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DATE
Thursday, August 7, 2025 at 2 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Paul McDowell
Chief Financial Officer — Gavin Brandon
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TAKEAWAYS
Total Revenues-- driven by portfolio contraction and vacancy.
Core FFO-- Core FFO of $11,500,000 for Q2 2025 or $0.20 per share, down from $14,200,000 or $0.25 per share in the same quarter of 2024, reflecting reduced occupancy and fewer properties.
Adjusted EBITDA-- compared to $20,500,000 for Q2 2024, mainly affected by vacancy rates and the smaller asset base.
Operating Property Occupancy Rate-- Operating property occupancy rate of 77.4% at Q2 2025, up 170 basis points sequentially.
Leasing Activity-- 639,000 square feet of leasing completed as of July 31, 2025, including three new leases and 110,000 square feet of short-term lease extensions signed in Q2 2025 at over 6% positive lease spreads on average.
Weighted Average Lease Term (WALT)-- Weighted average lease term of 5.5 years as of Q2 2025, up from 5.2 years last quarter, indicating greater portfolio duration.
CapEx and Leasing Costs-- CapEx and leasing costs of $15,600,000 for Q2 2025, reflecting accelerated leasing.
General and Administrative Expense (G&A)-- G&A expense of $4,800,000 for Q2 2025, up from $4,500,000 in Q2 2024, with anticipated cost benefits from restructuring expected in Q3 and Q4 2025.
Liquidity-- Total liquidity of $257,700,000 at Q2 2025 period end, comprised of $17,700,000 in cash and cash equivalents at quarter-end and $240,000,000 available under the credit facility revolver at quarter-end.
Total Debt-- Outstanding debt of $509,000,000 at Q2 2025, with $355,000,000 CMBS loan maturing February 2027, $110,000,000 of floating rate debt on the credit facility revolver maturing May 2026, $18,000,000 mortgage maturing December 2031, and $26,000,000 joint venture mortgage maturing November 2025, with a borrower option to extend for an additional twelve months until November 2026.
Net Debt to Adjusted EBITDA-- Net debt to annualized year-to-date adjusted EBITDA was 6.93x at Q2 2025 quarter-end, expected to rise modestly in the coming year but with anticipated earnings growth in subsequent years expected to offset the increase.
Net Debt to Gross Real Estate Assets-- Net debt to gross real estate assets of 32% at quarter-end.
Asset Dispositions-- Four vacant, non-core properties totaling 434,000 square feet sold for $26,900,000 in Q2 2025 ($62 per square foot), with agreements in place for an additional 540,000 square feet at $57,000,000 ($106 per square foot), pending close in the second half of the year.
DUA Property Exposure-- At Q2 2025 quarter-end, 32.2% of annualized base rent and 25.3% of portfolio square footage were dedicated use assets, with management expecting these ratios to rise.
Dividend-- Quarterly cash dividend of $0.02 per share declared August 5, 2025.
2025 Guidance Adjustments-- Core FFO guidance raised to $0.67-$0.71 per diluted share (from $0.61-$0.70) for 2025, G&A guidance unchanged at $19,500,000-$20,500,000 for 2025.
SUMMARY
Management stressed the acceleration of its business transformation through selective asset sales and portfolio repositioning, explicitly highlighting sale agreements for an additional 540,000 square feet at markedly higher average pricing than in preceding periods, expected to close in the second half of 2025. The company articulated an intention to shift further toward dedicated use assets, targeting medical, lab, R&D flex, and non-CBD government properties for both acquisitions and retention, with the expectation that the weighting of these assets by base rent (32.2% at quarter-end) and square footage (25.3% at quarter-end) will increase. Orion plans to deploy available liquidity to fund capital expenditures and targeted acquisitions, while maintaining a disciplined capital allocation approach. Discussions with credit facility lenders regarding the May 2026 maturity were described as an "among our highest priorities," and the company "expects to be successful" in executing an extension or refinancing. Management attributed improvements in full-year 2025 guidance to one-time income items and better-than-expected leasing performance, and expects incremental G&A savings from restructuring to materialize in Q3 and Q4 2025.
CEO McDowell directly stated, "our approach to unlocking value has not wavered. We remain committed to disciplined execution, continued portfolio stabilization, and enhancement."
The demolition of legacy office assets on the Deerfield, Illinois campus was cited as a cost reduction measure and as preparation for enhanced capital deployment options for approximately 37.4 acres, with completion expected before year-end.
CFO Brandon noted, "Extending this debt obligation is among our highest priorities." in reference to the May 2026 credit facility maturity.
At Q2 2025 quarter-end, the pipeline included more than 800,000 square feet of leasing prospects at various stages, which may further influence future revenue and occupancy rates if closed by year-end.
INDUSTRY GLOSSARY
Core FFO: Core funds from operations; a measure of cash flow for REITs that excludes one-time items and gains or losses from property sales.
