Q4 2024 Orion Office REIT Inc Earnings Call
Speaker Change: Greetings and welcome to Orion Properties 4th Quarter and 4th Year 2024 earnings call.
As a reminder, this conference is being recorded
Speaker Change: I would now like to turn a call over to Paul Hughes, General Counsel for Orion. Thank you, you may begin.
. . . .
Speaker Change: Thank you and good morning everyone. Yesterday Orion released its financial results for the quarter and year ended December 31, 2024. File this annual report on Form 10K with the Securities and Exchange Commission had posted its earning supplement to its website at ONLread.com.
Speaker Change: During the call today, we will be discussing certain forward-looking statements.
Speaker Change: such as the company's guidance estimates for calendar year 2025, which are based on management's current expectations and are subject to certain risks that could cause actual results to differ materially from our estimates.
Speaker Change: The risks of our disgust in our earnings release, as well as in our Form 10K and other SEC
Speaker Change: and Orion undertakes no duty to update any forward-looking statements made during this call. Today on the call, we will be discussing certain non-GAAP financial measures, which are not the substitute for financial information presented in accordance with GAP.
Speaker Change: such as Funds from Operations, or Effet Bell, and Core Funds from Operations, or Core Effet Bell.
Speaker Change: Orion's earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable gap measure.
[inaudible]
Speaker Change: Posting the call today are Orion's Chief Executive Officer, Paul McDowell and Chief Financial Officer, Gavin Brandon, and joining us for the Q&A session are Gary Landriau, our Chief Investment Officer, and Chris Day, our Chief Operating Officer.
Gavin Brandon: With that, I am now going to turn the call over to Paul McDowell.
Paul McDowell: Good morning everyone and thank you for joining us on Orion Properties 4th quarter earnings call.
Paul McDowell: Today I will provide a recap on the quarter and full year 2024, and then speak to the business and the direction we plan to take the company.
Gavin Brandon: Following my remarks, Gavin will review our financial results and provide our outlook for 2025.
The highlight of the year was leasing.
Gavin Brandon: As we exited 2024, there is no question that the overall market tone was improving, which was reflected in our leasing performance, which totaled about 1.1 million square feet.
Gavin Brandon: This was more than four times the leasing we delivered in 2023.
Gavin Brandon: A great example of this positive momentum was our approximately 136,000 square foot Hasbro property in downtown Providence, Rhode Island.
Gavin Brandon: Last year, Hasbro notified us that they were moving out of this class A building and after a brief but intensive marketing effort.
Gavin Brandon: with a long-term, 11-year lease to Rhode Island's largest health system, lifespan corporation, now called Brown University Health.
Gavin Brandon: As Bros. Least expired in early February , and we expect Lifes fans' Least to commence roughly 60 days thereafter.
Gavin Brandon: Overall, we signed 287,000 square feet of new leases in 2024, which is more than 13 times the new leases signed in 2023 at 21,000 square feet.
Gavin Brandon: This year has started with a robust pipeline of potential new and renewal leasing torrents actions.
Gavin Brandon: We exited 2024 with a portfolio weighted average lease term or a wall that now stands at 5.2 years up from 4 years at the same time last year which reflects our stabilizing portfolio.
Gavin Brandon: Renewal Rent Spreads for 2024 Leasing Activity were down 6.6%, primarily because of one lease renewed in the fourth quarter was significant rent roll down.
Gavin Brandon: These pressures on rent spreads reflect the significant competition we face to retain and find new tenants in specific markets.
Gavin Brandon: However, renewal rent spreads on a gap or average rent basis due to annual rent bumps over the lease terms are positive by just over 2%
Gavin Brandon: Given the smaller size of our portfolio, this figure will be quite valuable quarter to quarter and even year to year as we lease individual properties.
Gavin Brandon: Another key accomplishment I want to highlight is that Orion has weathered the intensive least rollover of the past three years.
Gavin Brandon: Particularly in 2024, when we had close to $40 million in annualized space rents scheduled to expire.
Gavin Brandon: Looking ahead, while we will still face significant lease explorations and roll over risk.
Gavin Brandon: We anticipate the combined pace of lease-up and disposition of vacant properties. We'll exceed the pace of tenant move-outs and our portfolio occupancy will begin to rise after this year.
