Hello, and welcome to the Orion Office REIT Fourth Quarter and Full Year 2021 Earnings Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mr. Paul Hughes, General Counsel and Secretary for Orion Office REIT. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Today, Orion released its financial results for the quarter ended December 31, 2021, filed its Form 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the Investors Section of the company's website at www.onlreit.com. I would like to remind everyone that certain statements made in the course of this call are not strictly historical information and constitute forward-looking statements. These statements, which include the company's guidance estimates for calendar year 2022 are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties of these forward-looking statements are discussed in our earnings release as well as in our Form 10-K and other SEC filings. You should not place undue reliance on these forward-looking statements, and the company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, during the conference call today, we will be discussing certain non-GAAP financial measures, such as funds from operations or FFO, and core funds from operations or core FFO. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The company's earnings release and supplement include a reconciliation of these non-GAAP financial measures to the most directly comparable measures prepared in accordance with GAAP. Hosting the call today are Paul McDowell, the company's Chief Executive Officer; Gavin Brandon, the company's Chief Financial Officer; and joining us for the Q&A session is Gary Landriau, our Chief Investment Officer; and Chris Day, our Chief Operating Officer. With that, I am now going to turn the call over to Paul McDowell. Paul?

Good afternoon, everyone, and welcome to Orion Office REIT's Fourth Quarter 2021 Earnings Call. Our first earnings call as a NYSE listed publicly traded company since we spun off from Realty Income on November 12, 2021. We want to thank everyone for joining us today. And importantly, for your patience as we have worked to complete the spin-off, spend time to fully digest the portfolio and assemble the right team to enable us to execute and deliver on our business plan over the coming years. Given we were a public company for less than 2 months in all of 2021, I will spend some time focusing on our differentiated strategy and the composition of the portfolio, detail some of our accomplishments since November, provide perspective on how we will address some of the company's potential challenges and wrap up by discussing why we are excited by the many opportunities we are evaluating in the near and longer-term to build value for shareholders. Gavin will then touch on some 2021 financial highlights, discuss our balance sheet and dividend and provide insight into our outlook for 2022. Orion is unique and that we are the only public net lease REIT that is entirely focused on owning a diversified portfolio of mission-critical and corporate headquarters office buildings located in high-quality suburban markets across the United States. The portfolios comprise substantially all of the office properties from Realty Income and VEREIT, who merged in November 2021 and spun us off shortly thereafter. The properties are leased primarily to creditworthy tenants on a mostly net lease basis. The driving force behind Orion is to provide investors with a specialized opportunity to invest in suburban net lease office properties, given the limited public market focus on this asset type and the compelling macroeconomic and demographic tailwinds…

Thanks, Paul. I echo Paul's comments that we are excited about the progress we have made since our spin-off and expect that we will continue that momentum throughout 2022. I will start by discussing Orion's GAAP financial results for the fourth quarter of 2021, additionally, because the company's GAAP results do not include all of the company's operating properties for the entire 3 months ended December 31, 2021. I will also be discussing on a supplemental basis pro forma results of operations for the 2-month period from November 1 to December 31, 2021, which are reported in our supplemental report furnished as an exhibit to the Form 8-K we filed today. These results include the results of operations for all of the company's properties for the full 2-month period and are adjusted to exclude the effects of certain infrequent or nonrecurring items, which can create significant earnings volatility, but which do not directly relate to our core recurring business operations. Therefore, we believe that pro forma results can help facilitate comparison of operating performance between periods. On a GAAP basis, Orion generated total revenue for the fourth quarter of 2021 of $40.8 million and recorded a net loss attributable to common stockholders of $54.9 million or a loss of $0.97 per share. For the same period, the company generated core FFO of $26.8 million or $0.47 per share. On a pro forma basis for the 2-month period from November 1 through December 31, 2021, Orion generated total revenue of $36.5 million, net loss attributable to common stockholders of $1.4 million or a loss of $0.02 per share and core FFO of $23.1 million or $0.41 per share. Turning to the balance sheet. We ended the year with $647.3 million of outstanding debt, including $355 million under the bridge loan, $175…

[Operator Instructions]. Our first question today is coming from Eddie Reilly from EF Hutton.

Just wanted some clarification on the reporting here. So looking at quarter ended December 31, 2021, where revenues were $40.8 million. So that only includes Realty Income's operations from October 1 to October 31 and VEREIT and Realty Income's operations from November to December 31. Do I have that correct?

