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Operator: Greetings. Welcome to Orion Office REIT’s Second Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to, Paul Hughes, General Counsel for Orion. Thank you, Mr. Hughes. You may begin.

Paul Hughes: Thank you. Good morning, everyone. Yesterday, Orion released its financial results for the quarter ended June 30, 2023, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its Web site. These documents are available in the Investor Section of the company’s Web site at onlreit.com. I would like to remind everyone that certain statements [Technical Difficulty]. These statements, which include the company’s guidance estimates for calendar year 2023 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 our estimates. The risks and uncertainties are discussed in our earnings release as well as in our Form 10-Q and other SEC filings.

You should not place undue reliance on these forward-looking statements, and the company undertakes no duty to update any forward-looking statements made during this call. Additionally, during the conference call today, we will be discussing certain non-GAAP financial measures, such as funds from operations or FFO and core funds from operations or core FFO. Company’s earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. 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. Hosting the call today are Paul McDowell, the company’s Chief Executive Officer; and Gavin Brandon, the company’s Chief Financial Officer.

And joining us for the Q&A session is Gary Landriau, 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?

Paul McDowell: Good morning, everyone. And welcome to Orion Office REIT’s second quarter 2023 earnings call. On behalf of our team, I want to thank you all for joining us today. I will discuss our performance and operations for the second quarter and highlight our continued progress in executing on our business strategy. I will then turn the call over to Gavin to provide an update on our financial results and on our outlook for the rest of the year. We would certainly welcome an acceleration in the pace of office utilization and leasing momentum. But since we cannot control that timing, we remain focused on executing our strategy to reposition the portfolio of properties we inherited in 2021 from Orion’s spinoff from Realty Income.

The economic backdrop for commercial real estate and specifically for the office sector remains difficult. At Orion, we are continuing to take proactive steps to reinforce our capital structure to support the necessary investments in our core portfolio in the form of building improvement allowances and lease incentives to retain tenants and extend our portfolio’s weighted average lease term, produce sustained cash flows and ultimately position the company to grow. With that in mind, the most important news for us in the quarter was that we successfully secured an amendment to our credit agreement, which retired our term loan ahead of schedule, gives us continued access to significant liquidity and the ability to extend the revolver loan term well into 2026.

Gavin will provide a few more details but we appreciate the continued support of Orion and our business plan by all our lenders that allowed us to close this amendment in the midst of a tight credit market and challenging financing environment for office properties. We remain steadfast and confident that owning a diversified portfolio of well located properties in high quality markets will contribute to our growth in the future, but it will take time. We continue to leverage our teams’ more than 30 years of experience across multiple economic cycles as we seek to extend, re-lease or sell properties with pending lease maturities or vacancy across our portfolio. With the rising cost of capital, we are required to be thoughtful with our capital allocation decisions by quickly determining which properties will provide the greatest return over time.

We still believe that the best use of our capital is to continue to stabilize and reposition the existing portfolio and recycle capital as appropriate through the sale of properties that do not align with our long term strategy. At quarter end, we owned 81 properties and six unconsolidated joint venture properties comprising 9.7 million square feet that were 86.5% occupied. The properties in the portfolio are predominantly either triple or double net leased to credit worthy tenants. As a percentage of annualized base rent, as of June 30, 2023, 73.7% were investment grade, up from 67.3% as of June 30, 2022. Our strong portfolio of assets is well diversified by tenant, tenant industry and geography. Our largest tenant by annualized base rent is the United States Government and our two largest tenant industries are healthcare and government, representing 13.8% and 12.8% of annualized base rent respectively.

Over 30% of our annualized base rent is derived from Sunbelt markets. Our largest markets by state are Texas and New Jersey, which represents 15.7% and 12.5% of annualized base rent respectively. While we have increasingly heard of the efforts by some large corporations to mandate and enforce a return to office for many employees, the data has yet to show these initiatives as being broadly successful. As a result, while tenant interest in some of our vacant properties is good, we have not yet begun to see an appreciable acceleration of leasing activity in our portfolio. However, we believe these changing attitudes will over time be a catalyst for a more sustained return of demand for office space. Additionally, even as return to office gains traction, hybrid work practices are not going away and office space utilization will continue to evolve as the industry adapts.

