Q1 2022 Orion Office Reit Inc Earnings Call

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Greetings and welcome to Orion Office, REIT first quarter 2022 earnings conference call.

As a reminder, this conference is being recorded.

I would now like to turn your call over to your host Paul Hughes General Counsel for Orion. Thank you.

Thank you operator.

Morning, everyone.

Yesterday Orion released its financial results for the quarter ended March 31 2022.

Filed its Form 10-Q, 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 <unk> Dot com.

I would like to remind everyone that certain statements made in the course of this call are 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 of these forward looking statements are discussed in our earnings release as well as in our Form 10-Q, and other SEC filings.

Should not place undue reliance on these forward looking statements and the company undertakes no duty to update any forward looking statements that may be made during the course of this call.

Additionally, during this 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 S. F O.

Our presentation of this information is not intended to be considered in isolation 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 company's Chief Executive Officer.

Gavin Brandon the company's Chief Financial Officer at.

Joining us for the Q&A session is Gary laundry Al 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.

Paul.

Good morning, everyone and welcome to Orion Office, Reits first quarter 2022 earnings call.

On behalf of our team I want to thank you all for joining us today.

Given that it has been only about four weeks since our year end call. My remarks will be brief and I will focus today on continuing to articulate our business strategy discuss our performance during our first full quarter of operations and highlight the progress we continue to make.

I will then turn the call over to Gavin to provide an update on our financial results.

In late March we held our first earnings call since we spun off from royalty income on November 12 2021.

As we detailed previously at our inception, we inherited a portfolio that need some intensive asset management. So we can ultimately grow the business by focusing on retaining tenants leasing vacant space growing our joint venture with arch Street capital buying select assets for the balance sheet and selling now.

Non core assets to maximize long term value.

Today, I will reiterate a few facts about orion's differentiated strategy.

Orion is unique and that we are the only public net lease REIT that is exclusively focused on owning a diversified portfolio of mission critical and corporate headquarters office buildings located in high quality suburban markets throughout the United States.

The portfolio consists of 92 properties and six unconsolidated joint venture properties, representing $10 6 million square feet.

That is 88, 3% occupied.

The properties are leased predominantly to credit worthy tenants on a net lease basis.

As a percentage of annualized base rent as of March 31, 2022.

There was 67% investment grade tenancy across the portfolio.

And over 80% of our leases are either triple or double net.

Our assets are also diversified by tenant tenant industry and geography, no tenant industry makes up more than 12, 5% of annualized base rent.

And no single tenant makes up more than 12, 1% of annualized base rents.

Our largest markets by state, our Texas, and New Jersey, which represents 14, 1% and 12% of annualized base rent respectively.

And over 25% of our annualized base rent is derived from Sun belt markets.

Orion represents a specialized opportunity to invest in suburban net lease office given the limited public market focused on this asset type and what we believe our demographic and economic tailwind that will support these properties in the coming years.

We continue to have conviction in the role of high quality suburban office as an important hub for the workforce of tomorrow.

We are seeing large corporations hold the same belief as well as our own tenants that have executed or are actively seeking to secure early renewals and extensions in these markets.

On our call a few short weeks ago. We noted a few of the renewals and expansions we have been able to complete since our spin. The most notable being the 11 year extension of our lease with Merrill Lynch.

Gary laundry and his team are continuing their intensive efforts and we are in various stages of negotiation and documentation for new leases and renewals at multiple properties.

It is great to see this continued positive leasing activity and we are pleased with the progress we have made in starting to strengthen the portfolio.

That said given the relative size of our portfolio tenant retention will be volatile quarter to quarter and year to year, depending on the needs of our tenants.

Highlighting this volatility.

Had three scheduled lease expirations during the quarter, which impacted occupancy no.

Our portfolio's weighted average lease term held steady at four one years at quarter end.

We have a large number of leases rolling over the next three years and we will remain laser focused on actively addressing these maturities with a primary goal being retaining our tenants if we can fill.

Filling vacancy with new tenants, if we can and selectively selling the properties that don't fit our strategy.

To that end during the quarter. We also continued to advance our initiative of selling vacant and identified non core assets.

Do not fit our long term investment objectives as well as assets, where we believe the value has been maximized for us.

