Realty Income Corp. has announced completion of “substantially all of its office assets” into a new publicly traded REIT, called Orion Office REIT.
Current shareholders will get one share of Orion stock for every ten shares of Realty Income stock they held on November 2, 2021.
The move is likely to create more focused investment vehicles according to experts and market watchers. A recent JLL report said that general REIT mergers and acquisitions had already hit $108 billion in transaction volume in the first nine months of 2021.
“Over time, what you’ve seen with REITs is that they’ve become more and more pure play within a sector,” John Worth, head of research at Nareit, tells GlobeSt.com. “Over the past 20 plus years, the real estate investment community has said, ‘We don’t want you to diversify over property type. We want you to specialize in a sector, become incredibly efficient in it, and diversify across geographies. We the investors will put you into the portfolio sectors we’re interested in.’”
Worth explains that one sector Nareit follows is called diversity, which comprises REITs that have less than 75% of their assets in any single sector. Only 4% of the entire market capitalization of REITs is in that category.
“In the US, the notion of pure play has become the dominant force,” Worth says. “When I see a spinoff like Orion, this is about taking assets that were going to be almost hidden on the balance sheet of Realty Income and turning them into a pure play opportunity.”
However, as Peter Zabierek, co-founder and CEO at Sugi Capital Management, notes, office REITS have underperformed meaningfully since the pandemic began. “With employers still not sure what their back to work plans are broadly, the outlook for office REITs is especially murky,” he tells GlobeSt.com.
Worth lays out the numbers: the broader REIT index is up 32% through October 12. However, office REITs were up 25%.
“When you look across the entirety of the Covid period, if you start in February 2020 and run it through Friday, what you see is that office REITs are down about 4%,” Worth says. “That includes a difficult environment in 2020, positive returns in 2021. That gives you a prism or view into offices more generally.”
But he calls himself “bullish” on offices. “A lot of different organizations will experiment, but at the end of all this, we’ll see the majority of places with a majority of employees in the office a majority of the time,” says Worth.