Orion Properties Inc. Q3 FY2025 earnings call

• Leasing: Productive leasing quarter with 303,000 sq ft leased, 57,000 sq ft signed after quarter end, year-to-date leasing 919,000 sq ft. Positive rent spreads on renewals and total leasing activity. Pipeline over 500,000 sq ft. • Asset Sales: Completed and ongoing sales of properties, saving cumulative carry costs. Evaluating obsolete buildings and assets needing capital investment, e.g., former Walgreens campus in Deerfield, Illinois. • Portfolio Transformation: Shifting towards DUAs, with DUAs percentage expected to increase. • Leverage Management: Net debt to adjusted EBITDA at 6.7x, maintaining liquidity, managing debt.

In the third quarter, 303,000 square feet of space was leased with a weighted average lease term of over 10 years, and an additional 57,000 square feet was signed after quarter end. Year-to-date through November 6, 919,000 square feet of leasing was completed, in addition to the 1.1 million square feet leased last year. Operating property occupancy rate was 72.8% at quarter end, and adjusted for properties under agreement to be sold or sold since quarter end, it was 74.5%. In 2025, 7 vacant or soon-to-be vacant properties and 1 stabilized traditional office property totaling 761,000 square feet were sold for a gross sales price of $64.4 million. Approximately 33.9% of the portfolio by annualized base rent and approximately 24.6% by square footage were DUAs at quarter end.

• Raised full year core FFO guidance to $0.74 - $0.76 per share from $0.67 - $0.71 per share. • Net debt to adjusted EBITDA expected to range from 6.7x to 7.2x, down from 7.3x to 8.3x. • Tightened G&A range to $19.5 million to $20 million from $19.5 million to $20.5 million. • Expect 2025 to be a trough for core FFO, with improved recurring earnings in 2026 and beyond.

• Credit facility revolver debt maturing in May 2026, need to extend or refinance. • Uncertainties in asset acquisition pricing, property location, and lease duration.

Q: Just I want to talk about some of the puts and takes of guidance. You get the benefit of the lease term income, you're selling some vacancy, which helps with some of the expense drag, though it seems like in the last quarter, the lease term income actually went down. So just maybe kind of describe some of the puts and takes that helped you kind of shape where your outlook is today.

A: The lease termination income was a result of the negotiated termination settlement with one of our tenants in the Fresno building. The puts really is driven by that and then as well as our leasing efforts that are taking place in the fourth quarter and the third quarter of leases that we signed in the prior year and the prior quarter as well for the free rent bridge now coming to an end. And then from an interest perspective, our interest rates are coming down, and so we're not paying as much interest expense. So we believe that, that also helped us in the fourth quarter.

Q: Your leasing pipeline went down quarter-over-quarter. Does any of that have to do with some execution? Obviously, a little bit of a smaller portfolio as well. Is there anything that we should be thinking about behind that with regards to demand?

A: The answer is no on the demand scale. We've seen continued improved demand for our properties. So we feel pretty good about that. Some of it is exactly what you just mentioned, that is some of the properties that we talked about on the last call that were sort of in the pipeline have -- we've now got leases signed up. And I think the second thing is that's a little different is we have less rollover coming next year. So we have a somewhat smaller portfolio. We've been selling vacancy, and we have less expected vacancies for next year. So all that combines to probably shrinking the pipeline slightly. But the pipeline we do have, we feel pretty good about.

Q: You did one acquisition last year. Obviously, you want to change the composition of the types of assets that you're owning over time. It's not going to be an overnight thing. Curious about the pipeline of deals. Are you seeing deals? And is pricing and demand, what could be slowing your ability to acquire here? Maybe just provide some perspective, please?

A: Well, I think that on the first -- on the last part, we are seeing a pretty strong pipeline of potential transactions. Of course, we are highly sensitive to a number of factors, pricing being probably the biggest one, of course. But then, of course, it's property location and lease duration. So it's a -- it's a little like Goldilocks. We kind of got to find the right temperature for the acquisition that we're looking for. But we do see some good transactions. We're being highly selective, but we do think it makes sense for us to recycle some of the capital -- some of this capital into new assets with long-duration WALT's and with higher quality cash flows. We're just not going to do it willy-nilly. We're going to be highly selective. We expect to add some assets in the next 12 months, but it will not be -- it will be a relatively modest number.