Q3 2022 Orion Office Reit Inc Earnings Call
Greetings and welcome to Orion Office, REIT third quarter 2022 financial results. As a reminder, this conference is being recorded I would now like to turn your call over to your host Paul He was general counsel for Oh, Ryan. Please go ahead.
You operator, good morning, everyone yesterday Orion released its financial results for the quarter ended September 32022.
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 O N L reap dotcom.
Forward looking statements made during today's call such as the company's guidance estimates for calendar year 2022 are subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations.
These risks and uncertainties are discussed in our earnings release as well as in our Form 10-Q, and other SEC filings.
The company undertakes no duty to update any forward looking statements that maybe made during the course of today's 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>.
The company's earnings release and supplemental include a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.
Hosting the call today are Paul Mcdowell, the company's Chief Executive Officer.
Gavin Brandon the Companys, Chief Financial Officer, and joining us for the Q&A session are 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 morning, everyone.
And welcome to Orion Office, REIT third quarter 2022 earnings call on behalf of our team I want to thank you all for joining us.
On the call today, I will discuss our performance in only our third full quarter of operations as well as highlight the ongoing progress, we're making on orion's portfolio.
I will then turn the call over to Gavin to provide an update on our financial results and guidance.
As we've detailed since November 2021, following our spin off from Realty income, we are working hard to reposition and align the suburban focused office portfolio that we inherited from the merger of Realty income and Murray.
Orion is uniquely positioned as 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.
While Orion owns a significant number of high quality stabilized assets.
Sizable portion of our portfolio requires pruning intensive asset manage it repositioning and capital to address lease maturities and vacancy.
These efforts are complicated by the current economic backdrop of rising interest rates inflation recession fears and return to the office hesitancy all of which have given pause to businesses looking to sign new or extend currently.
While these trends have been widely reported for several quarters.
We began to notice an uptick in the impact in our portfolio toward the end of the third quarter and that has continued into the fourth.
Since our spin off late last year, we have consistently commented that our efforts to stabilize and rightsize our portfolio would take time and consistent multiple challenges along the way that could impact the timing of our progress.
Despite these recent negative trends due to demographic and other long term changes as well as the quality of our assets.
We remain optimistic about our long term prospects for owning a large suburban net lease office portfolio in attractive markets that will provide solutions for the Workforces up tomorrow and that in turn will result in the growth of Orion.
Turning to some updates on the portfolio.
At quarter end, we owned 87 properties and six unconsolidated joint venture properties, representing 10 1 million square feet.
That was 88, 2% occupied.
Properties are leased predominantly to credit worthy tenants, primarily at a net lease basis.
As a percentage of annualized base rent there was 69, 9% investment grade tenancy across the portfolio at approximately 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 13, 1% of annualized base rent and.
No single tenant makes up more than 11, 5% of annualized base rent.
Our largest markets by state, our Texas, and New Jersey, which represents 14, 6% and 11, 4% of annualized base rent respectively.
And approximately 31, 8% of our annualized base rent is derived from Sun belt markets say proportion, we intend to grow over time.
As I mentioned companies are continuously recalibrating their expectations for space and growth.
While we believe the rapidly slowing economic environment and continued employee hesitant hesitancy to return to the office is temporary.
The result is that some of the anticipated leasing we expected to realize is either going to be delayed reduced or eliminated.
When our tenants do renew they continue to lock in multiple year extensions.
In the third quarter, we had a tenant renew in 35000 square feet for five years at our property in Greensville Idaho.
Subsequent to quarter end, we executed a new five four year lease.
78000 square feet at one of our properties in Brownsville, Texas.
Overall since the spin we've had good leasing momentum executing on close to one 2 million square feet.
This year, so far we have completed about 500000 square feet of renewal expansion and new leases.
And notwithstanding our slow third quarter in terms of signing new leases and lease renewals.
We continue to have an active pipeline of several hundred thousand square feet of leases in various stages of negotiation and documentation.
As we have said on previous calls tenant retention will continue to be lumpy quarter to quarter.
Specifically, we had two scheduled lease expirations during the quarter totaling about 49000 square feet.
