Orion Properties Inc. (ONL) Earnings Call Transcript

Greetings. Welcome to Orion Properties, Inc.'s Third Quarter 2026 Financial Results. As a reminder, this conference is being recorded. I would now like to turn the call over to Paul Hughes, General Counsel. Thank you. You may begin.

Thank you, and good morning, everyone. Yesterday, Orion released its results for the quarter ended September 30, 2026, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website at onlreit.com. During the call today, we will be discussing Orion's guidance estimates for calendar year 2026 and other forward-looking statements, 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. These risks are discussed in our earnings release as well as in our Form 10-Q and other SEC filings, and Orion undertakes no duty to update any forward-looking statements made during this call. We will also be discussing non-GAAP financial measures such as funds from operations, or FFO, and core funds from operations or core FFO. These non-GAAP financial measures are not a substitute for financial information presented in accordance with GAAP, and Orion's earnings release and supplement include a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measure. Hosting the call today are Orion's Chief Executive Officer, Paul McDowell; and Chief Financial Officer, Gavin Brandon. Joining us for the Q&A session will be Chris Day, our Chief Operating Officer. With that, I will turn the call over to Paul McDowell.

Good morning, everyone, and thank you for joining us on Orion's third quarter earnings call. I will start with an update on our strategic options process. The process is ongoing. And despite the length of time of the review to date, we continue to believe it is in shareholders' interest to see that work through to its reasonable conclusion. In addition to the ongoing challenges surrounding our asset class, macro events, including the significant rise in treasury rates have made that work more challenging and have further slowed the process. We are moving as expeditiously as possible to ensure we have explored all potentially viable options available to the company. However, we can offer no assurance that this process will result in Orion concluding any particular transaction. Beyond the strategic review, our team is focused on driving improvement in our key financial and operating metrics, nearly all of which are improved year-over-year. Our strategy remains centered on the same priorities we have discussed all year, stabilizing the portfolio through increased leasing activity, the timely disposition of noncore assets and prudent leverage management. We continue to expect these efforts to drive core FFO per share growth in 2026 and beyond. From a leasing perspective, we are on track to lease over 1 million square feet for the third consecutive year despite materially smaller portfolio and have increased the weighted average lease term of the portfolio in the process. Contributing to these results, we completed approximately 143,000 square feet of leasing in the third quarter and an additional 222,000 square feet subsequent to quarter end, bringing our year-to-date total to approximately 922,000 square feet. Our leasing pipeline stood at about 1 million square feet at quarter end. To give some additional color to our continued leasing momentum, subsequent to quarter end, we entered into a 57,000 square foot 10-year lease and a 17,000 square foot 10.8-year lease at our 209,000 square foot Plano, Texas property, bringing the lease rate to 85%, significantly driving value. We also completed a 10.3-year lease extension for 65,000 square feet at our 156,000 square foot property in Milwaukee, Wisconsin, and a 2-year full building renewal at our 83,000 square foot Indianapolis, Indiana property. We are also close to finalizing another large lease in our approximately 405,000 square foot renovated Class A property in Downtown Buffalo, New York. With one large tenant already as a 161,000 square foot anchor, we expect to finalize a 93,000 square foot lease for 15 years in the fourth quarter, which will bring this property to 64% leased from 0 just over a year ago. We are confident that this lease will be completed, though as always, we will not count it until it is signed. Our weighted average lease term for the consolidated portfolio was 6.1 years, continuing to build on the progress we have made this year and up from 5.8 years at the end of the third quarter in 2025. Cash rent spreads on third quarter renewals were up 25% when comparing ending rents in the current term to starting rents in the new term. Year-to-date, rent spreads are up 1.8% when comparing ending rents in the current term to starting rents in the new term and up 8.6% when comparing ending rents in the previous term to ending rents in the new term. As always, we caution that rent spreads can be volatile from quarter-to-quarter, though we remain encouraged by the overall trend. It is also worth noting that we have seen tenant retention rates continuing to improve, reflecting both a healthier leasing environment and our strengthening portfolio quality. Our consolidated portfolio occupancy rate was 78.3% at the end of the third quarter compared to 72.1% at the end of the third quarter of last year. As we've said many times, occupancy will continue to also show some volatility quarter-to-quarter given our largely single-tenant portfolio, though we expect the overall trend to keep improving as our leasing efforts, including the aforementioned opportunity in Buffalo, continue to play out. Turning to dispositions. Year-to-date, we have generated gross proceeds of almost $84 million on the sale of 4 properties plus the 37-acre Deerfield, Illinois campus. Additionally, we have 2 properties under contract to be sold for total gross sales price of $9.5 million. Since our spin, we have sold 39 properties totaling more than 4.2 million square feet. At quarter end, dedicated use assets or DUA, represented 40.6% of annualized base rent of our consolidated portfolio compared to 33.9% at the end of the third quarter 2025. We expect this percentage to continue increasing over time through disposition activity of traditional office and potential targeted acquisitions of DUA properties. As we discussed last quarter, our longer-term target remains to have more than a majority of the portfolio in dedicated use assets. Within our existing portfolio and absent broader access to outside capital, we expect that progress to continue, albeit in an opportunistic manner. To the extent our access to outside cost-effective capital improves, we would expect that transition to occur significantly more rapidly. As we communicated to start the year, we have a stabilized portfolio that will continue to benefit from ongoing return to office and our strong leasing efforts. Through the first 3 quarters of the year, nearly all of our key financial and operational metrics have shown meaningful and sustained improvement, including our critical per share metrics supported by a balance sheet marked by prudent leverage. For the rest of 2026 and into 2027, our focus remains consistent, continue to grow core FFO, improve portfolio quality, lengthen WALT, renew tenants, fill or sell vacant space and continue to manage expenses and leverage as we work to maximize Orion's value for investors and potential strategic partners. We believe that consistent ongoing execution will allow the market to start to recognize and appreciate the intrinsic value of this company. With that, I will turn the call over to Gavin.

