Executive Summary / Key Takeaways

• Orion Properties is executing a credible strategic pivot from traditional suburban office to Dedicated Use Assets (DUAs), with 33.9% of annualized base rent now in medical, lab, R&D, and government properties, but this transformation is overshadowed by a May 2026 debt maturity that has triggered explicit going concern warnings from management.

• The company has demonstrated strong operational execution, completing 919,000 square feet of leasing year-to-date through November 2025 with positive rent spreads and a weighted average lease term of 5.8 years, yet Core FFO per share has declined to $0.19 in Q3 2025 from $0.21 in the prior year period, reflecting the intentional shrinkage of the portfolio.

• Trading at $2.06 per share, or 0.18x book value, the stock embeds a distressed valuation that assumes refinancing failure, yet the company maintains $273 million in total liquidity and has improved its net debt to adjusted EBITDA ratio to a guided range of 6.7x-7.2x through aggressive asset sales.

• The investment thesis is binary: successful refinancing of the $110 million Revolving Facility unlocks a dramatically undervalued equity with significant upside as the DUA strategy matures, while failure renders all operational improvements irrelevant and likely results in near-zero equity value.

• Critical variables to monitor include progress on refinancing negotiations, the pace of DUA acquisitions using disposition proceeds, and whether 2025 truly marks the trough of Core FFO as management projects, with 2026 representing the inflection point where leasing gains outpace disposition losses.

Setting the Scene: From Spin-Off to Strategic Reinvention

Orion Properties Inc. began its public journey on November 12, 2021, when Realty Income Corporation (O) distributed all outstanding shares to its stockholders, creating an independent REIT focused on suburban office properties. This origin story matters because Orion inherited a portfolio constructed under a different strategic paradigm—one that emphasized scale and single-tenant net leases in a pre-pandemic office environment. The company immediately faced a fundamental industry shift: hybrid work arrangements permanently reduced demand for generic suburban office space while increasing tenant bargaining power and concessions.

The business model is straightforward but increasingly obsolete in its original form. Orion owns 63 operating properties totaling 7.4 million leasable square feet, primarily leased on a single-tenant net lease basis where tenants pay most operating expenses. This structure provides predictable cash flows when occupied but creates binary risk when leases expire. The value proposition hinges on owning mission-critical suburban properties leased to creditworthy tenants, yet the definition of "mission-critical" has evolved dramatically since 2021.

Industry structure has shifted beneath Orion's feet. Traditional suburban office faces what management candidly describes as "reduced demand" and pressure from newer Class A properties with superior amenities. Tenants increasingly compare Orion's B and C-class buildings to discounted alternatives, pushing leasing costs higher and sales prices lower on non-core assets. This dynamic explains why Orion has sold 27 properties totaling 2.7 million square feet since the spin-off, saving an estimated $39 million in cumulative carry costs. The company isn't just pruning; it's performing surgery on its inherited portfolio.

Orion's strategic response, formalized with its March 2025 name change from Orion Office REIT to Orion Properties Inc., represents a deliberate pivot toward Dedicated Use Assets (DUAs). These are properties with specialized components—medical, laboratory, R&D, flex operations, and non-CBD government facilities—where work cannot be replicated from home or relocated to generic office settings. This shift matters because DUAs command higher tenant investment, stronger renewal trends, and more durable cash flows. By the end of Q3 2025, DUAs represented 33.9% of annualized base rent and 24.6% of square footage, with management explicitly targeting gradual increases through further dispositions and selective acquisitions.

Strategic Differentiation: The DUA Advantage and Leasing Execution

The DUA strategy addresses the core problem plaguing traditional office: obsolescence. When a tenant can vacate 80,000 square feet of generic office space in Kennesaw, Georgia, Orion can replace them with a medical facility or R&D tenant whose business model depends on physical presence. This differentiation creates tangible economic benefits. In Q3 2025 alone, Orion completed 303,000 square feet of leasing with a weighted average lease term exceeding 10 years, including a 15-year extension with AGCO Corporation (AGCO) for 126,000 square feet in Duluth and a 15-year extension with the U.S. government for 16,000 square feet in Fort Worth. These long-duration leases contrast sharply with the 3.5-year WALT at spin-off, now improved to 5.8 years.