And we had 10 vacant assets at quarter end.
Our occupancy improved slightly from 86, 4% last quarter to 88, 2% this quarter driven by our progress in selling vacant assets. Additionally.
Additionally, our portfolio's weighted average lease term declined slightly to three nine years.
One of our main asset management strategies is to sell vacant and identified non core assets that do not fit our long term investment objectives.
The sale of these assets will allow us to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with re tenant it.
This initiative continues to progress well.
To date, we have closed on seven dispositions totaling 539000 square feet for.
For an aggregate sale price of $28 4 million.
Waiting to a price per square foot of approximately $53, both reducing existing vacancy and avoiding near term vacancy as the leases expire.
We also have four additional properties totaling about 278000 square feet under contract for sale for an aggregate sale price of approximately $15 9 million equating to a price per square foot of about $57.
A couple of these properties are currently vacant while the remainder have short lease terms, where we know the tenant will not renew.
We are also actively marketing or planning to auction a number of other assets for sale totaling over 900000 square feet that fall into the same bucket.
We anticipate that several of these sales will occur as we head into the next year, allowing us to continue to harvest rent before the sale closes.
While it remains our goal to reach stabilization and enhance our portfolio's weighted average lease term by addressing the portfolio's vacancies and significant lease rollover in the next several years.
We now believe it could take somewhat longer than initially anticipated given the given the changing economic environment.
Notwithstanding the headwinds our portfolio continues to have positive net cash flow and our available capital to execute on our business plan continues to grow with over $418 million in total liquidity.
Liquidity, coupled with our experience expertise and the underlying strength of many of the properties we own in the portfolio will continue to serve as a strong core platform.
Given the macroeconomic environment, we remain highly disciplined and strategic when it comes to adding new properties to our core portfolio.
Longer term, we remain excited about orion's growth prospects and opportunity set.
Our acquisition pipeline continues to be active for both the joint venture as well as orion's own balance sheet with some indications that seller pricing expectations are beginning to become more rational.
Regarding capital allocation decisions, we can.
Carefully evaluate where best to apply our operating cash flow the.
The proceeds from our property sales and borrowings under the revolver with our board on a regular basis.
While current market conditions are dynamic our long term plans remain firmly in place.
We have a strong portfolio of occupied assets some of which will require significant capital outlays that we renewed our tenants in place.
We have several current or near term vacancies, where we believe the quality and location of the properties Merit holding these assets repositioning them as necessary and re tenant them that makes sense.
These assets will also take significant amounts of capital to carry and then attract new occupants.
Our belief is that over time, our shareholders best interests will be served by preserving and then growing our core portfolio.
All that said, while the need for capital to execute on our business plan is critically important.
Our board believes along with management that under certain circumstances of sustained market weakness our company shares may offer a compelling investment.
And to that point, they have approved a $50 million share repurchase program.
As I wrap it up I want to emphasize that market disruptions. Notwithstanding we are continuing to make steady progress in actively managing the portfolio.
And recycling capital.
We remain committed to delivering long term value for our shareholders through our ongoing efforts.
With that I will now turn the call over to Gavin who will discuss our third quarter 2022 financial highlights.
Our balance sheet dividend and outlook for the remainder of the year Gavin.
Thanks, Paul I will begin by discussing Orion's GAAP results for the third quarter of 2022, which is our third full quarter operating as a public company.
Ryan generated total revenues for the quarter of $51 8 million and reported a net loss attributable to common stockholders of $53 million or a loss of <unk> 94 per share.
Core friends core funds from operations was $24 million or 42 per share and adjusted EBITDA was $32 1 million.
G&A in the third quarter was $4 7 million, while capex tenant in property improvements and leasing costs were $3 7 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 roll.
Turning to the balance sheet, we ended the quarter with $588 3 million of outstanding debt, including Orion's proportionate share in the joint venture.
During the quarter, we utilized a combination of proceeds from asset dispositions and cash flows from operations to repay $40 million outstanding on our revolving credit facility to bring the balance down to $31 million from $71 million it.
It is worth noting that since the spin and through today, we have reduced debt by approximately $69 million or 11%.