DUA: Dedicated Use Assets; office properties purpose-built or modified for specialized tenant needs, such as medical, laboratory, or government use, not suited to generic office formats.
CMBS: Commercial mortgage-backed securities; fixed-income securities collateralized by commercial real estate loans, providing funding but subject to refinancing and maturity risk.
WALT: Weighted average lease term; reflects the average remaining lease duration across all properties, weighted by either annual rent or square footage.
Full Conference Call Transcript
Paul McDowell: Good morning, everyone, and thank you for joining us on Orion Properties' second quarter earnings call. Today, I will highlight the continued progress we are making on our new business strategy and discuss our second quarter performance and operations. Importantly, leasing momentum continues, and we are energized that the marketplace has been receptive to our accelerated asset sales. Following my remarks, Gavin will review our financial results and provide our improved outlook for the rest of the year. With 639,000 square feet of leasing completed as of July 31, we are successfully building on last year's strong momentum that saw Orion lease 1,100,000 square feet.
Specifically, 639,000 square feet of leasing is a combination of new and renewal transactions, with a weighted average lease term of 6.4 years. Included in this total for the second quarter and shortly thereafter, are three new leases: a 15.7-year agreement for 46,000 square feet at our Parsippany, New Jersey property, a 5.4-year agreement for 80,000 square feet at our Kennesaw, Georgia property, and a 7.6-year agreement for 23,000 square feet at our Plano, Texas property. The Kennesaw, Georgia property is currently leased to Home Depot for almost three more years, making the combined lease term more than eight years.
Additionally, we signed 110,000 square feet of short-term lease extensions at two properties during the quarter at over 6% positive lease spreads on average. We are encouraged by our strong leasing activity to date and the momentum that has continued to build in our future pipeline, including various longer-duration renewals and new leases with terms greater than the average of our portfolio. We are working hard to get a substantial portion of this more than 800,000 square foot pipeline of leasing activity, which includes transactions in both the discussion and documentation stage, to the finish line by year-end. Orion's operating property occupancy rate was 77.4% at quarter-end, an increase of 310 basis points sequentially.
The operating property leased rate was 79.1%, an increase of 170 basis points sequentially. The weighted average lease term increased to 5.5 years from 5.2 years last quarter and 4.2 years this time last year. We anticipate tenant retention will continue to fluctuate due to the smaller size of our portfolio and the timing of certain expected move-outs in the remainder of the year. We continue to expect that our portfolio occupancy will rise after 2025 as we lease vacant space, sell vacant properties that do not meet our long-term goals, and generally labor to overcome the significant lease expirations and rollovers of the past few years.
This will be important as we continue to work to reduce property operating costs. One area that is particularly noteworthy is the increasing pace of property dispositions we have been able to achieve this year at strong prices compared to previous years. During the second quarter, we closed on the sale of four vacant properties totaling 434,000 square feet for a gross sales price of $26,900,000, approximately $62 per square foot. We have agreements in place to sell five traditional office properties, three near-term vacant properties, and one stabilized property, totaling 540,000 square feet for $57,000,000 or $106 per square foot, and are expected to close in the second half of the year.
For comparison, we sold just two properties last year totaling 164,000 square feet for about $5,300,000. All four properties sold so far this year have been vacant non-core buildings. We believe the additional sale transactions we are working on provide very attractive exits and avoid the uncertainty and significant capital investment and carrying cost to retenant the assets. These transactions demonstrate our continued ability to monetize non-core assets and redeploy capital while improving the overall quality and durability of our remaining portfolio, as demonstrated by our increasing WALT. We expect to have additional dispositions throughout the remainder of the year and into next.
Finally, the demolition of the outdated office buildings on our former Walgreens campus in Deerfield, Illinois is well underway and should be completed before the year-end. This will allow us to lower carrying costs materially and make the property more attractive to potential investors while we continue to evaluate our alternatives for this approximately 37.4-acre site. As we shared on our year-end 2024 results call, we are continuing to shift our portfolio concentration away from traditional generic suburban office properties and towards dedicated use assets or DUA properties, where our tenants perform work that cannot be replicated from home or relocated to a generic office setting.
These property types include medical, lab, R&D flex, and non-CBD government properties, all of which we already own. Our experience is that these assets tend to exhibit stronger renewal trends, higher tenant investment, and more durable cash flows. As we continue to recycle capital, we are continuing to look carefully at DUA acquisition opportunities. At quarter-end, approximately 32.2% of our portfolio by annualized base rent, and approximately 25.3% by square footage, were DUA properties, and this percentage will increase over time through disposition activity and targeted acquisitions. Turning to the balance sheet, Orion has been very proactive in maintaining significant liquidity to support our ongoing leasing efforts.
To do so, we have sold vacant properties, used sale proceeds and cash flow to pay down debt, managed G&A, been highly selective and targeted on acquisitions, and aligned our dividend policy. As a result, our net debt to annualized year-to-date adjusted EBITDA was 6.93 times at quarter-end. We do expect this ratio to rise modestly in the coming year, which we expect to be offset by anticipated earnings growth in subsequent years. As we head into the third quarter, we have a solid leasing pipeline and remain focused on investing in our well-located properties within target markets.
