Orion Properties Inc.

Hello, and welcome to the Orion Office REIT fourth quarter and full year 2021 earnings call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mr. Paul Hughes, General Counsel and Secretary for Orion Office REIT. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Today, Orion released its financial results for the quarter ended December 31, 2021, filed its Form 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the Investors section of the company's website at www.onlreit.com. I would like to remind everyone that certain statements made in the course of this call are not strictly historical information and constitute forward-looking statements. These statements, which include the company's guidance estimates for calendar year 2022, are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties of these forward-looking statements are discussed in our earnings release, as well as in our Form 10-K and other SEC filings. We should not place undue reliance on these forward-looking statements, and the company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, during the conference call today, we will be discussing certain non-GAAP financial measures, such as funds from operations, or FFO, and core funds from operations, or core FFO. Our presentation of this information is not intended to be considered in isolation or as a substitute or the financial information presented in accordance with GAAP. The company's earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable measures prepared in accordance with GAAP. Hosting the call today are Paul McDowell, the company's Chief Executive Officer, Gavin Brandon, the company's chief financial officer, and joining us for the Q&A session is Gary Landrieu, our chief investment officer, and Chris Day, our chief operating officer. With that, I am now going to turn the call over to Paul McDowell. Paul?

Good afternoon, everyone, and welcome to Orion OfficeReit's fourth quarter 2021 earnings call. our first earnings call as a NICE-listed publicly traded company since we spun off from Realty Income on November 12th, 2021. We want to thank everyone for joining us today, and importantly, for your patience as we have worked to complete the spinoff, spent time to fully digest the portfolio, and assembled the right team to enable us to execute and deliver on our business plan over the coming years. Given we were a public company for less than two months in all of 2021, I will spend some time focusing on our differentiated strategy and the composition of the portfolio, detail some of our accomplishments since November, provide perspective on how we will address some of the company's potential challenges, and wrap up by discussing why we are excited by the many opportunities we are evaluating in the near and longer term to build value for shareholders. Gavin will then touch on some 2021 financial highlights, discuss our balance sheet and dividend, and provide insight into our outlook for 2022. Orion is unique in that we are the only public net lease REIT that is entirely focused on owning a diversified portfolio of mission-critical and corporate headquarters office buildings located in high-quality suburban markets across the United States. The portfolio is comprised substantially all of the office properties from Realty Income and Verit, who merged in November 2021 and spun us off shortly thereafter. The properties are leased primarily to creditworthy tenants on a mostly net lease basis and The driving force behind Orion is to provide investors with the specialized opportunity to invest in suburban net lease office properties given the limited public market focus on this asset type and the compelling macroeconomic and demographic tailwinds that support this asset class. As has been well documented, in recent years, deurbanization has caused the population shifts away from gateway cities towards smaller primary and secondary markets and non-urban communities. Large corporations have noted these trends and have begun to relocate or co-locate on new corporate campuses in suburban markets. We are increasingly seeing companies seeking to provide office space closer to where their workforce continues to migrate and believe the pandemic has only served to accelerate these existing trends. The total suburban office market is estimated to be valued at one to one and a half trillion dollars. And we have conviction that Orion is well positioned to capitalize on this large opportunity. Our company has a seasoned leadership team that has a combined over 100 years of net lease office and public read experience. Our starting point is a high quality diversified portfolio of 92 properties representing 10.6 million square feet that is 91.9% occupied with 67.7% investment grade tenancy as of December 31st, 2021. Our largest markets by state are in Texas and New Jersey, which represent 13.1% and 11.3% of our annualized base rent. As of year end, the portfolio had a weighted average remaining lease term of 4.1 years, and we had 10 properties that were vacant as of January 1st, 2022, several of which we considered to be non-core assets. This portfolio demonstrated a strong track record of tenant retention and releasing when owned by Realty Income and Veri. While our portfolio today has a relatively short average lease term, We believe that in an improving economic outlook for suburban office, these lease maturities may represent value creation opportunities through active asset management and targeted capital recycling. Since our spinoff and in the coming years, as the only