Orion Properties Inc.

Greetings and welcome to Orion Office REIT's fourth quarter and full year 2022 earnings call. This conference call is being recorded. I'd now like to turn the call over to your host, Paul Hughes, General Counsel for O'Brien. Please go ahead, Paul.

Thank you, operator. Good morning, everyone. Yesterday, Orion released its financial results for the quarter and year ended December 31, 2022. 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.onlreat.com. Forward-looking statements made during today's call, such as the company's guidance for calendar year 2023, 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-K and other SEC filings. The company undertakes no duty to update any forward-looking statements that may be made during today's call. Additionally, during the conference 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 measure. As discussed in the company's earnings release and Form 10-K, we will be revising our definition of core FFO beginning in 2023 to exclude certain non-cash amortization charges, which do not reflect the ongoing performance of our business. 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? Thank you, Paul. Good morning, everyone, and welcome to Orion Office REIT's 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 the fourth quarter and full year 2022, touch on our first full year of operations, and 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 I mentioned, 2022 was our first full year of operations following our spinoff from Realty Income. During the year, we made significant progress in our core strategy that focuses on owning mission critical suburban office properties located in high quality suburban markets throughout the United States. These accomplishments came against the backdrop of an evolving and challenging economic environment for real estate in general and office properties in particular. Our mission, as we have communicated since inception, is to own high-quality, stabilized assets in the right markets, and that will require we resolve pending lease maturities and vacancies across a large portion of our portfolio in the coming years. To do so, we are intensively managing our assets, including making thoughtful capital allocation decisions in order to effectively address these issues. The ongoing economic environment of rising interest rates, persistent inflation, recession fears, and many tenants inaction on mandating a return to the office is impacting the timing around signing new and or extending current leases in our properties. We have faced many of these headwinds since our spin. However, given the quality of our core assets, we have confidence that our approach to unlock long-term value from owning a large suburban net lease office portfolio in attractive markets will persevere with time. Many of us in Orion's senior management team have effectively navigated these cycles before. We believe that as conditions inevitably improve, the long-term demographic trends and the changing workplace will position our core properties to serve as the base to spur Orion's growth. As of year-end and including the disposition of six non-core properties in the fourth quarter, we owned 81 properties and six unconsolidated joint venture properties representing 9.7 million square feet. That was 89% occupied, up slightly from 88.2% last quarter. It is important to stress the strengths that our core portfolio possesses. Our properties are leased to creditworthy tenants, primarily on an at-lease basis. As a percentage of annualized base rent, there was 73.3% investment-grade tenancy across the portfolio, and approximately 83.4% of our leases are either triple or double net. Our portfolio's weighted average remaining lease term ended 2022 at 4.1 years, steady with one year ago. Our assets are also diversified by tenant, tenant industry, and geography. No tenant industry makes up more than 13.4% of annualized base rent, and no single tenant makes up more than 11.9% of annualized base rent. Our largest markets by state are Texas and New Jersey, which represent 15% and 12% of annualized base rent respectively. And approximately 33% of our annualized base rent is derived from Sunbelt markets, a proportion we intend to grow over time. From a leasing perspective, we look to begin renewal negotiations proactively with our existing tenants as early as we can. However, the uncertain economy and the continuing hesitancy to return to the office is resulting in the constant recalibration of businesses around the country as companies realign their expectations for space and growth. The consequence we have found is that our tenants continue to push leasing decisions out, are shrinking their space needs, and new tenants are waiting to commit to new space. This dynamic is not unique to Orion nor our assets. but a symptom of the wider environment facing every office landlord. Importantly, we maintained leasing momentum throughout the year. In the fourth quarter, we had two 10-year lease renewals for a total of 213,000 square feet at two of the company's properties in New York. One five-year lease renewal for 90,000 square feet at one of the company's properties in Lawrence, Kansas. and one 5.4 year lease renewal for 4,000 square feet at one of the company's properties in the Woodlands in Houston, Texas. The company also signed a new 5.4 year lease for 78,000 square feet at one of its properties in Brownsville, Texas. For the year, we leased 805,000 square feet of space at positive cash rent spreads of more than 4%, and with a weighted average lease term of more than seven years. As we look back on our progress in only our first 14 months of being public, we have completed approximately 1.5 million square feet of lease renewals, expansions, and new leases. As we look ahead, we continue to have an active pipeline of several hundred thousand square feet of leases in various stages of negotiation and documentation. Given the nature of our lease expirations, tenant retention will continue to be lumpy quarter to quarter and year to year. Specifically, we had three scheduled lease expirations during the fourth quarter, totaling about 286,000 square feet, and we owned five vacant assets at year end. 2023 will present a variety of challenges for retention, particularly given that we have more than 750,000 square feet of space expiring in suburban Chicago, including the Walgreens campus. That said, we focus intently on addressing vacancy in the portfolio on commercially reasonable terms in regards to the timing and expense. At year end, our vacant space represented about 11% or 1.1 million square feet of the overall portfolio. And we incur annual operating expenses of roughly $7.50 per square foot on average to keep that space. Accordingly, one of our main asset management strategies has been to sell vacant and identified non-core assets that do not fit our long-term investment objectives to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with retenanting. In 2022, we deliberately focused our resources on this strategy and closed on 11 sales of approximately 900,000 square feet for approximately $33 million. This equated to a price per square foot of about $36, both reducing existing vacancy and avoiding near-term vacancy as the leases expire. Eight of the 11 properties were vacant as of the date of sale, and the remaining three had near-term lease expirations where we knew the tenants were not renewing. We estimate that the sale of these 11 assets will allow us to save annual vacant property carrying costs of about $7.5 million. If the two properties we sold in Illinois at auction in the fourth quarter are excluded, our average sales price per square foot for the year was about $50, in line with our expectations at the beginning of the year. For the year, we disposed of over 400,000 square feet in Illinois, a decidedly slow-growth, high-tax state with accompanying poor suburban office fundamentals. Additionally, we have entered into a definitive agreement to sell our 574,000 square foot six property corporate Walgreen campus in Illinois, where the Walgreens leases will expire in August 2023 and the tenant will not be renewing. The sale is scheduled to close in early 2024 and is subject to completion of the buyer's entitlement process. We have determined to sell these properties given the upcoming vacancy, high carry costs, and our focus on locating our portfolio in the right markets. To that point, all of our sales have moved the portfolio closer to our long-term targets. Including the Walgreen campus, we have seven properties totaling about 584,000 square feet currently under contract, for sale at an aggregate sale price of approximately $36.6 million, or $63 per square foot. We are also actively marketing a number of other assets for sale totaling over 500,000 square feet that are currently vacant and or have short-term leases where we know the tenant will not renew. We believe selling these assets is the right decision for the long-term value we are looking to create. During 2022, we took a very deliberate approach to our balance sheet. Rather than quickly grow the portfolio with debt-funded acquisitions in a market where values were changing rapidly as rates rose, we focused on selling vacant and non-core assets to reduce carry costs and use the proceeds to pay down debt. Our current debt is largely hedged at attractive rates. We have no borrowings on our revolver, and overall net debt to gross real estate investments is a conservative 31%. In 2022, we made tremendous progress in our business plan. Our proactive asset management and disposition activities, along with good leasing momentum, moved our portfolio meaningfully in the right long-term direction. We finished our first full year as a public company with a portfolio producing positive net cash flow, and our available capital to execute our business plan is more than sufficient. Our financial capacity, The underlying strength of many of the properties we own in the portfolio, along with our proven ability over the past 30 years operating this asset class, provides us with the confidence that Orion will emerge as a net lease office force in the coming years. With that, I will now turn the call over to Gavin.