Orion Properties Inc.

Welcome to Orion Office REIT's first quarter 2023 earnings call. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Paul Hughes, General Counsel for Orion. Thank you. You may begin.

Thank you, Operator. Good morning, everyone. Yesterday, Orion released its financial results for the quarter ended March 31, 2023. 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 Investors section of the company's website at www.onlreit.com. I would like to remind everyone that certain statements made during this call are not strictly historical information and constitute forward-looking statements. These statements, which include the company's guidance estimates for calendar year 2023, 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 our estimates. The risks and uncertainties are discussed in our earnings release as well as in our Form 10-Q and other SEC filings. You should not place undue reliance on these forward-looking statements, and the company undertakes no duty to update any forward-looking statements made during 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. The company's earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. As discussed during our year-end conference call and in our earnings release and Form 10-Q, We revised 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. We will apply this definitional change retrospectively for comparison purposes. 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 morning, everyone, and welcome to Orion Office REIT's first quarter 2023 earnings call. On behalf of our team, I want to thank you all for joining us today. I will highlight the ongoing progress we are making executing on our business strategy and discuss our first quarter performance and operations. I will then turn the call over to Gavin to provide an update on our financial results and on our outlook for the rest of the year. We are continuing our intensive efforts to reposition the portfolio of properties we inherited when we were spun off from Realty Income in late 2021. Our focus remains on ensuring that we have the right capital structure in place to support investments in our core portfolio in the form of CapEx and lease incentives in order to retain tenants and lease vacancy so we can deliver sustained cash flow and ultimately position the company to grow. There is no question that our pursuit to execute on Orion's differentiated net lease focused investment strategy has been impacted by the persistent and deteriorating economic backdrop for real estate and specifically for office. The current conditions notwithstanding, we remain confident that over time our focus on owning a diversified portfolio of mission critical and corporate headquarter office buildings located in high quality suburban markets will allow us to build a strong platform for success. This will require over the next few years that we resolve pending lease maturities and vacancies across a large portion of our portfolio that we must continue to intensively manage. It will include making capital allocation decisions that acknowledge that capital is precious and not always available when needed from external sources. We still believe that the best use of our capital is to continue to stabilize and reposition the portfolio and recycle capital as appropriate. we do not plan to over-leverage the business. As a quarter end, we own 81 properties and six unconsolidated joint venture properties comprising 9.7 million square feet that were 87.5% occupied. The properties in the portfolio are primarily either triple or double net lease to credit worthy tenants. As a percentage of annualized base rent as of March 31st, 2023, 73.6% were investment grade, up from 67% as of March 31st, 2022. Our assets are well diversified by tenant, tenant industry, and geography. Our largest tenant by annualized base rent is the United States government, and our two largest tenant industries are healthcare and government, representing 13.5% and 12.5% of annualized base rent, respectively. Over 30% of our annualized base rent is derived from Sunbelt markets. Our largest markets by state are Texas and New Jersey, which represent 15.2% and 12.3% of annualized base rent, respectively. Interestingly, over the last few months, we have seen an increasing number of comments by corporate leaders on the value of in-person work and a new resolve by some large corporations to begin to mandate and enforce a return to the office for many employees. We believe over time, these changing attitudes will be the incentive for a more sustained return to office. However, even as return to the office gains momentum, hybrid work practices are here to stay and office space utilization will change as the industry moves forward. As a result, like other office landlords, We are seeing some office tenants seeking less square footage on renewal, and this development will likely continue for the foreseeable future. As we stated last quarter, the pace of signing early renewals has slowed and the tenant decision-making process has lengthened. Nonetheless, we remain active on the leasing front. In the first quarter, we signed four leases for 83,000 square feet. We remain aggressive in the pursuit of new tenants and lease extensions by staying close to each of our properties and the respective surrounding markets. Specifically in the quarter, we renewed 64,000 square foot lease with the U.S. government in Parkersburg, West Virginia for 15 years. We also signed or amended three leases at the Woodlands in Houston, Texas for 19,000 square feet. One lease was an expansion with an existing single A-rated tenant for 11,000 square feet, who now occupies 100% of the leaseable square feet in the building on a 10-year remaining lease term. The other two transactions were at the multi-tenant property we own in the Woodlands, where we entered into a new 4,000 square foot lease and a 4,000 square foot renewal. Overall, leasing spreads during the first quarter were about 20%. though we caution there will be significant variability on spreads in any given period, given the very granular nature of the portfolio. We also remain in various stages of negotiation and documentation for new leases and renewals at multiple properties. Given the timing of leases and the size of our portfolio, tenant retention will be volatile quarter to quarter and year to year, depending on the needs of our tenants. Our portfolio's weighted average lease term was four years at quarter end. We also intend to continue our aggressive stance to dispose of vacant and identified non-core assets that do not fit our long-term investment objectives, as well as assets where we believe the value has been maximized for us. Specifically, as of today's call, we have eight properties under contract for $41 million, and we are actively negotiating and marketing a number of other assets for sale or lease. We ended the quarter with six vacant properties whose operating expenses negatively impact earnings. Selling non-core vacant assets will reduce operating expense drag in the short term, but pressure our ability to grow earnings in the future, particularly given our smaller size. That said, we know that this is the right approach to maximize the long-term value of the overall portfolio. With respect to our growth, we've begun to see an improvement in asset pricing from a buyer's perspective, as high-quality, single-tenant suburban properties have begun to trade at or near long-term attractive levels. However, we remain cognizant of the overall market and financing environment. The long-term prospects for Orion's success remain intact. We have a stable portfolio of assets, good profitability and low leverage. Looking forward, it will require persistence, vision and plenty of work to retain tenants, fill vacant space and dispose of non-core assets. But it is clear that as we accomplish our portfolio goals, There will be a time that we can meaningfully grow the core portfolio and cash flow as we look beyond today's challenges. We will continue to examine all of our options and are energized and committed to providing value for our shareholders over the long term. With that, I will now turn the call over to Gavin. Gavin?