEREIT (a medium-sized REIT) was acquired by Realty Income (a huge REIT). 2021 was during the heat of the work-from-home Covid mass office exodus and almost everyone alive was completely bearish on the office sector (and most still are). Realty Income, immediately after acquiring VEREIT, spun off all or most of the office properties they held into a new REIT, Orion (ONL) as they likely saw it dragging down their performance.
Since the spin-off, here is what the price of the stock has done:
ONL has not made any acquisitions of late, and seem to be in a mode of repositioning their portfolio. Their focus is on suburban markets that are in growing, business-friendly areas. As a whole, this niche within the office sector has rebounded a lot faster than the core office sector has.
Millennials are leading the charge with wanting to get away from the city and out into the suburbs. Employers are taking note and moving their headquarters accordingly. I’ve seen this both from large sets of data showing mass migration and high vacancy rates in downtown/core office areas, and also anecdotally where I have heard of companies moving from a place such as DC to a suburb such as Reston, VA.
ONL has already been in the suburban office niche for a while and this is what all of their properties are made up of. For instance, they own a flex/office space in Sterling, VA and an office building in Herndon, VA that both do very well and appear to be 100% occupied. I spoke to management about the Herndon property and this is exactly what they want their portfolio to be made up of.
To get to that point, they are pruning off the undesirable ones that are a drag on performance. In 2023 they sold 6 vacant properties totaling about 850k sf for $25.4MM, or $29.78/sf. That is extremely cheap and prompted me to reach out to management to get the story on that to ensure this is not indicative of how they would price properties to be sold in the future. The person I spoke with said these were in areas that weren’t business friendly and were essentially lost causes. Since they were vacant, they contributed no revenue, but did incur carry costs. So, eliminating these properties reduced their expenses and they were able to generate some cash to pay down debt. Here is a snippet from their 2023 10-K:
One of our main asset management strategies during year ended December 31, 2023 was to continue to sell vacant and identified non-core assets that do not fit our long-term investment objectives. The sale of these assets will allow us to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with re-tenanting. During year ended December 31, 2023, we closed on six fully vacant dispositions totaling 0.8 million square feet for an aggregate sale price of $25.4 million, equating to a price per square foot of approximately $29.78, and primarily used the proceeds to pay down debt and to fund capital expenditures and leasing costs. We expect to continue this non-core asset disposition strategy in 2024. We cannot provide any assurance as to whether we will be able to sell non-core assets on favorable terms and in a timely manner, or at all.
Another thing to note is that they renewed leases on 240k sf and signed new leases on 21k sf in 2023. For the renewals, the weighted average rent change was 6.8% with minimal tenant improvements (TI). For the new leases, the weighted average rent change was (19.8%). Blending all that together gave them a weighted average rent change of 5.3% for the better.
My takeaway here is that there is demand for this suburban office product and the increased rents reflect that, contrary to what the market sentiment might be saying. In 2024 Q1, the net increase for 108k sf in re-leased properties (both new leases and renewals) was 32.6% from the prior leases. Now, there were heavier TI concessions, but the increased rent suggests that these increases were baked into the leases and charged back to the tenants through higher rents.
All that background is meant to say that the office sector, no matter where it is, has taken a hit post-Covid. However, the suburban product in good areas seems to be experiencing a resurgence in demand. The last thing I’ll point out is that ONL’s tenants seem to be fairly high quality. Here is a breakdown of the 3 industries that make up over 40% of their tenants by annualized base rent:
15.3% - Health Care Equipment and Services
13.9% - Government and Public Services
11.1% - Financial Institutions
Over 70% of their tenants, based on annualized base rent, are investment-grade tenants as well. Some names include Merrill, Cigna, Coterra, T-Mobile and Home Depot. Their largest tenant by annualized base rent is the GSA (a government agency).
Their occupancy rate as of 3/31/24 across all 81 properties is 75.8%, but adjusting for properties under contract to be sold it is 83.2%. They also have a weighted average remaining lease term of 4.1 years. A lot of leases expire in 2024, but they’ve recently been able to sign new leases at higher rents, and as I’ll get to below, even if there is quite a bit of atrophy in their rental income, this should not matter given current prices the stock is trading for.
