ORION OFFICE REIT INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated and combined financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.Orion Office REIT Inc. (the "Company", "Orion", "we", or "us") makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled " Forward-Looking Statements ". Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see the section in this report entitled " Ri sk Facto rs ".
Overview
Orion is an internally managed REIT engaged in the ownership, acquisition, and management of a diversified portfolio of mission-critical regional and corporate headquarters office buildings located in high-quality suburban markets across theU.S. and leased primarily on a single-tenant net lease basis to creditworthy tenants.Orion Office REIT Inc. was incorporated in theState of Maryland onJuly 1, 2021 and has been operating in a manner so as to qualify and has elected to be taxed as a REIT forU.S. federal income tax purposes, commencing with our initial taxable year endedDecember 31, 2021 . As ofDecember 31, 2022 , the Company owned and operated 81 office properties with an aggregate of 9.5 million leasable square feet located in 29 states with an occupancy rate of 88.8% and a weighted-average remaining lease term of 4.0 years. Including the Company's pro rata share of square feet and annualized base rent from the Arch Street Joint Venture, the Company's unconsolidated joint venture with an affiliate ofArch Street Capital Partners, LLC ("Arch Street Capital Partners "), we owned an aggregate of 9.7 million leasable square feet with an occupancy rate of 89.0% and a weighted-average remaining lease term of 4.1 years as ofDecember 31, 2022 .
Executive Summary
Despite the challenged macroeconomic environment, our real estate portfolio generally performed as expected during the year endedDecember 31, 2022 , with no material amount of scheduled rent payments determined to be uncollectible. Property operating expenses were generally in line with what we had budgeted for the year endedDecember 31, 2022 . General and administrative expenses were modestly below our 2022 budget, as the Company benefited from lower annual meeting costs and lower amortization of stock-based compensation. General and administrative expenses are expected to increase in 2023 and beyond as subsidies provided by Realty Income at the Distribution (as defined below) expire, and as stock-based compensation cost increases and public company compliance costs increase due to additional Sarbanes-Oxley compliance costs and costs associated with theSEC's expected climate change rules. Our interest expense was generally in line with what we had budgeted for the year endedDecember 31, 2022 , as increases in interest rates on our floating rate indebtedness were offset by lower amounts of debt outstanding as the Company utilized cash from operations and proceeds from real estate dispositions to repay debt on the Revolving Facility. The Company did not acquire any new properties during year endedDecember 31, 2022 , primarily due to the impact of rapidly rising interest rates and disruptions in the financing markets. Our ability to resume asset acquisition activity will be highly dependent upon favorable market conditions, including attractive yields on properties and access to requisite financing. We cannot provide any assurance as to whether we will be able to acquire assets on favorable terms and in a timely manner, or at all. During year endedDecember 31, 2022 , we completed approximately 0.8 million square feet of lease renewals, expansions and new leases, while our weighted average remaining lease term remained consistent at 4.1 years as ofDecember 31, 2022 and 2021, and our occupancy level declined from 91.9% as ofDecember 31, 2021 to 89.0% as ofDecember 31, 2022 . Our efforts to address upcoming lease maturities and vacancies have been adversely impacted by economic conditions, such as rising interest rates, rising inflation and recession fears, along with persistent remote working trends as a result of the COVID-19 pandemic. We have experienced and we expect we will continue to experience slower new leasing and there remains uncertainty over existing tenants' long-term space requirements. Some of the anticipated leasing we expected to realize is either going to be delayed, reduced or eliminated. Overall, this could reduce our future rental revenues. We cannot provide any assurance as to whether we will be able to renew leases with existing tenants or re-let vacant space to new tenants on favorable terms and in a timely manner, or at all. 28
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The Company has agreed to provide rent concessions to tenants and incur leasing costs with respect to its properties, including amounts paid directly to tenants to improve their space and/or building systems, or tenant improvement allowances, landlord agreements to perform and pay for certain improvements, and leasing commissions. During year endedDecember 31, 2022 , the Company made aggregate commitments for tenant improvement allowances and base building allowances, leasing commissions and free rent of$30.1 million , or$37.41 per rentable square foot leased. The Company anticipates it will continue to agree to tenant improvement allowances and to pay leasing commissions, the amount of which may increase in future periods. One of our main asset management strategies during year endedDecember 31, 2022 was to sell vacant and identified non-core assets that do not fit our long-term investment objectives. The sale of these assets will allow us to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with re-tenanting. During year endedDecember 31, 2022 , we closed on 11 dispositions totaling 0.9 million square feet for an aggregate sale price of$33.1 million , equating to a price per square foot of approximately$36.42 , and primarily used the proceeds to pay down debt and capital expenditures and leasing costs. We expect to continue this non-core asset disposition strategy in 2023. We cannot provide any assurance as to whether we will be able to sell non-core assets on favorable terms and in a timely manner, or at all.
The Separation and the Distribution
OnApril 29, 2021 , Realty Income Corporation ("Realty Income") entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement") with VEREIT, Inc. ("VEREIT"), its operating partnership,VEREIT Operating Partnership, L.P. ("VEREIT OP"),Rams MD Subsidiary I, Inc. , a wholly owned subsidiary of Realty Income ("Merger Sub 1"), andRams Acquisition Sub II, LLC , a wholly owned subsidiary of Realty Income ("Merger Sub 2"). OnNovember 1, 2021 , pursuant to the Merger Agreement, Merger Sub 2 merged with and into VEREIT OP, with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the "Mergers", and such effective time of the Mergers, the "Merger Effective Time"). Upon the Merger Effective Time, as part of the Mergers, Realty Income acquired certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, "VEREIT Office Assets"). Following the Merger Effective Time, in accordance with the Merger Agreement, Realty Income contributed the portion of the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, "Realty Income Office Assets") and the VEREIT Office Assets (the "Separation") to the Company and its operating partnership,Orion Office REIT LP ("Orion OP"). OnNovember 12, 2021 , following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement dated as ofNovember 11, 2021 , by and among Realty Income, the Company and Orion OP (the "Separation and Distribution Agreement"), Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the "Distribution"). Following the Distribution, we became an independent publicly traded company and have been operating in a manner so as to qualify and have elected to be taxed as a REIT, commencing with our initial taxable year endedDecember 31, 2021 . OnNovember 12, 2021 , in connection with the Distribution, Orion OP also entered into an Amended and Restated Limited Liability Company Agreement (the "LLCA") ofOAP/VER Venture, LLC (the "Arch Street Joint Venture"), withOAP Holdings LLC (the "Arch Street Partner"), an affiliate ofArch Street Capital Partners , pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held byVEREIT Real Estate, L.P. to Orion OP.
Our common stock, par value
Through
Emerging Growth Company Status
We are an "emerging growth company" as defined in the Jumpstart Our Business
Startups Act (the "JOBS Act"). As such, we are eligible to take advantage of
certain exemptions from various reporting requirements that apply to other
public companies that are not emerging growth companies, including compliance
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act and the requirements to hold a non-binding advisory vote on executive
compensation and any golden parachute payments not previously approved. We
cannot predict if investors will find our common stock less attractive because
we rely on the exemptions available to us as an emerging growth company. If some
investors find our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may be more
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Table of Contents volatile. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies until we can no longer avail ourselves of the exemptions applicable to emerging growth companies or until we affirmatively and irrevocably opt out of the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed$1.235 billion , (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (iii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds$700.0 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than$1.0 billion in non-convertible debt during the preceding three-year period. As ofJune 30, 2022 , the market value of our common stock held by non-affiliates was less than$700.0 million , and therefore, we expect to remain an "emerging growth company" at least until the next measuring date, which isJune 30, 2023 .
