onl-20240930

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 September 30, 2024


			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 55,947,802 shares of common stock of Orion Office REIT Inc. outstanding as of November 1, 2024.

ORION OFFICE REIT INC.

For the quarterly period ended September 30, 2024


						Page
PART I
Item 1. Unaudited Financial Statements						3
Orion Office REIT Inc. Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023						3
Orion Office REIT Inc. Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023						4
Orion Office REIT Inc. Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2024 and 2023						5
Orion Office REIT Inc. Consolidated Statements of Equity for the Three and Nine Months Ended Septem ber 30, 2024 and 2023						6
Orion Office REIT Inc. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023						8
Notes to Orion Office REIT Inc. Consolidated Financial Statements						10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						29
Item 3. Quantitative and Qualitative Disclosures About Market Risk						50
Item 4. Controls and Procedures						51
PART II
Item 1. Legal Proceedings						52
Item 1A. Risk Factors						52
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities						52
Item 3. Defaults Upon Senior Securities						53
Item 4. Mine Safety Disclosures						53
Item 5. Other Information						53
Item 6. Exhibits						53
Signatures						54

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements.

ORION OFFICE REIT INC.

CONSOLIDATED BALANCE SHEETS

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


	September 30, 2024		December 31, 2023
ASSETS
Real estate investments, at cost:
Land	$	234,980	$	223,264
Buildings, fixtures and improvements	1,089,798		1,097,132
Total real estate investments, at cost	1,324,778		1,320,396
Less: accumulated depreciation	180,683		158,791
Total real estate investments, net	1,144,095		1,161,605
Accounts receivable, net	24,144		24,663
Intangible lease assets, net	101,501		126,364
Cash and cash equivalents	16,564		22,473

Other assets, net	82,567		88,828
Total assets	$	1,368,871	$	1,423,933

LIABILITIES AND EQUITY
Mortgages payable, net	$	353,373	$	352,856
Credit facility revolver	130,000		116,000
Accounts payable and accrued expenses	32,237		30,479
Below-market lease liabilities, net	21,328		8,074
Distributions payable	5,595		5,578
Other liabilities, net	24,010		23,943
Total liabilities	566,543		536,930

Common stock, $0.001 par value, 100,000,000 shares authorized 55,947,802 and 55,783,548 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively	56		56
Additional paid-in capital	1,146,924		1,144,636
Accumulated other comprehensive loss	(102)		(264)
Accumulated deficit	(345,946)		(258,805)
Total stockholders’ equity	800,932		885,623
Non-controlling interest	1,396		1,380
Total equity	802,328		887,003
Total liabilities and equity	$	1,368,871	$	1,423,933

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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Rental	$	38,976	$	48,876	$	125,894	$	150,690
Fee income from unconsolidated joint venture	202		200		605		600
Total revenues	39,178		49,076		126,499		151,290
Operating expenses:
Property operating	16,643		15,506		48,399		46,337
General and administrative	4,468		4,367		13,961		13,241
Depreciation and amortization	19,913		27,013		83,031		83,056
Impairments	—		11,403		25,365		26,976
Transaction related	105		101		382		356
Total operating expenses	41,129		58,390		171,138		169,966
Other (expenses) income:
Interest expense, net	(8,170)		(7,380)		(24,374)		(21,741)
Gain on disposition of real estate assets	—		18		—		18
Loss on extinguishment of debt, net	—		—		(1,078)		(504)

Other income, net	208		437		580		638
Equity in loss of unconsolidated joint venture, net	(218)		(108)		(497)		(326)
Total other (expenses) income, net	(8,180)		(7,033)		(25,369)		(21,915)
Loss before taxes	(10,131)		(16,347)		(70,008)		(40,591)
Provision for income taxes	(76)		(160)		(226)		(505)
Net loss	(10,207)		(16,507)		(70,234)		(41,096)
Net income attributable to non-controlling interest	(10)		(12)		(16)		(38)
Net loss attributable to common stockholders	$	(10,217)	$	(16,519)	$	(70,250)	$	(41,134)

Weighted-average shares outstanding - basic and diluted	55,948		56,543		55,887		56,621
Basic and diluted net loss per share attributable to common stockholders	$	(0.18)	$	(0.29)	$	(1.26)	$	(0.73)