Value
A quick look at their balance sheet would suggest that this stock is trading incredibly cheap:
Book value isn’t always an accurate depiction of true value though, especially in a sector that has seen a lot of decline. However, they have been taking hefty impairment charges over the years, bringing down the value of the properties on their balance sheet. Cap rate or market value is more accurate and what we should go on, but seeing something trading at a quarter of their book value is a pretty strong signal that this is cheap.
Here is a matrix I made in Excel that takes their annual base rent or NOI at $115,000,000. Now, as of 3/31/24 it was $132,794,000 so I am being conservative here. It is quite probable this figure has a net increase during the year actually. Taking the $115,000,000 NOI and looking at what the portfolio value could be based on different valuation cap rates is below. I’ve gone from an 8-cap to a 20-cap and my belief is that it is conservatively somewhere in the 10-11% range.
A 10-11% cap rate would suggest that the stock is currently trading around 30-40% of the true value. It should also be noted that their free cash flow just from operations in 2023 was just over $89,000,000 or $1.60/share, and they’ve been paying a $0.40 annual dividend for years now, which is around 10% annual at current prices. I’d have to be extremely wrong here to lose money, and I don’t believe I am. (What a foolish statement in hindsight!)
Their debt is also very modest, compared to most real estate companies. They have a $355MM CMBS loan that is fixed interest-only at 4.971% that is due in February, 2027. And they also have a $116MM draw on a revolving line of credit that is due May, 2026. Currently, the rate on that is 8.66%. When blended, their debt isn’t bad at all considering the high rates. It is also well below 50% of their combined property values, so debt-risk isn’t a big concern for me here.
Catalyst
The most obvious catalyst I see to unlock the value is for rates to decrease and public sentiment to improve on office and real estate in general. Real estate has been one of the worst performing sectors going back a few years, which has allowed for mispricings like this one. I don’t have any clue when rates will decline and market sentiment will improve, but in the meantime I’ll clip a 10% coupon while I wait for this to happen.
Update 8/20/2024
I began to lose conviction on this upon reading their 2024 Q2 report. I am only about $18k into this one through a fund at a weighted avg. cost around $3.99/share and before putting more into this I really wanted to ensure I wasn’t buying a landmine or value trap.
On their website I found a PDF that has supplemental info apart from their SEC filing. It includes a simplified rent roll showing all of their properties, what the tenant industry is, occupancy rate, what the ABR is, and when the leases expire. I transferred it all into an Excel doc to play around with it to see if I could find anything useful from that.
In the next 2.5 years they have 8 properties with a substantial amount of lease income dropping off based on it appearing the tenants will not renew. I Googled every property to see if they were listed for sale/lease and how much space was available and it was pretty easy to see when a tenant had or plans to vacate. These are the ones that blatantly appear to have tenants that will not renew. There are 4 additional properties (out of 67 that are leased) that appear obvious that the tenant is vacating, however one is about 2.5 years out and the other 3 are more than 3.5 years out. So I’m not too worried about those since time is on our side.
For the 8 vacating, the ABR that will be lost is around $21,700,000. It appears that ABR has a good bit of reimburseables are not included as the rental revenue on their quarterly report is much higher than this figure. If I take the rental income from Q2, which was $40,124,000 and annualize it we arrive at about $160,000,000. And if I add the assumed ABR from a lease that was recently signed we are at $161,259,000.
If I then take the operating costs for all properties, in aggregate, of about $60,000,000, we are left with a NOI of $101,259,000.
Now, to get an absolute worst-case scenario I take the assumed ABR that will be lost over the next 2.5 years of $21,700,000 and deduct that from the NOI to arrive at a worst-case NOI of about $80,000,000. This would happen in a scenario where all the properties I assume will renew end up renewing over the next 2.5 years, and all the properties that have expiring leases expire and are left vacant over the next 2.5 years. If we take this $80,000,000 in NOI and apply a blended cap rate of 10% to it, the book value of each share would be $7.15. We would be at a break-even based on current share prices at a 13% cap rate.
