Executive Summary / Key Takeaways

• Orion Properties (ONL) is undergoing a strategic transformation, shifting its portfolio focus from traditional suburban office assets towards "dedicated use assets" (DUA) like government, medical, lab, R&D, and flex properties, aiming for more durable cash flows and higher tenant retention in a challenging office market.
• The company faces significant near-term pressure on revenues and Core FFO, with 2025-2026 anticipated as the low point, driven by substantial lease expirations, increased vacancy carry costs, and high tenant concession requirements in a competitive leasing environment.
• ONL is actively managing its portfolio through aggressive dispositions of non-core and vacant traditional office properties, using proceeds to fund necessary capital investments in the remaining portfolio and manage debt, while also selectively targeting DUA acquisitions.
• Liquidity remains a key focus, supported by cash on hand, the Revolving Facility, and disposition proceeds, enabling the company to fund significant expected capital commitments for leasing and manage upcoming debt maturities, including the Arch Street Joint Venture debt.
• The recent reduction in the quarterly dividend to $0.02 per share is a strategic move to retain capital, viewed as the cheapest source of funds, to support portfolio transformation, leasing efforts, and debt management, aiming to accelerate the pathway to earnings growth expected to accelerate in 2027 and beyond.

The Transformation of Orion Properties: A Strategic Pivot in a Challenging Market

Orion Properties Inc. (NYSE: ONL), which recently rebranded from Orion Office REIT Inc. on March 5, 2025, is a real estate investment trust primarily focused on owning, acquiring, and managing a diversified portfolio of office properties in suburban markets across the United States. The company's journey began as a spin-off from Realty Income Corporation (O) in November 2021, inheriting a portfolio that, while initially providing a foundation, also presented significant challenges, particularly substantial lease expirations and exposure to the evolving dynamics of the office sector.

In the years following its separation, ONL has grappled with the profound impacts of shifting workplace practices, notably the rise of remote and hybrid work, which have significantly reduced demand for traditional office space. This market-wide headwind has been compounded by an oversupply of office properties and intense competition for tenants. In this environment, properties classified as Class B and C, which constitute a portion of ONL's portfolio (65.7% traditional office, 18.9% flexindustrial, 10.1% governmental by rentable square feet in Class B/C properties as of March 31, 2025), have experienced reduced demand and often lease or sell at discounts compared to Class A assets. This competitive pressure necessitates high tenant concessions and capital investment to secure new leases or retain existing tenants, impacting profitability and requiring a strategic response.

Recognizing these market realities and observing the relative resilience of certain property types within its portfolio, ONL has embarked on a deliberate strategic transformation. The core of this strategy is a significant shift in portfolio concentration away from traditional, generic suburban office buildings towards "dedicated use assets" (DUA). These are defined as properties with a substantial specialized use component, such as governmental, medical office, flex/laboratory and R&D, and flex/industrial operations. Management believes that tenants in DUA properties perform work that is less susceptible to remote work trends and cannot be easily replicated from home or relocated to a generic office setting. This is expected to lead to higher property usage, stronger renewal trends, greater tenant investment in their space, and ultimately, more durable and predictable cash flows. As of March 31, 2025, approximately 32% of ONL's portfolio by annualized base rent and 25% by square footage were classified as DUA, a percentage the company aims to increase over time.

This strategic pivot is being executed primarily through aggressive portfolio management, focusing on the disposition of non-core and vacant traditional office properties. Since the spin-off, ONL has sold 17 properties, representing over 15% of the initial portfolio, generating approximately $59 million in gross proceeds by early 2024. This disposition activity continued into 2025, with three vacant properties totaling 287,000 square feet sold in April 2025 for $19.1 million gross, including one transaction at $101 per square foot for conversion to multifamily housing. As of early May 2025, two additional operating properties totaling 211,000 square feet were under contract for $27.3 million gross. These sales, while reducing the overall asset base in the short term, are crucial for reducing operating drag from vacant properties, mitigating future capital expenditure requirements, and generating capital to be redeployed into the remaining portfolio or used for debt management. The proceeds are intended to fund necessary capital investments in existing properties to enhance their value and marketability, support selective acquisitions of DUA properties, and for general corporate purposes, including debt repayment.

