I can't really figure out exactly what this aligns or how.
Does anyone have better insight?
Yep... select two or more items and then this option will space them equally...
so if you had X.X...X, and chose horizontally, you'd get X..X..X
Where X is an object and . = space...
Does it space them out by point of origin or size/borders of the object?
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I assumed it did it by left edge of the leftmost and right edge of the rightmost (for horizontal -- top and bottom for vertical) to get the width of the group, then subtracted the total of the individual widths to get the width of the empty space, then divide that by total items-1 (5 items = 4 spaces), but it could use origin I suppose.