Now, this doesn’t ascribe any value to the vacant properties. In my scenario there are 8 that would become vacant in 2.5 years and there are 8 currently vacant. 16 in total that are valued in this scenario at $0. Obviously these properties are worth something, and more than likely there will be leases signed on vacant properties as we move further from the Covid office disruption. In the first 8 months of the year they signed over 200k of space that had previously been fully vacant. It is also true that there will be heavy rent concessions and TI costs to get these vacant spaces filled, but it appears that management is smart about selling the ones that are “throwing good money after bad” and investing in the ones that are situated in good markets. Their recent earnings call shed light on this, and their recent filings show this as well.
Another way to look at it is that in my worst-case scenario where 8 properties go fully vacant over the next 2.5 years and the 8 currently-vacant properties are left vacant (with operating costs still being paid on all 16 properties) we have $80MM in NOI. The worst case annual debt service is about $32MM and G&A is about $18MM which means their free cash flow in a worst case situation should be around $30MM/year. So, they should never even flirt with insolvency no matter how bleak it gets. And they shouldn’t even have to reduce their dividend, which is currently $.40/share annually. They have 55,910,000 shares out, which makes their annual dividend payment $22.364MM --- well below their net cash flow of $30MM. And again, this is a very unlikely worst-case scenario.
If you put a gun to my head and made me give a conservative prediction based on all available info and my knowledge of real estate trends, in general, I would assume that the next 1.5 years will be pretty rocky with almost all of these leases expiring in that timeframe. It seems these are the last of the pre-Covid leases that are rolling off. Their rent roll over the next 1.5 years and the rent roll beyond that look entirely different with lots of government and healthcare tenants that appear to be much stickier tenants.
But after that it seems to be much more secure and back to a stabilized portfolio of properties. How much of the vacant and soon-to-be-vacant space gets leased up is anyone’s guess, but I think if the economy improves and businesses are excited about the future again, they just do just fine here. And with rate cuts imminent it will really juice things up.
Update 8/26/24
Lost conviction entirely and sold entire position. Realized a gain slightly less than $1,000 on about $18k cost basis. I met with Darius Saeidi and he scared me when talking about TI obligations. In reading their most recent 10-Q the TI for new leases was astronomical.
I prayed a lot on this and just couldn’t see that there was clear value. It feels like with the upcoming leases ending and huge TI bills on the horizon that it is trying to catch a falling knife to peg what the worst-case scenario will be.
It just simply felt like too much speculation was involved here and I didn’t like that, therefore, with the stock trading above my cost basis I decided it was time to sell and hold the cash.
I will continue to keep an eye on this and if it gets to the point where I can understand the value being purchased, and the price makes sense, I will buy again. But for now I am comfortable staying on the sidelines.
Update 6/17/25
Dodged a major bullet on this one, praise the Lord. In early March, 2025 they released their annual financials and it wasn’t pretty. They also cut their dividend which is likely the bigger catalyst for the price drop given that yield is highly valued by REIT investors.
My view now is that Orion is best suited for liquidation. If you dig through their properties as I have, you’ll realize it is a jumbled portfolio of mostly properties that are functionally obsolete. Some are decent with long leases and good market demand, but most are not.
On 3/5/25 they issued a press release announcing results and how they plan to shift away from their multi-tenant properties into dedicated use properties (single tenant), hence the name change to Orion Properties. This makes sense, but to get there it is going to be costly in terms of updating properties, TI concessions, etc.
A liquidation, à la NLOP, is likely the smarter play so that they don’t throw good money after bad. My belief is that this is in the best interest of shareholders.
What is Orion worth?
There are 4 ways I’ve valued this and my analysis can be found below as a downloadable Excel file, which includes property by property info.
I’ll get into each one below.
Book value
This is a completely useless way to value this, but I’ll include in case anyone is curious what book value is for Orion. Excluding payables/receivables and all intangible assets, their book NAV is $12.68/share. There is absolutely zero chance Orion is worth anywhere close to this and the only reason it is this high is because of the historical cost bases for their properties.
Cap rate value
Originally, I took a cap rate approach to valuing this where I slapped different cap rates on their NOI to get a value range. Obviously, this is not a great way to do this given the uncertainty regarding their future leases set to roll in the next few years. They have 40 properties that are either vacant or that have a 3 year or less remaining WALTs. That is more than half of their total portfolio.
Be that as it may, if we take their run rate NOI from Q1 2025 ($86.2M) and discount it by 10% to assume future carnage from lease expirations, the NAV per share assuming a 9-12% cap rate range is $2.72-6.57. This is a wide range and certainly isn’t something I’d rely on, especially given how this has gone over the last few years.
