Orion Properties Inc. 2026 Q2 Earnings Call

Thank you, and good morning, everyone. Yesterday, Orion released its results for the quarter ended June 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 second quarter earnings call. I will start with a few words on our continuing strategic options process that began in late January. Since that announcement, in concert with our financial advisors at Wells Fargo and JP Morgan, we have conducted a robust effort, including broad outreach to solicit proposals from interested parties. Those efforts have been supported by a virtual data room containing comprehensive property and corporate data for those participants that sign non-disclosure agreements. With several parties continuing to conduct diligence, we believe it is in shareholders' interest to see that work through to its reasonable conclusion rather than set arbitrary deadlines. Rest assured, we are moving as expeditiously as possible, although we can offer no assurance that this process will result in Orion concluding any particular transaction.

Beyond the ongoing strategic review efforts, the team has continued to execute and deliver strong results against our business plan, which is reflected in our second quarter results. Our strategy remains centered on four priorities: stabilizing the portfolio through increased leasing activity, the timely disposition of non-core assets, prudent leverage management, and selective capital recycling into Dedicated Use Assets. As we have consistently communicated, we expect these efforts to drive Core FFO per share growth in 2026 and beyond, while maintaining prudent levels of leverage. Far this year, we have been successful on each of those priorities. From a leasing perspective, we have completed 673,000 sq ft of leasing, including 202,000 sq ft completed in the second quarter and 116,000 sq ft after quarter end, including our first new lease at our Tulsa property.

The weighted average lease term for the consolidated portfolio stands at 6.2 years at the end of the second quarter, up from 5.5 years at the end of the second quarter last year, continuing our steady improvement of this crucial metric. Cash rent spreads on second quarter renewals were down 7.7% when comparing ending rents in the current term to starting rents in the new term. Rent spreads are up 2.1% when comparing current ending rents to new ending rents, driven by escalations over the new lease term. For the year to date period, cash rent spreads are very slightly down by 0.2% on renewals and up 7.1% when comparing current ending rents to new ending rents. Although volatile, leasing concessions are so far trending lower this year than last on a per sq ft basis.

Due to a few scheduled move-outs and select opportunistic dispositions, offset to some extent by our leasing efforts, our consolidated portfolio occupancy rate of 78.1% at the end of the second quarter was down as expected from the end of the first quarter, but up from 76.8% at the end of the second quarter of last year. As we have said many times, rent spreads and occupancy rates can and will be volatile from quarter to quarter given our largely single-tenant portfolio, though we remain positive about the overall trends, which continue to see steady improvement. Beyond the leasing completed year to date, our pipeline remains quite strong despite our smaller size at over 1.1 million sq ft. Over 17% of the total portfolio that is in either discussion or documentation stage, including a substantial number of new long-term leases for currently vacant space and some full building renewals.

As we look out, we continue to see improving demand for our assets, and we are working hard to move forward on executing as much leasing as possible. The key message is that we continue to be quite pleased with our leasing velocity so far this year. Turning to dispositions, we have been very successful this year, and we have primarily utilized the proceeds from opportunistic asset sale activity to continue to deleverage, ending the quarter with net debt to annualized adjusted EBITDA at 5.4 times, almost a full turn better than last quarter and the same quarter a year ago. Specifically, during the first half of the year, we generated gross proceeds of almost $84 million on the sale of 4 properties, plus the 37.4 acre Deerfield, Illinois campus. The second quarter sales activity generated an aggregate gross sales price of $70.6 million and included 2 strategic dispositions.

One of which was sold to the existing tenant at a 5.6% cash capitalization rate, and the other was a recently vacated asset sold to an adjacent user at an implied 5% cash capitalization rate on expiring rent. These sales have allowed us to repay roughly $61 million of debt, including over $35 million on our CMBS loan in the second quarter. Our debt repayment and refinance efforts have also allowed us to steadily reduce interest expense by $700,000 for the second quarter and $1.6 million for the year to date period, compared to the same periods in 2025. On another very positive note, the average sale price per square foot has steadily increased on the sale of vacant properties over the past year or so.

These transactions continue to demonstrate our ability to monetize non-core assets and redeploy capital while improving the overall quality and durability of our remaining portfolio. Our continued focus on selling properties with difficult re-leasing prospects and high carrying costs has allowed us to continue to materially reduce property operating expenses. For example, our 2025 and 2026 vacant or near-term vacant property sales are estimated to save more than $12 million in annual carrying costs. These efforts have already contributed to an improvement in property operating costs of $3.4 million for the second quarter and $5.1 million for the year to date period compared to the same periods in 2025. We remain committed to shifting our portfolio concentration toward Dedicated Use Assets where our tenants perform work that cannot be replicated from home or relocated to a generic office setting and away from traditional suburban office properties.

These property types include medical, lab, R&D, flex, and government properties, all of which we already own. At quarter end, these Dedicated Use Assets, or DUA, represent 38.7% of annualized base rent of our consolidated portfolio, compared to 37.1% at the end of last quarter and 32.6% at the end of the second quarter of 2025, reflecting our sales of traditional office assets and our purchase earlier this year of the Barilla DUA property. We expect this percentage to continue increasing over time through continued disposition activity of traditional office and targeted acquisitions of DUA properties. Before I close, I do want to take a moment to reflect on the very significant progress we have made at Orion. Over the past two years, we have averaged about 1 million square feet of leasing per year and are on track to lease about that much again this year.

We have sold 39 properties since our spin, totaling more than 4.2 million square feet, reducing property operating expenses by millions per year. We continue to work to manage overhead, significantly reducing headcount over the past two years, including at the executive level. We successfully refinanced and extended both our revolving debt and our CMBS debt this year. We continue to manage leverage and have steadily reduced debt by $183 million since the spin. These combined efforts are showing up in our key metrics, such as WALT, occupancy, net debt to adjusted EBITDA, and G&A, all of which are improved over the same period a year ago. Finally, we have significant confidence in our ability to meaningfully grow Core FFO from here.

For the balance of 2026, our operational focus remains on improving portfolio quality, lengthening WALT, renewing tenants, filling or selling vacant space, and prudently managing expenses and leverage as we work to maximize Orion's value for investors and potential strategic partners.

I firmly believe that if we continue to execute on our business plan, the market will finally begin to recognize the meaningful intrinsic value of this company that is not reflected in our current discounted valuation. With that, I will turn the call over to Gavin.