onl-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


			OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from _________ to __________

Commission file number: 001-40873


Orion Office REIT Inc.
(Exact name of registrant as specified in its charter)

Maryland

87-1656425

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2398 E. Camelback Road, Suite 1060

Phoenix

85016

(Address of principal executive offices)

(Zip Code)


(602)			698-1002
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class:

Trading Symbol(s):

Name of each exchange on which registered:

Common Stock

$0.001 par value per share

ONL

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 56,663,927 shares of common stock of Orion Office REIT Inc. outstanding as of May 5, 2023

ORION OFFICE REIT INC.

For the quarterly period ended March 31, 2023


						Page
PART I
Item 1. Unaudited Financial Statements						3

Orion Office REIT Inc. Consolidated Balance Sheets as of March 31, 2023 and December 31, 20 2 2						3
Orion Office REIT Inc. C onsolidated Statements of Operations for the Three Months Ended March 31, 2023 and 20 2 2						4
Orion Office REIT Inc. Consolidated Statements of Comprehensive Income (Loss) for the Thre e Months Ended Mar ch 31, 2023 and 2022						5
Orion Office REIT Inc. Consolidated Statements of Equity for the Three Months Ended March 31, 2023 and 2022						6
Orion Office REIT Inc. Consolidated Statements of Cash Flows for the Three Months Ende d March 31, 2023 and 2022						7
Notes to Orion Office REIT Inc. Consolidated Financial Statements						8



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						23
Item 3. Quantitative and Qualitative Disclosures About Market Risk						39
Item 4. Controls and Procedures						40
PART II
Item 1. Legal Proceedings						40
Item 1A. Risk Factors						41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						41
Item 3. Defaults Upon Senior Securities						41
Item 4. Mine Safety Disclosures						41
Item 5. Other Information						41
Item 6. Exhibits						41
Signatures						42

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

ORION OFFICE REIT INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data) (Unaudited)


	March 31, 2023		December 31, 2022
ASSETS
Real estate investments, at cost:
Land	$	236,966	$	238,225
Buildings, fixtures and improvements	1,127,590		1,128,400
Total real estate investments, at cost	1,364,556		1,366,625
Less: accumulated depreciation	141,093		133,379
Total real estate investments, net	1,223,463		1,233,246
Accounts receivable, net	24,697		21,641
Intangible lease assets, net	182,629		202,832
Cash and cash equivalents	23,755		20,638
Real estate assets held for sale, net	2,502		2,502
Other assets, net	89,826		90,214
Total assets	$	1,546,872	$	1,571,073

LIABILITIES AND EQUITY
Mortgages payable, net	$	352,337	$	352,167
Credit facility term loan, net	174,153		173,815

Accounts payable and accrued expenses	19,957		26,161
Below-market lease liabilities, net	12,526		14,068
Distributions payable	5,666		5,664
Other liabilities, net	22,286		23,340
Total liabilities	586,925		595,215


Common stock, $0.001 par value, 100,000,000 shares authorized 56,663,927 and 56,639,040 shares issued and outstanding as of each of March 31, 2023 and December 31, 2022, respectively	57		57
Additional paid-in capital	1,147,466		1,147,014
Accumulated other comprehensive income	4,540		6,308
Accumulated deficit	(193,516)		(178,910)
Total stockholders’ equity	958,547		974,469
Non-controlling interest	1,400		1,389
Total equity	959,947		975,858
Total liabilities and equity	$	1,546,872	$	1,571,073

The accompanying notes are an integral part of these statements.

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ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share data) (Unaudited)


	Three Months Ended March 31,
		2023		2022
Rental		$	49,990	$	53,017
Fee income from unconsolidated joint venture		200		189
Total revenues		50,190		53,206
Operating expenses:
Property operating		15,344		15,314
General and administrative		4,309		3,517
Depreciation and amortization		28,166		34,353
Impairments		3,754		1,602
Transaction related		105		63
Spin related		—		756
Total operating expenses		51,678		55,605
Other (expenses) income:
Interest expense, net		(7,139)		(6,847)

Loss on extinguishment of debt, net		—		(468)

Other income, net		36		39
Equity in loss of unconsolidated joint venture, net		(123)		(41)
Total other (expenses) income, net		(7,226)		(7,317)
Loss before taxes		(8,714)		(9,716)
Provision for income taxes		(160)		(166)
Net loss		(8,874)		(9,882)
Net income attributable to non-controlling interest		(11)		(24)
Net loss attributable to common stockholders		$	(8,885)	$	(9,906)

Weighted-average shares outstanding - basic and diluted		56,642		56,626
Basic and diluted net loss per share attributable to common stockholders		$	(0.16)	$	(0.17)

The accompanying notes are an integral part of these statements.