While the strategic shift is underway, the office market's technological evolution, particularly the widespread adoption of remote and hybrid work models, continues to present a significant challenge. These technology-enabled work arrangements directly reduce the demand for physical office space, especially in traditional settings. Furthermore, government initiatives like the Department of Government Efficiency (DOGE) are exploring ways to increase government office utilization and potentially shrink the federal government's real estate footprint, posing a specific risk to properties leased to the United States Government, ONL's largest tenant. While ONL's government portfolio is largely in firm lease terms and not located in the immediate Washington, D.C. area, the uncertainty around GSA leasing decisions and potential termination options remains a risk. The sources do not detail specific proprietary technologies owned or developed by ONL that provide a competitive moat in the market. In contrast, competitors like Boston Properties (BXP) may have advantages in areas like "smart building integrations" or "energy systems." ONL's response to the impact of technology on the market is primarily strategic and portfolio-based – shifting towards DUA where the nature of the work performed is less susceptible to technological displacement of physical space, rather than leveraging proprietary technology as a direct competitive advantage.

Performance Under Pressure: Navigating the Transition

Orion Properties' recent financial performance reflects the pressures of the challenging market and the ongoing portfolio transformation. For the three months ended March 31, 2025, the company reported total revenues of $38.001 million, a decrease from $47.197 million in the same period of 2024. This decline was primarily attributed to a decrease in overall occupied square footage resulting from lease expirations, which accounted for approximately $7.1 million in lost rental revenues, and a reduction in non-recurring reimbursements from previous tenants ($2.7 million in Q1 2024 vs. none in Q1 2025). The revenue decrease was partially offset by $1.3 million in rental revenue from the property acquired in San Ramon, California, in September 2024.

Operating expenses saw mixed movements. Property operating expenses increased slightly to $16.450 million in Q1 2025 from $15.999 million in Q1 2024, driven by higher costs associated with additional property vacancies ($5.1 million in Q1 2025 vacant property operating expenses vs. $2.8 million in Q1 2024) and expenses from the San Ramon acquisition, partially offset by timing differences and decreases from property dispositions. Depreciation and amortization decreased significantly to $16.022 million from $24.504 million, largely due to the full amortization of certain intangible assets related to expired or terminated leases, partially offset by accelerated amortization for one early termination and D&A from the San Ramon property. Impairment charges decreased substantially to $1.709 million in Q1 2025 from $19.685 million in Q1 2024, reflecting management's updated estimates on lease renewal and sale probabilities and terms. Interest expense remained relatively consistent at approximately $8.2 million, despite an increase in average debt outstanding, due to a slightly lower weighted average effective interest rate (5.69% in Q1 2025 vs. 5.88% in Q1 2024).

The net result was a net loss attributable to common stockholders of $9.361 million ($0.17 per share) in Q1 2025, an improvement from the $26.232 million loss ($0.47 per share) in Q1 2024, primarily driven by the lower impairment charges. Core FFO, a key performance metric for REITs, declined to $10.653 million ($0.19 per diluted share) in Q1 2025 from $20.365 million ($0.36 per diluted share) in Q1 2024, reflecting the impact of reduced revenues from vacancy and dispositions.

Despite the financial pressures, operational activity shows signs of momentum. ONL completed approximately 380,000 square feet of leasing (new and renewal) across four properties in Q1 2025 with a weighted average lease term of 6.7 years. Year-to-date through May 6, 2025, leasing activity exceeded 450,000 square feet with a 7.4-year weighted average term, including a 15.7-year lease in Parsippany, NJ, and a 10-year lease in Buffalo, NY. While initial cash rent spreads on Q1 2025 renewals were down 18%, reflecting market pressures, the average initial cash rent spread on all leasing activity since the spin is down only about 5%, with ending cash spreads up about 7%. These figures highlight the variability inherent in a smaller portfolio and the competitive need for concessions. As of March 31, 2025, total outstanding commitments for rent concessions and leasing costs amounted to $100.8 million, expected to be funded between 2025 and 2039, underscoring the significant investment required to secure leasing in the current market.

