Orion Properties Inc.

Greetings and welcome to Orion Properties fourth quarter and full year 2024 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 and good morning, everyone. Yesterday, Orion released its financial results for the quarter and year ended December 31, 2024. filed its annual report on Form 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website at onlread.com. During the call today, we will be discussing certain forward-looking statements, such as the company's guidance estimates for calendar year 2025, which are based on management's current expectations and are subject to certain 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 10-K and other SEC filings. and Orion undertakes no duty to update any forward-looking statements made during this call. Today on the call, we will be discussing certain non-GAAP financial measures, which are not a substitute for financial information presented in accordance with GAAP, such as funds from operations, or FFO, and core funds from operations, or core FFO. Orion's earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. Hosting the call today are Orion's Chief Executive Officer, Paul McDowell, and Chief Financial Officer, Gavin Brandon. 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.

Good morning, everyone, and thank you for joining us on Orion Property's fourth quarter earnings call. Today, I will provide a recap on the quarter and full year 2024 and then speak to the business and the direction we plan to take the company. Following my remarks, Gavin will review our financial results and provide our outlook for 2025. The highlight of the year was leasing. As we exited 2024, there is no question that the overall market tone was improving, which was reflected in our leasing performance, which totaled about 1.1 million square feet. This was more than four times the leasing we delivered in 2023. A great example of this positive momentum was our approximately 136,000 square foot Hasbro property in downtown Providence, Rhode Island. Last year, Hasbro notified us that they were moving out of this Class A building, and after a brief but intensive marketing effort, we were able to backfill the entire building almost immediately with a long-term 11-year lease to Rhode Island's largest health system, Lifespan Corporation, now called Brown University Health. Hasbro's lease expired in early February, and we expect Lifespan's lease to commence roughly 60 days thereafter. Overall, we signed 287,000 square feet of new leases in 2024, which is more than 13 times the new leases signed in 2023 at 21,000 square feet. This year has started with a robust pipeline of potential new and renewal leasing transactions. We exited 2024 with a portfolio weighted average lease term, or WALT, that now stands at 5.2 years, up from four years at the same time last year, which reflects our stabilizing portfolio. Renewal rent spreads for 2024 leasing activity were down 6.6%, primarily because of one lease renewed in the fourth quarter with significant rent rolldown. These pressures on rent spreads reflect the significant competition we face to retain and find new tenants in specific markets. However, renewal rent spreads on a gap or average rent basis due to annual rent bumps over the lease terms are positive by just over 2%. Given the smaller size of our portfolio, this figure will be quite volatile quarter to quarter and even year to year as we lease individual properties. Another key accomplishment I want to highlight is that Orion has weathered the intensive lease rollover of the past three years, particularly in 2024 when we had close to $40 million in annualized base rents scheduled to expire. Looking ahead, while we will still face significant lease expirations and rollover risk, we anticipate the combined pace of lease up and disposition of vacant properties will exceed the pace of tenant move outs and our portfolio occupancy will begin to rise after this year. We have made significant progress in reorienting our portfolio since our spin, and we believe that 2025 and into 2026 will be the nadir of our revenue and core FFO earnings declines. followed by accelerating revenue and earnings growth as we move into 2027 and thereafter. Overall, we have delivered against our strategic plan even as the broader office markets have seen a historic collapse in demand. However, as we have observed the events of the past three years and their impacts on our portfolio, we have noted a significant trend that we believe we can capitalize on over time to build a more stable, long-duration property mix. During this period, we have experienced historically high non-renewals in many of our traditional or generic office properties as tenant space needs have shrunk due to the work-from-home and other phenomena. While at the same time, we have had good success renewing tenants who occupy our dedicated use assets that have an office component. We believe that owning properties where our tenants conduct business that cannot be replicated from home or other generic office locations will have higher usage, stronger rents, and higher likelihood of lease renewal, thus stabilizing cash flows and increasing our growth profile. These dedicated use assets, or DUA, have other attractive features that we believe enhance tenant stability, such as significant tenant investment in FF&E and strategic placement near dedicated workforces in addition to other attributes. Our DUA property focus will include medical, lab, R&D, flex, and non-CBD government, all property types we already own. A good example of this property type is the Valent lab and office property that we added in San Ramon, California during the third quarter. As we execute on this shift in strategy, we intend to continue to move away from generic office properties that has already been well underway as we have aggressively sold these types of properties as they have become vacant. At year end, approximately 32% of our properties measured by annualized base rent or 25% as measured by total square footage are dedicated use. As we move ahead, we intend to gradually increase this percentage over time through property sales of traditional office, including both vacant and stabilized assets, and selectively adding DUA properties in their place. In connection with this strategy shift, as we announced