Prepared remarks
Greetings. Welcome to Orion Properties Second Quarter 26 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Paul C. Hughes, General Counsel.
Thank you.
You may begin.
Thank you, and good morning, everyone. Yesterday, Orion released its results for the quarter ended 06/30/2026, 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 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 H. McDowell, and Chief Financial Officer, Gavin Brandon. Joining us for the Q&A session will be Christopher Haviland Day, our Chief Operating Officer. With that, I will turn the call over to Paul H. 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 advisers at Wells Fargo and JPMorgan, 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 nondisclosure 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 noncore 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. So far this year, we have been successful on each of those priorities. From a leasing perspective, we have completed 673 thousand square feet of leasing including 202 thousand square feet completed in the second quarter and 116 thousand square feet 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. However, 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-square-foot 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 square feet, or 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 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 proceeds from opportunistic asset sale activity to continue to deleverage, ending the quarter with net debt to annualized adjusted EBITDA at 5.4x, 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 $84 million on the sale of four 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 two 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 thousand for the second quarter and $1.6 million for the year-to-date period compared to the same period 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 noncore assets and redeploy capital while improving the overall quality and durability of our remaining portfolio. Our continued focus on selling properties with re-leasing prospects and high carrying costs has allowed us 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.
Thanks, Gavin.
For the second quarter of 2026 compared to the second quarter of 2025, Orion had total revenues of $34.3 million compared to $37.3 million. Net income of $24.6 million, or $0.43 per share, for the second quarter of 2026 included a gain of $28.8 million primarily related to the opportunistic sale of two operating properties during the quarter. This nonrecurring gain does not impact our core FFO results, which were $11.8 million, or $0.20 per share, basically flat compared to the same quarter in 2025. Adjusted EBITDA was $17.2 million versus $18 million in the same quarter of 2025. G&A in the second quarter improved to $4.6 million compared to $4.8 million in the same quarter of 2025 as we benefited from the decision to continue to lower headcount through attrition and other means. G&A expense includes the ongoing cost related to the strategic review which we equate to approximately $100 thousand in the second quarter of 2026 and $200 thousand year to date.
CapEx and leasing costs in the second quarter were $8.9 million compared to $15.6 million in the same quarter of 2025. As we have previously discussed, CapEx timing is dependent on when leases are executed and work is completed on properties. Turning to the balance sheet, our net debt to annualized adjusted EBITDA was 5.4 times at quarter end compared to 6.4x at the end of the second quarter of 2025. As of June 30, we had total liquidity of $177 million, comprised of $63.5 million of cash and cash equivalents and restricted cash, and $113 million of available capacity under our credit facility revolver. Given our strong efforts to sell noncore and select operating properties, we have significantly lowered debt outstanding and extended maturities; we ended the quarter with $436.6 million of outstanding debt compared to $483 million a year ago, excluding a proportionate share of the unconsolidated joint venture's debt.
Our next significant maturity is not until February 2028, which we have an option to extend until February 2029. Our net debt to gross real estate assets was 27.9% at the end of the quarter compared to 29.5% a year ago. On August 5, Orion's Board of Directors declared a quarterly cash dividend of $0.02 per share for the third quarter of 2026 payable on October 15, 2026 to stockholders on record as of September 30, 2026. Moving to our outlook for 2026, we are narrowing and raising the range for our core FFO, lowering the range for our net debt to adjusted EBITDA, and reaffirming our expectations for G&A. Core FFO for the year is now expected to range from $0.72 to $0.77 per diluted share, up from our previously affirmed range of $0.69 to $0.76 per diluted share. Net debt to adjusted EBITDA is now expected to range from 6 to 6.8x, down from our previous range of 6.5 to 7.3x. These improvements in our guidance for the year are driven by several factors including recurring items such as actively reducing operating expenses and improved leasing expectations, as well as one-time items such as lease termination income and property tax appeals and refunds. Our G&A range of $19.8 million to $20.8 million is unchanged. With that, we will open the line for questions. Operator?
Questions and answers
Thank you. You may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset. Our first question is from Mitch Germain with Citizens JMP. Please proceed.
Congrats on the quarter. One asset for sale today, it seems like. I'm curious about your decision to potentially sell an asset leased to the government, which kind of meets your criteria for the existing portfolio.
Correct. Hey Mitch, this is Christopher. The asset that we are under contract to sell is one where the government's looking to downsize on that asset. So there is some risk around the government tenancy in that one asset. Plus it is in a very remote area, and it is one that we analyzed for disposition and thought that this was the best overall outcome for that asset.