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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net loss	$	(10,207)	$	(16,507)	$	(70,234)	$	(41,096)
Total other comprehensive income (loss):
Unrealized (loss) gain on interest rate derivatives	(88)		37		162		386
Reclassification of previous unrealized gain on interest rate derivatives into net loss	—		(2,077)		—		(5,708)
Total other comprehensive income (loss)	(88)		(2,040)		162		(5,322)

Total comprehensive loss	(10,295)		(18,547)		(70,072)		(46,418)
Comprehensive income attributable to non-controlling interest	(10)		(12)		(16)		(38)
Total comprehensive loss attributable to common stockholders	$	(10,305)	$	(18,559)	$	(70,088)	$	(46,456)

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 Loss		Accumulated Deficit		Total Stockholders’ Equity		Non-Controlling Interest		Total Equity
Balance, January 1, 2024	55,783,548	$	56	$	1,144,636	$	(264)	$	(258,805)	$	885,623	$	1,380	$	887,003
Net (loss) income	—	—		—		—		(26,232)		(26,232)		6		(26,226)
Distributions	—	—		—		—		(5,673)		(5,673)		—		(5,673)

Repurchases of common stock to settle tax obligations	(46,598)	—		(162)		—		—		(162)		—		(162)
Equity-based compensation, net	132,869	—		790		—		—		790		—		790
Other comprehensive income, net	—	—		—		219		—		219		—		219
Balance, March 31, 2024	55,869,819	$	56	$	1,145,264	$	(45)	$	(290,710)	$	854,565	$	1,386	$	855,951
Net (loss) income	—	—		—		—		(33,801)		(33,801)		—		(33,801)
Distributions	—	—		—		—		(5,625)		(5,625)		—		(5,625)


Equity-based compensation, net	77,983	—		935		—		—		935		—		935
Other comprehensive income, net	—	—		—		31		—		31		—		31
Balance, June 30, 2024	55,947,802	$	56	$	1,146,199	$	(14)	$	(330,136)	$	816,105	$	1,386	$	817,491
Net (loss) income	—	—		—		—		(10,217)		(10,217)		10		(10,207)
Distributions	—	—		—		—		(5,593)		(5,593)		—		(5,593)



Equity-based compensation, net	—	—		725		—		—		725		—		725
Other comprehensive loss, net	—	—		—		(88)		—		(88)		—		(88)
Balance, September 30, 2024	55,947,802	$	56	$	1,146,924	$	(102)	$	(345,946)	$	800,932	$	1,396	$	802,328

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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
Net (loss) income	—	—		—		—		(15,730)		(15,730)		15		(15,715)
Distributions	—	—		—		—		(5,683)		(5,683)		—		(5,683)

Equity-based compensation, net	31,764	—		689		—		—		689		—		689
Other comprehensive income, net	—	—		—		(1,514)		—		(1,514)		—		(1,514)
Balance, June 30, 2023	56,695,691	$	57	$	1,148,155	$	3,026	$	(214,929)	$	936,309	$	1,415	$	937,724
Net (loss) income	—	—		—		—		(16,519)		(16,519)		12		(16,507)
Distributions	—	—		—		—		(5,578)		(5,578)		—		(5,578)
Repurchases of common stock under Share Repurchase Program	(915,637)	(1)		(5,017)		—		—		(5,018)		—		(5,018)

Equity-based compensation, net	—	—		687		—		—		687		—		687
Other comprehensive income, net	—	—		—		(2,040)		—		(2,040)		—		(2,040)
Balance, September 30, 2023	55,780,054	$	56	$	1,143,825	$	986	$	(237,026)	$	907,841	$	1,427	$	909,268

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)


	Nine Months Ended September 30,
	2024		2023
Cash flows from operating activities:
Net loss	$	(70,234)	$	(41,096)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	83,031		83,056
Non-cash revenue adjustments, net	783		(6,562)

Impairments	25,365		26,976
Gain on disposition of real estate assets	—		(18)

Loss on extinguishment of debt, net	1,078		504
Amortization of deferred financing costs	2,758		3,041
Equity-based compensation	2,450		1,902
Equity in loss of unconsolidated joint venture, net	497		326

Changes in assets and liabilities:
Accounts receivable, net and other assets, net	(698)		(2,545)
Accounts payable, accrued expenses and other liabilities, net	(3,269)		4,004
Net cash provided by operating activities	41,761		69,588
Cash flows from investing activities:
Investment in real estate assets	(34,734)		—
Capital expenditures and leasing costs	(12,649)		(12,746)
Proceeds from disposition of real estate, net	2,070		13,767

