Executive Summary / Key Takeaways

• Orion Properties Inc. (ONL) is executing a critical strategic transformation, shifting its portfolio from traditional suburban office properties to "Dedicated Use Assets" (DUAs) like medical, lab, R&D flex, and government properties, aiming for enhanced stability and cash flow durability.
• The company has demonstrated significant operational momentum, achieving 919,000 square feet of leasing year-to-date through November 6, 2025, and improving its weighted average lease term (WALT) to 5.8 years from 3.5 years at its spin-off.
• Despite a net loss of $69.035 million in Q3 2025 and $103.499 million for the nine months ended September 30, 2025, management projects 2025 (excluding lease termination income) to be the trough for Core FFO, with accelerating earnings growth anticipated from 2027 onwards.
• A "substantial doubt" exists regarding ONL's ability to continue as a going concern due to the May 2026 maturity of its $110 million Revolving Facility, which has no remaining extension options, although management is actively pursuing refinancing and expects success.
• ONL's Board rejected unsolicited takeover bids of up to $2.75 per share, signaling confidence in the company's intrinsic value and long-term strategic plan to unlock shareholder value.

Orion's Strategic Pivot: Forging Durable Value in a Transformed Office Landscape

Orion Properties Inc. (ONL), an internally managed real estate investment trust, is actively redefining its footprint in the U.S. suburban office market. Spun off from Realty Income Corporation (O) in November 2021, Orion inherited a portfolio primarily composed of single-tenant net lease office properties. From its inception, the company confronted significant headwinds, including an intensive lease rollover schedule—notably, nearly $40 million in annualized base rents were at risk in 2024—and a broader market grappling with a historic collapse in office demand, exacerbated by the rise of remote and hybrid work arrangements. This challenging environment necessitated a bold strategic pivot, leading to the company's rebranding from Orion Office REIT Inc. to Orion Properties Inc. on March 5, 2025, to better reflect its evolving investment focus.

The core of Orion's strategy now centers on a deliberate shift away from generic suburban office buildings towards "Dedicated Use Assets" (DUAs). These properties, encompassing medical, lab, research and development (R&D) flex, and non-CBD government facilities, are characterized by tenants performing work that is difficult to replicate remotely or relocate to standard office settings. This strategic reorientation is Orion's primary differentiator in a competitive market. While Orion does not possess proprietary hardware or software technology in the traditional sense, its "cycle-tested investment evaluation framework" acts as its core methodological differentiator. This framework, applied to the selection and management of DUAs, is designed to yield tangible benefits for investors. It aims to enhance risk management, improve portfolio stability, and generate more durable cash flows by focusing on assets that typically exhibit stronger renewal trends, higher tenant investment in their spaces, and a reduced susceptibility to broader office market volatility. The success of this framework is already evident in the company's weighted average lease term (WALT), which has materially improved from approximately 3.5 years at the time of its spin-off to 5.8 years as of September 30, 2025. This extended lease duration directly translates into more predictable and stable rental revenues, a critical "so what" for investors seeking long-term value in real estate.

In the broader competitive landscape, Orion operates alongside diversified net lease REITs like Realty Income Corporation (O) and W. P. Carey Inc. (WPC), as well as specialized players such as Digital Realty Trust Inc. (DLR), which focuses on data centers. Realty Income, with its expansive, diversified retail and commercial portfolio, benefits from significant scale and robust cash flow generation. W. P. Carey offers a global, multi-sector net lease approach, including industrial and warehouse assets, providing broad diversification. Digital Realty, while not a direct office competitor, indirectly competes for "mission-critical" investment capital by specializing in high-growth data center infrastructure driven by AI and cloud computing.

Orion's focused strategy on U.S. suburban DUAs positions it uniquely. While it may not match the sheer scale or broad diversification of a Realty Income or W. P. Carey, its targeted approach aims for superior operational execution and stability within its niche. Orion's emphasis on creditworthy, single-tenant corporate headquarters in essential business locations provides a distinct value proposition, potentially leading to higher tenant retention compared to more generic office portfolios. The company's cycle-tested framework helps it compete by prioritizing quality and long-term occupancy, countering the broader market's shift away from traditional office spaces. However, Orion's smaller size and specialized focus mean it lags in overall market share capture and rapid growth opportunities compared to the tech-adjacent expansion seen by Digital Realty. The company's properties, particularly its Class B and C assets, face reduced demand and pricing discounts compared to Class A properties, reflecting competitive pressures in the current office environment.

Operational Momentum and Financial Performance

Orion's strategic pivot is underpinned by significant operational achievements. Year-to-date through November 6, 2025, the company completed 919,000 square feet of leasing, building on the 1.1 million square feet leased in 2024. This leasing momentum includes notable transactions such as a 15.7-year lease for 46,000 square feet in Parsippany, New Jersey, and a 10-year lease for 160,000 square feet in Buffalo, New York. Rent spreads on lease renewal activity were positive in Q3 2025, increasing over 2% for renewals and over 4% for total leasing activity, although initial rent spreads for Q1 2025 renewals were down approximately 18% due to specific market dynamics. The company's operating property occupancy rate stood at 72.8% at September 30, 2025, which rises to 74.5% when adjusted for properties under agreement to be sold or already sold post-quarter end.

