Orion Properties Inc.

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

Thank you. Good morning, everyone. Yesterday, Orion released its financial results for the quarter ended June 30, 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 investor section of the company's website at 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. We 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. Hosting the call today are Paul McDowell, the company's Chief Executive Officer, and Gavin Brandon, the company's Chief Financial Officer. And joining us for the Q&A session are 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 second quarter 2023 earnings call. On behalf of our team, I want to thank you all for joining us today. I will discuss our performance and operations for the second quarter and highlight our continued progress in executing on our business strategy. 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 would certainly welcome an acceleration in the pace of office utilization and leasing momentum. But since we cannot control that timing, we remain focused on executing our strategy to reposition the portfolio of properties we inherited in 2021 from Orion's spinoff from Realty Income. The economic backdrop for commercial real estate and specifically for the office sector remains difficult. At Orion, we are continuing to take proactive steps to reinforce our capital structure to support the necessary investments in our core portfolio in the form of building improvement allowances and lease incentives to retain tenants and extend our portfolio's weighted average lease term, produce sustained cash flows, and ultimately position the company to grow. With that in mind, The most important news for us in the quarter was that we successfully secured an amendment to our credit agreement, which retired our term loan ahead of schedule, gives us continued access to significant liquidity, and the ability to extend the revolver loan term well into 2026. Gavin will provide a few more details, but we appreciate the continued support of Orion and our business plan by all our lenders. that allowed us to close this amendment in the midst of a tight credit market and challenging financing environment for office properties. We remain steadfast and confident that owning a diversified portfolio of well-located properties in high-quality markets will contribute to our growth in the future, but it will take time. We continue to leverage our team's more than 30 years of experience across multiple economic cycles as we seek to extend release or sell properties with pending lease maturities or vacancy across our portfolio. With the rising cost of capital, we are required to be thoughtful with our capital allocation decisions by quickly determining which properties will provide the greatest return over time. We still believe that the best use of our capital is to continue to stabilize and reposition the existing portfolio and recycle capital as appropriate to the sale of properties that do not align with our long-term strategy. At quarter end, we owned 81 properties and six unconsolidated joint venture properties comprising 9.7 million square feet that were 86.5% occupied. The properties in the portfolio are predominantly either triple or double net lease to creditworthy tenants. As a percentage of annualized base rent, As of June 30th, 2023, 73.7% were investment grade, up from 67.3% as of June 30th, 2022. Our strong portfolio of assets is 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 13.8 and 12.8% 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 represents 15.7 and 12.5% of annualized base rent, respectively. While we have increasingly heard of the efforts by some large corporations to mandate and enforce a return to office for many employees, the data has yet to show these initiatives as being broadly successful. As a result, while tenant interest in some of our vacant properties is good, we have not yet begun to see an appreciable acceleration of leasing activity in our portfolio. However, we believe these changing attitudes will over time be a catalyst for a more sustained return of demand for office space. Additionally, even as return to office gains traction, hybrid work practices are not going away and office space utilization will continue to evolve as the industry adapts. As a result, the office sector is seeing some office tenants seeking less square footage on renewal, a trend that will likely continue for the foreseeable future. As we discussed last quarter, the pace of signing early renewals remains slow and the tenant decision-making process has lengthened. Nonetheless, we remain proactive on the leasing front. During the quarter, we renewed a 44,000 square foot lease with the U.S. government in Redding, California for five years and signed one new three-year lease for 3,000 square feet at our multi-tenant property in the Woodlands, Texas. Overall, leasing spreads during the second quarter were about 7%, though we caution there will be significant variability on spreads in any given period given the very granular nature of the portfolio. While leasing momentum was muted in the second quarter, as I mentioned, we have decent activity at some of our properties and we remain in various stages of discussions and negotiation for new leases and renewals of over 500,000 square feet. Given the timing of leases and the size of our portfolio, tenant retention will also be volatile quarter over quarter, depending on the needs and timing of tenants decisions. Our portfolio's weighted average lease term was 3.9 years at quarter end. Turning to dispositions, we maintain our aggressive stance to dispose of vacant and identified non-core assets where we believe we have maximized the value relative to our underwriting. Shortly after quarter end, we closed the sale of one vacant property for a gross sales price of $9.7 million, at a price per square foot of $43. We also have eight properties under contract for an aggregate gross sales price of $41 million and are actively negotiating and marketing a number of other assets for sale or lease. This includes the sale of the sixth building Walgreens campus in Illinois, which has been steadily moving towards its anticipated close in early 2024. The buyer continues to progress with its redevelopment plans for the properties and now has a modest portion of the deposit toward the purchase price at risk. We ended the quarter with seven vacant properties, one of which was sold after quarter end as previously discussed. Vacant property operating expenses negatively impact earnings, so selling non-core vacant properties reduces operating expense drag in the short term. but does pressure our ability to grow earnings in the future, particularly given our smaller size. That said, we know that in this environment, it is the right approach to maximize the long-term value of the overall portfolio. Our long-term direction remains clear. Retain tenants, fill vacant space, and dispose of non-core assets to position us to look beyond today's challenges and towards growing our core portfolio and sustained cash flow. We remain optimistic about Orion's long-term prospects, and we are dedicated to pursuing value for our shareholders. With that, I will now turn the call over to Gavin. Gavin?