Q4 2021 Orion Office Reit Inc Earnings Call
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Ladies and gentlemen, please standby your conference will be getting started momentarily. Please standby.
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Hello, and welcome to the Hawaiian office, REIT fourth quarter, and full year 2021 earnings call and webcast. At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
Once you require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Mr. Paul Hughes General Counsel and Secretary for Orion Office REIT. Please go ahead Sir.
Thank you operator, good afternoon, everyone.
Today, well Ryan released its financial results for the quarter ended December 31 2021.
<unk> Form 10-K , with the Securities and Exchange Commission.
And posted its earnings supplement to its website.
These documents are available in the investors section of the company's website at Www Dot O and greet dot com.
Yeah.
I would like to remind everyone that certain statements made in the course of this call.
Not strictly historical information.
And constitute forward looking statements.
These statements which include the company's guidance estimates for calendar year 2022.
Are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
The risks and uncertainties. These forward looking statements are discussed in our earnings release.
As well as in our Form 10-K , and other SEC filings.
You should not place undue reliance on these forward looking statements and.
And the company undertakes no duty to update any forward looking statements that may be made during the course of course of this call.
Additionally, during the conference call today, we will be discussing certain non-GAAP financial measures.
Such as funds from operations or <unk>.
And core funds from operations or core <unk>.
Our presentation of this information is not intended to be considered in isolation or.
Or as a substitute for the financial information presented in accordance with GAAP.
The company's earnings release and supplemental include a reconciliation of these non-GAAP financial measures to the most directly comparable measures prepared in accordance with GAAP.
Hosting the call today are Paul Mcdowell, the Companys Chief Executive Officer.
Gavin Brandon the company's Chief Financial Officer.
Joining us for the Q&A session is Gary laundry out, our Chief investment Officer, and Chris <unk>, Our Chief operating officer.
With that I am now going to turn the call over to Paul Mcdowell.
Paul.
Good afternoon, everyone and welcome to Orion Office REIT fourth quarter 2021 earnings call. Our first earnings call as a nice listed publicly traded company since we spun off from royalty income on November 12 2021.
We want to thank everyone for joining us today and importantly for your patience as we work to complete the spin off spend time to fully digest the portfolio and.
And assembled the right team to enable us to execute and deliver on our business plan over the coming years.
Given we're a public company for less than two months in all of 2021.
I will spend some time focusing on our differentiated strategy and the composition of the portfolio.
Details some of our accomplishments since November <unk>.
Provide perspective on how we will address some of the company's potential challenges and wrap up by discussing why we are excited by the many opportunities we are evaluating in the near and longer term to build value for shareholders.
Kevin will then touch on some 2021 financial highlights.
Discuss our balance sheet and dividend and provide insight into our outlook for 2022.
Orion is unique and they were the only public net lease REIT that is entirely focused on owning a diversified portfolio of mission critical and corporate.
Headquarters office buildings, located in high quality suburban markets across the United States.
The portfolio was comprised substantially all of the office properties from Realty income and varied who merged in November 2021, and spun us off shortly thereafter.
The properties are leased primarily to credit worthy tenants auto mostly net lease basis.
The driving force behind the Orion is to provide investors with a specialized opportunity to invest in suburban net lease office properties given the limited public market focus on this asset type.
And the compelling macroeconomic and demographic tailwind that support this asset class.
And it has been well documented in recent years D. Urbanization has caused the population shifts away from gateway cities towards smaller primary and secondary markets and non urban communities.
Large corporations have noted these trends that have begun to relocate or co locate on new corporate campuses in suburban markets.
We are increasingly seeing companies seeking to provide office space closer to where their workforce continues to migrate and believe the pandemic has only served to accelerate these existing trends.
The total suburban office market is estimated to be valued at one to one and a half trillion dollars and we've and we have conviction that Orion is well positioned to capitalize on this large opportunity.
Our company has a seasoned leadership team.
As a combined over 100 years of net lease office and public REIT experience.
Starting point is our highest is a high quality diversified portfolio of 92 properties, representing $10 6 million square feet that is 91.9% occupied with 67.7% investment grade tenancy as of December 31, 2010.
One.
Our largest market by state are in Texas, and New Jersey, which represents 13.1% at 11, 3% of our annualized base rent.
As of year end the portfolio had a weighted average remaining lease term of four one years.
And we had 10 properties that were vacant as of January one 2022.
Several of which we considered to be non core assets.
This portfolio demonstrated a strong track record of tenant retention and re leasing when owned by Realty income and very.