Basis of Presentation
The consolidated and combined financial statements of the Company include the accounts of the Realty Income Office Assets presented on a combined basis for the period fromJanuary 1, 2021 toOctober 31, 2021 and for the year endedDecember 31, 2020 , as the ownership interests were under common control and ownership of Realty Income during the respective periods. From and after the Merger Effective Time, the consolidated and combined financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture, which accounts include the Realty Income Office Assets and the VEREIT Office Assets. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in the Company's consolidated and combined balance sheets, statements of operations, statements of comprehensive income (loss) and statements of equity. The historical combined and consolidated financial results for the VEREIT Office Assets include the accounts of the VEREIT Office Assets on a combined basis as the ownership interests were under common control and ownership of VEREIT. These combined and consolidated financial results were derived from the books and records of and carved out from VEREIT. The combined and consolidated financial statements of the VEREIT Office Assets reflect charges for certain corporate costs, and we believe such charges are reasonable. Costs of the services that were charged to the VEREIT Office Assets were based on either actual costs incurred by each business or a proportion of costs estimated to be applicable to each business, based on VEREIT Office Assets' pro-rata share of annualized rental income. The historical combined and consolidated financial information presented does not necessarily include all of the expenses that would have been incurred had VEREIT Office Assets been operating as a separate, standalone company. Such historical combined and consolidated financial information may not be indicative of the results of operations, financial position or cash flows that would have been obtained if the VEREIT Office Assets had been an independent, standalone public company during the periods presented or of the future performance of the Company as an independent, standalone company.
Election as a REIT
The Company elected to be taxed as a REIT forU.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year endedDecember 31, 2021 . To maintain our qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. As a REIT, except as discussed below, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if we maintain our qualification for taxation as a REIT, we may become subject to certain state and local taxes on our income and property, federal income taxes on certain income and excise taxes on our undistributed income. 30
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Table of Contents Critical Accounting Estimates Our accounting policies have been established to conform withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policy involves significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 - Summary of Significant Accounting Policies to our consolidated and combined financial statements.
Real Estate Impairment
We invest in real estate assets and subsequently monitor those investments quarterly for impairment. The risks and uncertainties involved in applying the principles related to real estate impairment include, but are not limited to, the following:
•The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss.
•The evaluation of real estate assets for potential impairment requires our management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rate; (2) discount rate; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions including the number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of our tenants.
•Changes related to management's intent to sell or lease the real estate assets used to develop the forecasted cash flows may have a material impact on our financial results.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 2 - Summary of Significant Accounting Policies to our consolidated and combined financial statements.
Significant Transactions Summary
Activity during the year ended
Real Estate Operations
•During the year endedDecember 31, 2022 , we closed on the sale of 11 non-core assets that do not fit our long-term investment objectives for an aggregate gross sales price of$33.1 million . As ofMarch 8, 2023 , we had pending agreements to dispose of an additional seven non-core assets for an aggregate gross sales price of$36.6 million . These pending transactions remain subject to customary conditions for real estate transactions of this nature, which may include conditions related to the buyer's due diligence and the buyer's right to terminate the agreement in its sole discretion. There can be no assurance these pending sale transactions will be completed on their existing terms or at all. •During the year endedDecember 31, 2022 , we completed approximately 0.8 million square feet of lease renewals, expansions and new leases across 11 different properties. During the year endedDecember 31, 2022 , 11 leases expired or were downsized comprising a total reduction in occupied space of approximately 0.9 million leasable square feet. As ofDecember 31, 2022 , the Company had a total of five vacant properties, two of which are being marketed for sale. The Company's plans with respect to vacant properties are subject to change. 31
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Table of Contents Debt •We refinanced the$355.0 million Bridge Facility onFebruary 10, 2022 with a$355.0 million CMBS Loan at a fixed rate of 4.971%. The CMBS Loan matures onFebruary 11, 2027 . •During the year endedDecember 31, 2022 , we borrowed and repaid amounts under the Revolving Facility, which amounts aggregate to net repayments of$90.0 million of borrowings under the Revolving Facility, utilizing a combination of cash flows from operations and proceeds from real estate dispositions. As ofDecember 31, 2022 , the Company did not have any borrowings under the Revolving Facility and, therefore, had$425.0 million of availability under the Revolving Facility. •DuringDecember 2022 , we transitioned the benchmark rate for borrowings under the Revolver/Term Loan Agreement from LIBOR to SOFR. In connection with that transition, we terminated the interest rate swap agreements that had been entered into during the year endedDecember 2021 to hedge interest rate volatility with respect to the Company's borrowings under the Term Loan Facility, and we entered into new interest rate swap agreements with an aggregate notional amount of$175.0 million .
Equity
•The Company's Board of Directors declared quarterly cash dividends of$0.10 per share for each of the four quarters of 2022. The dividends were paid onApril 15, 2022 ,July 15, 2022 ,October 17, 2022 andJanuary 17, 2023 . OnMarch 7, 2023 , the Company's Board of Directors declared a quarterly cash dividend of$0.10 per share for the first quarter of 2023, payable onApril 17, 2023 , to stockholders of record as ofMarch 31, 2023 .
Real Estate Portfolio Metrics
Our financial performance is impacted by the timing of acquisitions and
dispositions and the operating performance of our operating properties. The
following table shows the property statistics of our operating properties as of
December 31, 2022 December 31, 2021
Portfolio Metrics
Operating properties 81 92
Arch Street Joint Venture properties 6 6
Rentable square feet (in thousands) (1) 9,732 10,646
Occupancy rate (2) 89.0% 91.9%
Investment-grade tenants (3) 73.3% 67.7%
Weighted-average remaining lease term (in years) 4.1 4.1
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(1)Represents leasable square feet of operating properties and the Company's pro rata share of leasable square feet of properties owned by the Arch Street Joint Venture.
(2)Occupancy rate equals the sum of leased square feet divided by rentable square feet.
(3)Based on annualized base rent of our real estate portfolio, including the Company's pro rata share of annualized base rent for properties owned by the Arch Street Joint Venture, as ofDecember 31, 2022 . Investment-grade tenants are those with a credit rating of BBB- or higher byStandard & Poor's Financial Services LLC or a credit rating of Baa3 or higher by Moody's Investor Service, Inc. The ratings may reflect those assigned byStandard & Poor's Financial Services LLC or Moody's Investor Service, Inc. to the lease guarantor or the parent company, as applicable. 32
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Operating Performance
In addition, management uses the following financial metrics to assess our
operating performance (dollar amounts in thousands, except per share amounts).