ONL maintains a focus on liquidity and capital structure management to support its strategic initiatives. As of March 31, 2025, total debt outstanding was $503.4 million (carrying value), with a weighted average years to maturity of 1.8 years. This includes a $355 million CMBS loan (fixed 4.97%, matures Feb 2027), $132 million drawn on the Revolving Facility (matures May 2026), and an $18 million San Ramon mortgage loan (fixed 5.90%, matures Dec 2031). The company also has a proportionate share of $26.2 million in Arch Street Joint Venture mortgage debt maturing in November 2025 (with one extension option). To support the joint venture and facilitate a lease extension, ONL provided an $8.9 million member loan to the JV at a 15% interest rate, structured to be repaid from the JV's excess cash flow, maturing in November 2026. As of May 5, 2025, total liquidity stood at $244.5 million, comprising cash on hand and available capacity on the $350 million Revolving Facility. This liquidity is deemed sufficient to meet near-term needs, but the company will rely on a combination of cash flow, dispositions, new borrowings, and potentially equity issuances to address longer-term needs and upcoming debt maturities.

In a move to bolster capital retention for strategic execution, ONL's Board of Directors declared a quarterly cash dividend of $0.02 per share for Q1 2025 (paid April 15, 2025) and Q2 2025 (payable July 15, 2025), a reduction from previous levels. Management views this retained capital as the cheapest source of funds to invest in the portfolio, support leasing, continue the shift to DUA, and manage debt obligations.

Outlook and Risks: A Path to Growth Beyond the Nadir

Orion Properties' outlook reflects management's expectation that the near term will be the most challenging period for the company's financial results. Management anticipates that 2025, and potentially extending into 2026, will represent the "low point" or nadir for revenue and Core FFO earnings. This expectation is driven by the significant lease expirations experienced in recent years, particularly the large volume in 2024, which are expected to continue impacting occupancy and revenue throughout 2025. The associated vacant property carry costs and the high capital investment required for re-leasing will continue to pressure the bottom line.

For the full year 2025, ONL has reaffirmed its guidance:

• Core FFO per diluted share: $0.61 to $0.70
• General and administrative (G&A) expenses: $19.5 million to $20.5 million (excluding non-cash compensation, expected to be in line or slightly better than 2024)
• Net Debt to Adjusted EBITDA: 8.0x to 8.8x

This guidance implies a significant increase in the leverage ratio compared to year-end 2024 (6.06x), reflecting the anticipated pressure on EBITDA from declining revenues and increased costs before the benefits of re-leasing and portfolio repositioning fully materialize.

Management's strategic plan is predicated on the belief that the combined pace of lease-up and disposition of vacant properties will eventually exceed the pace of tenant move-outs, leading to a rise in portfolio occupancy after 2025. They anticipate that earnings growth will begin to accelerate in 2027 and beyond as lease expirations moderate, vacant space is filled, market conditions potentially improve, and financing costs potentially fall. The continued execution of the DUA strategy through targeted acquisitions and dispositions is central to building a more stable, long-duration property mix that can support this future growth.

However, the path forward is not without significant risks. The macroeconomic environment remains uncertain, with potential impacts from rising interest rates, inflation, and geopolitical conditions affecting both ONL's borrowing costs and its tenants' financial health. The duration and ultimate impact of changes in workplace practices on office demand remain uncertain. The ability to successfully acquire new DUA properties and dispose of non-core assets on favorable terms and in a timely manner is not assured and is subject to market conditions. Tenant defaults, particularly in a single-tenant focused portfolio, could materially impact results. The high cost of tenant concessions and the ability to re-lease vacant space at favorable rates are ongoing challenges. Uncertainty surrounding government budgetary priorities and initiatives like DOGE could adversely affect leases with the U.S. Government. Furthermore, the Arch Street Joint Venture faces a debt maturity in November 2025, and while the portfolio is performing, the ability to satisfy extension conditions or refinance is subject to market conditions and the partner's ability to contribute capital.

Conclusion

Orion Properties is a company in the midst of a critical strategic transformation, pivoting its portfolio towards dedicated use assets in response to the secular headwinds facing the traditional office sector. This shift, coupled with aggressive asset recycling and a focus on capital retention, is designed to build a more stable and durable cash flow profile over the long term. While the near-term financial outlook, reflected in the 2025 guidance, indicates continued pressure on revenues and earnings as the company navigates significant lease rollover and invests in its portfolio, management anticipates this period will represent the low point, with a pathway to accelerating growth beginning in 2027. The success of this strategy hinges on the company's ability to effectively execute its leasing and disposition plans in a challenging market, manage its debt obligations, and successfully increase its concentration in DUA properties. For investors, ONL represents a value proposition tied to the successful execution of this strategic pivot, balancing the near-term risks associated with market headwinds and portfolio repositioning against the potential for long-term stabilization and growth driven by a more resilient asset base.