To support this, we will continue to fund capital expenditures that enhance asset value, enable us to lease space, retain tenants, and attract new ones. Our disciplined approach to capital allocation, including maintaining a low leverage balance sheet over the past several years, has positioned us to navigate the current environment even as we face continued cash flow pressure from higher interest rates, elevated vacancy from recent lease roll, and the impact of the 23 properties we have sold since the spin. With another strong quarter of leasing and asset sales behind us, and a healthy leasing and disposition pipeline ahead of us, we are encouraged that Orion's transformation is accelerating.
I want to take a moment to reiterate and emphasize that our approach to unlocking value has not wavered. We remain committed to disciplined execution, continued portfolio stabilization, and enhancement. It takes time to evolve a net lease office portfolio, but we have made incredibly strong progress. As we look ahead, beyond repositioning the portfolio, management and the board will continuously evaluate the best path forward to maximize value for all our shareholders. With that, I will turn the call over to Gavin. Gavin?
Gavin Brandon: Thanks, Paul. Orion generated total revenues of $37,300,000 in the second quarter as compared to $40,100,000 in the same quarter of the prior year. Core FFO for the quarter was $11,500,000 or $0.20 per share as compared to $14,200,000 or $0.25 per share in the same quarter of 2024. Adjusted EBITDA was $18,000,000 versus $20,500,000 in the same quarter of 2024. The changes year over year are primarily related to vacancies, a smaller portfolio, and the timing of leasing activity. G&A in the second quarter came in as expected at $4,800,000 compared to $4,500,000 in the same quarter of 2024.
As mentioned on prior calls, savings to G&A brought on by our restructuring efforts, including headcount reductions, will begin to contribute in the third and fourth quarters of this year. CapEx and leasing costs in the second quarter were $15,600,000 compared to $6,300,000 in the same quarter of 2024. The increase in CapEx in the 2025 period was driven by the acceleration of leasing activity. As we have previously discussed, CapEx timing is dependent on when leases are executed and work is completed on properties. We expect to allocate more capital to CapEx over time as leases roll and new and existing tenants draw upon their tenant improvement allowances.
Turning to the balance sheet, at quarter-end, we had total liquidity of $257,700,000, comprised of $17,700,000 in cash and cash equivalents, including the company's pro-rata share of cash in the RStreet joint venture, and $240,000,000 of available capacity on the credit facility revolver. We intend to maintain significant liquidity on the balance sheet for the foreseeable future to fund expected capital commitments to support our future leasing efforts and provide the financial flexibility needed to execute on our business plan for the next several years.
We ended the quarter with $509,000,000 of outstanding debt, including our non-recourse $355,000,000 CMBS loan, which is a securitized mortgage loan collateralized by 19 properties maturing in February 2027, $110,000,000 of floating rate debt on the credit facility revolver maturing in May 2026, $18,000,000 under the mortgage loan for our San Ramon property maturing in December 2031, and $26,000,000 representing our share of the RStreet joint venture mortgage debt maturing in November 2025 with a borrower option to extend for an additional twelve months until November 2026. Our net debt to gross real estate assets was 32% at the end of the quarter.
Regarding our credit facility revolver, as mentioned, the scheduled maturity date for this obligation is in May 2026. We have no remaining extension options. We are in discussions with our lenders about extending and/or refinancing this debt obligation in keeping with our current business plan. Extending this debt obligation is among our highest priorities. We expect to be successful, and we will share more information about our progress on this front in future quarters. There are additional disclosures regarding our credit facility in our Form 10-Q. On August 5, 2025, Orion's Board of Directors declared a quarterly cash dividend of 2¢ per share for 2025.
Moving to our outlook for 2025, we are now narrowing and raising the range for our core FFO and lowering the range for our net debt to adjusted EBITDA and reaffirming our expectations for G&A. Core FFO is now expected to range from $0.67 to $0.71 per diluted share, up from $0.61 to $0.70 per diluted share. Net debt to adjusted EBITDA is now expected to range from 7.3 times to 8.3 times, down from 8.0 times to 8.8 times. These improvements in our guidance for the year are driven by a number of factors, including one-time items such as lease termination income, property tax appeals, and refunds, as well as improved leasing versus our initial expectations.
Our G&A range of $19,500,000 to $20,500,000 is unchanged. Excluding non-cash compensation, we expect 2025 G&A will be in line or slightly better than 2024. With that, we will open the line for questions. Operator?
Operator: Thank you. Before pressing the star keys, there are no questions at this time. I would like to turn the call back over to Paul McDowell for closing remarks.
Paul McDowell: Okay. Well, thank you very much. We appreciate everyone joining us today, and we look forward to updating you next quarter.
Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.