Gavin Brandon: We have made significant progress in reorienting our portfolio since our spin and we believe that 2025 and into 2026 will be the native of our revenue and core FFO earnings declines.
Gavin Brandon: followed by Accelerating Revenue and Earnings Growth as we move into 2027 and thereafter.
Gavin Brandon: Overall, we have delivered against our strategic plan even as the broader office markets have seen a historic collapse in demand.
Gavin Brandon: However, as we have observed the events of the past three years and their impacts on our portfolio, we have noted a significant trend that we believe we can capitalize on over time to build a more stable, long duration property mix [inaudible]
Gavin Brandon: During this period, we have experienced historically high non-renewals in many of our traditional or generic office properties as tenant space needs have shrunk due to the work from home and other phenomena.
Gavin Brandon: While at the same time, we have had good success renewing tenants who occupy our dedicated use assets that have an office component.
Gavin Brandon: We believe that owning properties where our tenants conduct business, that cannot be replicated from home or other generic office locations, will have higher usage, stronger rents, and higher likelihood of lease renewal, thus stabilizing cash flows and increasing our growth profile.
Gavin Brandon: These dedicated use assets, or DUA, have other attractive features that we believe enhance tenants stability, such as significant tenant investment in FF&E, and strategic placement near dedicated workforces in addition to other attributes.
Gavin Brandon: Our DUA property focus will include medical, lab, R&D, flex, and non-CVD government, all property types we all radio.
Gavin Brandon: A good example of this property tight is the Valent Lab and Office property that we added in San Ramon, California during the third quarter.
Gavin Brandon: As we execute on this shift in strategy, we intend to continue to move away from generic office properties that has already been well underway as we have aggressively sold these types of properties as they have become vacant.
Gavin Brandon: At year end, approximately 32% of our properties measured by annualized base rent, or 25% as measured by total square footage are dedicated use.
Gavin Brandon: As you move ahead, we intend to gradually increase this percentage over time through property sales of traditional office, including both vacant and stabilized assets, and selectively adding DUA properties in their place.
Gavin Brandon: and the direction away from traditional office toward our focus on dedicated use assets as we move forward.
Gavin Brandon: We recognize, as a smaller size read, that GNA as a percentage of assets and revenues is a particular importance.
Accordingly, together with our corporate rebranding and strategy shifts [inaudible]
Gavin Brandon: We have made various changes to more effectively align our DNA costs.
Gavin Brandon: Examples of savings include restructuring the composition of the team and responsibilities to streamline operations and more effectively manage GNA.
Gavin Brandon: We will encourage restructuring charge in 2025 related to these changes.
Gavin Brandon: One of the changes I want to acknowledge directly is the retirement of Gary Landriau, our Chief Investment Officer, Effective June 30.
Gavin Brandon: Gary and I have worked together closely for nearly 30 years at Orion and his predecessor companies and I want to thank him personally for all his contributions which have been a mess.
He's an outstanding professional and we will miss him.
[inaudible]
Gavin Brandon: Luckily, we have a strong bench here at Orion and it is our intention to reallocate his responsibilities to the team already in place.
Gavin Brandon: To allow for transition, following his retirement, Gary will remain in a consulting role at Orion through January 2026
Gavin Brandon: We also expect to make additional changes to further streamline our efficiency and team as we move through the year, but none will be as impactful financially as the roughly $1 million of annualized savings we will be able to realize upon Gary's retirement.
Further to our commitment to aligning GNA.
Gavin Brandon: Gavin and I have both foregone any salary increase for this year. We are severely limiting promotions and average salary increases for the remainder of Orion's employees in 2025 will be below inflation.
Gavin Brandon: Even with these measures, it is important to understand we need to maintain the team to both run a public company and manage our portfolio which is increasingly becoming more management intensive as more properties become multi-tenant.
Gavin Brandon: Importantly, these efforts should enable us to keep GNA flat year over year, despite continued inflationary pressures on costs across the board.
Gavin Brandon: While market leasing tone is improving, it is from a very low base.
Gavin Brandon: and then remain a myriad of challenges ahead for all suburban office property owners, including Orion.
Gavin Brandon: We expect tenant concessions to remain high and rents to remain pressured on both renewals and retenining.
Gavin Brandon: Additionally, it remains to be seen how objectives of the new presidential administration will impact our GSA portfolio, though we remain cautiously optimistic as nearly our entire portfolio is in the firm term and none is in the immediate Washington DC area.
