Orion Properties Inc.

Greetings. Welcome to Orion Office REIT's third 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. You may begin.

Thank you. Good morning, everyone. Yesterday, Orion released its financial results for the quarter ended September 30th, 2023. Filed its form 10Q 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. 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 are subject to a number of risks that could cause actual results to differ materially from our estimates. The risks are discussed in our earnings release as well as in our form 10Q and other SEC filings. 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 through the most directly comparable GAAP measure. Our presentation of this information is not 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 OfficeReach's third quarter 2023 earnings call. On behalf of our team, I want to thank you all for joining us today. I will discuss our portfolio, performance, and operations for the third quarter and highlight our ongoing progress in executing our business strategy of owning a diversified portfolio of high-quality office properties leased primarily on a single-tenant net lease basis in markets across the United States. 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. At quarter end, we own 79 properties and six unconsolidated joint venture properties comprising 9.5 million rentable square feet that were 80.5% occupied. Adjusted for properties that have been sold subsequent to quarter end or currently under agreement to be sold, our occupancy rate was 88.7% as of September 30th, 2023. 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 September 30th, 2023, 72% of our tenants were investment grade, up from 69.9% as of September 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 14.7% and 13.7% of annualized base rent, respectively. Over 30% of our annualized base rent is derived from Sunbelt markets. Our largest markets by state remain Texas and New Jersey, which represent 16.7% and 13.2% of annualized base rent respectively. Our portfolio's weighted average lease term stayed steady at 3.9 years at quarter end. Maintaining a strong capital structure that can support the necessary investments in our core portfolio is a critical part of our business plan beyond being proactive in our approach to new and renewal leasing. Carefully balancing our leverage asset sales, and capital investment is the right strategy since we cannot control the macro environment or the financial climate for the office sector, which continues to be very difficult. To that point, the continued negative sentiment has certainly weighed on valuation for not just Orion, but also the entire office and net lease sectors. In September, we learned that Orion would transition out of certain stock indexes resulting in a significant temporary spike in trading volumes and added selling pressure on our shares as investors rotated out of their ownership positions. Given the dislocation, we executed a repurchase of 900,000 shares of our common stock for $5 million at a weighted average price of $5.46 per share as part of the company's previously announced $50 million share repurchase program. Beyond that investment, we continue to prioritize current and expected future capital spend for building improvement allowances and lease incentives to retain and attract new tenants and enable us to maintain and extend our existing portfolio's weighted average lease term to drive sustained cash flows. We spend a significant amount of time on capital allocation decisions, and remain guided by ascertaining 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 through the sale of properties that do not align with our long-term strategy. During the third quarter and shortly thereafter, we closed in the sale of three vacant properties representing 452,000 square feet for an aggregate gross sales price of $15.4 million or $34 per square foot. We also have agreements to sell nine additional properties representing 779,000 square feet for approximately $47 million. Regarding the six property former Walgreens campus in Deerfield, Illinois, that we've had under contract to sell for the past several quarters, the buyer continues to progress with its redevelopment plans for the properties despite the challenging financing environment and has reached an additional milestone, therefore adding to their at-risk deposit toward the purchase price. We are now targeting this sale to close sometime in mid-2024. The reason it is so important to execute on these sales of vacant and non-core assets is the costs that are associated with maintaining a vacant building where re-tenanting opportunities over the near to intermediate term appear unlikely through the nine months ended september 30th 2023 we estimate that we have spent 8.2 million dollars in carrying costs on vacant and partially vacant properties as shown on page 18 of the supplemental as we have said before While asset sales reduce operating expense drag in the short term, it will pressure our ability to grow earnings in the future as we become smaller with fewer buildings. That said, we believe that in this environment, it is the right approach to maximize the long-term value of the overall portfolio and position the company to grow profitably in the future. Leasing continues to be challenging, and we did not sign any leases during the third quarter, despite decent activity. However, in October, we secured a 10-year early lease renewal for approximately 90,000 square feet in Memphis, Tennessee, where the investment grade tenant's lease term will now run until December 31st, 2034. We also entered into a new 10-year lease for approximately 3,000 square feet of retail space on the ground floor in our building in Covington, Kentucky, at least primarily to the United States of America. From an office sentiment perspective, we have not seen or heard of much change from what we shared over the summer on a return to office for many employees. But anecdotally, the parking lots do seem a bit fuller as we travel throughout our markets. We also are seeing an increase in conversations and showings at some of our properties And while there is a long road to convert market interest into new leases, it is definitely a positive step forward for office space demand relative to the sentiment over the summer. Despite these green shoots, we do not think that office utilization will revert back to historical norms, even as return to office gains traction. Hybrid work practices are not going away, and lower utilization will likely continue to result in office tenants seeking less square footage on renewal for the foreseeable future. Tenant retention remains our highest priority, but as we've provided in our supplemental filing, we do have significant lease roll in 2024 of approximately 1.9 million square feet. and several of our larger tenants have publicly indicated they do not intend to renew with us, which will impact revenues until those properties can be re-tenanted. From the leasing pipeline perspective, however, we continue to be in various stages of discussion and negotiation for new leases and renewals of over 1.5 million square feet, including at some of our properties where we have lease roll next year. While our pipeline is encouraging, corporate decision-making remains slow and converting interest into signed leases can be a slow and uncertain process. Given the timing of leases and the size of our portfolio, retention will remain volatile quarter over quarter depending on the needs and timing of tenants' decisions. Our strategy remains intact. Retain tenants, lease vacant space, and dispose of non-core assets. We know it will take a few more years to fully reposition our portfolio, but we continue to progress towards overcoming the challenges and are building a solid foundation from which we intend to grow our core portfolio and produce sustained cash flows to create value for our shareholders. With that, I will now turn the call over to Gavin. Gavin? Thanks, Paul.