Return of investment from unconsolidated joint venture	987		1,374
Principal repayments received on notes receivable	1,200		—
Deposits for real estate assets	(1,350)		(2,340)
Uses and refunds of deposits for real estate assets	1,350		2,340
Proceeds from the settlement of property-related insurance claims	171		757
Net cash (used in) provided by investing activities	(42,955)		3,152
Cash flows from financing activities:


Proceeds from credit facility revolver	28,000		175,000
Repayments of credit facility revolver	(14,000)		—
Repayment of credit facility term loan	—		(175,000)
Payments of deferred financing costs	(1,363)		(5,654)
Repurchases of common stock under Share Repurchase Program	—		(5,018)
Repurchases of common stock to settle tax obligations	(162)		(74)
Payments of deferred equity offering costs	—		(41)
Distributions paid	(16,759)		(17,000)
Other financing activities	(116)		(68)

Net cash used in financing activities	(4,400)		(27,855)
Net change in cash and cash equivalents and restricted cash	(5,594)		44,885

Cash and cash equivalents and restricted cash, beginning of year	57,198		55,311
Cash and cash equivalents and restricted cash, end of period	$	51,604	$	100,196

Reconciliation of Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents at beginning of year	$	22,473	$	20,638
Restricted cash at beginning of year	34,725		34,673

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ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


Cash and cash equivalents and restricted cash at beginning of year	$	57,198	$	55,311

Cash and cash equivalents at end of period	$	16,564	$	32,286
Restricted cash at end of period	35,040		67,910
Cash and cash equivalents and restricted cash at end of period	$	51,604	$	100,196

The accompanying notes are an integral part of these statements.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

Note 1 – Organization

Organization

Orion Office REIT Inc. (the “Company”, “Orion”, “we” or “us”) is an internally managed real estate investment trust (“REIT”) engaged in the ownership, acquisition, and management of a diversified portfolio of office buildings located in high-quality suburban markets across the U.S. and leased primarily on a single-tenant net lease basis to creditworthy tenants. The Company’s portfolio is comprised of traditional office buildings, as well as governmental office, medical office, flex/laboratory and R&D and flex/industrial properties.

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” 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.

During the nine months ended September 30, 2024, the Company commenced classifying certain of its properties which are being repositioned, redeveloped, developed or held for sale as non-operating properties rather than operating properties, resulting in six properties being removed from operating properties. Also during the nine months ended September 30, 2024, the Company completed a parcel split of its property located in Amherst, New York, which included two buildings. As a result of the split, the two parcels and respective buildings on the parcels are being reported as separate operating properties. As of September 30, 2024, the Company owned and operated 70 office properties with an aggregate of 8.1 million leasable square feet located in 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 September 30, 2024, 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 Presentation

The consolidated statements of the Company presented herein include the accounts of the Company and its consolidated subsidiaries and consolidated joint venture. 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, 2023, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2024. 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

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.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

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 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 impairments and purchase price allocations.

Revenue Recognition

Rental Revenue

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 on a gross basis. Property operating expenses paid directly by tenants are recorded on a net basis (i.e., treated as fully offset by an identical amount of assumed reimbursement revenue) and, therefore, are not included in the Company’s consolidated financial statements.

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 and nine months ended September 30, 2024 and 2023, the Company recorded a reduction to rental revenue of less than $0.1 million for income not probable of collection.

Periodically the Company receives reimbursements from previous tenants that are recognized in rental revenue on a cash basis or when the amounts are definitively agreed upon. During the three and nine months ended September 30, 2024, the Company recognized $0.1 million and $2.9 million of such reimbursements. No such amounts were recognized during the three and nine months ended September 30, 2023. 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. The Company recognized lease termination income of $0.2 million and $1.9 million during the three and nine months ended September 30, 2024, respectively, and $1.0 million and $4.1 million during the three and nine months ended September 30,

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

2023, respectively. Amortization of above and below-market leases and lease incentives is also included in rental revenue and is discussed further in Note 3 – Real Estate Investments and Related Intangibles.

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 September 30, 2024 and 2023 and $0.6 million for the nine months ended September 30, 2024 and 2023.