Gavin Brandon: Accordingly, as we have been communicating for more than three years, Orion needs to maintain liquidity although we will inevitably see debt levels rising on both an absolute and debt to EBITDA basis in coming years
Offset by anticipated earnings growth in the out years.
Gavin Brandon: We expect to further pair our portfolio through Accelerating Asset Sales in 2025, focused on traditional office.
Gavin Brandon: We are continuing to evaluate our best exit strategy for the former Walgreen campus in Deerfield, Illinois and expected demolish the outdated office buildings this spring to lower our cost of carry should we decide to continue to own the land in anticipation of future development.
Gavin Brandon: In the fourth quarter, we also extended the mortgage loan financing on our art street to join Venture Portfolio for one year until November 2025.
Gavin Brandon: and made a member loan to the joint venture at 15% annual interest.
Gavin Brandon: to fund a modest paydown of the mortar's loan and the cis-mex leasing costs in connection with the extension.
Gavin Brandon: We had $9.2 million receivable under the member loan as of March 5, 2025.
Gavin Brandon: We structure this loan to pay interest and principal monthly from excess cash flows from the six properties in the joint venture portfolio, thus reducing our repayment risk.
Gavin Brandon: as part of our ongoing efforts to retain capital to execute on the business plan and accelerate our pathway to earnings growth.
Gavin Brandon: We are constantly evaluating our sources and uses of capital, including our dividend, which is our cheapest source of capital, while the current dividend is well covered on a core FFO basis.
Gavin Brandon: The Board of Directors has approved a new dividend of two cents per share beginning with the first quarter.
For more information, go to www.fema.gov
Gavin Brandon: The change to the dividend payout is consistent with the strategic change we are announcing today as we seek the lowest cost of funds to help us maintain and grow existing tenancy in the future.
Gavin Brandon: continue the shift towards more dedicated use assets and efficiently refinance our debt obligations as they come due in 2026 and 2027.
Gavin Brandon: As we enter 2025, we will continue to invest capital in well-located properties we believe will generate strong sustained cash flow in our target growth markets and property
Gavin Brandon: During the year and in the coming years, we will need to fund capital expenditures to enhance the long-term value and to ensure we can continue to lease our properties and keep current tenants and attracts new companies.
Gavin Brandon: This strategy is the reason we have remained highly disciplined in reducing debt and maintaining a low leverage balance sheet over the past three years.
Gavin Brandon: Given last year's strong leasing and our growing pipeline this year, we are beginning to realize the benefits of some of our past investments.
Gavin Brandon: That said, in 2025, the impact of the rise in interest rates, the 19 properties we have sold, and the vacancy we carry from lease rollover of the last few years, will pressure cash flow as we have previously communicated.
Gavin Brandon: Importantly, we remain profitable from an FFO and core FFO for share basis.
Gavin Brandon: As I shared earlier, we believe that 2025 and into 2026.
Gavin Brandon: We are quite energized that this transformation will position the company to grow meaningfully in the future And encourage that the leasing momentum will continue to contribute to stabilization of our portfolio with that I will pass the call to Gavin
Gavin Brandon: Thanks, Paul. I will start by discussing Orion's results for the fourth quarter and full year, and then provide our 2025 financial
Gavin Brandon: Orion generated total revenues of $38.4 million in the fourth quarter as compared to $4.3.8 million in the same quarter of the prior year.
Gavin Brandon: We reported a net loss, a trivial to common stockholders of 32.8 million, or 59 cents per share, as compared to a net loss of 16.2 million, or 29 cents per share reported in the fourth quarter of 2023.
Gavin Brandon: Core FFO for the quarter was 10.2 million or 18 cents per share, as compared to 18.5 million or 33 cents per share in the same quarter of 2023.
Gavin Brandon: Adjusted EBIDA was 16.6 million versus 24.6 million in the same quarter of 2023. The changes year over year are primarily related to vacancies and the timing of leasing activity.
Gavin Brandon: For the full year, Orion's revenues were $164.9 million, and a net loss at Tribula Commons dockholders was $103 million, or a net loss of $1.84 per share.
Gavin Brandon: Core of F.O. was 56.8 million or a dollar and one per share, adjusted EBIDOP for the full year was 82.8 million. GNA and the fourth quarter came in as expected at 6.1 million compared to 5.5 million in the same quarter of 2023.