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ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)


	Three Months Ended March 31,
		2023		2022
Net loss		$	(8,874)	$	(9,882)
Total other comprehensive income (loss):
Unrealized (loss) gain on interest rate derivatives		(72)		3,818
Reclassification of previous unrealized (gain) loss on interest rate derivatives into net loss		(1,696)		239
Total other comprehensive income (loss)		(1,768)		4,057

Total comprehensive loss		(10,642)		(5,825)
Comprehensive income attributable to non-controlling interest		(11)		(24)
Total comprehensive loss		$	(10,653)	$	(5,849)

The accompanying notes are an integral part of these statements.

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ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except for share data) (Unaudited)


	Common Stock
	Number of Shares	Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity		Non-Controlling Interest		Total Equity
Balance, January 1, 2023	56,639,040	$	57	$	1,147,014	$	6,308	$	(178,910)	$	974,469	$	1,389	$	975,858
Net (loss) income	—	—		—		—		(8,885)		(8,885)		11		(8,874)
Distributions	—	—		—		—		(5,721)		(5,721)		—		(5,721)

Repurchases of Common Stock to settle tax obligations	(12,728)	—		(74)		—		—		(74)		—		(74)
Equity-based compensation, net	37,615	—		526		—		—		526		—		526
Other comprehensive income, net	—	—		—		(1,768)		—		(1,768)		—		(1,768)
Balance, March 31, 2023	56,663,927	$	57	$	1,147,466	$	4,540	$	(193,516)	$	958,547	$	1,400	$	959,947


	Common Stock
	Number of Shares	Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity		Non-Controlling Interest		Total Equity
Balance, January 1, 2022	56,625,650	$	57	$	1,145,278	$	299	$	(58,715)	$	1,086,919	$	1,369	$	1,088,288
Net (loss) income	—	—		—		—		(9,906)		(9,906)		24		(9,882)
Distributions	—	—		—		—		(5,707)		(5,707)		—		(5,707)

Equity-based compensation, net	—	—		270		—		—		270		—		270
Other comprehensive income, net	—	—		—		4,057		—		4,057		—		4,057
Balance, March 31, 2022	56,625,650	$	57	$	1,145,548	$	4,356	$	(74,328)	$	1,075,633	$	1,393	$	1,077,026

The accompanying notes are an integral part of these statements.

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ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net loss	$	(8,874)	$	(9,882)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	28,166		34,353
Non-cash revenue adjustments, net	(2,656)		(1,092)

Impairments	3,754		1,602


Loss on extinguishment of debt, net	—		468
Amortization of deferred financing costs	1,048		1,172
Equity-based compensation	526		270
Equity in loss of unconsolidated joint venture, net	123		41

Changes in assets and liabilities:
Accounts receivable, net and other assets, net	(4,308)		(1,989)
Accounts payable, accrued expenses and other liabilities, net	(6,338)		3,210

Net cash provided by operating activities	11,441		28,153
Cash flows from investing activities:
Capital expenditures and leasing costs	(3,138)		(1,836)


Return of investment from unconsolidated joint venture	421		601
Proceeds from the settlement of property-related insurance claims	250		—
Net cash used in investing activities	(2,467)		(1,235)
Cash flows from financing activities:
Repayment of bridge facility, including debt extinguishment costs	—		(355,026)
Proceeds from mortgages payable	—		355,000


Proceeds from credit facility revolver	—		70,000
Repayments of credit facility revolver	—		(69,000)
Payments of deferred financing costs	(40)		(3,096)
Repurchases of common stock to settle tax obligations	(74)		—
Payments of deferred equity offering costs	(10)		—
Distributions paid	(5,664)		—


Other financing activities	(56)		(46)

Net cash used in financing activities	(5,844)		(2,168)
Net change in cash and cash equivalents and restricted cash	3,130		24,750

Cash and cash equivalents and restricted cash, beginning of period	55,311		29,318
Cash and cash equivalents and restricted cash, end of period	$	58,441	$	54,068