Rent spreads reinforce the strategy's validity. Renewal activity generated over 2% cash rent spreads in Q3, while total leasing activity produced over 4% positive spreads. This demonstrates that even in a distressed office market, Orion can maintain pricing power on its better assets. The 919,000 square feet leased year-to-date through November 2025 represents a fourfold increase from 2023 levels, indicating that management's intensive leasing efforts are gaining traction despite market headwinds.

The capital recycling strategy supports the transformation. Orion has closed on $64.4 million of property sales year-to-date, with another $46.6 million under agreement, targeting both vacant traditional office and stabilized assets. The proceeds fund capital investment into existing properties and selective DUA acquisitions like the $34.6 million San Ramon flex/laboratory facility purchased in 2024. This demonstrates discipline: rather than chasing growth, management is upgrading portfolio quality, even if it means near-term earnings dilution.

Financial Performance: Intentional Decline as Portfolio Medicine

Orion's financial results appear weak on the surface but reflect strategic choices. Total revenues declined to $37.1 million in Q3 2025 from $39.2 million in the prior year period, while nine-month revenues fell to $112.4 million from $126.5 million. The primary driver is decreasing occupied square footage from lease expirations, which reduced rental revenues by $3.4 million and $15.4 million for the three and nine-month periods, respectively. This is the cost of transformation: shrinking to grow stronger. Core FFO attributable to common stockholders dropped to $11.0 million ($0.19 per share) in Q3 2025 from $12.0 million ($0.21 per share) in Q3 2024. Nine-month Core FFO fell to $33.1 million ($0.59 per share) from $46.6 million ($0.83 per share). Management's commentary is crucial here: they explicitly state that 2025, net of lease-related termination income, should represent the bottom for Core FFO per share, with accelerating earnings growth expected in 2026 and beyond. This frames the decline as temporary and necessary, not structural.

Impairments tell a similar story. The company recorded $63.7 million of impairments in Q3 2025 and $84.9 million year-to-date, primarily on properties sold or expected to be sold. These charges reflect management's aggressive stance on shedding outdated assets, even at the cost of accounting losses. The alternative—carrying non-core properties at inflated values—would be far more damaging long-term. Property operating expenses increased due to $1.3 million in demolition costs at the Deerfield, Illinois campus, where Orion is razing outdated buildings to reduce carrying costs and prepare the 37.4-acre site for future development. These are one-time costs of portfolio purification.

Adjusted EBITDA declined to $17.4 million in Q3 2025 from $19.1 million in Q3 2024, primarily due to vacancies, a smaller portfolio, and timing of leasing activity. However, the net debt to adjusted EBITDA ratio is improving to a guided range of 6.7x-7.2x, down from 7.3x-8.3x, driven by debt reduction through dispositions and lease termination income. This indicates management is managing leverage even as earnings decline, preserving financial flexibility for the refinancing challenge ahead.

The Debt Crisis: The Only Thing That Matters

All operational improvements, strategic pivots, and leasing successes become irrelevant if Orion cannot solve its debt problem. The Revolving Facility matures on May 12, 2026, with no remaining extension options. As of September 30, 2025, $110 million was outstanding, reduced to $92 million by November 6. Management has explicitly stated: "Substantial doubt exists about our ability to continue as a going concern for at least one year from the issuance of the consolidated financial statements due to uncertainty with regard to our ability to extend or refinance the Revolving Facility." This warning is the single most important fact in the entire investment case. The company does not expect to generate sufficient cash from operations to repay the principal at maturity.

Management is evaluating strategies including amending the Credit Agreement, refinancing with replacement debt, or obtaining alternative funding through equity or property dispositions. As of November 6, 2025, no agreements have been reached, and there is no assurance of success.