Specifically, we have three properties under contract for about $13 million and we are actively negotiating and marketing a number of other assets for sale or lease.

We ended the quarter with 10 vacant properties that are a drag on earnings several of which we consider to be noncore assets that we intend to dispose of as expeditiously as we can.

Enhancing our portfolio's weighted average lease term and stabilizing the portfolio through sale of noncore and vacant properties are top priorities for us and we acknowledged that addressing these areas will undoubtedly continue to challenge our growth and pressure earnings in coming periods. We have significant challenges ahead, but we are confident in our.

Abilities as a highly experienced team.

Some of whom have worked together for decades to execute on our business plan.

As I mentioned on our first earnings call. Our team has a long track record of success in repositioning portfolios and the assets themselves have demonstrated a strong track record of tenant retention and re leasing when owned by Realty income and varied in the past it.

It is also important to remember that we have some very strong assets in this portfolio with a strong tenant base that are well positioned for long term income stability.

The current economic outlook presents its own set of challenges through active asset management and targeted capital recycling. We do believe there are a number of value creation opportunities embedded in the portfolio.

One additional use of capital is for acquisitions and this quarter, we continue to leverage our joint venture with arch Street capital and seeking to purchase a number of new assets. We are actively reviewing a number of potential property acquisitions for the joint venture as well as for Orion's own balance sheet.

Given the current market volatility and rapidly rising interest rates, we will maintain a disciplined and thoughtful approach on the acquisitions front.

We continue to evaluate all of our markets and each one of our properties to determine how best to unlock and maximize value.

This work will help us to determine where it makes sense to invest where it makes sense to sell and where it makes sense to acquire.

We believe these are the best uses of our capital as we continue to stabilize and reposition the inherited portfolio.

We recently paid our first dividend and our board has just declared our second quarterly dividend and it is our intention over time to position the portfolio. So that we can begin to put upward pressure on the payout ratio, but we caution that will take time.

To conclude we continue to be excited about our progress since Orion was spun off and we're continuing to make steady progress in 2022.

We want to again make it clear that there is plenty of work ahead to retain tenants fill vacant space dispose of non core assets and begin to grow the core portfolio through targeted acquisitions, we believe that active asset management and targeted capital recycling could provide us with upside given our.

<unk> strategy and focus.

We remain enthusiastic about <unk> future and are steadfast in our commitment to delivering value for our shareholders.

With that I will now turn the call over to Gavin Brandon, Our CFO , who will discuss our first quarter 2022 financial highlights our balance sheet dividend and outlook for the remainder of the year Gavin. Thanks.

Thanks, Paul I'll begin by discussing our Ryan's GAAP results for the first quarter 2022, which as Paul mentioned is our first full quarter operating as a public company.

Orion generated total revenue for the first quarter of 2020 to $53 2 million and reported a net loss attributable to common stockholders of $9 9 million or <unk> 17 per share core funds from operations of $28 million.

Or a 49 per share and adjusted EBITDA was $34 9 million.

G&A in the first quarter of 2022 was $3 5 million Capex. This quarter was $1 4 million, including tenant improvements of 400000 and other property improvements of $1 million.

Leasing commissions associated with the company's leasing activity for an additional $1 million.

As we have discussed capex timing will be dependent on when leases are signed and work is completed on properties and likely will increase over time as our leases rollover.

Turning to the balance sheet, we ended the quarter with $648 $3 million of outstanding debt, including Orion's proportionate share of that and the joint venture, which is consistent with last quarter.

As we noted on our last call in February we refinanced our outstanding bridge loan with a $355 million five year 497, 1% fixed rate MBS long.

As of March 31, 2022, we had total liquidity of $353 2 million consisting of $334 million of available capacity on our $425 million revolving credit facility and $19 2 million in cash and cash equivalents. We also have no.

Debt maturities this year.

Our net debt to adjusted EBITDA was $4 five one times at quarter end and we expect to remain within the estimated range of four seven times to five five times as of December 31, 2022 that we guided to on the last call.

We also wanted to highlight the Orion's board of directors declared a quarterly dividend of <unk> 10 per share for the second quarter of 2022 to be paid on July 15th to stockholders of record as of June 30th 2022.