Reconciliation of Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents at beginning of period	$	20,638	$	29,318
Restricted cash at beginning of period	34,673		—
Cash and cash equivalents and restricted cash at beginning of period	$	55,311	$	29,318

Cash and cash equivalents at end of period	$	23,755	$	18,585
Restricted cash at end of period	34,686		35,483
Cash and cash equivalents and restricted cash at end of period	$	58,441	$	54,068

The accompanying notes are an integral part of these statements.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Note 1 – Organization

Organization

Orion Office REIT Inc. (the “Company”, “Orion”, “we” or “us”) was incorporated in the state of Maryland on July 1, 2021 and has been operating in a manner so as to qualify and has elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with its initial taxable year ended December 31, 2021.

The Company was initially formed as a wholly-owned subsidiary of Realty Income Corporation (“Realty Income”). Following completion of the merger transaction involving Realty Income and VEREIT, Inc. (“VEREIT”) on November 1, 2021, Realty Income contributed the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income, and certain office real properties and related assets previously owned by subsidiaries of VEREIT (the “Separation”), to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”), and on November 12, 2021, effected a special distribution to its stockholders of all the outstanding shares of common stock of the Company (the “Distribution”).

Following the Distribution, the Company became independent and publicly traded and its common stock, par value $0.001 per share, trades on the New York Stock Exchange (the “NYSE”) under the symbol “ONL”.

As of March 31, 2023, the Company owned and operated 81 office properties and related assets totaling approximately 9.5 million leasable square feet located within 29 states. In addition, the Company owns an equity interest in OAP/VER Venture, LLC (the “Arch Street Joint Venture”), an unconsolidated joint venture with an affiliate of Arch Street Capital Partners, LLC (“Arch Street Capital Partners”). As of March 31, 2023, the Arch Street Joint Venture owned a portfolio consisting of six office properties totaling approximately 1.0 million leasable square feet located within six states.

Note 2 - Summary of Significant Accounting Policies

Basis of Accounting

The consolidated statements of the Company presented herein include the accounts of the Company and its consolidated subsidiaries. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These adjustments are considered to be of a normal, recurring nature.

The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2023. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC and U.S. GAAP.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in the Company’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of equity.

For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one or more of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance; (b) the obligation to absorb the expected losses of the entity; or (c) the right to receive the expected returns of the entity. The

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Company consolidates entities that are not VIEs if it has a majority voting interest or other rights that result in effectively controlling the entity.

The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company continually evaluates the need to consolidate VIEs based on standards set forth in U.S. GAAP.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding real estate investment impairments.

Reclassification

Acquisition, disposition and leasing deal related costs incurred by the Company, previously included in the acquisition related line on the consolidated statements of operations, have been presented in the transaction related line for prior periods presented to be consistent with the current period presentation. Spin related costs are costs incurred by the Company in connection with the Separation and the Distribution. These costs were previously included in the transaction costs line on the consolidated statements of operations and have been presented in the spin related line for all prior periods presented to be consistent with the current period presentation. These reclassifications had no effect on the reported results of operations.

Revenue Recognition

Rental Revenue

The Company continually reviews receivables related to rent, straight-line rent and property operating expense reimbursements and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as cash is received and the Company reduces rental revenue for any straight-line rent receivables. The Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental revenue. During the three months ended March 31, 2023, the Company recorded a reduction to rental revenue of less than $0.1 million for income not probable of collection. During the three months ended March 31, 2022, the Company did not record any reductions to rental revenue for amounts not probable of collection.

For operating leases with minimum scheduled rent increases, the Company recognizes rental revenue on a straight-line basis, including the effect of any free rent periods, over the lease term when collectability of lease payments is probable. Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur.

Certain of the Company’s leases also contain provisions for tenants to reimburse the Company for real estate taxes, insurance and maintenance and other property operating expenses. Such reimbursements are included in rental revenue and amounts paid directly by tenants are recorded on a net basis, as applicable (i.e., the property operating expenses paid directly by tenants are not included in the Company’s consolidated financial statements).

Rental revenue also includes lease termination income collected from tenants to allow for the tenants to settle their lease obligations and/or to vacate their space prior to their scheduled termination dates, as well as amortization of above and below-market leases and lease incentives. During the three months ended March 31, 2023, the Company recognized $1.6 million of lease termination income. During the three months ended March 31, 2022, the Company did not recognize any lease termination income.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Fee Income from Unconsolidated Joint Venture

The Company provides various services to the Arch Street Joint Venture in exchange for market-based fees. Total asset and property management fees earned in connection with this entity was $0.2 million for the three months ended March 31, 2023 and 2022.