pure play net lease REIT dedicated to this space, we will be laser focused on addressing our lease maturities with the goal to meaningfully extend our weighted average lease term for the overall portfolio. We understand and want our investors to understand that in suburban office, these efforts will take time and capital. So I'm very happy to report that we're already beginning to see positive releasing renewal and expansion activity. For example, we are excited that in November 2021, we were able to address the lease at the largest property in our portfolio as measured by annualized base rent as we secured an early 11-year lease extension on favorable terms with Merrill Lynch at our campus in Hopewell, New Jersey. This lease had accounted for approximately 23% of our scheduled rollover in 2024 and single-handedly increased our weighted average lease term to 4.1 years at the end of the year from 3.4 years before the spinoff. This is exactly the type of proactive asset management we intend to continue in the future. Furthermore, we have continued to generate leasing momentum. Subsequent to quarter end at one of our properties in the Woodlands, Texas, we executed a new lease expansion for approximately 41,000 square feet of vacant space with an existing tenant, which now leases 92% of the building on an 11-year lease. At our property in Plano, Texas, an existing tenant executed a two-year extension covering approximately 54,000 square feet. And at our property in Augusta, Georgia, the existing tenant executed a five-year extension of the entire approximately 78,000 square foot property. We acknowledge that we have a large number of leases rolling over the next three years and we have some properties we inherited in the merger that do not fit in our long-term plan. This lease roll and stabilization of the portfolio by disposing of non-core vacant or soon to be vacant properties will pressure earnings in the coming years. While this portfolio repositioning will be a challenge and presents risks, many of which we do not control, we see it also a potential opportunity to extract value. Moving forward, we will continue to evaluate all of our markets and each property to determine where it makes sense to invest and where it makes sense to sell. While releasing an active asset management of the existing portfolio, will be job one. Over time, we intend to meaningfully grow the portfolio and diversify as circumstances allow. One very important avenue of growth is our joint venture with Art Street Capital Advisors. Orion's interest in the joint venture was assumed from Burit, so our respective teams have strong connectivity and a successful track record. Together, we have actively pursued accretive transactions to bolster our portfolio. Since inception, the joint venture has acquired six assets in six states for approximately $227 million. One of those assets is 700 Market Street, a 127,000 square foot office property in St. Louis, Missouri, that has an investment grade tenant in place on a long-term lease. This property was acquired by the joint venture in December for $30.5 million. As part of our ongoing external growth strategy, we are actively monitoring a number of mission critical and corporate headquarters office acquisition candidates for both Orion's own balance sheet and the joint venture with Art Street. Capital recycling will also be core to our business as we manage our inherited portfolio. To that end, so far in 2022, we are in various stages of negotiation and agreement to sell three assets for approximately $21.4 million, and we will continue to selectively dispose of non-core properties that no longer fit our long-term investment objectives. Proceeds from these dispositions will be redeployed to fund new acquisitions, pay down debt, as well as for capital investment into the existing portfolio. We have also made progress to strengthen our balance sheet and enhance our liquidity. Subsequent to quarter end, we refinanced an outstanding short-term bridge loan with a $355 million five-year, 4.97% fixed-rate CMBS loan that is collateralized by 19 properties. Gavin will discuss our capitalization in more detail, but in general, we intend to employ a conservative, mostly fixed-rate leverage strategy going forward and will maintain ample liquidity to support our growth plans. To conclude, we entered 2022 from a position of relative strength. When the company was spun off, we initially chose to focus on tenant retention, leasing vacant space, growing the joint venture, and beginning to sell non-core assets. In a few short months, we have made notable progress in all four of these areas. We readily acknowledge that there is still plenty of work to do. The composition of the portfolio will require us to invest capital to retain tenants and fill vacant space and dispose of non-core assets. These factors could also somewhat mute our ability to grow while putting downward pressure on earnings and result in lumpiness in cash flow depending on the timing of capital spend. However, we believe active asset management and targeted capital recycling could provide upside if the macroeconomic environment continues to fan demand for our properties in the future. We have a differentiated strategy, an experienced team, and the capital in place to execute on this strategy. And importantly, there is a large opportunity in front of us, supported by favorable market dynamics. Needless to say, we are excited about Orion's prospects, and the value we can create for our shareholders. With that, I will now turn the call over to Gavin.