Shift Toward Dedicated Use Assets Will Support More Durable Cash Flows Over Time

Catalysts

About Orion Properties

Orion Properties is a REIT focused on office and dedicated use assets across the United States.

What are the underlying business or industry changes driving this perspective?

• The move away from traditional suburban office buildings toward dedicated use assets such as medical, lab, R&D flex and non-CBD government properties aligns the portfolio with tenants whose work is less easily done remotely, which can support more stable occupancy and rental revenue over time.
• Longer lease terms, with recent activity at a weighted average lease term above 10 years and a portfolio WALT approaching 6 years, can increase visibility on cash flows and help smooth earnings and core FFO through future cycles.
• Ongoing sales of vacant and obsolete properties, along with the avoidance of carry costs and large reinvestment needs, may reduce expense drag and support net margins as more capital is recycled into income producing assets.
• Lower lease rollover exposure, with 2026 rent subject to rollover at $10.8 million versus $39.4 million of rent that was at rollover risk in 2024, reduces near term vacancy risk and can support steadier revenue and earnings.
• Efforts to manage leverage, reflected in net debt to adjusted EBITDA of 6.7x and an improved guidance range, combined with liquidity of $273 million, provide capacity to fund leasing and selective acquisitions that could support revenue growth and potentially lift core FFO as occupancy improves.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Orion Properties's revenue will decrease by 3.3% annually over the next 3 years.
• Analysts are not forecasting that Orion Properties will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Orion Properties's profit margin will increase from -91.0% to the average US Office REITs industry of 9.9% in 3 years.
• If Orion Properties's profit margin were to converge on the industry average, you could expect earnings to reach $13.4 million (and earnings per share of $0.24) by about January 2029, up from $-136.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.7x on those 2029 earnings, up from -0.9x today. This future PE is lower than the current PE for the US Office REITs industry at 34.3x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Office exposure remains meaningful, with occupancy at 72.8% at quarter end and 74.5% when adjusting for assets under contract for sale. If long term pressure on office demand persists or deepens, vacancies could linger longer than planned and weigh on revenue and core FFO.
• The business relies on continuing property sales and reinvestment into dedicated use assets. Recent dispositions have reached more than $110 million of gross proceeds, but any slowdown in buyer demand, weaker pricing or delays in closing could limit capital recycling and put pressure on net margins and earnings.
• Leverage is still material at net debt to adjusted EBITDA of 6.7x and there are several upcoming debt maturities, including the US$110 million floating rate credit facility revolver due in May 2026 and the US$355 million CMBS loan due in February 2027. Any difficulty refinancing or higher long term funding costs could increase interest expense and reduce earnings and core FFO.
• Core FFO guidance for 2025 benefits from US$0.08 per share of lease termination income that is non recurring in nature. If recurring rent growth and occupancy improvements do not offset the loss of this income, earnings and core FFO per share could be weaker than some investors might expect.
• CapEx and leasing costs have already risen to US$18.3 million in the third quarter compared to US$6.1 million in the prior year quarter and management expects more capital to be allocated over time as tenants draw on improvement allowances. If required investment stays elevated or rises further, free cash flow and net margins could stay under pressure even if revenue trends improve.

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Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $3.0 for Orion Properties based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $135.6 million, earnings will come to $13.4 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of $2.23, the analyst price target of $3.0 is 25.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.