Cash and Cash Equivalents

Cash and cash equivalents include cash in bank accounts, as well as investments in highly-liquid funds with original maturities of three months or less. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed federally insured levels. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held.

Restricted Cash

The Company had $34.7 million in restricted cash as of March 31, 2023 and December 31, 2022, primarily comprised of reserves held by the lender under the CMBS Loan (as defined in Note 6 – Debt, Net) for future rent concessions and tenant improvement allowances. Restricted cash is included in other assets, net on the Company’s consolidated balance sheets.

Recent Accounting Pronouncements

There are no recent account pronouncements that the Company has yet to adopt as of March 31, 2023, that are expected to have a significant impact on its consolidated financial statements.

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the three months ended March 31, 2023, the Company had no acquisitions. During the three months ended March 31, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of the tax advantaged bond and ground lease structure. As a result of the transaction, $4.7 million that was previously classified as a finance lease right-of-use asset with respect to such land parcel previously subject to the ground lease was reclassified from other assets, net to real estate investments in the Company’s consolidated balance sheet as of March 31, 2022. The Company did not have any other acquisitions during the three months ended March 31, 2022.

Property Dispositions and Real Estate Assets Held for Sale

During the three months ended March 31, 2023 and 2022, the Company had no dispositions.

As of March 31, 2023, there was one property classified as held for sale, which the Company expected to be sold in the next 12 months as part of its portfolio management strategy. The property had a carrying value of $2.5 million primarily comprised of land of $0.6 million and building, fixtures and improvements, net of $1.9 million, included in real estate assets held for sale, net in the accompanying consolidated balance sheets.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Intangible Lease Assets and Liabilities

Intangible lease assets and liabilities consisted of the following (in thousands, except weighted-average useful life):


	Weighted-Average Useful Life (Years)	March 31, 2023		December 31, 2022
Intangible lease assets:
In-place leases, net of accumulated amortization of $156,457 and $144,798, respectively	5.6	$	158,395	$	177,698
Leasing commissions, net of accumulated amortization of $1,908 and $1,553, respectively	12.4	14,143		13,614
Above-market lease assets, net of accumulated amortization of $12,130 and $11,391, respectively	5.8	8,498		9,826
Deferred lease incentives, net of accumulated amortization of $217 and $116, respectively	4.7	1,593		1,694
Total intangible lease assets, net		$	182,629	$	202,832

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $18,791 and $17,249, respectively	8.8	$	12,526	$	14,068

The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $0.2 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was $0.1 million for the three months ended March 31, 2023, as compared to no impact to rental revenue for the three months ended March 31, 2022. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $19.7 million and $25.2 million for the three months ended March 31, 2023 and 2022, respectively.

The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of March 31, 2023 (in thousands):


	Remainder of 2023		2024		2025		2026		2027		2028
In-place leases:
Total projected to be included in amortization expense	$	54,378	$	49,049	$	21,608	$	15,499	$	7,441	$	4,592
Leasing commissions:
Total projected to be included in amortization expense	$	1,086	$	1,404	$	1,336	$	1,336	$	1,333	$	1,191
Above-market lease assets:
Total projected to be deducted from rental revenue	$	3,488	$	2,964	$	850	$	682	$	237	$	115
Deferred lease incentives:
Total projected to be deducted from rental revenue	$	302	$	403	$	386	$	288	$	212	$	—
Below-market lease liabilities:
Total projected to be added to rental revenue	$	4,451	$	3,786	$	1,036	$	817	$	655	$	571

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Investment in Unconsolidated Joint Venture

The following is a summary of the Company’s investment in the Arch Street Joint Venture, as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022 (dollars in thousands):


	Ownership % (1)	Number of Properties	Carrying Value of Investment			Equity in Loss, Net
						Three Months Ended
Investment	March 31, 2023		March 31, 2023		December 31, 2022	March 31, 2023		March 31, 2022
Arch Street Joint Venture (2) (3)	20%	6	$	15,279	15,824	$	(123)	(41)

____________________________________

(1)The Company’s ownership interest reflects its legal ownership interest. The Company’s legal ownership interest may, at times, not equal the Company’s economic interest because of various provisions in the joint venture agreement regarding capital contributions, distributions of cash flow based on capital account balances and allocations of profits and losses. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interest.