Overall with our current liquidity anticipated proceeds from dispositions and the cash flow the business is generating itself.

We believe we are in a strong financial position to achieve our near and longer term objectives. We continue to make steady and consistent progress in our focus areas and are looking forward to building on the momentum we have generated thus far in 2022.

Turning to our outlook for the remainder of 2022, we believe our first quarter performance keeps us on track with our full year 2022 guidance. We provided with an estimated core <unk> range of $1 66 to $1 74 per share.

Based on our initial results in April 2nd quarter 2022 is also tracking well from an expense perspective, we still anticipate G&A range of $17 million to $18 million for the full year of 2022.

With that we'll open the lineup for questions operator.

Thank you, we'll now be conducting a question and answer session, let's see like replacing the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question.

You May press star two if he'd like to remove your question from the queue.

For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions and once again Thats star one to place the question queue.

Our first question today is coming from Mitch Germain from JMP Securities. Your line is now live.

Hi, good morning.

Good morning, Mitch.

So your net debt $4 five today, you're guiding higher.

So are you assuming deployment that just really the key.

Needs that are required for the existing portfolio.

I think it's a combination of things and Gavin can jump in here if necessary.

Relation things one is we will be expanding money expected on to the portfolio.

And in Capex, and Ti and Lcs and the like.

And then secondly, we may have some acquisition activity, where we borrow money on our line of credit to buy the asset.

Considering your vacancy.

And your portfolio in general how much of your portfolio.

Mind is considered noncore.

Over time like to potentially recycle.

I will let you know that is.

A bit of a moving target Mitch you know we have guided before that we have anywhere from 10 to 15 properties that we think are would fall into the non core bucket and I would sort of put the noncore bucket into two different.

Sectors, one sector is properties that we wouldn't want to hold on a long term basis.

The second is where we may have realized the full value where there is a long term lease in place and we can find ourselves with a very tight cap rate to sell that asset and then recycle that capital into.

Assets that we think have got better long term yield perspective so.

We have I would say anywhere between 10, and 15 assets that fall into those buckets at the moment.

Helpful. And then last question for me any change in sentiment.

With regards to the conversations you're having with tenants I mean.

Continue to see different strains of the virus numbers increasing recently.

To ebb and flow.

I'm curious if that is continuing to impact some of the tenant decision making.

We haven't seen it directly in that way Mitch.

Where the tenant says I was considering leasing re leasing this space from you, but now new variants are coming in place and we're going to step away I will say, what we have noticed and we've mentioned it I think previously.

Is that the decision making process at companies is taking longer than it ever has before so while we often ultimately end up with the renewal.

That decision, making from our first discussion with the tenant about a potential renewal to signing the lease is has been extended.

Helpful. Thank you.

Take the next question is coming from Eddie Rally.

Your line is now live.

Hey, guys just to piggyback on that last question.

The timing of the decision making.

For the tenants is that have you seen that compress a little bit maybe from from last from last quarter has anything changed there at all.

Yeah.

Yes, this is Gary laundry.

I can't I can't say things have changed much.

It is a bit fluid and.

There is a range of of timelines that these tenants are on.

I don't think here's a way to give you a simple answer it's.

I don't see a lot of change.

Okay Gotcha Gotcha.

And you guys mentioned that you're kind of on track.

Right.

Your guidance for the full year.

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Should we be expecting maybe three years or so property fills per quarter going forward.

Yeah, I'm not sure I would necessarily put it in the.

In some defined schedule that we'll do three this.

<unk> in the second quarter three in the third quarter, so on and so forth. They may come in a bit more batches I will tell you that we mentioned that we have three properties under contract for sale now and those will close over a variety of time periods.

We also have got offers or discussing LOI on probably another four or five properties.

At the moment right now so we're trying to move these sales as expeditiously as we can but they don't fall at any set timeline, but the expectation is that we will start to have sales flowing through in the next couple of quarters and that will likely pick up overtime.

Okay got it thank you.

Thank you we reached end of our question and answer session I would like to turn the floor back over to Mr. Macdonald for any further closing comments.

Thank you everyone for joining us today, and we look forward to talking to you. After we report our second quarter results have a good day.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.