That is super helpful. There are four vacant assets in the portfolio, which is pretty amazing. I think at one point you had 11 or 12. Tell me about the decision and process that you guys go through regarding whether to sell or to re-lease.
Yeah. It has been a pretty consistent process and it has evolved over time. We look closely at each asset and ask, is this an asset worth putting money into and leasing up over time, or is this an asset that will cost us significant money to retenant or lacks long-term demand factors? We have sold many vacant assets, but we've also been successful in leasing some assets up. For example, we invested in our asset in Parsippany, New Jersey and that asset is leasing up well. The same is true with our Buffalo property. We thought that property is a class A building in downtown Buffalo, and we believe we can lease it up. We migrated our tenant Ingram Micro into that building and we've got strong momentum on leasing from other tenants. So, we feel good about that. It is an ongoing and dynamic process. We have moved most of the vacant properties off our balance sheet and have a few left. Some we have quite a bit of confidence about leasing up—for example, the Tulsa property, where we just put our first lease into that property—while others are being evaluated for long-term leasing momentum.
Got you. 57 assets, 6.4 million square feet. What percentage would you characterize as noncore at this point?
It is hard to give a precise percentage. We make that judgment based on our expectations for long-term leases. I would say it is just a few percent at this stage. We feel pretty confident about the assets we have left and our ability to keep those properties leased or to lease them up if they are vacant or become vacant. We will always evaluate opportunities and we may have some vacant sales over the course of the year, but we'll see how leasing shapes up.
Great. Last one for me. Paul, I appreciate the color you are providing regarding your strategic review. Not many management teams are as transparent. To that end, will there be a formal announcement if you decide to continue to operate? Obviously, if something happens we will know. But will there be a formal announcement if you decide to continue to operate?
Thank you for the question and for the compliment on transparency. We want to be as transparent as possible. We know this process has been going on for a long time. We do not control a lot of the timing since we are interacting with third parties and they control timing to some degree. We are trying to move as expeditiously as possible. When we come to a conclusion of the process, whatever that is, we will make an announcement. We are just not there yet. When we do get there, we will let everyone know, and that includes if we decide to move forward with our independent business plan.
As a reminder, just press star 1 on your questions. There are no further questions at this time. I would like to turn the floor back over to Paul H. McDowell. Actually, we do have a question from Matthew Gardner with Jones Trading. Please proceed.
Hey guys, apologies—I thought I had dialed in. Thanks for taking the question and congrats on the continued progress. I thought you guys had a really good quarter. I guess following up on the portfolio, you said you had a few percent left. Piggybacking on that, what percentage are you looking to get those dedicated use assets to in the near term and then over the long term, call it three to five years out?
It is a good question. A lot of it depends on our access to outside capital. At the moment, our share price does not support that, so we have to work within our existing portfolio. Working within the existing portfolio, progress will be steady but incremental. As we recycle capital by selling assets we might occasionally buy DUA assets, so we will slowly build that up over time. To the extent we get access to outside capital, we would expect that transition to occur much more rapidly. The longer-term goal is to have well more than a majority of the portfolio in DUA assets. The timing of that is yet to be determined.
I appreciate the color there. I know CapEx is a chunky number and can bounce around quarter to quarter. Do you have any idea of what you are expecting across the remainder of the year?
So far this year, we have spent about $27 million in CapEx. We use that term broadly: building and site updates, tenant improvements and lease incentives, and leasing commissions. It is a volatile number because we do not know when tenants will draw down on existing obligations that we have, which is disclosed in our 10-Q. We expect for the remainder of the year that additional CapEx could range from anywhere between $30 to $40 million. That expectation is incorporated into our guidance.
That is helpful—we have modeled that in. You talked a little about Tulsa starting to lease up. It is good to see somebody go in there. How are discussions going for the remainder of that building and what is your confidence level to strengthen the occupancy at that site?
Our confidence is relatively high. It is a very high-quality building in downtown Tulsa and there is not a lot of competing product of that quality. We have one lease done and we are in discussion on at least one more of relatively significant size. We feel pretty good about that over time.
Awesome, that is great. Well, thank you guys for taking the questions and speaking with me.
I would now like to turn the floor back over to Paul H. McDowell for closing comments.
Thank you everyone for joining us on the call. We look forward to updating you again at our third quarter call in the fall. Thank you.
This will conclude today's conference. You may disconnect at this time, and thank you for your participation.