(2)During the three months ended March 31, 2023 and 2022, the Arch Street Joint Venture did not acquire any properties.

(3)The total carrying value of the Company’s investment in the Arch Street Joint Venture was greater than the underlying equity in net assets by $0.8 million and $0.9 million as of March 31, 2023 and December 31, 2022, respectively. This difference is related to a step up in the fair value of the investment in the Arch Street Joint Venture in connection with the Separation and the Distribution. The step up in fair value was allocated based on the underlying assets and liabilities of the Arch Street Joint Venture and is being amortized over the estimated useful lives of the respective assets and liabilities in accordance with the Company’s accounting policies.

Note 4 – Receivables and Other Assets:

Accounts receivable, net consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Accounts receivable, net	$	12,060	$	10,461
Straight-line rent receivable, net	12,637		11,180
Total	$	24,697	$	21,641

Other assets, net consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Restricted cash	$	34,686	$	34,673
Right-of-use assets, net (1)	26,168		26,422
Investment in unconsolidated joint venture	15,279		15,824
Derivative assets	4,540		6,308
Deferred costs, net (2)	4,089		4,619
Prepaid expenses	3,961		1,305
Other assets, net	1,103		1,063
Total	$	89,826	$	90,214

____________________________________

(1)Amortization expense for below market right-of-use asset was less than $0.1 million for the three months ended March 31, 2023 and 2022. Includes right-of-use finance leases of $9.0 million and a below-market right-of-use asset, net of $6.8 million as of March 31, 2023 and December 31, 2022, and right-of-use operating leases of $10.4 million and $10.6 million, as of March 31, 2023 and December 31, 2022, respectively.

(2)Amortization expense for deferred costs related to the Revolving Facility totaled $0.5 million for the three months ended March 31, 2023 and 2022. Accumulated amortization for deferred costs related to the Revolving Facility was $3.0 million and $2.5 million as of March 31, 2023 and December 31, 2022, respectively. Includes outstanding deferred equity offering costs of $0.5 million, which will be offset against additional paid in capital for future issuances of shares of the Company’s common stock, as of both March 31, 2023 and December 31, 2022.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Note 5 – Fair Value Measures

Items Measured at Fair Value on a Recurring Basis

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, aggregated by the level in the fair value hierarchy within which those instruments fall (in thousands):


	Level 1		Level 2		Level 3		Balance as of March 31, 2023
Derivative assets	$	—	$	4,540	$	—	$	4,540


	Level 1		Level 2		Level 3		Balance as of December 31, 2022
Derivative assets	$	—	$	6,308	$	—	$	6,308

Derivative Assets – The Company’s derivative financial instruments relate to interest rate swap agreements entered into in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility (as defined in Note 6 – Debt, Net). The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.

Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2023 and December 31, 2022, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Items Measured at Fair Value on a Non-Recurring Basis

Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Real Estate and Other Investments – The Company performs quarterly impairment review procedures for real estate investments, right of use assets and its investment in the Arch Street Joint Venture, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of such assets may not be recoverable.

As part of the Company’s impairment review procedures, net real estate assets representing three and two properties were deemed to be impaired during the three months ended March 31, 2023 and 2022, respectively, resulting in impairment charges of $3.8 million and $1.6 million during the three months ended March 31, 2023 and 2022, respectively. The impairment charges relate to adjustments to expected sales prices for certain non-core assets which have been identified by management for potential sale or management determined would not be re-leased by the existing tenant, as well as changes related to management’s intent to sell or lease the real estate assets.

The following table summarizes our provisions for impairment during the periods indicated below (dollars in thousands):


	Three Months Ended March 31,
	2023		2022
Number of properties	3		2

Carrying value of impaired properties	$	28,357	$	8,728
Provisions for impairment	(3,754)		(1,602)
Estimated fair value	$	24,603	$	7,126

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

The Company estimates fair values using Level 2 and Level 3 inputs and uses a combined income and market approach, specifically using discounted cash flow analysis and/or recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rate; (2) discount rates; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions including 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 the Company’s tenants.

For the Company’s impairment tests for the real estate assets during the three months ended March 31, 2023, the fair value measurement for all three impaired properties was determined by applying an estimated sales price based on market data. During the three months ended March 31, 2023, impairment charges of $3.8 million were recorded for held and used properties, and no impairment charges were recorded for held for sale properties.

