Orion Properties Inc. Q1 FY2024 earnings call

• Owns 75 properties and 6 unconsolidated joint venture properties with 8.9 million rentable square feet, 75.8% occupied (83.2% adjusted for properties under sale agreement).
• Portfolio diversified by tenant, industry, and geography; largest tenant is the United States government, with over 35% of annualized base rent from Sun Belt markets.
• Leasing momentum: Completed 522,000 square feet of new and renewal leasing in 2024, more than doubling the prior year's amount; signed long-term leases with the U.S. government, including a 17-year renewal and a new 15-year lease.
• Asset sales: Sold over 15% of the portfolio with gross proceeds of $58.5 million, reducing carry costs and freeing up capital; in April, agreed to sell a 96,000 square foot property in St. Charles, Missouri, and has agreements to sell 7 additional properties.
• Debt management: Retired term loan, paid down revolver, and has low coupon nonrecourse CMBS debt; recent amendment to revolving credit agreement rightsized borrowing capacity and modified covenants.

Orion Office REIT owns 75 properties and 6 unconsolidated joint venture properties, totaling 8.9 million rentable square feet with a first quarter occupancy of 75.8% (adjusted to 83.2% for properties under agreement to be sold). Total revenues for the first quarter were $47.2 million, down from $50.2 million in the prior year's first quarter. Core funds from operations for the quarter was $20.4 million or $0.36 per share, compared to $25.3 million or $0.45 per share in the same quarter of 2023. Adjusted EBITDA was $26.7 million versus $31.2 million in the prior year's first quarter. The portfolio has a weighted average lease term of 4.1 years, with 70.1% of tenants being investment grade.

• Reaffirmed core FFO range of $0.93 to $1.01 per diluted share for 2024.
• Reaffirmed G&A range of $19.5 million to $20.5 million for 2024.
• Reaffirmed net debt to adjusted EBITDA range of 6.2x to 7.0x for 2024.
• Intends to elect option to extend maturity of revolving credit facility from November 12, 2024, to May 12, 2026.
• After amendment to credit facility, has strong total liquidity of $258.3 million, including $24.3 million in cash and $234 million available on revolving credit facility.

• Leasing environment remains difficult with high competition, leading to expected continued substantial vacancy.
• Delays in asset sales due to current market and financial conditions, such as the Deerfield, Illinois property sale with ongoing redevelopment delays.
• Joint venture debt with Arch Street may face challenges in refinancing as the joint venture evaluates alternatives to exercise extension option.

Q: Congratulations on the leasing this year. So do you feel more conviction now towards tenant decision making?

A: Yes. Our forward leasing pipeline continues to look pretty healthy. We've seen leasing on renewals and some new leases on vacant space, with tenants showing interest in vacant space moving from interest to signing leases. But conditions remain tough with high competition.

Q: Just a little bit, if you can give some background on the U.S. government leases. When did those negotiations pick in? I think for one, you said it was a year-long process, but how is it playing out now?

A: The U.S. government lease negotiations for the Covington, Kentucky property took a year. We had extensive conversations with the government about their needs. The government exercised a 4-year renewal option, and discussions for a longer-term extension are ongoing as the government refines its needs at the property.

Q: On the Arch Street venture. Could you give some insight on like if there's any term on that and like expectations or some history?

A: The Arch Street joint venture has a nonrecourse mortgage loan facility expiring in November 2024. The portfolio assets are fully occupied and performing. We need to meet covenants to extend the debt, and we're working on either extending with existing lenders or refinancing the portfolio.