While our portfolio today is a relatively short average lease term, we believe that in an improving economic outlook for suburban office.
These lease maturities may represent value creation opportunities through active asset management and targeted capital recycling.
Since our spin off in the coming years as the only pure play net lease REIT dedicated to this space, we will be laser focused on addressing our lease maturities with a goal to meaningfully extend our weighted average lease term for the overall portfolio.
We understand and want our investors to understand that in suburban office. These efforts will take time and capital.
So I'm very happy to report that we're already beginning to see positive re leasing renewal and expansion activity.
For example, we are excited that in November 2021.
We were able to address the lease at the largest property in our portfolio as measured by annualized base rent as we secured and they're in early 11 year lease extension on favorable terms with Merrill Lynch at our campus in Hopewell New Jersey.
This lease had accounted for approximately 23% of our scheduled rollover in 2024 and single handedly increased our weighted average lease term to four one years at the end of the year from 3.4 years before the spin off.
This is exactly the type of proactive asset management, we intend to continue in the future.
Furthermore, we have continued to generate leasing momentum.
Subsequent to quarter end at one of our properties in the woodlands, Texas, we executed a new lease expansion for approximately 41000 square feet of vacant space with an existing tenant, which now leases 92% of the building on an 11 year lease.
At our property in Plano, Texas and existing tenant executed a two year extension.
Approximately 54000 square feet and at our property in Augusta, Georgia, the existing tenant executed a five year extension of the entire approximately 78000 square foot property.
We acknowledge that we have a large number of leases rolling over the next three years and we have some properties we inherited in the merger that do not fit in our long term plan.
This lease roll and stabilization of the portfolio by disposing of noncore vacant or soon to be vacant properties will pressure earnings in the coming years.
While this portfolio repositioning will be a challenge and presents risks many of which we do not control.
We see it also a potential opportunity to extract value.
Moving forward, we will continue to evaluate all of our markets and each property to determine where it makes sense to invest and where it makes sense to sell.
While re leasing and active asset management of the existing portfolio will be job one.
Over time, we intend to meaningfully grow the corridor portfolio and diversify as circumstances allow.
One very important Avenue of growth is our joint venture with Arch Street capital Advisors.
Ryan its interest in the joint venture was assumed from Murray So our respective teams have strong connectivity and a successful track record.
Together, we have actively pursued accretive transactions to bolster our portfolio.
Since inception.
The joint venture has acquired six assets in six states for approximately $227 million.
One of those assets is 700 market Street, a 127000 square foot office property in St. Louis, Missouri that has an investment grade tenant in place on a long term lease.
This property was acquired by the joint venture in December for $35 million.
As part of our ongoing external growth strategy. We are actively monitoring a number of mission critical and corporate headquarters office acquisition candidates for both orion's own balance sheet and the joint venture with Arch Street.
Capital recycling will also be core to our business as we manage our our inherited portfolio.
To that end so far in 2022, we are in various stages of negotiation and agreement to sell three assets for approximately $21 4 million and we will continue to selectively dispose of non core properties that no longer fit our long term investment objectives.
Proceeds from these.
Dispositions will be redeployed to fund new acquisitions pay down debt as well as for capital investment into the existing portfolio.
We have also made progress progress strengthening our balance sheet and enhance our liquidity.
Subsequent to quarter end, we refinanced an outstanding short term bridge loan with a 355 million dollar five year, 4.97% fixed rate C. M. B S loan that is collateralized by 19 properties.
Gavin will discuss our capitalization in more detail, but in general we intend to employ our conservative.
Mostly fixed rate leverage strategy going forward, and we will maintain ample liquidity to support our growth plans.
To conclude we enter 2022 from a position of relative strength.
When the company was spun off we initially chose to focus on tenant retention and leasing vacant space.
Growing the joint venture and beginning to sell noncore assets in.
In a few short months, we have made notable progress in all four of these areas.
We readily acknowledge that there is still plenty of work to do the composition of the portfolio will require us to invest capital to retain tenants and fill vacant space.
And dispose of non core assets.
These factors could also somewhat mute our ability to grow while putting downward pressure on earnings and result in lumpiness in cash flow, depending on the timing of capital spend however.
However, we believe active asset management.
And targeted capital recycling could provide upside if the macroeconomic environment continues to fan demand for our properties in the future.
We have a differentiated strategy and experienced team and the capital in place to execute on this strategy.
And importantly, there is a large opportunity in front of us supported by favorable market dynamics.
Needless to say, we are excited about orion's prospects and the value we can create for our shareholders with that I will now turn the call over to Gavin Gavin.