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 $35.0 million and $34.7 million in restricted cash as of September 30, 2024 and December 31, 2023, respectively, 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

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280, Segment Reporting). ASU 2023-07 serves to improve reportable segment disclosure requirements, primarily through enhanced disclosures, on both an annual and interim basis, about significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of profit or loss, other segment items and a description of its composition by reportable segment, the title and position of the CODM, and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not anticipate the adoption of ASU 2023-07 will have a material impact on its consolidated financial statements.

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the nine months ended September 30, 2024, the Company acquired, for no consideration, the fee simple 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, $3.5 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 land in the Company’s consolidated balance sheet as of September 30, 2024.

Additionally, during the nine months ended September 30, 2024, the Company acquired fee simple, controlling financial interest in one real property and the improvements thereon including a 97,000 square foot flex/laboratory and R&D facility located in San Ramon, California for a gross purchase price of $34.6 million and external acquisition-related expenses of $0.1 million that were capitalized. The property is fully leased to a single tenant with a remaining lease term of 15.0 years as of the acquisition date.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

The following table presents the allocation of the purchase consideration and capitalized transaction costs to the assets acquired and liabilities assumed based on their relative fair values during the nine months ended September 30, 2024 (in thousands):


Real estate investment, at cost:
Land	$	12,250
Building, fixtures and improvements	25,269
Total real estate investment, at cost	37,519
Acquired intangible assets:
Intangible lease asset	13,847
Assumed intangible liabilities:
Below-market lease liability	(16,632)
Net assets acquired	$	34,734

During the three and nine months ended September 30, 2023, the Company had no acquisitions.

Property Dispositions and Real Estate Assets Held for Sale

The following table summarizes the Company’s property dispositions during the periods indicated below (dollars in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Total dispositions	—		2		1		2
Aggregate gross sales price	$	—	$	14,050	$	2,100	$	14,050

Gain on disposition of real estate assets	$	—	$	18	$	—	$	18
Property count	—		2		—		2

Impairments on disposition of real estate assets	$	—	$	—	$	20	$	—
Property count	—		—		1		—

As of September 30, 2024, the Company had no properties classified as held for sale. In November 2024, the Company closed on the sale of one vacant property for a gross sales price of $3.2 million. See Note 15 – Subsequent Events, below.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

Intangible Lease Assets and Liabilities

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


	Weighted-Average Useful Life (Years)	September 30, 2024		December 31, 2023
Intangible lease assets:
In-place leases, net of accumulated amortization of $173,264 and $193,470, respectively	9.0	$	77,039	$	103,997
Leasing commissions, net of accumulated amortization of $4,253 and $3,033, respectively	12.4	17,705		13,539
Above-market lease assets, net of accumulated amortization of $12,671 and $10,372, respectively	9.1	2,652		5,006
Deferred lease incentives, net of accumulated amortization of $792 and $419, respectively	11.0	4,105		3,822
Total intangible lease assets, net		$	101,501	$	126,364

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $25,083 and $23,176, respectively	14.8	$	21,328	$	8,074

The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was less than $0.1 million and $1.0 million for the three and nine months ended September 30, 2024, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2023, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was $0.1 million and $0.4 million for the three and nine months ended September 30, 2024, respectively, and $0.2 million for the nine months ended September 30, 2023. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $11.7 million and $42.1 million for the three and nine months ended September 30, 2024, respectively, and $18.5 million and $57.4 million for the three and nine months ended September 30, 2023, 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 September 30, 2024 (in thousands):


	Remainder of 2024		2025		2026		2027		2028		2029
In-place leases:
Total projected to be included in amortization expense	$	8,859	$	22,537	$	16,157	$	8,262	$	5,517	$	2,797
Leasing commissions:
Total projected to be included in amortization expense	$	486	$	1,943	$	1,939	$	1,912	$	1,692	$	1,403
Above-market lease assets:
Total projected to be deducted from rental revenue	$	609	$	849	$	680	$	237	$	115	$	63
Deferred lease incentives:
Total projected to be deducted from rental revenue	$	136	$	527	$	429	$	405	$	392	$	381
Below-market lease liabilities:
Total projected to be added to rental revenue	$	732	$	2,147	$	1,928	$	1,766	$	1,682	$	1,500

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

Investment in Unconsolidated Joint Venture

The following is a summary of the Company’s investment in the Arch Street Joint Venture, as of and for the periods indicated below (dollars in thousands):


	Ownership % (1)	Number of Properties	Carrying Value of Investment				Equity in Loss, Net
							Nine Months Ended
Investment	September 30, 2024		September 30, 2024		December 31, 2023		September 30, 2024		September 30, 2023
Arch Street Joint Venture (2)	20%	6	$	12,065	$	13,549	$	(497)	$	(326)

____________________________________

(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)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 less than $0.1 million and $0.4 million as of September 30, 2024 and December 31, 2023, 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.

