In the immediate aftermath of the COVID-19 pandemic, virtually every economic sector suffered a severe loss of commercial activity as millions of Americans began sheltering in place. However, with the global health crisis imposing the highest magnitude of devastation to non-essential businesses, segments of the commercial real estate market fell under serious skepticism.
In particular, the post-COVID macro environment cast some of the darkest shadows on the U.S. retail and office spaces, with corresponding indices suffering declines of 4.1% and 0.5% year-over-year (YOY) in August 2020, according to a Deloitte report. On the other hand, the industrial property index increased 7.4% YOY during the same period, reflecting the cruelly capricious nature of the pandemic.
On paper, though, the deduction followed a coldly logical process. Office-based employees could work from home while retail demand shifted heavily toward online channels during the worst of the crisis, thus negating the relevance of brick-and-mortar businesses. But with humans being a social species combined with a gradual return to the workplace, commercial real estate (CRE) could make a comeback.
This scenario adds up to a positive backdrop for Orion Office REIT, which will soon make its debut in a similar process to an initial public offering (IPO).
When Is the Orion Office REIT IPO Date?
One of the more complicated public market debuts, Orion Office REIT features a date of Nov. 15, 2021, on the IPO calendar. Further, Orion — which will list on the New York Stock Exchange under the ticker symbol ONL — will join the S&P SmallCap 600 index, replacing electronic display company Daktronics Inc. (NASDAQ: DAKT).
However, prospective investors should note that ONL stock does not technically represent an IPO but rather a spinoff; in this case, from the merged entity between single-tenant investment trust Realty Income Corp. (NYSE: O) and VEREIT Inc.
Earlier this month on Nov. 1, Realty Income and VEREIT announced the completion of their previously announced merger. From the disclosure date moving forward, the business combination will assume the identity and ticker symbol of Realty Income. Where ONL stock comes into play is that the 2 merging companies spun off “substantially all the office assets” to form Orion.
Per the terms of the agreement, “For every 10 shares of Realty Income common stock held of record by Realty Income stockholders as of the close of business on November 2, 2021, the record date for the Distribution, such stockholder will receive 1 share of Orion common stock.”
While a spinoff results in the same outcome to retail investors as an IPO — that is, the availability to invest in a new enterprise — several key differences exist. First is that an IPO defines the process where a private company enters the public arena. Under a spinoff of a public enterprise, the new entity was already “tradable” in the market. It’s just that now, the spinoff’s success depends purely on its specific business focus.
Second, an IPO involves a capital raise. By nature, such public market debuts are expansionary in nature. The management team believes the business is on the rise, requiring an influx of capital to feed its ambitions and distributing equity shares as a tradeoff. In contrast, spinoffs don’t spark capital raises. Instead, the parent company distributes shares of the spun-off entity to the former’s existing shareholders.
In such a way, parent companies can add value to their shareholders, especially if the spinoff enjoys success. Perhaps the most prominent example is when online marketplace eBay Inc. (NASDAQ: EBAY) announced the spinoff of its payment processing business PayPal Holdings Inc. (NASDAQ: PYPL).
Orion Office REIT Financial History
Although investors now have an additional avenue to trade the migration back to the workplace via ONL stock, predicting the underlying sector’s financial performance is incredibly difficult. On one hand, traffic volumes across various transportation modes indicate robust activity, implying a normalization process in the labor market. At the same time, data from CBRE Group Inc. (NYSE: CBRE) indicated late last year that office real estate vacancies may persist at a “stubbornly high rate” in 2021.
Being that Orion Office focuses on the suburban properties market, the backdrop features a mix of pros and cons. However, it’s possible that analysts overplayed their prior estimations of how work-from-home initiatives would impact the in-office workplace environment. Yes, the impact was severe during the worst of the COVID-19 lockdowns. But moving forward, business realities may turn favorably for ONL stock.
Certainly, as a report from The Washington Post noted, labor productivity increased 1.8% on a YOY basis in Q2 of 2021. However, it’s difficult to interpret this data because “some of the largest productivity gains have occurred in durable-goods manufacturing (the making of items like cars and appliances) — a highly capital-intensive sector largely unaffected by the working-from-home trend.”