Year Ended December 31,
2022 2021
Financial Metrics
Total revenues $ 208,118 $ 79,731
Net loss $ (97,474) $ (47,464) Basic and diluted net loss per share attributable to common stockholders
$ (1.72) $ (0.84) FFO attributable to common stockholders (1)$ 99,657 $ 46,572
FFO attributable to common stockholders per diluted share (1)
$ 1.76 $ 0.82 Core FFO attributable to common stockholders (1)$ 101,764 $ 58,263
Core FFO attributable to common stockholders per diluted share (1)
$ 1.80 $ 1.03
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(1)See the Non-GAAP Measures section below for descriptions of our non-GAAP
measures and reconciliations to the most comparable
Leasing Activity and Capital Expenditures
The Company remains highly focused on leasing activity, given the 4.1 year weighted-average remaining lease term and the significant lease maturities which will occur across the portfolio over the next few years. If our tenants decide not to renew their leases, terminate their leases early or default on their leases, we will seek to re-lease the space to new tenants. We also seek to lease our vacant properties to new tenants. We may not, however, be able to re-lease the space to suitable replacement tenants on a timely basis, or at all. Even if we are able to renew leases with existing tenants or enter into new leases with replacement tenants, the terms of renewals or new leases, including the cost of required renovations, improvements or concessions to tenants, particularly commercial tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay dividends to stockholders could be materially adversely affected. Further, if any of our properties cannot be leased on terms and conditions favorable to us, we may seek to dispose of the property; however, such property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all, which could inhibit our ability to effectively dispose of those properties and could require us to expend capital to fund necessary capital improvements or alterations. In general, when we sell properties that are vacant or soon to be vacant, the valuation will be discounted to reflect that the new owner will bear carrying costs until the property has been leased up and take the risk that the property may not be leased up on a timely basis, favorable terms or at all. As an owner of commercial real estate, the Company is required to make capital expenditures with respect to its portfolio, which include normal building improvements to replace obsolete building components and expenditures to extend the useful life of existing assets and lease related expenditures to retain existing tenants or attract new tenants to our properties. The Company has agreed to provide rent concessions to tenants and incur leasing costs with respect to its properties, including amounts paid directly to tenants to improve their space and/or building systems, or tenant improvement allowances, landlord agreements to perform and pay for certain improvements, and leasing commissions. The Company anticipates it will continue to agree to tenant improvement allowances, the amount of which may increase in future periods. These rent concession and leasing cost commitments could be significant and are expected to vary due to factors such as competitive market conditions for leasing of commercial office space and the volume of square footage subject to re-leasing by the Company. As ofDecember 31, 2022 , the Company had outstanding commitments of$51.2 million for tenant improvement allowances and$0.3 million for leasing commissions. The actual amount we pay for tenant improvement allowances may be lower than the commitment in the applicable lease and will depend upon the tenant's use of the capital on the agreed upon timeline. The timing of the Company's cash outlay for tenant improvement allowances is significantly uncertain and will depend upon the applicable tenant's schedule for the improvements and corresponding use of capital, if any. The Company estimates that the foregoing tenant improvement allowances and leasing commissions will be funded between 2023 and 2035.
The Company has funded and intends to continue to fund tenant improvement allowances with cash on hand, which may include proceeds from dispositions. For assets financed on our CMBS Loan, the Company has funded reserves with the lender
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for tenant improvement allowances and rent concession commitments. The restricted cash included in this reserve totaled$34.7 million as ofDecember 31, 2022 , including$23.6 million for tenant improvement allowances and$11.1 million for rent concession commitments, and is included in other assets, net in the Company's consolidated balance sheets.
During the year ended
Year Ended
New Leases Renewals Total
Rentable square feet leased 119 686 805
Weighted average rental rate change (cash basis) (1) (2)
(6.0) % 5.7 % 4.1 %
Tenant leasing costs and concession commitments (3) $ 4,237 $ 35.53
7.3 7.2 7.3
Tenant leasing costs and concession commitments per rentable square foot per year
$ 4.85
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(1)Represents weighted average percentage increase or decrease in (i) the annualized monthly cash amount charged to the applicable tenants (including monthly base rent receivables and certain contractually obligated reimbursements by the applicable tenants, which may include estimates) as of the commencement date of the new lease term (excluding any full or partial rent abatement period) compared to (ii) the annualized monthly cash amount charged to the applicable tenants (including the monthly base rent receivables and certain contractually obligated reimbursements by the applicable tenants, which may include estimates) as of the expiration date of the prior lease term. If a space has been vacant for more than 12 months prior to the execution of a new lease, the lease will be excluded from this calculation.
(2)Excludes one new lease for approximately 41,000 square feet of space that had been vacant for more than 12 months at the time the new lease was executed.
(3)Includes commitments for tenant improvement allowances and base building allowances, leasing commissions and free rent (includes estimates of property operating expenses, where applicable).
During the year endedDecember 31, 2022 , amounts capitalized by the Company for lease related costs, lease incentives and building, fixtures and improvements were as follows: Year Ended December 31, 2022 Lease related costs (1) $ 4,362 Lease incentives (2) 1,810 Building, fixtures and improvements (3) 8,452 Total capital expenditures $ 14,624
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(1)Lease related costs generally include lease commissions paid in connection with the execution of new and/or renewed leases.
(2)Lease incentives generally include expenses paid on behalf of the tenant or reimbursed to the tenant, including expenditures related to the construction of tenant-owned improvements. (3)Building, fixtures and improvements generally include expenditures to replace obsolete building or land components, expenditures that extend the useful life of existing assets and expenditures to construct landlord owned improvements.
Future Lease Expirations
For a tabular summary of scheduled lease expirations in our property portfolio
as of
Results of Operations
The results of operations discussed in this section include the accounts of Realty Income Office Assets fromJanuary 1, 2021 toOctober 31, 2021 and all prior periods presented and the accounts of the Company and its consolidated subsidiaries from and after the Merger Effective Time, including Realty Income Office Assets and VEREIT Office Assets. 34
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For the periods presented prior to the date of the Distribution, our historical consolidated and combined financial results reflect charges for certain legal, accounting and other costs related to the Distribution, which were incurred and paid by Realty Income on our behalf and are reflected as capital contributions.
Comparison of the year ended
The Company's portfolio size significantly increased in the last two months of 2021 as a result of the Mergers, which contributed to an increase in revenues and expenses when comparing the year endedDecember 31, 2022 to the same period in 2021. As ofDecember 31, 2022 , we had 81 office properties with an aggregate of 9.5 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet as ofOctober 31, 2021 , prior to the Merger Effective Time. Revenues
The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands):
Year Ended
2022 vs 2021
2022 2021 Increase/(Decrease)
Rental $ 207,353 $ 79,460 $ 127,893
Fee income from unconsolidated joint venture 765 271 494
Total revenues $ 208,118 $ 79,731 $ 128,387
Rental
The increase in rental revenue of $127.9 million during the year ended December
31, 2022 as compared to the same period in 2021 was primarily due to the
increase in our overall portfolio size resulting from the closing of the
Mergers, which was partially offset by our lower occupancy rate and property
dispositions. Including the rental revenue from the VEREIT Office Assets for the
period from January 1, 2021 to October 31, 2021 , rental revenue decreased by
$6.8 million primarily due to our lower occupancy rate and property
dispositions. Our portfolio occupancy rate was 88.8% and 91.8% as of
December 31, 2022 and 2021, respectively. The Company recognizes all changes in
the collectability assessment for an operating lease as an adjustment to rental
revenue. During the year ended December 31, 2022 the Company recorded a
reduction to rental revenue of $1.5 million primarily for property operating
expense reimbursements not probable of collection. During the year ended
December 31, 2021 , the Company did not have any reductions to rental revenue for
amounts not probable of collection. Rental revenue also includes lease
termination income collected from tenants to allow for tenants to settle their
lease obligations and/or vacate their space prior to their scheduled termination
dates, as well as amortization of above and below market leases and lease
incentives. During the years ended December 31, 2022 and 2021, the Company
recognized $1.4 million and $0.3 million , respectively, of lease termination
income.