Gavin Brandon: The changes primarily due to higher compensation expenses as a result of annual merit increases after beginning of 2024.
Gavin Brandon: The hiring of one additional headcount during the year to support our leasing efforts.
Gavin Brandon: along with an additional year of non-cash equity-based compensation expense. As it relates to equity-based compensation expenses, our awards have a three-year vesting period.
Gavin Brandon: In 2023, there were only two years worth of equity grants being expensed. At the end of 2024, the company had three years worth of equity grants being expensed. As a result, the future year over year variances are not expected to be significant.
Gavin Brandon: CAPEX in the fourth quarter was $8.2 million compared to $7.4 million in the same quarter of 2023. And as we previously discussed, CAPEX timing is dependent on when leases are signed and work is completed on properties. CAPEX will likely increase over time as leases roll and new and existing tenants drop on tenant improvement allowances.
Gavin Brandon: GNA for the full year was 20.1 million, Billion Updates, Tenant Improvement, and Leasing Costs of 24.1 million.
Gavin Brandon: Turn to the balance sheet. We end of the year with total liquidity of 247 million comprised of 16 million of cash and cash equivalent, including the company's pro-rata share of cash from the R3 joint venture and 231 million available capacity on the credit facility revolver.
Gavin Brandon: As Paul discussed, we intend to maintain significant liquidity on the balance sheet for the foreseeable future, the fund expected capital commitments to support our leasing efforts and provide the financial flexibility needed to execute on our business plan over the next several years.
Gavin Brandon: During the 4th quarter of 2024, the company financed the San Ramone, California property acquired for 34.6 million in September 2024, with an 18 million, seven year, 5.9% per annum, 6th rate mortgage loan.
Gavin Brandon: In addition, the R.C. joint venture elected its first option to extend maturity date on its mortgage debt in additional 12 months until November 27, 2025
[inaudible] I'm sorry. I'm sorry. I'm sorry.
Gavin Brandon: 119 million of floating rate debt on the Credit Facility Revolver, 18 million of the mortgage loan for the San Ramone property, and 26.3 million, representing our share of the Archstreet joint venture mortgage debt.
Gavin Brandon: during 2024 with something elected its option to extend the maturity date on the credit facility revolver for an additional 18 months until May 12, 2026.
Gavin Brandon: At year end, our net debt to adjusted EBIDA was 6.06 times, and since the spin, we have repaid a 146 million of the outstanding balance on the credit facility.
Gavin Brandon: On March 4, 2025, Orion's Board of Directors declared quarterly cash dividend of two cents per share for the first quarter of 2025, table on April 15, 2025, the stockholders of record as of March 31, 2025.
Paul McDowell: Turning to the 2025 outlook, as Paul stated, over the last few years, our financial results have been significantly impacted by significant lease explorations, and we have incurred increased vacant carry cost as a result.
Paul McDowell: We expect vacancies to continue throughout 2025 and we believe we will be in the bottom in 2025 and into 2026
as a release to vacancies.
Paul McDowell: While we continue to focus on reducing vacant care costs by leasing up vacant assets or disposing of the assets we no longer want to own.
Paul McDowell: Turn into our guidance, our core FFO for 2025, it expected a range from 61 cents to 70 cents per
Paul McDowell: Additionally, our G&A for 2025 is anticipated to range from 19.5 million to 20.5 million, which is the same range we provided in our 2024 outlook. Ned Bed to adjust EBIDA is expected to range from 8.0 times to 8.8 times.
Paul McDowell: Excluding non-cash compensation, we expect 2025 GNA will be in line or slightly better than 2024. We also do not expect GNA to rise significantly in the outer years, including non-cash compensation.
Paul McDowell: as a percentage of revenue and total assets are genearing manned in line with other similarly sized public
with that. I will open the line for questions. Operator?
Speaker Change: Thank you. At this time we'll be conducting a question and answer session.
Speaker Change: 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.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, while we pull for questions.
Speaker Change: Our first question today comes from Mitchell Germain of Citizens Capital Markets. Please
Mitch Germain: Paul, what gives you the confidence that 2026 is going to start a rebound?
Good morning, Mitch.
Mitch Germain: Well, you know, as you might imagine, we work intensively with the portfolio and looking at our trends in leasing.
and where we expect we can sell vacancy.