Financially, Orion's transformation is reflected in its recent results. For the three months ended September 30, 2025, total revenues were $37.122 million, a decrease from $39.178 million in the same period of 2024. The nine months ended September 30, 2025, saw total revenues of $112.428 million, down from $126.499 million in the prior year period. This decline was primarily driven by a reduction in occupied square footage due to lease expirations. The company reported a net loss attributable to common stockholders of $69.035 million for Q3 2025, significantly higher than the $10.217 million loss in Q3 2024. For the nine months, the net loss was $103.499 million, compared to $70.250 million in the previous year. Core FFO, a key REIT performance metric, was $11.007 million, or $0.19 per diluted share, for Q3 2025, down from $12.027 million, or $0.21 per diluted share, in Q3 2024. Year-to-date Core FFO was $33.118 million, or $0.59 per diluted share, compared to $46.563 million, or $0.83 per diluted share, for the nine months ended September 30, 2024.

Impairment charges significantly impacted profitability, totaling $63.70 million in Q3 2025 and $84.90 million for the nine months, primarily related to properties slated for disposition. Conversely, gains on disposition of real estate assets contributed $3.30 million in Q3 2025 and $4.20 million year-to-date, with no comparable gains in 2024. The increase in capital expenditures to $18.3 million in Q3 2025, compared to $6.1 million in Q3 2024, reflects accelerated leasing activity and investments to enhance asset value. Net cash provided by operating activities decreased by $26.70 million during the nine months ended September 30, 2025, partly due to a $9.20 million rent concession period at the Hopewell, New Jersey property.

Liquidity, Capital Allocation, and Outlook

Orion maintains a focus on liquidity and disciplined capital allocation to support its strategic transformation. As of September 30, 2025, the company held $32.60 million in cash and cash equivalents and had $240 million of available capacity on its Revolving Facility, totaling $273 million in liquidity. This liquidity is crucial for funding operating expenses, debt service, dividends, capital expenditures, and potential DUA acquisitions.

The company's debt structure includes $481.80 million in total consolidated debt as of September 30, 2025, with a weighted average effective interest rate of 5.66% for the nine months ended September 30, 2025. A critical near-term challenge is the $110 million Revolving Facility, which matures on May 12, 2026, and has no remaining extension options. Management is actively engaged in discussions to extend or refinance this obligation, expressing confidence in a successful outcome, but acknowledges that "substantial doubt" exists about the company's ability to continue as a going concern if these efforts are unsuccessful. Other significant debt includes a $355 million CMBS Loan maturing in February 2027 and an $18 million San Ramon Loan maturing in December 2031. The Arch Street Joint Venture's mortgage notes, with Orion's proportionate share at $25.90 million, were extended to November 2026, though conditions for this extension, including potential capital contributions from the joint venture partner, remain under review. Orion provided an $8.30 million member loan to the Arch Street Joint Venture in February 2025, earning 15% interest, to fund leasing costs and a partial debt paydown, demonstrating a proactive approach to managing its joint venture interests.

To retain capital and align with its strategic shift, Orion's Board of Directors reduced the quarterly cash dividend to $0.02 per share starting in Q1 2025, down from $0.10 per share. This decision, despite the dividend being "well covered on a core FFO basis," underscores the company's commitment to prioritizing capital for portfolio enhancement and debt refinancing. General and administrative (G&A) expenses are also being tightly managed, with the 2025 guidance tightened to a range of $19.5 million to $20 million. This includes annualized savings of approximately $1 million from the retirement of the Chief Investment Officer, Gary Landriau, and other restructuring efforts.

Looking ahead, management anticipates that 2025, excluding lease-related termination income, will represent the "trough" for Core FFO per share, with accelerating earnings growth and rising occupancy projected for 2027 and beyond. The full-year 2025 Core FFO guidance has been raised to $0.74 to $0.76 per share, primarily due to $0.05 per share in lease termination income from the Fresno property disposition. Net debt to adjusted EBITDA is expected to improve to a range of 6.7x to 7.2x. This optimistic outlook is predicated on continued leasing momentum, successful dispositions of non-core assets, and the strategic recycling of capital into higher-quality DUAs.

Key Risks and Conclusion

Despite the clear strategic direction and operational progress, Orion Properties faces several material risks. The "substantial doubt" regarding its ability to continue as a going concern, primarily due to the Revolving Facility's impending maturity and the lack of assured refinancing, represents a significant overhang. While management is confident in its ability to address this, the absence of a definitive agreement introduces uncertainty. The Arch Street Joint Venture's debt extension also carries risk, dependent on the partner's ability to meet potential capital requirements. Furthermore, the broader office market continues to present headwinds, with ongoing challenges in tenant retention, particularly for single-tenant leases, and the persistent impact of remote work trends. Class B and C properties within Orion's portfolio continue to experience reduced demand and pricing pressure. Macroeconomic factors, including high interest rates, inflation, and geopolitical tensions, could further impact tenant financial health and leasing activity. The governmental uncertainty surrounding the Department of Government Efficiency (DOGE) also poses a potential risk to Orion's government-leased assets.

In conclusion, Orion Properties Inc. is undergoing a profound transformation, strategically pivoting towards a portfolio of Dedicated Use Assets to build a more stable and durable income stream. The company's "cycle-tested investment evaluation framework" and disciplined capital allocation are central to this shift, aiming to enhance long-term value for shareholders. While recent financial performance reflects the challenges of a shrinking traditional office portfolio and significant impairment charges, operational successes in leasing and dispositions, coupled with proactive G&A management, demonstrate the company's commitment to its new direction. The projected rebound in Core FFO and occupancy from 2027 onwards offers a compelling long-term investment thesis. However, investors must closely monitor the resolution of the Revolving Facility's maturity and the broader macroeconomic environment, as these factors will be critical in determining Orion's ability to fully realize its strategic vision and unlock its intrinsic value. The Board's rejection of recent takeover bids underscores management's belief in the company's inherent worth, signaling a conviction in the long-term potential of its DUA-focused strategy.