Fee income from unconsolidated joint venture
Fee income from unconsolidated joint venture consists of fees earned for providing various services to the Arch Street Joint Venture. The increase of$0.5 million during the year endedDecember 31, 2022 as compared to the same period in 2021 was due to a full year of fees earned from the Arch Street Joint Venture, including property and asset management fees, in 2022 as compared to two months of fees in 2021. Including the fee income from unconsolidated joint venture from the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 , fee income from unconsolidated joint venture would have been consistent. 35
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Table of Contents Operating Expenses
The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands):
Year Ended December 31,
2022 vs 2021
2022 2021 Increase/(Decrease)
Property operating $ 61,519 $ 13,411 $ 48,108
General and administrative 15,908 3,832 12,076
Depreciation and amortization 131,367 43,922 87,445
Impairments 66,359 49,859 16,500
Transaction related 675 - 675
Spin related 964 7,909 (6,945)
Total operating expenses $ 276,792 $ 118,933 $ 157,859
Property Operating Expenses
Property operating expenses such as taxes, insurance, ground rent and
maintenance include both reimbursable and non-reimbursable property expenses.
The increase in property operating expenses of $48.1 million during the year
ended December 31, 2022 as compared to the same period in 2021 was primarily
attributable to the increase in our portfolio size. Including the property
operating expenses from the VEREIT Office Assets for the period from January 1,
2021 to October 31, 2021 , property operating expenses increased $11.9 million
primarily due to expenses for insurance, property owners association,
electricity and HVAC repairs and non-reimbursable expenses due to vacancies.
General and Administrative Expenses
General and administrative expenses increased$12.1 million during the year endedDecember 31, 2022 as compared to the same period in 2021, which was primarily due to actual costs recorded during the year endedDecember 31, 2022 following the Distribution and the Company's commencement of operations as a standalone business, as compared with an allocation of amounts for the first ten months of the year endedDecember 31, 2021 . Including the general and administrative expenses from the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 , general and administrative expenses increased$6.5 million . General and administrative expenses for Realty Income Office Assets and VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 are primarily an allocation from Realty Income and VEREIT general and administrative expenses, and therefore, do not reflect the full general and administrative expenses of an independent, separate public company.
Depreciation and Amortization Expenses
The increase in depreciation and amortization expenses of$87.4 million during the year endedDecember 31, 2022 as compared to the same period in 2021 were primarily due to the increase in our portfolio size. Including the depreciation and amortization expenses from the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 , depreciation and amortization expenses increased$38.5 million , primarily due to the fair valuation of the VEREIT Office Assets as a result of the Mergers.
Impairments
Impairments of$66.4 million were recorded during the year endedDecember 31, 2022 as compared to$49.9 million impairments during the same period in 2021. The impairment charges in the year endedDecember 31, 2022 include a total of 18 properties and the charges reflect management's estimates of lease renewal probability, timing and terms of such renewals, carrying costs for vacant properties, sale probability, estimates of sale proceeds, including where applicable, the negotiated price under a definitive agreement to sell the asset. Impairment charges totaling$12.2 million with respect to 11 properties were recorded during the three months endedDecember 31, 2022 . See Note 5 - Fair Value Measures for further information. Impairments for the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 were$28.1 million , due to four real estate assets that were deemed to be impaired. 36
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Table of Contents Transaction Related Expenses During the year endedDecember 31, 2022 the Company incurred$0.7 million of transaction related expenses which primarily consist of internal salaries allocated to acquisition-related activities as well as costs incurred for deals that were not consummated. No such costs were incurred during the same period in 2021. Spin Related Expenses During the year endedDecember 31, 2022 , the Company incurred$1.0 million of spin related expenses as compared to$7.9 million of spin related expenses during the same period in 2021. Such expenses primarily consist of legal and professional fees associated with the formation and organization of the Company, the Mergers and the Distribution. Such costs also include expenses related to the fair value of the warrants issued to the Arch Street Partner and one of its affiliates during the year endedDecember 31, 2021 .
Other (Expense) Income and Provision for Income Taxes
The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (in thousands):
Year Ended
2022 vs 2021
2022 2021 Increase/(Decrease)
Interest expense, net $ (30,171) $ (4,267) $ 25,904
Gain on disposition of real estate assets $ 2,352 $ - $ 2,352
Loss on extinguishment of debt, net $ (468) $ (3,782) $ (3,314)
Other income, net $ 223 $ - $ 223
Equity in loss of unconsolidated joint venture, net
$ (56) $ 468 Provision for income taxes$ (212) $ (157) $ 55 Interest Expense, net The increase in interest expense of$25.9 million during the year endedDecember 31, 2022 as compared to the same period in 2021 was primarily due to an increase in debt outstanding from and after the Distribution. Prior to the Distribution, the Company had no outstanding debt, as compared to$526.0 million as ofDecember 31, 2022 , as discussed in Note 6 - Debt, Net. Including the interest expense from the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 , interest expense increased$19.9 million primarily due to the increase in debt outstanding in connection with the capitalization of the Company.
Gain on disposition of real estate assets
Gain on disposition of real estate assets was$2.4 million for the year endedDecember 31, 2022 as compared to no gain during the same period in 2021. The gain was related to five of the Company's 11 dispositions during the year endedDecember 31, 2022 . Four of these properties were subject to cumulative impairment losses of$22.2 million in prior periods.
Loss on extinguishment of debt, net
Loss on extinguishment of debt, net was$0.5 million during the year endedDecember 31, 2022 as compared to$3.8 million loss on extinguishment of debt in the same period in 2021. The loss in the 2022 period relates to the write off of deferred financing costs due to the early extinguishment of theCompany's Bridge Facility, as discussed in Note 6 - Debt, Net. The loss in the 2021 period was primarily due to a prepayment penalty related to the early repayment of a mortgage completed inSeptember 2021 . Loss on extinguishment of debt, net for the VEREIT Office Assets was$5.3 million for the period fromJanuary 1, 2021 toOctober 31, 2021 , which primarily related to the write off of deferred financing costs due to the early extinguishment of mortgage notes payable. 37
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Equity in loss of unconsolidated joint venture, net
Equity in loss of the unconsolidated joint venture, net was$0.5 million during the year endedDecember 31, 2022 as compared to equity in loss of the unconsolidated joint venture, net of less than$0.1 million for the same period in 2021. These amounts relate to the Company's investment in the Arch Street Joint Venture, which interest was transferred to the Company in connection with the Distribution. Including the equity in income (loss) of unconsolidated joint venture from the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 , income decreased$1.2 million primarily related to amortization of the step up in basis in the Company's investment in the Arch Street Joint Venture as a result of the Mergers.
Provision for Income Taxes
The provision for income taxes consists of certain state and local income and franchise taxes. The provision for income taxes was$0.2 million during the year endedDecember 31, 2022 as compared to$0.2 million for the same period in 2021. The provision for income taxes for the VEREIT Office Assets for the period fromJanuary 1, 2021 toOctober 31, 2021 was$0.5 million .
Comparison of the year ended
For a comparison of the year ended
Non-GAAP Measures Our results are presented in accordance withU.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. Management uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance withU.S. GAAP.