Thanks, Paul I Echo Paul's comments that we are excited about the progress we have made since our spin off and expect that we will continue that momentum throughout 2022.
I'll start by discussing Orion's GAAP financial results for the fourth quarter of 2021. Additionally, because the company's GAAP results do not include all of the company's operating properties for the entire three months ended December 31, 2021, I will also be discussing on <unk>.
Supplemental basis pro forma results of operations for the two month period from November one to December 31st 2021.
Which are reported in our supplemental report furnished as an exhibit to the form 8-K, we filed today.
These results include the results of operations for all of the company's properties for the full two month period and are adjusted to exclude the effects of certain infrequent or nonrecurring items, which can create significant earnings volatility.
But which do not directly related to our core recurring business operations.
Therefore, we believe the pro forma results can help facilitate comparison of operating performance between periods.
On a GAAP basis Orion generated total revenue for the fourth quarter of 2021 of $40 8 million and recorded a net loss attributable to common stockholders of $54 9 million or a loss of 97 cents per share for the same period the company.
<unk> core F F O of $26 8 million or 47 cents per share.
On a pro forma basis for the two month period from November one through December 31, 2021, Orion generated total revenue of $36 5 million net loss attributable to common stockholders of 1.4 million or a loss of two cents per share.
Core F F O of $23 1 million or 41 cents per share.
Turning to the balance sheet, we ended the year with $647 3 million of outstanding debt.
Including 355 million under the bridge loan.
$175 million under the bank term loan nine.
$90 million outstanding under our 425 million capacity revolving credit facility.
And $27 3 million, representing our pro rata share of indebtedness of the arch Street joint venture.
On a pro forma basis for the two months period, our net debt to annualized adjusted EBITDA was 3.91 times.
As Paul noted in February we refinanced our outstanding bridge loan with a $355 million five year $4 97 fixed rate MBS long.
As part of the closing of this loan with a positive three $5.5 million of required lender reserves, primarily for future rent concessions and tenant improvement allowances.
The lease for the 19 collateral properties, which was mainly funded using our revolver.
As of March 15th 2022, we have total liquidity of $346 4 million consisting of $334 million of available capacity on the revolver and $12 4 million of cash on hand, with 54, 9% of our outstanding debt.
Ed as fixed rate and 27% as swap to fixed.
Leaving 18.1% that is variable.
With our current liquidity and the expected proceeds from our dispositions. We believe we are in a good financial position to achieve our objectives. In 2022. However, we will continue to evaluate all capital allocation options.
I wanted to additionally, highlight that Orion's board of directors has declared a quarterly dividend of 10 cents per share for the first quarter of 2022 to be paid on April 15th 2022 to stockholders of record as of March 31 2022.
This represents core F F O annualized payout ratio of approximately 23, 5% based on the midpoint of the anticipated range for 2022.
The dividend was sized to prevent future growth, while preserving meaningful cash flow for reinvestment into the current portfolio and for accretive investments.
We are also providing the following guidance for 2022 based on current economic conditions.
And the company's financial position.
Core F F O per share we are estimating a range of $1 66 per share to $1 74 per share for the fiscal year 2022.
Part of our underlying assumptions include G&A, ranging from 17 million to $18 million.
Our net debt to adjusted EBITDA, we are estimating a range of 4.7 times to five five times as of December 31 2022.
We acknowledge that in the coming years as we begin to invest back into the portfolio and make acquisitions. This ratio will rise.
From a capex perspective.
As we discussed in our materials, we will need to do to invest back into the portfolio in order to secure and drive future leasing.
Unlike G&A, which is fairly predictable capex timing will be somewhat lumpy on a quarterly and annual basis and.
And we will be dependent on when leases are signed and work is completed on the respective properties.
In the coming years, Capex will increase as our leases rollover.
We will also look to make targeted acquisitions to spur growth, which will additionally be part of our capital allocation decision process.
Given we are about a week away from the end of the first quarter of 2022, which will be a ryan's first full quarter of actual results.
Can also share that our performance is tracking well towards our full year core <unk> guidance range with that we will open the lineup for questions operator.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to move your question from the Q.
And speak using speaker equipment may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Eddie Riley for me up on your line is now live.
Hey, guys I'm just wanted to.
Some clarification on the reporting here. So looking at quarter ended December 31, 2021, where revenues were $40 8 million. So that only includes.
Realty Income's operations from October 1st October 31, and buried and Realty Income's operations from November to December 31st drive that correct.
Yes, that's correct.
Okay. So so.