Thanks, Paul. For the third quarter of 2026 compared to the third quarter of 2025, Orion had total revenues of $35.4 million compared to $37.1 million. Net loss attributable to common stockholders was $3.3 million or $0.06 per share compared to $69 million or $1.23 per share in the same quarter of 2025. Core FFO was $11.4 million or $0.20 per share compared to $11 million or $0.19 per share in the same quarter of 2025. Adjusted EBITDA was $16.5 million versus $17.4 million in the same quarter of 2025, primarily related to having fewer assets. G&A in the third quarter came in at relatively flat $4.7 million compared to $4.6 million in the same quarter of 2025. G&A expense in 2026 includes the ongoing costs associated to the strategic review, which equates to approximately $266,000 in the third quarter and $454,000 year-to-date. The G&A expense in the 2026 period also reflects Orion's loss of emerging growth company status during 2026, which drove increased expenses related to SOX 404 compliance. We have reduced headcount so far this year by 5. CapEx and leasing costs in the third quarter were $6.9 million compared to $18.3 million in the same quarter of 2025. CapEx and leasing costs for the 9 months ended September 30 were $34.4 million compared to $42.2 million in the same 2025 period. As we have previously discussed, CapEx timing is dependent on when leases are executed and work is completed on properties. Property operating expenses in the third quarter materially improved to $14.3 million as compared to $17.3 million in the same quarter of 2025. Turning to the balance sheet. Our net debt to annualized adjusted EBITDA showed meaningful improvement at 5.6x at quarter end compared to 6.4x at the end of the third quarter of 2025. We ended the quarter with $436.5 million of outstanding debt, excluding our proportionate share of the unconsolidated joint venture debt, which is a meaningful improvement when compared to $483 million of debt we had a year ago. Our debt reduction efforts have significantly reduced interest expense, which has totaled $21.7 million this year, down $2.4 million from $24.1 million in the same period a year ago. We remain well insulated from rising rates with 76.6% of our debt being fixed rate and 49% of the debt outstanding under our floating rate revolver is currently hedged. Our net debt to gross real estate assets was 27.8% at the end of the quarter compared to 31.2% a year ago. We have also been very successful this year managing and extending our maturities. Our next debt maturity is not until February of 2028, which we have an option to extend until February of 2029. As of September 30, we had total liquidity of $177.2 million, comprised of $64.2 million of cash and cash equivalents and restricted cash and $113 million of available capacity under our credit facility revolver. On November 4, 2026, Orion's Board of Directors declared a quarterly cash dividend of $0.02 per share for the fourth quarter of 2026, unchanged from the fourth quarter of 2025. We are also announcing an improved outlook for 2026, primarily driven by the strong 2026 leasing activity we have discussed. Core FFO for the year is now expected to range from $0.75 to $0.78 per diluted share, up from our previous range of $0.72 to $0.77 per diluted share. Our net debt to adjusted EBITDA is now expected to range from 5.8 to 6.4x, an improvement from our previous range of 6x to 6.8x. Our G&A range of $19.8 million to $20.8 million is unchanged. With that, we will open the line for questions. Operator?