Funds From Operations ("FFO") and Core Funds from Operations ("Core FFO") Attributable to Orion
Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts, Inc. ("Nareit"), an industry trade group, has promulgated a supplemental performance measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined underU.S. GAAP. Nareit defines FFO as net income or loss computed in accordance withU.S. GAAP adjusted for gains or losses from disposition of real estate assets, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to the unconsolidated joint venture. We calculate FFO in accordance with Nareit's definition described above. In addition to FFO, we use Core FFO as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. Core FFO, as defined by the Company, excludes from FFO items that we believe do not reflect the ongoing operating performance of our business such as transaction related expenses, spin related expenses and gains or losses on extinguishment of swaps and/or debt, and our pro rata share of Core FFO adjustments related to the unconsolidated joint venture. Beginning in 2023, the Company will be revising its definition of Core FFO to also exclude the following non-cash charges which management believes do not reflect the ongoing operating performance of our business: (i) amortization of deferred lease incentives, (ii) amortization of deferred financing costs, (iii) equity-based compensation, and (iv) amortization of premiums and discounts on debt, net. If this definitional change had been made in 2022, the impact would have been an increase to Core FFO for the year endedDecember 31, 2022 of$6.4 million , or$0.11 per share. This change in definition will be applied retrospectively beginningJanuary 1, 2023 .
We believe that FFO and Core FFO allow for a comparison of the performance of our operations with other publicly-traded REITs, as FFO and Core FFO, or equivalent measures, are routinely reported by publicly-traded REITs, each adjust for items that we believe do not reflect the ongoing operating performance of our business and we believe are often used by analysts and investors for comparison purposes.
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For all of these reasons, we believe FFO and Core FFO, in addition to net income (loss), as defined byU.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and Core FFO the same way, so comparisons with other REITs may not be meaningful. FFO and Core FFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither theSEC , Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate Core FFO and its use as a non-GAAP financial performance measure.
The table below presents a reconciliation of FFO and Core FFO to net (loss)
income attributable to common stockholders, the most directly comparable
Year Ended
2022 2021
Net loss attributable to common stockholders $ (97,494) $ (47,481)
Depreciation and amortization of real estate assets 131,297 43,914
Gain on disposition of real estate assets (2,352) -
Impairment of real estate 66,359 49,859
Proportionate share of adjustments for unconsolidated joint venture
1,847 280
FFO attributable to common stockholders $ 99,657 $ 46,572
Transaction related 675 -
Spin related (1) 964 7,909
Loss on extinguishment of debt, net 468 3,782
Core FFO attributable to common stockholders $ 101,764 $ 58,263 Weighted-average shares of common stock outstanding - basic and diluted
56,631,826 56,625,650
FFO attributable to common stockholders per diluted share $ 1.76 $ 0.82 Core FFO attributable to common stockholders per diluted share
$ 1.80 $ 1.03
____________________________________
(1)Spin related primarily consist of attorney fees and accountant fees related to the Mergers and the Distribution and the Company's start-up activities. Such costs also include expenses related to the fair value of warrants issued to the Arch Street Partner and one of its affiliates during the year endedDecember 31, 2021 .
Liquidity and Capital Resources -
General
Our principal liquidity needs for the next twelve months are to: (i) fund operating expenses; (ii) pay interest on our debt; (iii) repay or refinance the Term Loan Facility (as defined below) which is scheduled to mature onNovember 12, 2023 ; (iv) pay dividends to our stockholders; (v) fund capital expenditures and leasing costs at properties we own; and (vi) fund new acquisitions, including acquisitions related to the Arch Street Joint Venture. We believe that our principal sources of short-term liquidity, which are our cash and cash equivalents on hand, cash flows from operations, proceeds from real estate dispositions, and borrowings under the Revolving Facility, are sufficient to meet our liquidity needs for the next twelve months. As ofDecember 31, 2022 , we had$20.6 million of cash and cash equivalents and$425.0 million of borrowing capacity under the Revolving Facility. 39
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Our principal liquidity needs beyond the next twelve months are to: (i) repay or refinance debt at or prior to maturity; (ii) pay dividends to our stockholders; (iii) fund capital expenditures and leasing costs at properties we own; and (iv) fund new acquisitions, including acquisitions related to the Arch Street Joint Venture. We generally believe we will be able to satisfy these liquidity needs by a combination of cash flows from operations, borrowings under the Revolving Facility, proceeds from real estate dispositions, new borrowings such as bank term loans or other secured or unsecured debt, and issuances of equity securities. We believe we will be successful in either repaying or refinancing our debt obligations at or prior to maturity, but we cannot provide any assurance we will be able to do so. Our ability to refinance debt, raise capital and/or sell assets will be affected by various factors existing at the relevant time, such as capital and credit market conditions, the state of the national and regional economies, commercial real estate market conditions, available interest rate levels, the lease terms for and equity in and value of any related collateral, our financial condition and the operating history of the collateral, if any. Credit Agreements Summary
The following is a summary of the interest rate and scheduled maturities of our
consolidated debt obligations as of
Principal Amounts Due During the Years Ending December 31,
Interest Rate Maturity Total 2023 2024 2025 2026 2027
Credit facility
revolver (1) (2) SOFR + 2.60% November 2024 $ - $ - $ - $ - $ - $ -
Credit facility
term loan (1) (3) SOFR + 2.60% November 2023 175,000 175,000 - -
- -
Mortgages payable
(4) 4.971 % February 2027 355,000 - - - - 355,000
Total $ 530,000 $ 175,000 $ - $ - $ - $ 355,000 ____________________________________
(1)Includes interest rate margin of 2.50% plus SOFR adjustment of 0.10%.
(2)As of
(3)As of
(4)The table above does not include mortgage notes associated with the Arch
Street Joint Venture of
Credit Agreement Obligations
In connection with the Separation and the Distribution, onNovember 12, 2021 , we, as parent, and Orion OP, as borrower, entered into (i) a credit agreement (the "Revolver/Term Loan Credit Agreement") providing for a three-year,$425.0 million senior revolving credit facility (the "Revolving Facility"), including a$25.0 million letter of credit sub-facility, and a two-year,$175.0 million senior term loan facility (the "Term Loan Facility" and collectively with the Revolving Facility, the "Revolver/Term Loan Facilities") withWells Fargo Bank, National Association , as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the "Bridge Credit Agreement," and together with the Revolver/Term Loan Credit Agreement, the "Credit Agreements") providing for a 6-month,$355.0 million senior bridge term loan facility (the "Bridge Facility," and together with the Revolver/Term Loan Facilities, the "Facilities") withWells Fargo Bank, National Association , as administrative agent, and the lenders party thereto. The Term Loan Facility is scheduled to mature onNovember 12, 2023 , and the Revolving Facility is scheduled to mature onNovember 12, 2024 . We expect to extend, repay or refinance (or some combination of the foregoing) the Revolver/Term Loan Facilities on or prior to maturity, but we cannot provide any assurance we will be able to do so on favorable terms, in a timely manner, or at all. OnNovember 12, 2021 , Orion OP borrowed$90.0 million under the Revolving Facility, and each of the Term Loan Facility and the Bridge Facility was fully drawn. Approximately$595.0 million of the net proceeds of the Facilities was distributed by the Company to Realty Income in accordance with the Separation and Distribution Agreement. Orion OP retained the remaining net proceeds of such borrowings as working capital for general corporate purposes of the Company, Orion OP and Orion OP's subsidiaries. InFebruary 2022 , as further described below, we refinanced the Bridge Facility in full with the$355.0 million CMBS Loan (defined below), and the Bridge Credit Agreement was terminated.
