Earnings call transcript: Orion Office Reit Q2 2025 sees revenue beat

Orion Office Reit Inc. (ONL) reported its second-quarter 2025 earnings, revealing a revenue beat despite a challenging office real estate market. The company posted a revenue of $37.3 million, surpassing the forecast of $36.5 million. However, earnings per share (EPS) came in at -$0.45, reflecting ongoing market pressures. The stock closed down 3.71% following the earnings release. According to InvestingPro analysis, ONL is currently trading below its Fair Value, with strong liquidity metrics showing current assets at 2.58 times short-term obligations.

Key Takeaways

• Orion Office Reit exceeded revenue expectations for Q2 2025, posting $37.3 million.
• The company reported an EPS of -$0.45, indicating continued financial challenges.
• Stock price fell by 3.71% in response to the earnings report.
• The firm is focusing on Dedicated Use Assets to adapt to market shifts.
• Guidance for 2025 Core FFO has been raised to $0.67-$0.71 per share.

Company Performance

Orion Office Reit experienced a decline in total revenues compared to the same quarter last year, dropping from $40.1 million in Q2 2024 to $37.3 million in Q2 2025. The decrease reflects broader industry trends as the company navigates a difficult office real estate market. Despite the revenue beat, the decline in core funds from operations (FFO) and adjusted EBITDA underscores the ongoing financial pressures.

Financial Highlights

• Revenue: $37.3 million, down from $40.1 million in Q2 2024
• EPS: -$0.45, with a negative trend compared to previous quarters
• Core FFO: $11.5 million or $0.20 per share, down from $14.2 million or $0.25 per share in Q2 2024
• Adjusted EBITDA: $18.0 million, down from $20.5 million in Q2 2024

Earnings vs. Forecast

Orion Office Reit’s revenue of $37.3 million surpassed the forecast of $36.5 million, resulting in a 2.19% revenue surprise. However, the EPS of -$0.45 fell short of expectations, highlighting continued financial challenges.

Market Reaction

The stock price of Orion Office Reit declined by 3.71% following the earnings release, closing at $2.56. This movement reflects investor concerns over the negative EPS and the broader challenges facing the office real estate sector. The stock remains closer to its 52-week low of $1.46 than its high of $4.39, indicating cautious market sentiment.

Outlook & Guidance

Looking ahead, Orion Office Reit has raised its 2025 Core FFO guidance to $0.67-$0.71 per share, signaling confidence in its strategic initiatives. The company continues to focus on optimizing its portfolio by shifting towards Dedicated Use Assets and improving its leasing pipeline.

Executive Commentary

CEO Paul McDowell emphasized the company’s strategic shift, stating, "We are continuing to shift our portfolio concentration away from traditional generic suburban office properties." CFO Gavin Brandon highlighted financial priorities, noting, "We intend to maintain significant liquidity on the balance sheet."

Risks and Challenges

• Market volatility and economic uncertainty continue to impact the office real estate sector.
• The shift away from traditional office spaces may lead to transitional challenges.
• Rising G&A expenses and capital expenditures could pressure profitability.
• Maintaining occupancy rates and lease renewals in a competitive market remains a challenge.

Orion Office Reit’s Q2 2025 earnings reflect both the challenges and strategic shifts the company is undertaking in response to evolving market conditions. The revenue beat offers a positive note amid broader sector difficulties, while the focus on Dedicated Use Assets may position the company for future growth. For deeper insights into ONL’s valuation and growth potential, explore the full suite of financial metrics and expert analysis available on InvestingPro, including exclusive Fair Value calculations and comprehensive financial health scores.

Full transcript - Orion Office Reit Inc (ONL) Q2 2025:

Conference Operator: Greetings. Welcome to Orion Properties Second Quarter twenty twenty May. 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.

You may begin.

Paul Hughes, General Counsel, Orion Properties: Thank you, and good morning, everyone. Yesterday, Orion released its results for the quarter ended 06/30/2025, 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 2025 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. The 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.

Today on the call, we will be discussing funds from operations or FFO and core funds from operations or core FFO and other non GAAP financial measures. 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. And joining us for the Q and A session will be Chris Day, our Chief Operating Officer.

With that, I am now going to turn the call over to Paul McDowell.

Paul McDowell, Chief Executive Officer, Orion Properties: 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, the 06/9000 square feet of leasing is a combination of new and renewal transactions with a weighted average lease term of six point four years. Included in this total for the second quarter and shortly thereafter are three new leases, a fifteen point seven year agreement for 46,000 square feet at our Parsippany, New Jersey property, a five point four year agreement for 80,000 square feet at our Kennesaw, Georgia property, and a seven point six 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 three ten basis points sequentially. And the operating property leased rate was 79.1%, an increase of 170 basis points sequentially. And the weighted average lease term increased to five point five years from five point two years last quarter and four point two years this time last year. We do 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 when 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 or approximately $62 per square foot. Additionally, we have agreements in place to sell five traditional office properties, which includes one vacant property, 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, and we believe the additional sale transactions we are working on will provide very attractive exits and avoid the uncertainty and significant capital investment and carrying costs to retenant the assets. These transactions demonstrate our continued ability to monetize noncore 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, which will allow us to lower carrying costs materially and make the property more attractive to potential investors while we continue to evaluate our our alternatives for this approximately 37.4 acre site. As we shared on our year end twenty twenty four 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 and 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 and A, have 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 that 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’ve 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 and continued portfolio stabilization and enhancement.

It takes time to evolve a net lease office portfolio, but we have made incredibly strong progress. And 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,

Paul Hughes, General Counsel, Orion Properties: I will turn the call

Gavin Brandon, Chief Financial Officer, Orion Properties: over to Gavin. Gavin? 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 timing of leasing activity. G and A in the second quarter came in as expected at 4,800,000.0 compared to $4,500,000 in the same quarter of 2024. As mentioned on prior calls, same as the G and 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 2025 period was driven by the acceleration in 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 cash and cash equivalents, including the company’s pro rata share of cash from the R Street 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 $5.00 $9,000,000 of outstanding debt, including our non recourse $355,000,000 CMBS loan that is a securitized mortgage loan collateralized by 19 properties maturing in February 2027, dollars 110,000,000 of floating rate debt on the credit facility revolver maturing in May under the mortgage loan for San Ramon property maturing in December ’2 thousand and 31 and $26,000,000 representing our share of the R Street 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, and we have no remaining extension options. We are in discussions with our lenders about extending refinancing this debt obligation in keeping with our current business plan. Extending this debt obligation is among our highest priorities and 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 08/05/2025, Orion’s Board of Directors declared a quarterly cash dividend of $02 per share for the 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 and 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 eight point zero times to 8.8 times. These improvements in our guidance for the year are driven by a number factors, including onetime items such as lease termination income, property tax appeals and refunds, as well as improved leasing versus our initial expectations. Our G and A range of $19,500,000 to $20,500,000 is unchanged. Excluding non cash compensation, we expect 2025 gs and A will be in line or slightly better than 2024. With that, we’ll open the line for questions.

Operator?

Conference Operator: Thank There are no questions at this time. I would like to turn the call back over to Paul McDowell for closing remarks.

Paul McDowell, Chief Executive Officer, Orion Properties: Okay. Well, thank you very much. We appreciate everyone joining us today, and we look forward to updating you next quarter.

Conference Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.

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