Liquidation value – back of napkin
For this, I took their occupied sf and multiplied by an assumed value of $125 per sf, and I took their vacant sf and multiplied by $60 per sf. This seemed like a fairly conservative average for vacant and operating properties and lands us at a NAV/share of $6.93.
Liquidation value – property by property
I went through every property they own and came to a valuation using Gemini and my own instincts. In this scenario, the NAV/share is $5.80. I believe this is the most accurate way to come to a value and it would not surprise me if this were on the conservative end of things. The problem is that Orion has no plans to liquidate so this is not especially useful until a liquidation is announced.
Why a liquidation makes sense
With over half of their properties either vacant or set to have leases roll in the next 3 years, it is very hard to predict what the yield on this will look like. This has been a continuous "falling knife" since its spin-off, making its floor impossible to predict.
It seems like they are playing a game of “whack-a-mole” where they are just continuously investing in TI and reno costs to sign new tenants, draining cash with no end in sight. And as their NOI continues to drop, their corporate costs become more of a burden as the reduced NOI cannot absorb this as easily.
To me, this is a choice between a bird in the hand or two in the bush. In a liquidation scenario, shareholders are likely to get around 3x what this is currently trading for. In a going concern scenario, shareholders are likely to receive ¯\_(ツ)_/¯
Management hasn’t done anything irrational here, they were just dealt a horrible hand and have been playing it the best they can. While it doesn’t appear they wish to liquidate any time soon, it is possible they decide to do so as their debt gets closer to maturity and if the properties continue to be a headache while the price of the stock flounders.
My plan is to discuss this idea with management to see if they appear open to the thought. I don’t have the ability to force change via a proxy contest, but this does seem like it is worth looking into for someone who has the ability to do that.
While management hasn’t done anything terrible, continuing down the road that has destroyed a ton of value over the years doesn’t seem like a sensible decision. If anyone has any thoughts on how to push for a liquidation, reach out to me as I think there is money to be made in that scenario!
Update 6/28/25
The day after posting this, Orion received an unsolicited offer at $2.50/share that the board is currently reviewing. My opinion is that this is low and doesn’t go through at this price, although I do believe they either need to work with a group to sell the entire portfolio, or liquidate over time similar to NLOP.
It’ll be interesting to see how this shakes out and what the board decides. It is also possible that other potential buyers take a stab at this, which would be great for shareholders.
On the one hand, Orion’s assets are terrible and who knows how far the knife falls before it lands. In this scenario, a sale to take “a bird in the hand” might make sense.
On the other, they could be leaving value on the table by selling in this manner as it appears pretty conservatively that the properties could be liquidated for a substantially higher price.
I’m still sitting on the sidelines here because nothing is concrete and I can’t confidently predict what will happen.
Update 7/11/25
Unsurprisingly, the board unanimously rejected Kawa’s offer on 7/9 stating that it significantly undervalued their assets. Here is the press release announcing this.
Here’s an except from this announcement from them, “The Board is always open to evaluating opportunities to enhance stockholder value and, with management, will consider any proposal that appropriately values the Company and its prospects.”
It appears they are inviting others to come make a bid for the company. If the offer lands somewhere around $4 my guess is that they will take it. That provides a decent amount of upside from the current price, and should leave meat on the bone for the purchaser given that the assets can likely be liquidated for ~$6/share.
I really have zero clue what to do here though, need to think on it more.
Update 7/26/25
Kawa came back with an increased offer of $2.75/share, which I’d expect to also get rejected by the board given the previous offer was unanimously rejected and this is only slightly higher.
This one is interesting to watch but hard to get comfortable with given their horrifying portfolio of properties. I still think a liquidation is in the best interest of shareholders as opposed to an outright sale, but it seems unlikely that will happen at this point.
Kudos to the folks that had the stones to buy around its low around $1.50 back in April. Seems like no matter what happens here you will be making money on this one!
Update 8/5/25
No surprise, the $2.75/share offer was rejected. It’s now trading near $2.50/share and my guess is that someone comes in to make a higher offer at some point soon. Perhaps Kawa will just keep raising their bid $.25 until the board finally accepts it!
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.