For the Company’s impairment tests for the real estate assets during the three months ended March 31, 2022, the fair value measurement for each of the two impaired properties was determined by applying an estimated sales price based on market data. During the three months ended March 31, 2022, impairment charges of $1.6 million were recorded for held and used properties, and no impairment charges were recorded for held for sale properties.

The following table presents certain of the Company’s assets measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022, aggregated by the level in the fair value hierarchy within which those assets fall (in thousands):


	Level 1		Level 2(1)		Level 3(1)		Balance as of March 31, 2023
Assets of properties held and used	$	—	$	4,400	$	20,203	$	24,603


	Level 1		Level 2 (1)		Level 3 (1)		Balance as of December 31, 2022
Assets of properties held and used	$	—	$	38,900	$	11,957	$	50,857
Assets of properties held for sale	—		2,502		—		2,502
Total	$	—	$	41,402	$	11,957	$	53,359

____________________________________

(1)The fair value of the level 2 category was derived using negotiated sales prices with third parties and the fair value of the level 3 category was derived using discounted cash flow analysis and management estimates of selling prices.

Fair Value of Financial Instruments

The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their carrying value in the accompanying consolidated balance sheets due to their short-term nature. The fair values of the Company’s long-term financial instruments are reported below (dollars in thousands):


	Level	Carrying Value at March 31, 2023		Fair Value at March 31, 2023		Carrying Value at December 31, 2022		Fair Value at December 31, 2022
Liabilities (1):
Mortgages payable	2	355,000		338,371		355,000		332,323
Credit facility term loan	2	175,000		175,000		175,000		175,000

Total		$	530,000	$	513,371	$	530,000	$	507,323

____________________________________

(1)Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs.

Debt – The fair value is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of credit spreads and observable market interest rates, representing level 2 on the fair value hierarchy.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Note 6 – Debt, Net

As of March 31, 2023, the Company had $526.5 million of debt outstanding, including net deferred financing costs, with a weighted-average years to maturity of 2.8 years and a weighted-average interest rate of 4.38%. The following table summarizes the carrying value of debt as of March 31, 2023 and December 31, 2022, and the debt activity for the three months ended March 31, 2023 (in thousands):


			Three Months Ended March 31, 2023
	Balance as of December 31, 2022		Debt Issuances		Repayments, Extinguishment and Assumptions		Accretion and Amortization		Balance as of March 31, 2023
Mortgages payable:
Outstanding balance	$	355,000	$	—	$	—	$	—	$	355,000
Deferred costs	(2,833)		—		—		170		(2,663)
Mortgages payable, net	352,167		—		—		170		352,337

Credit facility term loan:
Outstanding balance	175,000		—		—		—		175,000
Deferred costs	(1,185)		—		—		338		(847)
Credit facility term loan, net	173,815		—		—		338		174,153





Total debt	$	525,982	$	—	$	—	$	508	$	526,490

The following table summarizes the scheduled aggregate principal repayments due on the Company’s debt outstanding as of March 31, 2023 (in thousands):


	Total
April 1, 2023 to December 31, 2023	$	175,000
2024	—
2025	—
2026	—
2027	355,000

Total	$	530,000

Credit Agreement

In connection with the Separation and the Distribution, on November 12, 2021, the Company, 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 million senior revolving credit facility (the “Revolving Facility”), including a $25 million letter of credit sub-facility, and a two-year, $175.0 million senior term loan facility (the “Term Loan Facility,” and together with the Revolving Facility, the “Revolver/Term Loan Facilities”) with Wells 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”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. The Term Loan Facility is scheduled to mature on November 12, 2023, and the Revolving Facility is scheduled to mature on November 12, 2024. The Company expects to extend, repay or refinance (or some combination of the foregoing) the Revolver/Term Loan Facilities on or prior to maturity. The Company has sufficient available capacity under the Revolving Facility to repay the Term Loan Facility, if needed.

In February 2022, as further described below, the Company refinanced the Bridge Facility in full with the $355.0 million CMBS Loan, and the Bridge Credit Agreement was terminated. As of March 31, 2023, the Company did not have any borrowings under the Revolving Facility and, therefore, had $425.0 million of availability under the Revolving Facility.

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. On December 1, 2022, the Company, as parent, and Orion OP, as borrower, entered into that certain First Amendment to the Revolver/Term Loan Credit Agreement

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

(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 the Federal 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).