As a result, the office sector is seeing some office tenants seeking less square footage on renewal, a trend that will likely continue for the foreseeable future. As we discussed last quarter, the pace of signing early renewals remains slow and the tenant decision making process has lengthened. Nonetheless, we remain proactive on the leasing front. During the quarter, we renewed a 44,000 square foot lease with the US government in Redding, California for five years and signed one new three year lease for 3,000 square feet at our multi-tenant property in the Woodlands, Texas. Overall leasing spreads during the second quarter were about 7%, though, we caution there will be significant variability on spreads in any given period given the very granular nature of the portfolio.

While leasing momentum was muted in the second quarter, as I mentioned, we have decent activity at some of our properties and we remain in various stages of discussions and negotiation for new leases and renewals of over 500,000 square feet. Given the timing of leases and the size of our portfolio, tenant retention will also be volatile quarter-over-quarter, depending on the needs and timing of tenants’ decisions. Our portfolio’s weighted average lease term was 3.9 years at quarter end. Turning to dispositions. We maintained our aggressive stance to dispose of vacant and identified noncore assets where we believe we have maximized the value relative to our underwriting. Shortly after quarter end, we closed the sale of one vacant property for a gross sales price of $9.7 million at a price per square foot of $43.

We also have eight properties under contract for an aggregate gross sales price of $41 million and are actively negotiating and marketing a number of other assets for sale or lease. This includes the sale of the six building Walgreens Campus in Illinois, which has been steadily moving towards its anticipated close in early 2024. The buyer continues to progress with it’s redevelopment plans for the properties and now has a modest portion of the deposit towards the purchase price at risk. We ended the quarter with seven vacant properties, one of which was sold after quarter end as previously discussed. Vacant property operating expenses negatively impact earnings, so selling noncore vacant properties reduces operating expense drag in the short term but does pressure our ability to grow earning in the future, particularly given our smaller size.

That said, we know that in this environment it is the right approach to maximize the long term value of the overall portfolio. Our long term direction remains clear, retain tenants, fill vacant space and dispose off noncore assets to position us to look beyond today’s challenges and towards growing our core portfolio and sustain cash flow. We remain optimistic about Orion’s long term prospects and we are dedicated to pursuing value for our shareholders. With that, I will now turn the call over to Gavin. Gavin?

Gavin Brandon: Thanks, Paul. I will start by discussing Orion’s GAAP results for the second quarter. We generated total revenues of $52 million as compared to $52.8 million in the same quarter of the prior year. We reported a net loss attributable to common stockholders of $15.7 million or $0.28 per share as compared to a net loss of $15.6 million or $0.27 per share reported in 2022. Core funds from operations for the quarter was $26.9 million or $0.48 per share as compared to $28.4 million or $0.50 per share in the same quarter of 2022. Due to the timing of an expense reimbursement that was received in the quarter, our results benefited by $0.02 per share in the second quarter. This benefit is offset by $0.02 of expense we incurred in the first quarter when we reserved against the reimbursement, thus having no 2023 year-to-date or full year impact.

Adjusted EBITDA was $32.7 million versus $34.7 million in the same quarter of 2022. The changes year-over-year are primarily related to vacancies and the disposition of properties. G&A was $4.6 million compared to $3.3 million in the second quarter of 2022. As we have discussed on prior calls, the expiration of spin related expense subsidies from realty income, the achievement of optimal headcount during 2022 and an additional year of stock based compensation expense will impact the year-over-year 2023 comparisons. CapEx this quarter was $2.2 million compared to $2.4 million in the second quarter of 2022, including property improvements of $2.1 million and leasing commissions associated with the company’s leasing activity or an additional $93,000.

As a reminder, CapEx timing will be dependent on when leases are signed and work is completed on properties. CapEx will likely increase over time as leases rollover and new and existing tenants draw upon tenant improvement allowances. Turning to the balance sheet. We ended the quarter with $557.3 million of outstanding debt and $250 million of available capacity on the $425 million revolving credit facility. We had total liquidity of $292.9 million, consisting of $250 million available on the revolving credit facility and $42.9 million in cash and cash equivalents, including Orion’s share of cash from the Arch Street joint venture. 100% of our debt is fixed rate or swapped at fixed rate until November 12, 2023 in the case of our revolving credit facility and until May 27, 2024 in the case of our Arch Street joint venture mortgage debt.

