What happened
Shares of Orion Office REIT (ONL -0.65%), a real estate investment trust (REIT) that is focused on largely suburban office properties, fell sharply in early trading Friday, losing around 18% of their value. The big story was the company's after-the-close earnings release on Thursday, which clearly didn't live up to investor expectations. The earnings number, however, wasn't the most important news from the company.
So what
Orion Office was spun off from Realty Income (O 1.46%) in late 2021, so the fourth-quarter update was the first that Orion has made as a stand-alone company. Complicating the quarterly results is the fact that Orion Office's portfolio represents the combination of Realty Income's office properties and those of VEREIT, which Realty Income bought just prior to Orion Office's spinoff. VEREIT's properties were only owned for part of the quarter, so you probably shouldn't even look at the fourth quarter as a baseline here -- that will come next quarter, when the entire portfolio has been owned for the entire period. Still, core funds from operations came in at $0.47 per share, with funds available for distribution of $0.30 per share.
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The bigger news out of Orion Office was its dividend, which was set at $0.10 per share per quarter. That was not as large as some industry watchers had projected. Given the current stock price, even after today's drop, the company's dividend yield is a slim 2.6% or so. That's lower than some of the leading names in the office REIT space. The problem here is that Orion Office is expecting a significant number of lease expirations over the next few years (its average lease term is just 4.1 years) and will need extra cash to deal with the renewal and re-leasing effort, both of which will likely require property upgrades and investments. It is also looking to sell some noncore assets, which brings even more uncertainty into the picture. Thus, management has chosen to be conservative with the dividend, which seems prudent.
Now what
It wouldn't be fair to call Orion Office a turnaround, but this young office REIT is still trying to get its portfolio in fighting shape. That's likely to take a couple of years. Conservative investors probably won't find it appealing, given the low yield and portfolio repositioning that has to take place. Therefore, only more aggressive types should be looking to play here -- and then only if they want to focus on nonurban offices, which is the company's stated focus area.