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 the Company 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.

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 the following financial covenants:

•ratio of total debt to total asset value of not more than 0.60 to 1.00;

•ratio of adjusted EBITDA to fixed charges of not less than 1.50 to 1.00;

•ratio of secured debt to total asset value of not more than 0.45 to 1.00;

•ratio of unsecured debt to unencumbered asset value of not more than 0.60 to 1.00; and

•ratio of net operating income from all unencumbered real properties to unsecured interest expense of not less than 2.00 to 1.00.

As of March 31, 2023, Orion OP was in compliance with these financial covenants.

The Revolver/Term Loan Facilities include customary representations and warranties of the Company 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 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

On February 10, 2022, certain indirect subsidiaries of the Company (the “Mortgage Borrowers”) obtained a $355.0 million fixed rate mortgage loan (the “CMBS Loan”) from Wells 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”). During March 2022, Wells Fargo effected a securitization of the CMBS Loan. The CMBS Loan bears interest at a fixed rate of 4.971% per annum and matures on February 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 19 Mortgaged 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.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

The CMBS Loan is secured by, among other things, first priority mortgages and deeds of trust granted by the Mortgage Borrowers and encumbering the Mortgaged 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 in March 2024, 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 of March 31, 2023, 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 the Mortgaged 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 the Mortgaged Properties.

The Company’s mortgages payable consisted of the following as of March 31, 2023 (dollars in thousands):


	Encumbered Properties	Net Carrying Value of Collateralized Properties (1)		Outstanding Balance		Weighted-Average Interest Rate		Weighted-Average Years to Maturity
Fixed-rate debt	19	$	456,563	$	355,000	4.97	%	3.9

____________________________________

(1)Net carrying value is real estate assets, including right-of-use assets, net of real estate liabilities.

The table above does not include mortgage notes associated with the Arch Street Joint Venture of $136.7 million as of March 31, 2023.

Note 7 – Derivatives and Hedging Activities

Cash Flow Hedges of Interest Rate Risk

As of each of March 31, 2023 and December 31, 2022, the Company had interest rate swap agreements with an aggregate notional amount of $175.0 million, which were designated as cash flow hedges under U.S. GAAP. The interest rate swap agreements were entered into in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility. The initial interest rate swap agreements were effective on December 1, 2021 and were scheduled to terminate on November 12, 2023. During the year ended December 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 initial interest rate swap agreements and entered into new interest rate swap agreements with an aggregate notional amount of $175.0 million, effective on December 1, 2022 and terminating on November 12, 2023.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

The table below presents the fair value of the Company’s derivative financial instrument designated as a cash flow hedge as well as its classification in the Company’s consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in thousands):


Derivatives Designated as Hedging Instruments	Balance Sheet Location	March 31, 2023		December 31, 2022
Interest rate swaps	Other assets, net	$	4,540	$	6,308

During the three months ended March 31, 2023, the Company recorded unrealized losses of less than $0.1 million for changes in the fair value of its cash flow hedge in accumulated other comprehensive income. During the three months ended March 31, 2022, the Company recorded unrealized gains of $3.8 million for changes in the fair value of its cash flow hedge in accumulated other comprehensive income.

During the three months ended March 31, 2023, the Company reclassified previous gains of $1.7 million from accumulated other comprehensive income into interest expense as a result of the hedged transactions impacting earnings. During the three months ended March 31, 2022, the Company reclassified previous losses of $0.2 million from accumulated other comprehensive income into interest expense as a result of the hedged transactions impacting earnings.

During the next twelve months, the Company estimates that an additional $4.5 million will be reclassified from other comprehensive income as a decrease to interest expense.

Derivatives Not Designated as Hedging Instruments

As of each of March 31, 2023 and December 31, 2022, the Company had no interest rate swaps that were not designated as qualifying hedging relationships.

Tabular Disclosure of Offsetting Derivatives

The table below details a gross presentation, the effects of offsetting and a net presentation of the Company’s derivatives as of March 31, 2023 and December 31, 2022 (in thousands). The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value.