At quarter end, we had total liquidity of $418 million, consisting of $394 million of available capacity on our revolving credit facility and $24 million in cash and cash equivalents, including Orange proportionate share in the joint venture we have no debt maturities this year and over 94% of our debt is fixed rate or swapped.
The fixed rate our debt debt to annualized adjusted EBITDA was $4 39 times.
The Orion Board of directors declared a quarterly dividend of <unk> 10 per share for the fourth quarter of 2022 to be paid on January 17, 2023 to stockholders of record as of December 32022.
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.
And whether the current and anticipated market volatility, while setting out to achieve our near and long term objectives.
As we look forward, we will reach our one year anniversary as a public company and a few weeks and have further enhanced our financial flexibility through filing a shelf registration statement.
While we do not currently have any plans to utilize the shelf. We believe it is prudent to have the option and Orion's financial toolbox, just as we have done with the share buyback program.
Turning to our outlook for the remainder of the year.
As we shared last quarter, our financial results will benefit in 2022 from some accounting adjustments and one time items.
These primarily include the Finalization of purchase price allocations related to the spin off annuity income.
The timing of noncash amortization of stock based compensation under GAAP.
An additional one year delay in the requirement for internal control audit and a delay in hiring for a number of roles are now filled.
As a result of our solid performance for the first nine months of 2022 and greater certainty in our estimates for the remainder of the year. We have raised the lower end of our core <unk> guidance.
Importantly, the updated core <unk> range should not be extrapolated to future years, given the impact of lease expirations. This year, coupled with anticipated explorations in the portfolio.
Over the next two years and the associated expected decline in revenue due to a smaller portfolio of size.
In addition in future years will also be affected by increased G&A.
Related to the timing of certain expenses as well as the end of certain operating subsidies. We have received from annuity income as part of the spin off.
Typically our core <unk> is now expected to range from $1 76 to $1 78 per share.
Up from last quarter's increased range of $1 74 to $1 78 per share.
Our G&A is anticipated to range from 16 million to $16 5 million consistent consistent with the previous quarter and our net debt to adjusted EBITDA is expected to range from four seven times to five times also consistent with the previous quarter with that we will open the line for questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. 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 you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Your first question comes from Yoann <unk> with JMP Securities. Please go ahead.
Yeah.
This is Jason Thank you for taking the question.
Also on the call. Please.
Really great to see the disposition pool.
What can you Paulo close all of these five.
Why not.
Yes, good morning.
The dispositions that we've been able to accomplish this year. You know we are very pleased about the pace at which we've been able to get to get some of these assets that are noncore off the balance sheet.
The buyers of these have all been generally they all have been one off transactions. So individual transactions and the buyers have generally been a combination of investors, who look to reposition the asset for the long term and users who intend to buy the asset reposition it and use it themselves.
<unk>.
Okay got it thank you.
But you mentioned in your opening remarks.
The tenant in place.
Awesome.
So what would be the two.
We did find is that that you were talking about that before they get to watch as well.
Yeah. So one of the lease that we signed.
During the quarter that was just a straight option extension option. So that was a five year extension with no T. I's know L sees nothing like that.
The lease that we signed at the conclusion of the after the conclusion of the quarter was a new lease with a new tenant in a building where they were the previous sub tenants.
Okay.
Would you say that.
Tom just kind of thing.
No I'm all for I D.
Well I would say the tenants.
Typically look for.
The five year term as sort of a shorter term we of course always try to entice tenants to sign longer terms with us.
And during the course of the year, we have had a variety of success in being able to.
Get tenants to sign longer term leases with US I think you know for the course of the year. We've signed leases that are in excess of five years. So we have some tenants that have signed 10 years. Some tenants that we are looking to sign that maybe longer than that fifth even 15 years. So the challenge of course is always high.
Do we get tenants to sign a longer term lease and that's very typically done by providing additional tenant improvements.
And providing additional landlord work in exchange for a longer lease term.
Alright.
That's all for me thank you.
Awesome.
Thank you.
Next question comes from Edward Riley with EF Hutton. Please go ahead.