The best way to kind of look at this is I'm looking at the pro forma in November to December .
Yeah, that's right.
So the historical royalty properties were for the entire quarter, whereas the merger.
November 12 times from the historical Orion properties very properties came in to the portfolio. So that's why we did the pro forma adjusted to show you two months of what the results could be or look like without having to stop period noises in the financials.
Gotcha makes sense I guess, turning to our G&A guidance you guys got it to 17 to 18 now if I take that pro forma.
And annualize it I'm coming up with 12 could you kind of help me reconcile the difference there.
The pro forma it doesn't include the public company costs that we've incurred that we will incur for the AGA.
Four O four it's also in four includes a month and a half of operations.
A lot of the G&A spend that we budgeted for.
We're comfortable with 2017 to 18 months in that range.
Okay.
And then on the dividend payout.
Payout ratio looks a little low relative to peers and I'm in the office space at least could you give us some color on.
What what the cash might be used for is it going more towards a new properties or capex on existing properties.
Yeah sure this is Paul.
You know look we've been pretty clear from the beginning the week, we set a business plan that doesn't require us to access the capital markets.
And you know part of that plan is to use our internally generated capital to help us deal both with our significant rollover.
And to fund some modest growth either on the balance sheet or in the JV. So we have very good uses of capital over the near term over the next several quarters that we think we can put back into the portfolio or buy assets that will be accretive to all investors. So that was kind of one of the driving force.
It's behind where we set the dividend and really it's a function of the short weighted average lease term that we have in the portfolio.
Gotcha, Gotcha, and Hum the renewal rates.
It was Merrill Lynch said, you guys re signed.
Could you give us some color on it.
The direction of those for new leases, whether they're up or down relative to the older leases.
Sure I can I can give you a little bit of color.
You know with with respect to the.
Merrill Lynch lease.
That's a that's a huge win for us here at Orion.
That's we extended that lease by 11 years beyond the original term. So the lease now goes out to about 2035.
As a result of that extension you know we gave a modest rent.
Rent concession to Merrill Lynch.
And we also gave them some you know T I's and base building work and.
And which I think equates to about $47 a foot, which is disclosed in our which is disclosed in our 10-K. So in that circumstance and as I've mentioned you know in the past before when we have a very high quality tenant that's looking for a long term lease we will granted initial lease.
Initial rent concession, but over time that those rents will grow and they'll continue to grow to the rate, where we get back with Merrill Lynch overtime to where they were at the conclusion of their initial lease term.
With respect to the property in Augusta, Georgia.
That property is a five year lease extension and that's about flat.
The one property that we did a two year lease extension with a that had an increase of four 5%.
Okay got it appreciate that color, there and I don't want to hog the line.
I was wondering if you guys could.
Disclose maybe what the current weighted average lease term is.
Given the subsequent activity to year end and then a related question I guess the three assets that you guys are.
Have pending right now where were those.
Are those weighted average leases low or those properties.
Bertie stake in.
Just wondering if you guys could give us any color there.
Sure. So at the at the end of the Covid at the end of the year. Our weighted average lease term was four one years you know we haven't had material changes to that weighted average lease term during the course of the beginning part of this first quarter.
With respect to the three properties that we have for sale those leases in all cases are materially shorter than our weighted average lease term.
Okay got it so those that should.
Hopefully increase here your weighted average lease term, okay cool all right. Thanks, guys.
Thank you.
Thank you as a reminder, that star one to be placed in the question Hugh.
Our final question today will come from Sheila Mcgrath from Evercore. Your line is now live.
Hi, Yes. Good afternoon I was just wondering on the major lease extension with now which is good news how far ahead of them lease expiration was that.
Did you guys approach them to do this deal.
Is that something you're dealing with other tenants.
Now as well.
Yeah. Thanks Sheila.
It was about three years before there before the end of their initial lease which are you know and then Gary and his team were able to tack on an additional 11 years. So you know a terrific outcome for US I would tell you that in general that's a little earlier than we normally are.
Discuss extensions and renewals.
I think Merrill initially came to us with respect to that extension.
That wasn't it was as you might imagine in the size of that transaction was you know it was a long a.
Asian process interrupted at some points by the pandemic.
But you know at the end of the day, we got to a terrific result, which is Merrill Lynch. One wanted to maintain their occupancy in our properties are on a long term basis.
And you know we are obviously delighted to have them.
Do you expect that youll be approaching other near term expirations to just kind of extent kind of blend and extend.
Yes.
Yes, sure, we do that pretty aggressively Gary and his guys well.