	Offsetting of Derivative Assets and Liabilities
	Gross Amounts of Recognized Assets		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2023	$	4,540	$	—	$	—	$	4,540	$	—	$	—	$	—	$	4,540
December 31, 2022	$	6,308	$	—	$	—	$	6,308	$	—	$	—	$	—	$	6,308

Note 8 – Supplemental Cash Flow Disclosures

Supplemental cash flow information was as follows during the periods indicated below (in thousands):


	Three Months Ended March 31,
	2023		2022
Supplemental disclosures:
Cash paid for interest	$	6,107	$	5,019
Cash paid for income taxes	$	52	$	145
Non-cash investing and financing activities:
Accrued capital expenditures and leasing costs	$	2,434	$	610



Distributions declared and unpaid	$	5,666	$	5,663
Land acquired upon finance lease termination	$	—	$	4,707

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Note 9 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Accrued real estate and other taxes	$	9,148	$	10,191
Accrued operating and other	4,219		10,034
Accrued capital expenditures and leasing costs	3,749		2,333
Accrued interest	1,769		1,810
Accounts payable	1,072		1,793
Total	$	19,957	$	26,161

Note 10 – Commitments and Contingencies

Leasing

As part of its ordinary re-leasing activities, the Company has agreed and anticipates that it will continue to agree 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. 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 of March 31, 2023, the Company had total commitments of $50.0 million outstanding for tenant improvement allowances and $0.3 million for leasing commissions. 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. For assets financed on the CMBS Loan, the Company has funded reserves with the lender for tenant improvement allowances and rent concession commitments. The restricted cash included in the reserve totaled $34.7 million as of March 31, 2023, 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.

Litigation

From time to time, the Company may be party to various legal proceedings which it believes are routine in nature and incidental to the operation of its business. The Company does not believe that any such legal proceedings will have a material adverse effect upon its consolidated and combined position or results of operations.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition, in each case, that it believes will have a material adverse effect upon its consolidated and combined position or results of operations.

Note 11 – Leases

Lessor

As of March 31, 2023, the Company’s operating leases have non-cancelable lease terms ranging from 0.1 years to 15.0 years. Certain leases with tenants include tenant options to extend or terminate the lease agreements or to purchase the underlying assets. Lease agreements may also contain rent increases that are based on an index or rate (e.g., the consumer price index).

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

The following table presents future minimum base rent payments due to the Company over the next five years and thereafter as of March 31, 2023 (in thousands).


	Future Minimum Base Rent Payments
April 1, 2023 - December 31, 2023	$	101,914
2024	111,103
2025	74,248
2026	71,234
2027	51,814
2028	40,104
Thereafter	158,714
Total	$	609,131

Lessee

The Company is the lessee under ground lease arrangements and corporate office leases, which meet the criteria under U.S. GAAP for an operating lease. As of March 31, 2023, the Company’s operating leases had remaining lease terms ranging from 0.7 years to 61.8 years, which includes options to extend. Under the operating leases, the Company pays rent and may also pay variable costs, including property operating expenses and common area maintenance. The weighted-average discount rate used to measure the lease liability for the Company’s operating leases was 3.50% as of March 31, 2023. As the Company’s leases do not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the lease commencement date or the lease guidance adoption date, as applicable, in determining the present value of lease payments.

Operating lease costs were $0.3 million for the three months ended March 31, 2023 and 2022. No cash paid for operating lease liabilities was capitalized for the three months ended March 31, 2023 and 2022.

The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for ground and corporate office lease obligations as of March 31, 2023 (in thousands).


	Future Minimum Lease Payments
April 1, 2023 - December 31, 2023	$	891
2024	883
2025	892
2026	478
2027	445
2028	447
Thereafter	12,491
Total	16,527
Less: imputed interest	5,984
Total	$	10,543

Note 12 – Stockholders’ Equity

Common Stock

The Company was initially capitalized on July 15, 2021 with the issuance of 100,000 shares of common stock to Realty Income for a total of $1,000.

On November 10, 2021, the Company issued 56,525,650 additional shares of common stock to Realty Income, such that Realty Income owned 56,625,650 shares of the Company’s common stock. On November 12, 2021, Realty Income effected the Distribution.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 (Unaudited)

Dividends

During the three months ended March 31, 2023 and 2022, the Company’s Board of Directors declared quarterly cash dividends on shares of the Company’s common stock as follows:

Declaration Date

Record Date

Paid Date

Distributions Per Share

March 7, 2023

March 31, 2023

April 17, 2023

0.10

Declaration Date

Record Date

Paid Date

Distributions Per Share

March 22, 2022

March 31, 2022

April 15, 2022