As of
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2022, we did not have any amounts outstanding under our$425.0 million Revolving Facility. During the year endedDecember 31, 2022 , as part of its normal cash management strategy, the Company borrowed and repaid amounts under the Revolving Facility, which amounts aggregate to net repayments of$90.0 million of borrowings under the Revolving Facility, utilizing a combination of cash flows from operations and proceeds from real estate dispositions. In addition, the Company's pro rata share of the mortgage notes of the Arch Street Joint Venture was$27.3 million as ofDecember 31, 2022 . The interest rate applicable to the loans under the Revolver/Term Loan Facilities was initially determined, at the election of Orion OP, on the basis of LIBOR or a base rate, in either case, plus an applicable margin. OnDecember 1, 2022 , we, as parent, and Orion OP, as borrower, entered into that certain First Amendment to the Revolver/Term Loan Credit Agreement (the "Amendment"). The Amendment, among other things, (i) changed the benchmark rate under the Revolver/Term Loan Credit Agreement for borrowings from LIBOR to SOFR (the secured overnight financing rate as administered by theFederal Reserve Bank of New York ), subject to certain adjustments specified in the Revolver/Term Loan Credit Agreement, and (ii) updated certain other provisions regarding successor interest rates to LIBOR. Following the effectiveness of the Amendment, the interest rate applicable to the loans under the Revolver/Term Loan Facilities may be determined, at the election of Orion OP, on the basis of Daily Simple SOFR, Term SOFR or a base rate, in the case of a SOFR loan, plus a SOFR adjustment of 0.10% per annum, and in the case of a SOFR loan or a base rate loan, plus an applicable margin. This applicable margin was not adjusted as a result of the Amendment other than the change from LIBOR to SOFR and is now (1) in the case of the Revolving Facility, 2.50% for SOFR loans and 1.50% for base rate loans, and (2) in the case of the Term Loan Facility, 2.50% for SOFR loans and 1.50% for base rate loans. Loans under the Revolver/Term Loan Facilities may be prepaid, and unused commitments under the Revolver/Term Loan Facilities may be reduced, at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs).
As of
To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25% per annum of the unused portion of the Revolving Facility.
The Revolver/Term Loan Facilities are guaranteed pursuant to a Guaranty (the "Revolver/Term Loan Guaranty") by us and, subject to certain exceptions, substantially all of Orion OP's existing and future subsidiaries (including substantially all of its subsidiaries that directly or indirectly own unencumbered real properties), other than certain joint ventures and subsidiaries that own real properties subject to certain other indebtedness (such subsidiaries of Orion OP, the "Subsidiary Guarantors").
The Revolver/Term Loan Facilities are secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors.
Revolver/Term Loan Facilities Covenants
The Revolver/Term Loan Facilities require that Orion OP comply with various covenants, including covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends. In addition, the Revolver/Term Loan Facilities require that Orion OP satisfy certain financial covenants. The following is a summary of financial covenants for the Company's Revolver/Term Loan Facilities and the Company's compliance therewith, as calculated per the terms of the Revolver/Term Loan Credit Agreement. These calculations are presented to show the Company's compliance with the financial covenants and are not measures of the Company's liquidity or performance. Revolver/Term Loan Facilities Financial Covenants Required December 31, 2022 Ratio of total indebtedness to total asset value ? 60% 29.0% Ratio of adjusted EBITDA to fixed charges ? 1.5x 4.94x Ratio of secured indebtedness to total asset value ? 45% 19.8%
Ratio of unsecured indebtedness to unencumbered asset value
? 60% 12.8%
Ratio of unencumbered adjusted NOI to unsecured
interest expense ? 2.00x 13.32x
As of
The Revolver/Term Loan Facilities include customary representations and
warranties of us and Orion OP, which must be true and correct in all material
respects as a condition to future extensions of credit under the Revolver/Term
Loan Facilities. The Revolver/Term Loan Facilities also include customary events
of default, the occurrence of which, following any applicable
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grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of Orion OP under the Revolver/Term Loan Facilities to be immediately due and payable and foreclose on the collateral securing the Revolver/Term Loan Facilities.
CMBS Loan
OnFebruary 10, 2022 , certain indirect subsidiaries of the Company (the "Mortgage Borrowers") obtained a$355.0 million fixed rate mortgage loan (the "CMBS Loan") fromWells Fargo Bank, National Association (together with its successor, the "Lender"), which is secured by the Mortgage Borrowers' fee simple or ground lease interests in 19 properties owned indirectly by the Company (collectively, the "Mortgaged Properties "). DuringMarch 2022 , Wells Fargo effected a securitization of the CMBS Loan. The CMBS Loan bears interest a fixed rate of 4.971% per annum and matures onFebruary 11, 2027 . The CMBS Loan requires monthly payments of interest only and all principal is due at maturity. The proceeds of the CMBS Loan were used to repay the Bridge Facility. Upon closing of the CMBS Loan, the Mortgage Borrowers funded$35.5 million of loan reserves primarily for future rent concessions and tenant improvement allowances under the leases with respect to the 19Mortgaged Properties . These amounts, as well as the transaction expenses incurred in connection with the CMBS Loan, were funded with cash on hand and borrowings under the Company's Revolving Facility. The CMBS Loan is secured by, among other things, first priority mortgages and deeds of trust granted by the Mortgage Borrowers and encumbering theMortgaged Properties . The CMBS Loan is generally not freely prepayable by the Mortgage Borrowers without payment of certain prepayment premiums and costs. The CMBS Loan may be prepaid in whole, but not in part, except as provided in the loan agreement governing the CMBS Loan (the "CMBS Loan Agreement"), at any time following the Prepayment Lockout Release Date (as defined in the CMBS Loan Agreement) (generally two years after the CMBS Loan has been fully securitized), subject to the payment of a yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement. Further, releases of individual properties are permitted in connection with an arms' length third party sale upon repayment of the Release Price (as defined in the CMBS Loan Agreement) for the applicable individual property and subject to payment of the applicable yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement. The CMBS Loan Agreement also contains customary cash management provisions, including certain trigger events (such as failure of the Mortgage Borrowers to satisfy a minimum debt yield) which allow the Lender to retain any excess cash flow as additional collateral for the Loan, until such trigger event is cured. In connection with the CMBS Loan Agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the "Guaranty"), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than$355.0 million and liquid assets of no less than$10.0 million , in each case, exclusive of the values of the collateral for the CMBS Loan. As ofDecember 31, 2022 , the Company was in compliance with these financial covenants. The Mortgage Borrowers and the Company also provided a customary environmental indemnity agreement, pursuant to which the Mortgage Borrowers and the Company agreed to protect, defend, indemnify, release and hold harmless the Lender from and against certain environmental liabilities relating to theMortgaged Properties . The CMBS Loan Agreement includes customary representations, warranties and covenants of the Mortgage Borrowers and the Company. The CMBS Loan Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the Lender to, among other things, declare the principal, accrued interest and other obligations of the Mortgage Borrowers to be immediately due and payable and foreclose on theMortgaged Properties .
