8-K: Orion Office REIT Announces First Quarter 2024 Results, Reaffirms 2024 Outlook

Orion Office REIT reported its first quarter 2024 results, highlighting leasing activity and reaffirming its 2024 outlook, while also declaring a dividend of $0.10 per share.

Summary

• Orion Office REIT announced its first quarter 2024 results, with total revenues of $47.2 million, down from $50.2 million in the same quarter of 2023.
• The company reported a net loss attributable to common stockholders of $(26.2) million, or $(0.47) per share, compared to a loss of $(8.9) million, or $(0.16) per share, in the first quarter of 2023.
• Funds from Operations (FFO) was $18.4 million, or $0.33 per share, while Core FFO was $20.4 million, or $0.36 per share.
• The company completed 108,000 square feet of leasing during the quarter and an additional 414,000 square feet subsequent to quarter end, bringing the total to 522,000 square feet of new and renewal leasing in 2024.
• Orion has agreements in place to sell 790,000 square feet of vacant space for an aggregate gross sales price of $48.1 million.
• The company's occupancy rate was 75.8%, or 83.2% adjusted for properties under agreement to be sold, with 70.1% of annualized base rent derived from investment-grade tenants.
• The weighted average remaining lease term was 4.1 years.
• Total debt was $498.3 million, and the company had $258.3 million of liquidity as of March 31, 2024.
• A quarterly cash dividend of $0.10 per share was declared for the second quarter of 2024.
• Orion reaffirmed its 2024 guidance for Core FFO per share between $0.93 and $1.01, general and administrative expenses between $19.5 million and $20.5 million, and net debt to adjusted EBITDA between 6.2x and 7.0x.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant net loss and decrease in revenue and core FFO compared to the previous year. While there are positive aspects such as leasing activity and debt management, the financial results are concerning.

Positives

• The company has made significant progress in leasing, with 522,000 square feet of new and renewal leases in 2024.
• Orion is actively streamlining its portfolio through non-core asset disposals, with agreements to sell 790,000 square feet of vacant space.
• The amendment to the credit facility revolver improves the company's financial flexibility.
• The company intends to extend the maturity of its credit facility revolver, providing more financial stability.
• The company reaffirmed its 2024 outlook, indicating confidence in its business plan.

Negatives

• The company experienced a net loss attributable to common stockholders of $(26.2) million, or $(0.47) per share, in the first quarter of 2024, which is significantly worse than the $(8.9) million loss in the same quarter of 2023.
• Total revenues decreased to $47.2 million from $50.2 million in the same quarter of the previous year.
• Core FFO decreased to $20.4 million, or $0.36 per share, from $25.3 million, or $0.45 per share, in the first quarter of 2023.
• The company's occupancy rate is 75.8%, indicating a significant amount of vacant space.

Risks

• The company's pending sale agreements are subject to conditions outside of their control, such as buyer due diligence and governmental approvals, which may prevent the transactions from closing.
• The company has two debt maturities in late 2024, including the credit facility revolver and the Unconsolidated Joint Venture mortgage debt, which require refinancing or extension.
• The company is exposed to interest rate fluctuations on its variable rate debt, including the Unconsolidated Joint Venture mortgages payable.
• The company's future performance is subject to risks and uncertainties, including rising interest rates, inflation, and changes in workplace practices.

Future Outlook

The company reaffirms its 2024 guidance for Core FFO per share between $0.93 and $1.01, general and administrative expenses between $19.5 million and $20.5 million, and net debt to adjusted EBITDA between 6.2x and 7.0x. The company's guidance is based on current plans and assumptions and subject to risks and uncertainties.

Management Comments

• Paul McDowell, Orion's Chief Executive Officer, stated, 'We continued to execute against our current business plan: retaining existing tenants, filling empty spaces and streamlining the portfolio through non-core asset disposals, as we completed 522,000 square feet of new and renewal leasing thus far in 2024 and have agreements in place to sell 790,000 square feet of vacant space.'
• He also noted that this performance nearly doubles their total 2023 leasing activity and includes the signing of two long-term leases with the United States Government.
• Regarding the maintenance of their low leveraged balance sheet, subsequent to quarter end, they secured an amendment to their credit facility revolver that more effectively aligns capacity and financial covenants to their business model.
• They expect later this quarter to exercise their option to extend the maturity out 18 months from November 2024 to May 2026.

Industry Context

The announcement reflects the ongoing challenges and strategies within the office REIT sector, including efforts to manage vacancies, secure new leases, and optimize capital structures. The focus on single-tenant net lease properties and the pursuit of government leases are common strategies in the current market. The company's efforts to dispose of non-core assets align with the broader trend of portfolio optimization in the REIT industry.

Comparison to Industry Standards

• Orion's occupancy rate of 75.8% is below the average for many office REITs, which typically aim for occupancy rates above 90%. For example, Boston Properties (BXP) and SL Green Realty Corp (SLG), two large office REITs, have reported occupancy rates in the low to mid 80s, although these are for higher quality properties.
• The company's weighted average remaining lease term of 4.1 years is relatively short compared to some peers, which can indicate higher lease rollover risk. Companies like W. P. Carey (WPC) often have weighted average lease terms of 10 years or more.
• Orion's net debt to adjusted EBITDA ratio of 4.43x is within the range of many REITs, but the company's leverage is higher than some of the more conservative REITs. For example, Realty Income (O) typically operates with a lower leverage ratio.
• The company's focus on single-tenant net lease properties is a common strategy, but the performance of these properties can be more volatile than multi-tenant properties. Companies like National Retail Properties (NNN) also focus on net lease properties, but with a focus on retail rather than office.
• The company's leasing activity of 522,000 square feet is a positive sign, but the company needs to continue to improve its occupancy rate to be competitive with industry leaders.

Stakeholder Impact

• Shareholders will be impacted by the net loss and the decrease in FFO, but may be encouraged by the leasing activity and dividend declaration.
• Employees may be affected by the company's efforts to streamline its portfolio and manage costs.
• Tenants will be impacted by the company's leasing activity and property management decisions.
• Creditors will be impacted by the company's debt management and refinancing efforts.

Next Steps

• The company intends to exercise its option to extend the maturity date on the credit facility revolver an additional 18 months from November 12, 2024 to May 12, 2026, during the second quarter of 2024.
• Orion will host a webcast and conference call to review its financial results at 10:00 a.m. ET on Thursday, May 9, 2024.

Key Dates

Keywords

REIT, Office Properties, Leasing, Real Estate, Net Lease, Dividend, FFO, EBITDA, Debt, Occupancy, Dispositions