The Arch Street Joint Venture adds another layer of complexity. The joint venture's $129.5 million mortgage notes (Orion's share: $25.9 million) were scheduled to mature November 27, 2025, but were extended to November 27, 2026, contingent on meeting a 60% loan-to-value ratio that may require partial repayment. Orion provided an $8.3 million member loan in February 2025 to fund leasing costs, with the receivable balance standing at $6.7 million as of September 30. The joint venture partner's ability to contribute capital for partial repayment remains uncertain.

The debt overhang creates a binary outcome. Successful refinancing unlocks the value of a transformed portfolio and trades at 0.18x book value. Failure likely results in distressed asset sales, equity dilution, or bankruptcy, wiping out shareholders. The company's $273 million in total liquidity ($33 million cash plus $240 million revolver capacity) provides runway, but the clock is ticking. The CMBS loan ($355 million, maturing February 2027) and San Ramon mortgage ($18 million, maturing December 2031) are not immediate concerns, but the Revolving Facility is a five-alarm fire.

Competitive Context: Small Scale, Niche Focus

Orion's competitive position reflects its small scale and specialized strategy. Compared to Cousins Properties (CUZ), a $4.2 billion market cap REIT focused on Class A Sun Belt offices, Orion's $115 million market cap limits its bargaining power with tenants and lenders. CUZ's Q3 2025 FFO per share of $0.69 and 5.6% growth guidance reflect the advantages of scale and location in high-demand markets. Orion's single-tenant net lease model offers lower operating costs for tenants but creates binary vacancy risk that CUZ's multi-tenant diversification mitigates.

Piedmont Office Realty Trust (PDM), with a $1.06 billion market cap, achieved record new tenant leasing in Q3 2025, exceeding Core FFO expectations by 3%. PDM's trophy assets in Boston and Atlanta command premium rents and attract institutional tenants. Orion's suburban focus and B/C-class buildings face "reduced demand" and must "lease or sell at discounts," according to management's candid assessment. However, Orion's DUA pivot creates a niche where it faces less direct competition. Medical and R&D tenants require specialized buildouts that generic office cannot accommodate, creating switching costs and pricing power.

Office Properties Income Trust (OPI) and City Office REIT (CIO) represent more distressed peers. OPI's Q3 2025 FFO guidance of $0.07-$0.09 per share reflects severe leasing challenges and liquidity pressures, with $28.9 million of properties under sale agreements. CIO reported a $110.58 million net loss for the first three quarters of 2025, highlighting the sector's distress. Orion's 919,000 square feet of leasing year-to-date and positive rent spreads demonstrate relative operational strength, even as financial metrics deteriorate.

The key competitive differentiator is Orion's strategic clarity. While peers struggle with generic office exposure, Orion is actively shedding these assets (27 properties sold since spin-off) and targeting DUAs. This strategy positions Orion to capture demand from tenants who cannot work remotely—medical practices, research labs, government agencies—while competitors fight over shrinking demand for traditional space. The risk is that Orion's small scale limits its ability to acquire meaningful DUA assets before its debt maturity forces a fire sale.

Valuation Context: Distressed Price Meets Transforming Portfolio

At $2.06 per share, Orion trades at a market capitalization of $115.4 million and an enterprise value of $574.4 million. The valuation metrics reflect distress: price-to-book ratio of 0.18x, enterprise value-to-revenue of 3.81x, and enterprise value-to-EBITDA of 9.35x. The company is unprofitable, with a -90.98% profit margin and -18.63% return on equity, making earnings-based multiples meaningless.

The balance sheet provides context. Book value per share is $11.70, meaning the stock trades at an 82% discount to stated asset value. Debt-to-equity stands at 0.74x, and net debt to gross real estate assets is 33.4%. The company maintains significant liquidity with $273 million total capacity, though $110 million of that is the soon-to-mature Revolver. The dividend yield of 4.04% reflects the reduced $0.02 quarterly payout, a strategic decision to preserve capital for leasing and refinancing.