The non-recourse mortgage notes associated with the Arch Street Joint Venture of $135.7 million as of September 30, 2024 are scheduled to mature on November 27, 2024, and the Arch Street Joint Venture has two successive one-year options to extend the maturity until November 27, 2026. The Company’s pro-rata share of the mortgage notes was $27.1 million as of September 30, 2024. The extension options are subject to satisfaction of certain conditions, including satisfaction of certain financial and operating covenants. In October 2024, the Arch Street Joint Venture and its lenders entered into an amendment to the loan agreement pursuant to which, among other things, the lenders agreed to modify certain conditions for the first loan extension and which amendment provides greater certainty the Arch Street Joint Venture will be able to satisfy all conditions for the first loan extension until November 27, 2025. In connection with the amendment, the Arch Street Joint Venture exercised the first extension option and is working with the lenders to satisfy all extension conditions, including a maximum loan-to-value of 60% which may result in a partial repayment of the mortgage notes that the Company anticipates will require it to fund a member loan to the Arch Street Joint Venture. The Company cannot provide any assurance the Arch Street Joint Venture will be able to satisfy the extension conditions for the first or second loan extension or otherwise extend or refinance this debt obligation prior to maturity. If the Arch Street Joint Venture is unable to extend or refinance the mortgage notes, the Company’s investment in the Arch Street Joint Venture could be materially adversely affected.

Note 4 – Receivables and Other Assets

Accounts receivable, net consisted of the following as of the periods indicated below (in thousands):


	September 30, 2024		December 31, 2023
Accounts receivable, net	$	7,919	$	9,008
Straight-line rent receivable, net	16,225		15,655
Total	$	24,144	$	24,663

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

Other assets, net consisted of the following as of the periods indicated below (in thousands):


	September 30, 2024		December 31, 2023
Restricted cash	$	35,040	$	34,725
Right-of-use assets, net (1)	22,448		26,596
Investment in unconsolidated joint venture	12,065		13,549
Deferred costs, net (2)	5,339		7,693
Prepaid expenses	3,240		1,318
Notes receivable (3)	2,500		3,700

Other assets, net	1,935		1,247
Total	$	82,567	$	88,828

____________________________________

(1)Amortization expense for below market right-of-use asset was less than $0.1 million for the three months ended September 30, 2024 and 2023 and $0.1 million for the nine months ended September 30, 2024 and 2023. Includes right-of-use finance leases of $5.6 million, right-of-use operating leases of $10.4 million, and a below-market right-of-use asset, net of $6.5 million as of September 30, 2024. Includes right-of-use finance leases of $9.0 million, right-of-use operating leases of $10.9 million, and a below-market right-of-use asset, net of $6.6 million as of December 31, 2023.

(2)Amortization expense for deferred costs related to the Revolving Facility was $0.7 million and $2.2 million for the three and nine months ended September 30, 2024, respectively, as compared to $0.8 million and $1.8 million for the three and nine months ended September 30, 2023, respectively. Accumulated amortization for deferred costs related to the Revolving Facility was $6.3 million and $5.1 million as of September 30, 2024 and December 31, 2023, respectively. During the nine months ended September 30, 2024, the Company capitalized additional deferred costs of $1.0 million in connection with the third amendment to the Credit Agreement, as defined below and discussed in Note 6 – Debt, Net. Also in connection with the third amendment to the Credit Agreement and resulting reduction in borrowing capacity, net deferred costs of $1.1 million were written-off and recognized in loss on extinguishment of debt, net in the consolidated statements of operations during the nine months ended September 30, 2024. Includes outstanding deferred equity offering costs of $0.6 million, which will be offset against additional paid-in capital for future issuances of shares of the Company’s common stock, as of September 30, 2024 and December 31, 2023.

(3)Notes receivable as of September 30, 2024 includes one long-term seller financed promissory note for one property sold during the year ended December 31, 2023. Notes receivable as of December 31, 2023 includes one long-term seller financed promissory note and one short-term seller financed promissory note for two properties sold during the year ended December 31, 2023. These loans were structured as first mortgage loans on the properties sold with an unsecured recourse guaranty from the buyer principal(s). The short-term seller financed promissory note was repaid in full during the nine months ended September 30, 2024.