Yes, that's correct.

Okay. So the best way to kind of look at this is looking at the pro forma in November to December?

Yes, that's right. The historical Realty properties were for the entire quarter, whereas the merger and -- happen in November 12, that's the historical Orion properties -- VEREIT properties came in to the portfolio. So that's why we did the pro forma adjustments to show you 2 months of what the results could be or look like without half the sub period noise within the financials.

Gotcha. Makes sense. I guess turning to G&A guidance. You guys guided to $17 million to $18 million. If I take that pro forma and annualize it, I'm coming up with $12 million. Could you kind of help me reconcile the difference there?

Yes. The pro forma doesn't include the public company costs that we've incurred that we will incur for the audit. That'll be in the 404. It's also only includes 1.5 months of operations. So a lot of the G&A spend that we have budgeted for -- we're comfortable with $17 million to $18 million for the range.

Okay. And then on the dividend, the payout ratio just looks a little low relative to peers in the office space at least. Could you give us some color on what the cash might be used for? Is it going more towards new properties or CapEx on existing properties?

Yes. Sure. This is Paul. Look, we've been pretty clear from the beginning that we set a business plan that doesn't require us to access the capital markets. And part of that plan is to use our internally-generated capital to help us deal both with our significant rollover and to fund some modest growth either on the balance sheet or in the JV. So we have very good uses of capital over the near-term over the next several quarters that we think we can put back into the portfolio or buy assets that will be accretive to all investors. So that was kind of one of the driving forces behind where we set the dividend. And really, it's a function of the short weighted average lease term that we have in the portfolio.

Gotcha. Gotcha. And on the renewal rates, it was Merrill Lynch that you guys resigned. Could you give us some color on the direction of those for new leases, whether they're up or down relative to the older lease?

Sure. I can give you a little bit of color. With respect to the Merrill Lynch lease, that's a huge win for us here at Orion. That's -- we extended that lease by 11 years beyond the original term. So the lease now goes out to about 2035. As a result of that extension, we gave a modest rent concession to Merrill Lynch. And we also gave them some TIs and base building work and which I think equates to about $47 a foot, which is disclosed in our 10-K. So in that circumstance, and as I've mentioned in the past before, when we have a very high-quality tenant that's looking for a long-term lease, we will grant an initial lease -- an initial rent concession. But over time, that - those rents will grow then they'll continue to grow to the rate where we get back with Merrill Lynch over time to where they were at the conclusion of their initial lease term. With respect to the property in Augusta, Georgia, that property is a 5-year lease extension and that's about flat with the property that we did a 2-year lease extension with that had an increase of 4% or 5%.

Okay. Got it. Appreciate that color there. And I don't want to hog the line. So I was wondering if you guys could disclose maybe what the current weighted average lease term is given the subsequent activity to year-end? And then a related question, I guess, the 3 assets that you guys have pending right now, were those weighted average leases low? Were those properties vacant? Just wondering if you guys could give us any color there?

Sure. So at the end of the year, our weighted average lease term was 4.1 years. We haven't had material changes to that weighted average lease term during the course of the beginning part of this first quarter. With respect to the 3 properties that we have for sale, those leases in all cases, are materially shorter than our weighted average lease term.

Okay. Got it. So those -- that should hopefully increase your weighted average lease term. Okay. Cool.

[Operator Instructions]. The final question today will come from Sheila McGrath from Evercore.

I was just wondering on the major lease extension with Merrill, which is good news, how far ahead of lease expiration was that? And did you guys approach them to do this deal? And is that something you're doing with other tenants right now as well?

Yes. Thanks, Sheila. It was about 3 years before the end of their initial lease, which -- and then Gary and his team are able to tack on an additional 11 years. So a terrific outcome for us. I will tell you that in general, that's a little earlier than we normally discuss extensions and renewals. I think Merrill initially came to us with respect to that extension. That was -- it was -- as you might imagine, and the size of that transaction was, it was a long negotiation process interrupted at some points by the pandemic. But at the end of the day, we got to a terrific result, which is Merrill Lynch wanted to maintain their occupancy in our properties on a long-term basis, and we are obviously delighted to have them.

And do you expect that you'll be approaching other near-term expirations to just kind of extend -- kind of blend and extend your process?