Net debt to annualized adjusted EBITDA was 3.93 times at the quarter end and the weighted average interest rate was 4.65%. As Paul mentioned, we successfully closed on an amendment of our credit agreement. Under the terms of the amendment, the company used borrowings from our revolving credit facility to repay and retire our $175 million term loan, which was scheduled to mature in November of this year. The amendment also provides us with the option to extend the revolving credit facility for an additional 18 months to May of 2026 from November 2024. The extension option is subject to customary conditions, including the payment of an extension fee. Because the market for financing office real estate assets is dislocated, it remains our intention to maintain significant liquidity on the balance sheet for this foreseeable future, given the expected capital commitments in our future leasing efforts and the necessary financial flexibility to execute on our business plan.

Orion’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the third quarter of 2023 to be paid on October 16, 2023 to stockholders on record as September 29, 2023. We are updating our expectations for our full year 2023 guidance for core FFO, G&A and net debt to adjusted EBITDA. Core FFO is now anticipated to range from $1.59 to $1.63 per diluted share, up from $1.55 to $1.63 per diluted share. G&A is now expected to range from $18.25 million to $18.75 million, down from $18.75 million to $19.75 million. Lastly, net debt to adjusted EBITDA is now expected to range from 4.3 times to 5 times, down from 4.3 times to 5.3 times. One additional note, while we do not provide quarterly guidance, given the scheduled lease vacancies during the year, we expect to have sequential reductions in the quarterly amount of earnings and core FFO on a per share basis as we move through the rest of the year.

The company’s strong financial position supported by our cash from operations and property sales should enable us to reach our near and long term objectives. We remain focused on and excited about effectively executing our business plan and creating value in the years ahead. With that, we’ll open the line for questions. Operator?

Operator: [Operator Instructions] And the first question comes from the line of Mitch Germain with JMP Securities.

Unidentified Analyst: This is Judy on from Mitch. The first one here, could you shed some light on the lease expiration for ‘23, ‘24, just maybe what it looks like in terms of tenant quality, geography, et cetera?

Paul McDowell: We’ve got a couple of — we’ve got a few lease expirations so far this year. One in Lawrence, Kansas and then we have a few coming up. The big one is primarily the Walgreens campus in Deerfield, Illinois, which expires on 8/31 and Experian property in Schaumburg, Illinois, which expires on 7/31, neither one of those tenants has renewed. Next year we’ve got about 15% of our total ABR or maybe, I think, it’s actually about 20% — 25% coming due next year. A portion of that likely won’t renew but a portion of it will renew still obviously working our way through that in advance of those expirations.

Unidentified Analyst: And that was one of my questions on the Walgreens move out, so thanks for answering that. So GSA leased during the quarter, we saw it was a five year renewal. Is this a trend that you’re seeing when the government is taking shorter leases right now or is it how just it did in the past?

Paul McDowell: Well actually that one’s a little unusual, Judy. The GSA has from time to time tried to execute some shorter lease extensions. But we have been generally successful with them on executing lease extensions that I think have probably been on average eight or nine years in the past year or two. In the case of the property that renewed this year, or this quarter rather, our expectation is that they will likely execute with us a much longer renewal in a few years as they transfer lease negotiation from the agency, which occupied the property to the GSA, hence the five year lease extension, that’s really just an interim step to what we expect will be a longer term lease extension.

Unidentified Analyst: The last one for me. Firstly, congratulations on getting the debt deal done, but now that it’s in the rear view and maturities are hopefully further down the line. What are your thoughts on stepping up the offensive and perhaps buying assets and maybe discuss like Arch Street’s perspective on growing with JV?

Paul McDowell: Yes, from a buying assets perspective, we’ve recycled a lot of capital. Since we spun off we have paid down about $90 million of debt. When we refinance the line of credit, we had no outstanding balances on our revolver. We have $42 million of cash and we have some additional disposition scheduled at the later part of this year and the beginning of next year. So we will consider recycling some of that capital into new assets depending upon where we see the market and our opportunities there as compared to paying down debt or other uses of capital. As we said in our prepared remarks, we think that most of the capital that we intent to utilize in coming periods will go back into the existing portfolio, but we will actually consider recycling some capital into assets on the balance sheet.

With respect to the Arch Street joint venture, that continues, we still are active with Arch Street. We are continuing to look at potential acquisition opportunities for that JV. One of the impediments to that is the financing market remains pretty challenging. So we are trying to make sure that, to the extent that we add additional assets to that JV, we can do so in a manner that is accretive from a financing perspective.

Operator: Ladies and gentlemen, that concludes the question-and-answer session. I would like to turn the floor back over to Paul McDowell for any closing comments.

Paul McDowell: Thank you all for joining us this quarter. And we look forward to updating you after our Q3 results are published.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.