You know discussed with tenants you know as soon as we can sometimes those discussions start years in advance.
Sometimes they start you know much closer to the end of the lease term and it's really a little bit of a balancing act. If we go to a tenant too early with a blend and extend their gonna want very significant rent concessions for us because they have significant amount of term. Your long term left so you know we just take it on a case by case basis.
With the end goal of course being to keep existing tenants in place as much as we possibly can.
Okay, Great and then for the vacant properties.
Value creation opportunities do you envision you know renovations or.
Are any of these properties like a higher and better use alternatives to office.
I'm just curious.
Yeah, I mean, we have.
You know.
With respect to properties that are vacant or we think are going vacant they would I say fall into two buckets bucket number one our properties that we like and would intend to keep for the longer term and then properties that we don't like you know that we don't think are particularly good for the long term.
Portfolio and and that's largely a function of the way that we got these properties right is as a result of the merger of Realty income and very you know we didn't necessarily pick them. So theres some properties, where we have vacancy that we just don't see a good long term outlook. So those we will likely sell vacant.
The properties that are vacant that we like we think we've got long term.
Abilities with we will do some investment into those properties to make them more enticing to tenants. You know there is a strong move towards adding amenities and sprucing up properties and things like that to help draw tenants in and so we will be doing some we will be doing some of that.
With respect to redevelopment.
At the moment, we don't have any properties on the balance sheet that we would expect to redevelop ourselves some of the vacant properties that we may sell vacant those properties may be subject to redevelopment for a higher and better use.
Okay, Great and then.
Just on the Oh right the.
The joint venture.
For acquisitions, there is less competition I would imagine on them right now.
And I understand that the cap rates will vary based on lease term and credit at the panic, but is there any like broad cap rate.
Our assumption range that you could frame for us to think about for that for acquisitions in the venture.
Sure. So the acquisition that we made into the venture in December was at about a six and a half cat.
I would say that.
There is significant competition for net leased office assets when there is in place the food lease.
On a long term basis in a reasonably good market.
And so we've seen cap rates as low as five in a quarter or a five and a half for well located long duration product too.
Two you know call it six and a half 7% for shorter lease terms or maybe somewhat lesser credits.
Okay, great. Thank you.
Thank you Sheila.
Okay.
Thank you. Our next question is coming from Mitch Germain from JMP. Your line is now live.
Hello, Mitch.
Hello, Mitch perhaps your phone is on mute please pickup your handset.
Sorry about that I'm curious about the tenant decision, making process you talked about not going to tenants too early you know from experience I'm hearing.
Tenants unwilling to make decisions too early obviously, given the fact that we've got you know different strains of the pandemic that are impacting our tenant playing so you know just kind of our tenants willing to sign leases and and negotiate or is there a hesitation on their part to sign anything until they.
Have clarity as to what's happening in the world.
The answer is tenants are willing to sign negotiate and sign leases with us and we've had some good experience with that recently, if you sort of spelled out you know with respect to Merrill Lynch and our properties in Augusta, Georgia, and so on and so forth.
But I will say that what we found during the pandemic is that the decision making process is longer than it ever was before so while we're able to engage with tenants and they are starting to think that there you know about their long term prospects in our property getting them to the decision where they agree to sign a lease.
You're always taking somewhat longer than than it used to you know I'll say now as the pandemic starts to fade and we hope disappear a bit into the rearview mirror. What we are starting to hear a lot more about is people coming back to the office on a mandatory basis, whether it's two days a week three days a week four days a week or more.
More more and more companies are starting to bring their employees back and as they bring their employees back that helps them understand their space plans better. So you know looking forward, we think that pace of decision making.
We'll pick up but so far we've had pretty good success in.
Re tenant in the properties, where we think our releasing two existing tenants, where we think the tenant wants to stay.
And what about the willingness to allocate capital.
And take on maybe shorter duration leases is that something that you're willing to do if you're comfortable with the real estate or likelihood is you're going to probably look to mitigate some of that risk with the lease term.
Yeah, I think Mitch will probably for new acquisitions will likely look to mitigate that risk with lease term and that's not because we don't know how to do it we do but we have a very short weighted average lease term average weighted lease term in the portfolio now so we've got a bunch of short term leases that we got to deal with now so we're.
On those and I think as we add incremental assets at least in the intermediate future there'll be other longer dated variety.
Right, we see the best.
Thank you. Thank you. Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mr. Macdonald at this time for any further closing comments.
Thank you all for joining us on our first earnings call and we look forward to speaking with you again in May.
Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.