Hey, guys. Thanks for taking my question I might have missed this my call cut out a little bit.
But youre talking about an uptick on the impact of your portfolio towards the end of Q3 and Q4.
Just wondering if you could you could unpack that a little bit for me because this has to do with any of the behavioral decisions from tenants.
I know last quarter, you talked about.
Tenants, where you know taking a longer amount of time to enter into leases.
And if they were considering that there will be a shorter term lease just I just wanted to unpack that a little bit.
Sure I think that you know it's been widely reported that you know there are.
A lot of headwinds in the office market.
I would say up until the third quarter, we had not seen too much of that in our portfolio. In other words, we were the tenants that reached the end of their lease term and they moved out of our properties that we had expected that.
And the tenants that renewed with us.
We had expected those renewals to come through in roughly the terms in which they came through although as we noted in the call last quarter.
Decision, making process. We've noticed has continued to get elongated and that's still the case.
However, in the third quarter, we had some eye on some tenants that we expect it to potentially fill some of our vacancy we have.
Also had some tenants come back to us and say, they're not looking for as much space as they anticipated during the renewal.
We had anticipated earlier for the renewal so I think inside of our portfolio, we're starting to see a little bit of what's been widely reported in the broader marketplace that is tenants are taking longer.
They are requesting smaller space and in some cases, they're changing their point of view entirely about whether or not to expand so.
We see some of those headwinds we think they are transitory.
But they are here now in our portfolio and so as a result, it's.
Some of the anticipated leasing we thought with might occur towards the end of this year or beginning of next.
We will be pushed out to some degree.
Okay got you thanks for that and just given given the smaller space required.
Some of the tenants does this maybe open up an opportunity toward shifting more towards a multi tenant approach versus a single tenant approach.
How are you guys thinking about that.
Well I think we would like to you know maintain our business model of owning primarily and I use the word primarily single tenant assets leased on a long term basis.
Good credit quality tenants, but the keyword there is tenants. So yes, we have the option to fill vacancy with tenants that are looking for less than a full building size. We are happy to do that and we'll multi tenant buildings to the extent that that makes the most sense for us and we have done that we do own a few multi.
Tenant buildings now and my suspicion is over time that will grow somewhat as we you know multi tenant some of the vacant properties that we have so.
As I said, we'd prefer to maintain our single tenant stance for the majority of the portfolio, but will take tendency pretty much wherever we can find it.
Okay, Gotcha and on the dispositions.
And apologies if I missed this.
Were those properties Bacon all of them or.
There were some filled.
And that was I was wondering if you could maybe provide some information about price per square foot on those that were vacant versus.
Those properties at.
If if there were any.
Sure so so for it.
To your first point it was a combination so some of the properties. We sold had tenancy in place where there you know we had an existing tenant and they continued to pay rent, but in all cases. The lease was very very short in general under well under a year. So those are tenants that we knew were going to leave.
And so they had a few months left on the lease. So you know and then the property would go vacant so that was sort of one set and that's probably about half of the properties. We sold the other half were actually vacant properties.
With respect to price per square foot you know given the short lease terms on the properties that had leases left versus the vacant there's not a big disparity on the price per square foot, it's more whereas property located what's the size of the property.
So on and so forth and in general we found the smaller sized properties that we've sold trade at a higher per square foot value not unexpectedly and this small and the bigger properties trade at a somewhat lower per square foot value.
Overall, we're pleased with where we're coming out with the sales of these properties.
I think when we did the spin we said, we'd hope to be between 40 and $60 a foot on average for selling these properties and we're well we're right in the middle of that range. So.
You know, we feel we feel pretty good about about that.
And of course, that's also right and one more final thing.
One more one more final thing is that when.
When we sell properties either with a short term lease or vacant property, it's not only the price we get per square foot, but it's the savings we get from not having to carry that asset vacant.
When we think that it's unlikely to be re tenant either on any type of reasonable economic terms.
Yep Yep, Okay, great. Thank you.
I would like to turn the floor over to Mr. Macdonald for closing remarks.
Thank you everyone for joining us and we look forward to updating you on our year end results in the new year.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
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