This valuation prices the stock for bankruptcy while the company demonstrates operational progress. Kawa Capital Management's unsolicited offers of $2.50 and $2.75 per share in mid-2025—both rejected by the board as undervaluing the company—provide a floor reference. The board's confidence suggests intrinsic value well above the current price, but only if the company survives. The valuation is a call option on refinancing success. If Orion extends or refinances the Revolver, the discount to book value should narrow dramatically as the DUA strategy matures. If not, the equity is likely worthless.

The $750 million universal shelf registration, expiring November 2025, signals potential dilution risk. Management expects to file a new registration before expiration, and the existing $100 million ATM program (unused as of September 30) may be terminated. The shelf capacity—over five times the current market cap—implies that equity financing is a contemplated option, albeit highly dilutive at current prices. This represents a potential path to refinance the debt, but at severe cost to existing shareholders.

Risks and Asymmetries: The Binary Outcome

The risk profile is asymmetric and concentrated. The primary risk is refinancing failure, which management has explicitly flagged as creating "substantial doubt" about going concern. If Orion cannot extend or refinance the $110 million Revolving Facility by May 2026, the company would need to pursue alternative debt, equity issuance, or accelerated asset sales. Given the distressed valuation, equity issuance would be massively dilutive, while forced asset sales would likely realize prices below book value, destroying shareholder value.

Secondary risks include office market deterioration. Management notes that "class B and class C properties generally have been experiencing reduced demand" and that tenant "concessions remain high and rents continue to be pressured." If hybrid work trends accelerate or the economy enters recession, leasing momentum could stall, delaying the anticipated 2026 occupancy recovery. The DOGE uncertainty adds a political dimension: if the Department of Government Efficiency pushes GSA to exercise termination options, Orion's government leases could face early termination risk, though management notes nearly the entire GSA portfolio is in firm term without termination options.

Execution risk on the DUA strategy is material. While 33.9% of ABR is now in DUAs, the company must recycle capital from traditional office sales into DUA acquisitions. The San Ramon acquisition demonstrates capability, but scale is limited. If disposition proceeds are diverted to debt repayment rather than reinvestment, the transformation stalls and Orion remains a traditional office REIT with a weaker balance sheet.

The asymmetry favors a high-risk, high-reward profile. Successful refinancing and continued DUA pivot could drive the stock toward book value or higher, representing 400%+ upside. Failure results in near-total loss. This binary outcome means the stock is uninvestable for risk-averse capital but potentially attractive for distressed investors who can underwrite the refinancing probability.

Conclusion: A Transformation on Borrowed Time

Orion Properties has executed a credible strategic transformation, shifting one-third of its portfolio to Dedicated Use Assets while delivering strong leasing results and extending its weighted average lease term to 5.8 years. The company has aggressively shed non-core properties, saving $39 million in carry costs, and has built a pipeline of over 500,000 square feet of potential leases. Management's guidance that 2025 represents the trough for Core FFO is plausible, supported by reduced rollover risk ($10.8 million in 2026 versus $39.4 million in 2024) and positive rent spreads.

Yet none of this matters if Orion cannot refinance its Revolving Facility by May 2026. The explicit going concern warning transforms every operational achievement into a footnote to the debt maturity. The stock's 0.18x price-to-book ratio reflects this reality, pricing in a high probability of distress. The rejected Kawa Capital offers of $2.50-$2.75 suggest management believes fair value is substantially higher, but that value is contingent on survival.

For investors, the thesis is clear but risky: Orion's transformation creates significant upside if the company navigates its debt maturity, but the refinancing uncertainty makes this a speculative bet on management's ability to secure capital in a distressed office market. The critical variables are refinancing progress, DUA acquisition pace, and whether leasing momentum can offset disposition losses in 2026. Until the Revolving Facility is resolved, the stock remains a call option on financial engineering rather than a play on real estate fundamentals.