Mitch Germain: and a variety of other factors. And when we look at...
Mitch Germain: you know, our results looking backwards in 2025, the leasing momentum in 2024 rather and the leasing momentum we have going into 2025, you know, we're starting to see the portfolio
Mitch Germain: Where we have disposed of or continue to dispose of the generic or traditional office properties that we don't think have got strong releasing opportunities.
Mitch Germain: Stable and that stability is increasing over time and is that stability increases and we've reached up some more vacancy, you know, we expect to see revenues and then of course bottom line, where FFO turned the corner.
Mitch Germain: in 25 or during 26, depending on a variety of factors.
Speaker Change: Gotcha. If I think about your strategic shift that you're...
referenced on the call and in your press release.
Speaker Change: I'm trying to understand something about a third of the portfolio now fits that category. So, is the thought that will be next?
36 months.
Speaker Change: To the extent whether it's vacant or occupied, you're going to be pursuing a pretty significant amount of asset sales. Is that the way to think about how the plan is going to evolve over the course in the next couple years?
Mitch Germain: Yeah, so I think that's exactly right, Mitch. Of course, it would be dependent upon where the capital markets, where the real estate markets rather give us opportunity.
Mitch Germain: But, you know, our goal is over time is as we've been doing by the way over the past couple of years,
Mitch Germain: We've been pretty aggressive about trying to sell some of the outdated office properties, traditional office properties that we own and we've had quite good success in renewing what we call a dedicated use assets, whether they be government or flex.
Mitch Germain: So we expect that trend to continue so we're going to look to sell vacancy to the extent that we have of appetite to add additional properties.
We'll add additional dedicated use assets
Mitch Germain: and we'll also look at selling some of the stabilized assets we have.
Mitch Germain: and replacing those traditional stabilized office buildings with longer-dated dedicated use assets. And the goal is to grow the portfolio over time and shift the portfolio over time.
Mitch Germain: to one where we have a longer weighted average lease term and where we have greater confidence in the long-term durability of the cash flows from the assets.
That's your talk to me about
the transaction with the joint venture.
In reading the K, it seemed like the
Speaker Change: Partner, had no capital, they were on willing, I mean what's specifically happening there and what gives me confidence about?
Mitch Germain: George Streets, you know, kind of commitment to that venture on a longer term.
Speaker Change: Right. Well, we, you know, very stressed. We've maintained a very strong relationship with our country, and they have been a good partner to us.
. . . . . . . . . . .
Speaker Change: You know, they are essentially a capital aggregator and they have aggregated capital in middle Eastern countries for the initial investments in these properties.
Speaker Change: with the initial expectation that when the joint venture was first put together at Varee,
Speaker Change: would be that there would be no additional capital calls on those investors. I think that's what when our street or their partner's gatehouse was selling it to their investors.
Speaker Change: was essentially, let's invest in long dated office properties, and you'll enjoy the capital returns associated with those and eventually a return of capital.
Speaker Change: Markets have changed and we're now entering a period where we need to renew leases in place, extend financing, and it's difficult for them to access additional capital for those reasons.
Speaker Change: So, rather than fire sale of portfolio, which we think doesn't make any sense at all, we made a loan to the JV at a 15% interest rate, so we believe we're being appropriately compensated for the risk.
Speaker Change: and that loan amortizes quickly from the cash flows from the existing assets which have a weighted average lease term now about six years.
Speaker Change: and are 100% occupied. So I think the loan amortizes at the rate of about $600,000 or so per month. So we're getting our money back quite quickly and we feel very comfortable with respect to that.
Gotcha, okay, last for me, maybe just some nuance on...
Speaker Change: the economic surrounding, the assumptions surrounding the outlook, is the restructuring charge
Speaker Change: The GNA, or is that going to be smoothed out when you look at bottom line next year?
Gavin Brandon: We're going to add that restructuring charge back into Core FFO, so it'll be smoothed out throughout the year.
Great, thank you very much.
. . . .
Thank you, Mitch.
Speaker Change: There are no additional questions at this time. I'd like to turn the call back to Mr. McDowell for closing remarks.
Paul McDowell: Thank you, everyone. We appreciate their extended time today and we look forward to updating you on our first quarter results in May.
Paul McDowell: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Paul Hughes, Paul McDowell, Katrina Khanown, Paul Hughes