[Operator Instructions] Our first question comes from Mitch Germain with Citizens Bank.

Congrats on the quarter. Pretty significant deceleration being contemplated in your guidance, even at the high end of the range. Why not put forth the number given leasing and momentum in the business, why not put forth a number that's a little bit more maybe realistic? And what am I missing with regards to how 4Q could play out?

I think there's a couple of things there, Mitch. First, the guidance we put out today is where we expect we'll come out for the course of the year. Looking forward into the fourth quarter, we see -- well, let me say it this way. Looking back for the first 3 quarters, we have got some income that we get from onetime tax savings and sometimes from onetime lease termination income and so on and so forth. We've had that year-over-year, as you might recall. So that has an impact on the first 3 quarters of the year. We don't expect to have a significant impact of that in the fourth quarter. Looking into 2027, I think the dynamic still exists, we continue to think that we will be able to grow core FFO over time. But the rate of that acceleration is -- will be dependent upon where we come out on leasing.

Okay. You guys seem to have great momentum on the leasing front, and I appreciate all that commentary in the Buffalo asset. Is that the kind of situation where you lease it and sell it? I'm trying to gain some insight. I think you've got like 50-something properties now, like 40% of your portfolio is dedicated use. The thought is to grow that to a higher percentage, obviously, or a majority of your cash flows. So is that asset like an example of something where you lease and then look to sell? Or is that considered a core asset for you?

I'd start by saying we like the asset a lot. We've renovated the building. It's a Class A asset. So we like the building a lot. But I think your point is well taken. I think we are opportunistic sellers. I think if you take a look, we sold the NetJet property at a 5-something cap rate out of the CMBS portfolio recently. So that gave us -- that was very opportunistic. And I think we would look at the Buffalo property much the same way. If we got a very good price for that asset from potentially a local buyer or something like that once we've leased it up, we'd be delighted to sell it and recycle that capital into dedicated use assets.

Great. Last one for me. When does there come a point in time in which the strategic alternatives are no longer relevant? And I ask it only because I know that term strategic alternatives is kind of broad, right? I mean there could be things in there, including investments from institutional partners to an outright sale to maybe a portfolio acquisition from that regard. So it's pretty broad. But when -- I mean, I guess that could always be something that's part of the every day of running public companies. So when does this process become kind of elongated and maybe we should at least kind of get rid of that terminology to expect that this should always be part of your thinking as a public CEO.

That's a very good question, Mitch. And I'll answer the last part first. That is, you're right. It always is a component of our running a public company. We've said so many times before we announced strategic options. So that -- you're right. Looking strategically is something we will do whether or not we have a process up and running. The reason the process is still continuing is we continue to engage with outside parties in sort of quite a meaningful way. And so we'll see how that comes out. We're not sure where -- what the result of that will be. If the result of that is a strategic transaction, we will announce that in due time. If the result of that is not a strategic announcement, we would announce that and close down the process. But like I said at the beginning, we will -- whether or not we have a process open, we will always consider strategic opportunities, but we're trying to wait to get through the process with respect to sort of the specific items we're working on once we figure whether those work or not, we'll make an announcement.