Equity
OnNovember 10, 2021 , we issued 56,525,650 additional shares of our common stock to Realty Income, such that Realty Income owned 56,625,650 shares of our common stock. OnNovember 12, 2021 , Realty Income effected the Distribution.
See the section "Dividends" below for disclosure with regard to the Company's dividend policy.
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OnNovember 12, 2021 , in connection with the Distribution, Orion OP entered into the Arch Street Joint Venture with the Arch Street Partner, an affiliate ofArch Street Capital Partners , pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held byVEREIT Real Estate, L.P. to Orion OP. Also onNovember 12, 2021 , in connection with the entry into the LLCA, the Company granted theArch Street Partner and Arch Street Capital Partners warrants to purchase up to 1,120,000 shares of our common stock (the "Arch Street Warrants"). The Arch Street Warrants entitle the respective holders to purchase shares of our common stock at a price per share equal to$22.42 , at any time. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of our common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) if the Arch Street Joint Venture is terminated, the later of the termination of the Arch Street Joint Venture and seven years after issuance. In accordance with our obligation under the Arch Street Warrants, onNovember 2, 2022 , we filed with theSEC a registration statement on Form S-3 for the registration, under the Securities Act, of the shares of our common stock issuable upon exercise of the Arch Street Warrants, and the registration statement was declared effective by theSEC onNovember 14, 2022 . We will use our commercially reasonable efforts to maintain the effectiveness of the registration statement, and a current prospectus relating thereto, until the earlier of (a) the expiration of the Arch Street Warrants, or (b) the shares issuable upon such exercise become freely tradable underUnited States federal securities laws by anyone who is not an affiliate (as such term is defined in Rule 144 under the Securities Act (or any successor rule)) of us. The holders of the Arch Street Warrants will also remain subject to the ownership limitations pursuant to our organizational documents. Also in connection with the entry into the LLCA, the Arch Street Joint Venture's lender consented to the transfer of the interests of the Arch Street Joint Venture previously held byVEREIT Real Estate, L.P. to Orion OP, and, in connection therewith, Orion OP agreed to become a guarantor of certain limited customary recourse obligations and provide certain customary environmental indemnities under the Arch Street Joint Venture's existing indebtedness.
Derivatives and Hedging Activities
During the year endedDecember 31, 2021 , the Company entered into interest rate swap agreements with an aggregate notional amount of$175.0 million , effective onDecember 1, 2021 and terminating onNovember 12, 2023 , which were designated as cash flow hedges, in order to hedge interest rate volatility with respect to the Company's borrowings under the Term Loan Facility. During the year endedDecember 31, 2022 , in connection with the transition of the benchmark rate for borrowings under the Revolver/Term Loan Credit Agreement from LIBOR to SOFR, the Company terminated the interest rate swap agreements that had been entered into during the year endedDecember 31, 2021 , and entered into new interest rate swap agreements with an aggregate notional amount of$175.0 million , effective onDecember 1, 2022 and terminating onNovember 12, 2023 , which were designated as cash flow hedges, to hedge interest rate volatility with respect to the Company's borrowings under the Term Loan Facility.
Right of First Offer Agreement
In connection with the entry into the LLCA, we and the Arch Street Joint Venture entered into that certain Right of First Offer Agreement (the "ROFO Agreement"), datedNovember 12, 2021 , pursuant to which, subject to certain limitations, we agreed not to acquire or purchase a fee simple or ground leasehold interest in any office real property, including by way of an acquisition of equity interests, within certain investing parameters without first offering the property for purchase to the Arch Street Joint Venture. The ROFO Agreement will expire upon the earlier of (1) the third anniversary of its execution, (2) the date on which the Arch Street Joint Venture is terminated or (3) the date on which the Arch Street Joint Venture's gross book value of assets is below$50.0 million . If the Arch Street Joint Venture decides not to acquire any such property, we may seek to acquire the property independently, subject to certain restrictions. We do not anticipate that the ROFO Agreement will have a material impact on our ability to acquire additional real estate investments, although it could result in us acquiring future properties through the Arch Street Joint Venture rather than as sole owner.
Dividends
We have been operating in a manner so as to qualify and have elected to be taxed as a REIT forU.S. federal income tax purposes beginning with our taxable year endedDecember 31, 2021 . We intend to make regular distributions to our stockholders to satisfy the requirements to maintain our qualification as a REIT. 43
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During the year ended
Declaration Date Record Date Paid Date Distributions Per Share March 22, 2022 March 31, 2022 April 15, 2022$0.10 May 3, 2022 June 30, 2022 July 15, 2022$0.10 August 2, 2022 September 30, 2022 October 17, 2022$0.10 November 1, 2022 December 30, 2022 January 17, 2023$0.10 OnMarch 7, 2023 , the Company's Board of Directors declared a quarterly cash dividend of$0.10 per share for the first quarter of 2023, payable onApril 17, 2023 , to stockholders of record as ofMarch 31, 2023 . Our dividend policy is established at the discretion of the Company's Board of Directors and future dividends may be funded from a variety of sources. In particular, we expect that, initially, our dividends will exceed our net income underU.S. GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income. To the extent that our funds available for distribution are less than the amount we must distribute to our stockholders to satisfy the requirements to maintain our qualification as a REIT, we may consider various means to cover any such shortfall, including borrowing under our Revolving Facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring share dividends. In addition, our organizational documents permit us to issue shares of preferred equity that could have a preference on dividends, and if we do, the dividend preference on the preferred equity could limit our ability to pay dividends to the holders of our common stock.
Universal Shelf Registration Statement
OnNovember 2, 2022 , the Company filed a universal shelf registration statement on Form S-3 (the "Universal Shelf") with theSEC , and the Universal Shelf was declared effective by theSEC onNovember 14, 2022 . Pursuant to the Universal Shelf, the Company is able to offer and sell from time to time in multiple transactions, up to$750.0 million of the Company's securities, including through "at the market" offering programs or firm commitment underwritten offerings. These securities may include shares of the Company's common stock, shares of the Company's preferred stock, depository shares representing interests in shares of the Company's preferred stock, debt securities, warrants to purchase shares of the Company's common stock or shares of the Company's preferred stock and units consisting of two or more shares of common stock, shares of preferred stock, depository shares, debt securities and warrants. InNovember 2022 , the Company established, as part of its Universal Shelf, an "at the market" offering program for its common stock (the "ATM Program"). Pursuant to the ATM Program, the Company may from time to time offer and sell shares of its common stock, having an aggregate offering price of up to$100.0 million . Such offers or sales of shares of the Company's common stock may be made in privately negotiated transactions, including block trades, brokers' transactions that are deemed to be "at the market" offerings as defined in Rule 415 under the Securities Act, including sales made directly on theNew York Stock Exchange , or through forward transactions under separate master forward sale confirmations and related supplemental confirmations for the sale of shares of the Company's common stock on a forward basis. As ofDecember 31, 2022 , we had not sold any shares of common stock pursuant to the ATM Program. Net proceeds from the securities issued, if any, may be used for general corporate purposes, which may include funding potential acquisitions and repaying outstanding indebtedness. The Company has no immediate plans to issue any securities for capital raising purposes pursuant to the Universal Shelf or otherwise. Share Repurchase Program OnNovember 1, 2022 , the Company's Board of Directors authorized the repurchase of up to$50.0 million of the Company's outstanding common stock untilDecember 31, 2025 , as market conditions warrant (the "Share Repurchase Program"). Repurchases may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements. The Share Repurchase Program does not obligate the Company to make any repurchases at a specific time or in a specific situation. Repurchases are subject to prevailing market conditions, the trading price of the Company's common stock, the Company's liquidity and anticipated liquidity needs, financial performance and other conditions. Shares of common stock repurchased by the Company under the Share Repurchase Program, if any, will be returned to the status of authorized but unissued shares of common stock. The Company did not repurchase any shares under 44
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the Share Repurchase Program during the year endedDecember 31, 2022 , and it has not repurchased any shares under the Share Repurchase Program throughMarch 8, 2023 .