earlier today, we are rebranding the company name to Orion Properties, which we believe better reflects the company's current portfolio mix and the direction away from traditional office toward our focus on dedicated use assets as we move forward. We recognize as a smaller size REIT that G&A as a percentage of assets and revenues is of particular importance. Accordingly, together with our corporate rebranding and strategy shift, we have made various changes to more effectively align our G&A costs. Examples of savings include restructuring the composition of the team and responsibilities to streamline operations and more effectively manage G&A. we will incur a restructuring charge in 2025 related to these changes. One of the changes I want to acknowledge directly is the retirement of Gary Landrieu, our Chief Investment Officer, effective June 30. Gary and I have worked together closely for nearly 30 years at Orion and its predecessor companies, and I want to thank him personally for all his contributions, which have been immense. He is an outstanding professional and we will miss him. Luckily, we have a strong bench here at Orion and it is our intention to reallocate his responsibilities to the team already in place. To allow for transition following his retirement, Gary will remain in a consulting role at Orion through January 2026. We also expect to make additional changes to further streamline our efficiency and team as we move through the year. but none will be as impactful financially as the roughly $1 million of annualized savings we will be able to realize upon Gary's retirement. Further to our commitment to aligning G&A, Gavin and I have both foregone any salary increase for this year. We are severely limiting promotions, and average salary increases for the remainder of Orion's employees in 2025 will be below inflation. Even with these measures, It is important to understand we need to maintain the team to both run a public company and manage our portfolio, which is increasingly becoming more management intensive as more properties become multi-tenant. Importantly, these efforts should enable us to keep G&A flat year over year, despite continued inflationary pressures on costs across the board. While market leasing tone is improving, it is from a very low base. and there remain a myriad of challenges ahead for all suburban office property owners, including Orion. We expect tenant concessions to remain high and rents to remain pressured on both renewals and re-tenanting. Additionally, it remains to be seen how objectives of the new presidential administration will impact our GSA portfolio, though we remain cautiously optimistic as nearly our entire portfolio is in the firm term and none is in the immediate Washington, D.C. area. Accordingly, as we've been communicating for more than three years, Orion needs to maintain liquidity, although we will inevitably see debt levels rising on both an absolute and debt to EBITDA basis in coming years, offset by anticipated earnings growth in the out years. We expect to further pair our portfolio through accelerating asset sales in 2025, focused on traditional office. We are continuing to evaluate our best exit strategy for the former Walgreen campus in Deerfield, Illinois, and expect to demolish the outdated office buildings this spring to lower our cost of carry should we decide to continue to own the land in anticipation of future development. In the fourth quarter, we also extended the mortgage loan financing on our Art Street joint venture portfolio for one year until November 2025. We have also recently extended the Sysmex lease in the joint venture portfolio by 10 years and made a member loan to the joint venture at 15% annual interest to fund a modest pay down of the mortgage loan and the Sysmex leasing costs in connection with the extension. We had $9.2 million receivable under the member loan as of March 5th, 2025. We structured this loan to pay interest and principal monthly from excess cash flows from the six properties in the joint venture portfolio, thus reducing our repayment risk. As part of our ongoing efforts to retain capital to execute on the business plan and accelerate our pathway to earnings growth, we are constantly evaluating our sources and uses of capital, including our dividend, which is our cheapest source of capital. While the current dividend is well covered on a core FFO basis, the Board of Directors has approved a new dividend of two cents per share beginning with the first quarter. The change to the dividend payout is consistent with the strategic change we are announcing today as we seek the lowest cost of funds to help us maintain and grow existing tenancy, continue the shift towards more dedicated use assets, and efficiently refinance our debt obligations as they come due in 2026 and 2027. As we enter 2025, we will continue to invest capital in well-located properties we believe will generate strong, sustained cash flow in our target growth markets and property type. During the year and in the coming years, we will need to fund capital expenditures to enhance the long-term value and to ensure we can continue to lease our properties and keep current tenants and attract new companies. This strategy is the reason we have remained highly disciplined in reducing debt and maintaining a low leverage balance sheet over the past three years. Given last year's strong leasing and our growing pipeline this year, we are beginning to realize the benefits of some of our past investments. That said, in 2025, The impact of the rise in interest rates, the 19 properties we have sold, and the vacancy we carry from lease rollover of the last few years will pressure cash flow as we have previously communicated. Importantly, we remain profitable from an FFO and core FFO per share basis. As I shared earlier, we believe that 2025 and into 2026 will be at the bottom, And beyond this year and into 2027, we will start to show flat to modest growth in many key metrics as newly leased space begins generating income and as associated vacant carry costs decline. We are quite energized that this transformation will position the company to grow meaningfully in the future and encourage that the leasing momentum will continue to contribute to stabilization of our portfolio. With that, I will pass the call to Gavin.