Orion Properties Inc.

Greetings. Welcome to Orion Properties' first quarter 2025 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 results for the quarter ended March 31, 2025, filed its form 10Q with the Securities and Exchange Commission, and posted its earnings supplement to its website at onlreit.com. During the call today, we will be discussing Orion's guidance estimates for calendar year 2025 and other forward-looking statements, 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-Q 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 funds from operations, or FFO, and core funds from operations, or core FFO, and other non-GAAP financial measures. These non-GAAP financial measures are not a substitute for financial information presented in accordance with GAAP, And Orion's earnings release and supplement include a reconciliation of our 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 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.

Good morning, everyone, and thank you for joining us on Orion Properties' first quarter earnings call. Today, I will highlight the progress we are making executing on our new business strategy and discuss our first quarter performance and operations. Following my remarks, Gavin will review our financial results and provide our outlook for the rest of the year. With over 450,000 square feet of leasing completed as of May 6th, we are successfully building on last year's strong leasing momentum that saw Orion lease 1.1 million square feet. Specifically, the over 450,000 square feet of leasing is a combination of new and renewal transactions with a weighted average lease term of 7.4 years. Included in this total is a 15.7 year lease for 46,000 square feet at our Persephone, New Jersey property, bringing that formerly vacant building to more than 60% leased to two tenants. In addition, we signed a new 10 year lease for 160,000 square feet in Buffalo, New York with Ingram Micro, who will be relocating from our Amherst, New York property We are encouraged by this strong leasing activity to start the year as it reflects the slowly improving market tone we started to see last year. We continue to work hard to sustain this momentum. However, we cannot control the impact from the very significant macroeconomic uncertainty that has been injected into the broader markets recently. Given the smaller size of our portfolio, there will be significant variability in leasing spreads quarter to quarter and even year to year as we lease individual properties. To that point, initial rent spreads on renewal leases during the first quarter were off about 18%, primarily related to the particular dynamics of the properties renewed in specific markets. To give a more rounded picture, when measured on all leasing activity since the spin, Our initial rent spreads are down about 5%, and ending rent spreads are up about 7% on average during the same time period. Orion's operating property occupancy rate was 74.3% at quarter end. The operating property lease rate was 77.4%, and the weighted average lease term was 5.2 years. Although we anticipate tenant retention to remain challenged this year, We expect that our portfolio occupancy will begin to rise after this year as we continue to lease vacant space, sell vacant properties that do not meet our long-term goals, and generally work to overcome the significant lease expirations and rollover of the past few years. This will be important as we continue to work to reduce property operating costs. After the quarter end, we closed on the sale of three vacant properties totaling 287,000 square feet for a gross sales price of $19.1 million or approximately $66 per square foot. One of those transactions is the sale of 119,000 square foot traditional office property located in Denver, Colorado. to a developer who intends to convert the vacant office building into multifamily affordable housing. This transaction was two years in the making and was executed at a purchase price of $101 per square foot, showing our creativity and patience in order to achieve the best possible result. Additionally, two properties totaling 211,000 square feet are currently under contract for $27.3 million, or $129 per square foot, with one sale scheduled to close later in the quarter and the other early in the fourth quarter. These transactions demonstrate our continued ability to monetize non-core assets and redeploy capital while improving the overall quality and durability of our remaining portfolio. we expect to have additional dispositions throughout the remainder of the year. We've made significant progress in reorienting our portfolio since our spin, despite an unprecedented collapse in demand across the broader office markets. And we believe the progress we have made positions us well to capitalize on our strategic plan to build a more stable long duration property mix. As discussed on last quarter's call, we are shifting our portfolio concentration over time away from traditional generic suburban office assets and toward dedicated use assets or DUA properties where our tenants perform work that cannot be replicated from home or relocated to a generic office setting. These property types include medical, lab, R&D, flex, and non-CBD government properties, all of which we already own. Our experience is that these assets tend to exhibit stronger renewal trends, higher tenant investments, and more durable cash flows. At quarter end, approximately 32% of our portfolio by annualized base rent and approximately 25% by square footage were dedicated use assets. and we expect this percentage to increase over time through disposition activity and targeted acquisitions. The continued demand we're seeing for dedicated use assets reinforces our confidence in this direction. While leasing pace and interest is improving, it is from a very low base. What has not changed is the many challenges all office property owners, including Orion, must continue to address, including obsolescence of properties. To that point, tenant concessions remain high and rents continue to be pressured on both renewals and re-tenanting. Furthermore, the governmental uncertainty around DOGE could cause additional leasing unpredictability around our government-owned assets. That said, we continue to have productive and routine interactions with the GSA. For example, following a relatively short 50-day delay, we received approval from the GSA to perform the landlord work at our Lincoln, Nebraska property, and that new 86,000-square-foot lease is expected to commence in December 2025. Additionally, nearly our entire GSA portfolio is in the firm term, during which the GSA does not have the option to terminate the lease and none is located in the immediate Washington D.C. area. Turning briefly to the balance sheet, as we have been communicating for more than three years, Orion has been very successful maintaining significant liquidity to support our ongoing leasing efforts. To do so, we have sold vacant properties, used sale proceeds and cash flow to pay down debt, managed G&A, have been highly selective and targeted on acquisitions, and recently aligned our dividend policy. As a result, at May 5th, our liquidity remains strong at $244.5 million, represented by cash on hand and the available balance on our revolver. We will inevitably see debt levels rising on both an absolute and debt to EBITDA basis in coming years, which we expect to be offset by anticipated earnings growth in subsequent years. We anticipate that the next year or two will represent the low point for our revenue and core FFO earnings, followed by accelerating growth as we move into 2027 and beyond. As we head into the second quarter, we have solid leasing activity momentum and we remain focused on investing in our well-located properties within target markets. To support this, we will continue to fund capital expenditures that enhance asset value, that enable us to lease space, retain tenants, and attract new ones. Our disciplined approach to capital allocation, including maintaining a low leverage balance sheet over the past several years, has positioned us to navigate the current environment, even as we face continued cash flow pressure from higher interest rates, elevated vacancy from recent lease roll, and the impact of the 22 properties we've sold. From a G&A perspective, we are highly cognizant that as a smaller company, evolving our strategy and shrinking the size of the portfolio before growing, we must control this line item. To that point, as mentioned last quarter, our Chief Investment Officer, Gary Landrieu, will retire on June 30th And we will reallocate his responsibilities internally. Gavin and I have foregone any salary increase for this year. Average salary increases for the rest of the Orion team are below inflation. And as inevitable attrition has occurred, we have shrunk our optimal headcount. That said, it is imperative that we maintain the team to operate as a public company and to execute on our asset management intensive strategy to manage our portfolio, giving the growing multi-tenant component. We recognize as a smaller size REIT that GNA as a percentage of assets and revenues is of particular importance, and we are doing our best to ensure that they are aligned. Importantly, Due to these efforts, along with other initiatives, we remain solidly profitable on both an FFO and core FFO per share basis. With another strong quarter of leasing and asset sales behind us and a healthy leasing pipeline ahead, we are encouraged that Orion's transformation is heading in a positive direction. We look forward to further portfolio stabilization and building on the company's many strengths. With that, I will pass the call to Gavin.