“Meanwhile, many of the service-sector businesses, such as bookstores and shoe stores, that had the biggest booms in productivity from 2019 to 2020 also saw significant drops in employment, and it is perhaps unsurprising that a skeleton staff of the most able workers is going to be more productive, per person,” the report said. Thus, many companies may opt to recall their employees rather than continue an experiment that has a very short track record.
To be fair, making a decision on ONL stock will require faith in the workplace normalization thesis. On a 3-year trendline, Orion Office REIT’s revenue performance is declining slightly, with 2020’s sales amounting to $53.47, at parity with 2019’s result and down 2% from 2018.
On a quarterly basis, the YOY comparisons are even more questionable. In Q2 2021, Orion posted revenue of $12.59 million, which was down 6.3% against the year-ago quarter. Considering that 2021 was supposed to be a recovery year, the Q2 drag was conspicuous. Nevertheless, the business environment for office-related real estate ventures might not stay deflated indefinitely, affording upside optimism for ONL stock.
Orion Office REIT Potential
Generally speaking, Orion Office REIT provides risk-tolerant investors with an avenue to profit from a possible reversal of an underperforming market segment. As ample economic data indicates, the pandemic and ensuing government mandates to temporarily shut down non-essential services hurt the CRE sector specifically geared toward office space. However, the bounce-back in demand could reverse this narrative.
Also, retail revenge has been a powerful catalyst across various consumer spending categories, motivating people to exercise their newly found freedoms. That trend could help explain why e-commerce as a percentage of total retail transactions peaked in Q2 2020. Since then, the ratio has declined, suggesting consumers prefer the in-person experience, particularly as the pandemic denied such avenues.
However, investors must deal with facts — and the fact is that not every spinoff has been a resounding success like PayPal. For instance, over the trailing 5-year period, the Invesco S&P Spin-Off ETF (NYSEARCA: CSD) underperformed the benchmark fund SPDR S&P 500 ETF Trust (NYSEARCA: SPY) — and it’s not even close. The former fund returned 50.8% whereas the latter returned nearly 114%.
Therefore, it’s imperative that you exercise strict money management should you decide to engage ONL stock. Above all, perform your due diligence with this and any public market debutante.
How to Buy Orion Office REIT IPO (ONL) Stock
If you weren’t already a stakeholder in Realty Income Corp before the merger deal cutoff period, then you must acquire ONL at the open, which is a straightforward process if you know how to buy stocks. If not, follow the steps below.
Step 1: Pick a brokerage.
With investing institutions offering similar financial incentives, you should narrow your list of best brokers down to platforms that suit your trading philosophy and provide you access to alternative opportunities.
Step 2: Decide how many shares you want.
With any new issue, you’re taking a step into the unknown. Mitigate downside risk by electing a balanced share count.
Step 3: Choose your order type.
Before investing, understand these market concepts.
- Bid: The buyer’s best offer for a stock.
- Ask: The seller’s lowest acceptable price.
- Spread: The difference between the bid-ask price, the spread indicates market risk as this is also the profit margin for market makers.
- Limit order: Buy or sell requests at a predetermined price, limit orders provide transparency but no execution guarantees.
- Market order: Market orders guarantee fulfillment but only at the current rate.
- Stop-loss order: Stop-loss orders automatically exit your position at either a predetermined price or anything lower.
- Stop-limit order: Stop-limit orders only leave positions at a specified price, but they also carry non-fulfillment risks.
Step 4: Execute your trade.
Follow these steps to execute a market order:
- Select your action type (buy or sell).
- Enter the shares you want to acquire (or sell).
- Hit the Buy (or Sell) button.
Follow the same sequence for limit orders (but include your execution price).
ONL Restrictions for Retail Investors
Review the Financial Industry Regulatory Authority (FINRA) rules on restricted persons before participating. You should avoid any investments in which you have privileged (non-public) information.
For “real” IPOs, certain platforms like ClickIPO allow you to submit an application for pre-IPO purchases, or buying new issues at their initial offering price. Those interested in developing their investing acumen should open an account with ClickIPO.
Buying into the Comeback
Although most worker bees prefer continuing the great telecommuting experiment, growing evidence indicates that the workforce will largely resume business as usual. If so, contrarian investors may want to consider adding ONL stock to benefit from the comeback.