Yes. So, we do that pretty aggressively. Gary and his guys will discuss with tenants as soon as we can. Sometimes those discussions start years in advance, sometimes they start much closer to the end of the lease term. And it's really a little bit of a balancing act. If we go to a tenant too early with a blend-and-extend, they're going to want very significant rent concessions for us because they have significant amount of term left. So we just take it on a case-by-case basis with the end goal, of course, being to keep existing tenants in place as much as we possibly can.

Okay. Great. And then for the vacant properties, you mentioned value creation opportunities. Do you envision renovations? Or are any of these properties like the higher and better use alternatives to office? Just curious.

Yes. I mean we have -- with respect to properties that are vacant or we think are going vacant, they would, I'd say, fall into 2 buckets. Bucket #1 are properties that we like and would intend to keep for the longer term. And then properties that we don't like, that we don't think are particularly good for the long-term portfolio. And that's largely a function of the way that we got these properties, right, as a result of the merger of Realty Income and VEREIT. We didn't necessarily pick them. So there are some properties where we have vacancy that we just don't see a good long-term outlook. So those we will likely sell vacant. The properties that are vacant that we like, we think we've got long-term possibilities with, we will do some investment into those properties to make them more enticing to tenants. There is a strong move towards adding amenities and sprucing up properties and things like that to help draw tenants in. And so we will be doing some of that. With respect to redevelopment, at the moment, we don't have any properties on the balance sheet that we would expect to redevelop ourselves. Some of the vacant properties that we may sell vacant, those properties may be subject to redevelopment for a higher and better use.

Okay. Great. And then just on the joint venture. For acquisitions, there is less competition, I would imagine, on office right now. And I understand the cap rates will vary based on lease term and the credit of the tenant. But is there any like broad cap rate assumption range that you could frame for us to think about for that -- for acquisitions in the venture?

Sure. So the acquisition that we made into the venture in December was at about a 6.5% cap. I would say that there is significant competition for net lease office assets when there is in place, good lease on a long-term basis in a reasonably good market. And so we've seen cap rates as low as 5.25%, 5.5%, for well-located long-duration product to, call it, 6.5%, 7% for shorter lease terms or maybe somewhat lesser credit.

Our next question is coming from Mitch Germain from JMP.

Sorry about that. I'm curious about the tenant decision-making process you talked about not going to tenants too early, from experience, I'm hearing tenants unwilling to make decisions too early, obviously, given the fact that we've got different strains of the pandemic that are impacting tenant plans. So just kind of -- are tenants willing to sign leases and negotiate or is there a hesitation on their part to sign anything until they have clarity as to what's happening in the world?

The answer is tenants are willing to sign -- negotiate and sign leases with us. And we've had some good experience with that recently as we sort of spelled out with respect to Merrill Lynch and our properties in Augusta, Georgia and so on and so forth. But I will say that what we found during the pandemic is that the decision-making process is longer than it ever was before. So while we're able to engage with tenants and they are starting to think that they're about their long-term prospects in a property, getting them to the decision where they agreed to sign a lease is taking somewhat longer than it used to. I'll say now as the pandemic starts to fade, and we hope disappear a bit into the rearview mirror, what we are starting to hear a lot more about is people coming back to the office on a mandatory basis, whether it's 2-days a week, 3-days a week, 4-days a week or more, more and more companies are starting to bring their employees back. And as they bring their employees back, that helps them understand their space plans better. So looking forward, we think that pace of decision-making will pick up. But so far, we've had pretty good success in re-tenanting the properties where we think or re-leasing to existing tenants where we think the tenant wants to stay.

And what about the willingness to allocate capital and take on maybe shorter duration leases. Is that something that you're willing to do if you're comfortable with the real estate or likelihood is you're going to probably look to mitigate some of that risk with lease term?

Yes. I think, Mitch, we'll probably -- for new acquisitions, we'll likely look to mitigate that risk with lease term. And that's not because we don't know how to do it. We do, but we have a very short weighted average lease term -- average weight lease term in the portfolio now. So we've got a bunch of short-term leases that we got to deal with now. So we're focused on those. And I think as we add incremental assets, at least in the intermediate future, they'll be on the longer-dated variety.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. McDonald this time for any further closing comments.

Thank you all for joining us on our first earnings call, and we look forward to speaking with you again in May. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.