Cash Flow Analysis for the Year Ended
The following table summarizes the changes in cash flows for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 (in thousands): Year Ended December 31, 2022 vs 2021 2022 2021 Increase/(Decrease) Net cash provided by operating activities$ 114,232 $ 56,108 $ 58,124 Net cash provided by (used in) investing activities$ 22,477 $ (12,261) $ 34,738 Net cash used in financing activities$ (110,716) $ (18,444) $ (92,272) Net cash provided by operating activities increased$58.1 million during the year endedDecember 31, 2022 , compared to the same period in 2021 primarily due to the increase in our portfolio size as a result of the Mergers. As ofDecember 31, 2022 , we had 81 office properties with an aggregate of 9.5 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet as ofOctober 31, 2021 , prior to the Merger Effective Time. Net cash provided by investing activities increased$34.7 million during the year endedDecember 31, 2022 , compared to the same period in 2021. The change was primarily due to proceeds from the disposition of real estate and distributions received from the Arch Street Joint Venture during the year endedDecember 31, 2022 , partially offset by an increase in capital expenditures and leasing costs associated with lease renewals. Net cash used in financing activities increased$92.3 million during the year endedDecember 31, 2022 , compared to the same period in 2021, primarily due to net repayments on the Company's Revolving Facility and payments of dividends to stockholders during the year endedDecember 31, 2022 . Financing activities during the year endedDecember 31, 2021 , included the initial debt capitalization of the Company in connection with the Separation and the Distribution, as well as payments on and extinguishment of mortgages payable and net distributions to parent company prior to the Distribution. Following the Distribution, Realty Income was no longer the parent of Realty Income Office Assets, and therefore, no further distributions to Realty Income occurred. 45
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Table of Contents
VEREIT OFFICE ASSETS
Critical Accounting Policies
Real Estate Investments
VEREIT management performed quarterly impairment review procedures, primarily
through continuous monitoring of events and changes in circumstances that could
indicate the carrying value of its real estate assets may not be recoverable.
Impairment indicators that VEREIT management considered included, but were not
limited to, decrease in operating income, bankruptcy or other credit concerns of
a property's major tenant or tenants or a significant decrease in a property's
revenues due to lease terminations, vacancies or reduced lease rates.
When impairment indicators are identified or if a property is considered to have
a more likely than not probability of being disposed of within the next 12 to 24
months, VEREIT management assessed the recoverability of the assets by
determining whether the carrying value of the assets will be recovered through
the undiscounted future cash flows expected from the use of the assets and their
eventual disposition. U.S. GAAP required VEREIT Office Assets to utilize the
expected holding period of its properties when assessing recoverability. In the
event that such expected undiscounted future cash flows did not exceed the
carrying value, the real estate assets have been adjusted to their respective
fair values and an impairment loss has been recognized. There are inherent
uncertainties in making estimates of expected future cash flows such as market
conditions and performance and sustainability of the tenants.
Goodwill Impairment
VEREIT evaluated goodwill for impairment annually or more frequently when an event occurred or circumstances changed that indicated the carrying value may not be recoverable. To determine whether it was necessary to perform a quantitative goodwill impairment test, VEREIT first assessed qualitative factors, including, but not limited to macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or sustained decrease in VEREIT's stock price on either an absolute basis or relative to peers. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e., greater than 50% chance) that the fair value of a reporting unit is less than its carrying value, the quantitative impairment test is required. Otherwise, no quantitative testing is required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying value, the provisions of guidance require that the fair value be compared to the carrying value.Goodwill is considered impaired if the carrying value exceeds the fair value. No impairments of VEREIT's goodwill were recorded during the ten months endedOctober 31, 2021 and year endedDecember 31, 2020 . The results of the VEREIT impairment tests carry over to VEREIT Office Assets, therefore no impairments were recorded in the accompanying statements of operations.
Results of Operations
For a comparison of the results of operations for certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, "VEREIT Office Assets") for the period fromJanuary 1, 2021 toOctober 31, 2021 to the year endedDecember 31, 2020 , see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K filed onMarch 24, 2022 . 46
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Ten Months Year Ended
Ended October December 31, Increase /
31, 2021 2020 (Decrease)
REVENUE
Rental revenue
654 596 58
Total revenues 135,394 170,900 (35,506)
EXPENSES
Property operating 36,173 46,597 (10,424)
General and administrative 5,602 7,029 (1,427)
Depreciation and amortization 48,938 62,662 (13,724)
Impairments 28,064 9,306 18,758
Total operating expenses 118,777 125,594 (6,817)
Other (expenses) income:
Other income, net 152 158 (6)
Interest expense (5,961) (9,905) (3,944)
Gain on disposition of real estate sales, net - 9,765 (9,765)
Loss on extinguishment of debt, net (5,294) (1,686) 3,608
Equity in income of unconsolidated joint venture 697 535 162
Total other expenses, net (10,406) (1,133) 9,273
Income before taxes 6,211 44,173 (37,962)
Provision for income taxes (520) (640) (120)
Net income $ 5,691 $ 43,533 $ (37,842) Liquidity and Capital Resources - VEREIT Office Assets
Cash Flows
The following table summarizes the changes in cash flows for the ten months endedOctober 31, 2021 compared to the year endedDecember 31, 2020 (dollars in millions): Ten Months Ended October Year Ended 10 months 2021 31, December 31 to 2020 2021 2020 Change Net cash provided by operating activities$ 83.7 $ 108.5 $ (24.8) Net cash (used in) provided by investing activities$ (9.2) $ 111.4 $ (120.6) Net cash used in financing activities$ (77.9)
Net cash provided by operating activities decreased$24.8 million during the ten months endedOctober 31, 2021 compared to the year endedDecember 31, 2020 primarily due to having only 304 days of activity in the 2021 period versus a full year in the 2020 period, as well as a decrease in rental income due to the disposition of three properties that were sold to the Arch Street Joint Venture during the year endedDecember 31, 2020 . Net cash used in investing activities was$9.2 million during the ten months endedOctober 31, 2021 , as compared to net cash provided by investing activities of$111.4 million during the year endedDecember 31, 2020 . The change was primarily due to the three properties sold to the Arch Street Joint Venture during the year endedDecember 31, 2020 for proceeds of$116.4 million after closing costs. Net cash used in financing activities decreased$141.5 million during the ten months endedOctober 31, 2021 , compared to the year endedDecember 31, 2020 , primarily due to a decrease of$337.4 million in net distributions to parent, offset by an increase of$194.8 million in the repayment of mortgage notes payable. 47
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Table of Contents Contractual Obligations
VEREIT Office Assets was subject to the following contractual obligations as of
Payments Due by Period
More Than 5
Total Less than 1 Year 1 - 3 Years 4 - 5 Years Years
Operating lease and ground lease
commitments $ 11,762 $ 55 © Edgar Online, source
