Orion Properties Inc.

Greetings. Welcome to Orion Office REIT's third quarter 2022 financial results. As a reminder, this conference is being recorded. I would now like to turn your call over to your host, Paul Hughes, General Counsel for Orion. Please go ahead.

Thank you, Operator. Good morning, everyone. Yesterday, Orion released its financial results for the quarter-ended September 30, 2022, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the investor section of the company's website at www.onlreit.com. Forward-looking statements made during today's call, such as the company's guidance estimates for calendar year 2022, are subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations. These risks and uncertainties are discussed in our earnings release, as well as in our Form 10-Q and other SEC filings. The company undertakes no duty to update any forward-looking statements that may be made during the course of today's 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. The company's earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. 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 are Gary Laundrieu, 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 morning, everyone, and welcome to Orion Office REIT's third quarter 2022 earnings call. On behalf of our team, I want to thank you all for joining us. On the call today, I will discuss our performance in only our third full quarter of operations, as well as highlight the ongoing progress we are making on Orion's portfolio. I will then turn the call over to Gavin to provide an update on our financial results and guidance. As we've detailed since November 2021, following our spinoff from Realty Income, we are working hard to reposition and align the suburban-focused office portfolio that we inherited from the merger of Realty Income and Verete. Orion is uniquely positioned as the only public net lease REIT that is exclusively focused on owning a diversified portfolio of mission-critical and corporate headquarters office buildings located in high-quality suburban markets throughout the United States. While Orion owns a significant number of high-quality stabilized assets, a sizable portion of our portfolio requires pruning, intensive asset management, repositioning, and capital to address lease maturities and vacancies. These efforts are complicated by the current economic backdrop of rising interest rates, inflation, recession fears, and return to the office hesitancy, all of which have given pause to businesses looking to sign new or extend current leases. While these trends have been widely reported for several quarters, we began to notice an uptick in the impact in our portfolio toward the end of the third quarter, and it has continued into the fourth. Since our spinoff late last year, we have consistently commented that our efforts to stabilize and right-size our portfolio would take time and consist of multiple challenges along the way that could impact the timing of our progress. Despite these recent negative trends, due to demographic and other long-term changes, as well as the quality of our assets, We remain optimistic about our long-term prospects for owning a large suburban net lease office portfolio in attractive markets that will provide solutions for the workforces of tomorrow and that in turn will result in the growth of Orion. Turning to some updates on the portfolio, at quarter end we owned 87 properties and six unconsolidated joint venture properties representing 10.1 million square feet. that was 88.2% occupied. Properties are leased predominantly to credit worthy tenants, primarily on a net lease basis. As a percentage of annualized base rent, there was 69.9% investment grade tenancy across the portfolio, and approximately 80% of our leases are either triple or double net. Our assets are also diversified by tenant, tenant industry, and geography. No tenant industry makes up more than 13.1% of annualized base rent, and no single tenant makes up more than 11.5% of annualized base rent. Our largest markets by state are Texas and New Jersey, which represent 14.6% and 11.4% of annualized base rent, respectively. And approximately 31.8% of our annualized base rent is derived from Sunbelt markets, a proportion we intend to grow over time. As I mentioned, companies are continuously recalibrating their expectations for space and growth. While we believe the rapidly slowing economic environment and continued employee hesitancy to return to the office is temporary, the result is that some of the anticipated leasing we expected to realize is either going to be delayed, reduced, or eliminated. When our tenants do renew, they continue to lock in multiple year extensions. In the third quarter, we had a tenant renew in 35,000 square feet for five years at our property in Grangeville, Idaho. Subsequent quarter end, we executed a new 5.4 year lease in 78,000 square feet at one of our properties in Brownsville, Texas. Overall, since the spin, We've had good leasing momentum, executing on close to 1.2 million square feet. This year, so far, we have completed about 500,000 square feet of renewal, expansion, and new leases. And notwithstanding our slow third quarter in terms of signing new leases and lease renewals, we continue to have an active pipeline of several hundred thousand square feet of leases in various stages of negotiation and documentation. As we have said on previous calls, tenant retention will continue to be lumpy quarter to quarter. Specifically, we had two scheduled lease expirations during the quarter, totaling about 49,000 square feet. And we had 10 vacant assets at quarter end, so our occupancy improved slightly from 86.4% last quarter to 88.2% this quarter, driven by our progress in selling vacant assets. Additionally, our portfolio's weighted average lease term declined slightly to 3.9 years. One of our main asset management strategies is to sell vacant and identified non-core assets that do not fit our long-term investment objectives. The sale of these assets will allow us to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with retenanting. This initiative continues to progress well. To date, we have closed on seven dispositions totaling 539,000 square feet for an aggregate sale price of $28.4 million, equating to a price per square foot of approximately $53, both reducing existing vacancy and avoiding near-term vacancy as the lease is expired. We also have four additional properties totaling about 278,000 square feet under contract for sale for an aggregate sale price of approximately $15.9 million, equating to a price per square foot of about $57. A couple of these properties are currently vacant, while the remainder have short lease terms where we know the tenant will not renew. We are also actively marketing or planning to auction a number of other assets for sale, totaling over 900,000 square feet that fall into the same bucket. We anticipate that several of these sales will occur as we head into the next year, allowing us to continue to harvest rent before the sale closes. While it remains our goal to reach stabilization and enhance our portfolio's weighted average lease term by addressing the portfolio's vacancies and significant lease rollover in the next several years, we now believe it could take somewhat longer than initially anticipated, given the changing economic environment. Notwithstanding the headwinds, our portfolio continues to have positive net cash flow, and our available capital to execute on our business plan continues to grow with over $418 million in total liquidity. That liquidity coupled with our experience, expertise, and the underlying strength of many of the properties we own in the portfolio will continue to serve as a strong core platform. Given the macroeconomic environment, we remain highly disciplined and strategic when it comes to adding new properties to our core portfolio. Longer term, we remain excited about Orion's growth prospects and opportunity set. Our acquisition pipeline continues to be active for both the joint venture as well as Orion's own balance sheet, with some indications that seller pricing expectations are beginning to become more rational. Regarding capital allocation decisions, we carefully evaluate where best to apply our operating cash flow, the proceeds from our property sales and borrowings under the revolver with our board on a regular basis. While current market conditions are dynamic, our long-term plans remain firmly in place. We have a strong portfolio of occupied assets, some of which will require significant capital outlays as we renew our tenants in place. We have several current or near-term vacancies, where we believe the quality and location of the properties merit holding these assets, repositioning them as necessary, and re-tenanting them makes sense. These assets will also take significant amounts of capital to carry and then attract new occupancy. Our belief is that over time, our shareholders' best interests will be served by preserving and then growing our core portfolio. All that said, While the need for capital to execute in our business plan is critically important, our board believes, along with management, that under certain circumstances of sustained market weakness, our company's shares may offer a compelling investment. And to that point, they have approved a $50 million share repurchase program. As I wrap it up, I want to emphasize that market disruptions notwithstanding, we are continuing to make steady progress in actively managing the portfolio and and recycling capital. We remain committed to delivering long-term value for our shareholders through our ongoing efforts. With that, I will now turn the call over to Gavin, who will discuss our third quarter 2022 financial highlights, our balance sheet, dividend, and outlook for the remainder of the year. Gavin?