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 the periods indicated below, 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 September 30, 2024

Derivative liabilities	$	—	$	102	$	—	$	102


	Level 1		Level 2		Level 3		Balance as of December 31, 2023

Derivative liabilities	$	—	$	264	$	—	$	264

Derivative Liabilities – The Company’s derivative financial instruments comprise interest rate collar agreements entered into in order to hedge interest rate volatility with respect to the Company’s borrowings with an aggregate notional amount of $60.0 million as of September 30, 2024 and December 31, 2023 (as described 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 September 30, 2024 and December 31, 2023, the Company assessed the significance of the impact of the credit valuation

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

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.

The following table summarizes the Company’s provisions for impairment during the periods indicated below (dollars in thousands). The impairment charges reflect changes in the Company’s future cash flow assumptions for agreed-upon or estimated sales proceeds with respect to real estate assets that were expected to be sold as well as changes to assumptions with regard to management’s intent to sell or lease the real estate assets.


	Nine Months Ended September 30,
		2024		2023
Number of properties		8		6

Carrying value of impaired properties		$	62,710	$	54,803
Provisions for impairment		(25,365)		(26,976)
Estimated fair value		$	37,345	$	27,827

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 rates; (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 nine months ended September 30, 2024, the fair value measurement for seven properties were determined based on the sales price under a definitive agreement and one property was determined by a discount rate of 9.0% and capitalization rate of 8.5%. During the nine months ended September 30, 2024, impairment charges of $22.1 million were recorded for held and used properties and impairment charges of $3.3 million were recorded for one disposed property. No impairment charges were recorded for held for sale properties during the nine months ended September 30, 2024.

For the Company’s impairment tests for the real estate assets during the nine months ended September 30, 2023, the fair value measurement for five properties was determined based on sales prices under definitive agreements and one property was determined by applying an estimated sales price based on market data. During the nine months ended September 30, 2023, impairment charges of $14.0 million were recorded for held and used properties, impairment charges of $8.4 million were recorded for held for sale properties and impairment charges of $4.6 million were recorded for disposed properties.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

The following tables present certain of the Company’s assets measured at fair value on a non-recurring basis as of the period indicated below, 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 December 31, 2023
Assets of properties held and used	$	—	$	—	$	5,402	$	5,402

____________________________________

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

There were no assets measured at fair value on a non-recurring basis as of September 30, 2024.

Fair Value of Financial Instruments

The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, notes 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 (in thousands):


	Level	Carrying Value at September 30, 2024		Fair Value at September 30, 2024		Carrying Value at December 31, 2023		Fair Value at December 31, 2023
Assets:

Notes receivable	3	$	2,500	$	2,500	$	2,500	$	2,500


Liabilities (1):
Mortgages payable	2	$	355,000	$	341,241	$	355,000	$	334,897

Credit facility revolver	2	130,000		130,000		116,000		116,000
Derivative liabilities	2	102		102		264		264
Total		$	485,102	$	471,343	$	471,264	$	451,161

____________________________________

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

Notes Receivable – The carrying value of the Company’s long-term promissory note receivable was determined to be at fair value based on management’s estimates of credit spreads and observable market interest rates, representing level 3 on the fair value hierarchy.

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.

Note 6 – Debt, Net

As of September 30, 2024, the Company had $483.4 million of debt outstanding, including net deferred financing costs, with a weighted-average years to maturity of 2.2 years and a weighted-average effective interest rate for the nine months ended September 30, 2024 of 5.88%. The following table summarizes the carrying value of debt as of September 30, 2024 and December 31, 2023, and the debt activity for the nine months ended September 30, 2024 (in thousands):


			Nine Months Ended September 30, 2024
	Balance as of December 31, 2023		Debt Issuances		Repayments, Extinguishment and Assumptions		Accretion and Amortization		Balance as of September 30, 2024
Mortgages payable:
Outstanding balance	$	355,000	$	—	$	—	$	—	$	355,000
Deferred costs	(2,144)		—		—		517		(1,627)
Mortgages payable, net	352,856		—		—		517		353,373






Credit facility revolver	116,000		28,000		(14,000)		—		130,000

Total debt	$	468,856	$	28,000	$	(14,000)	$	517	$	483,373

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

The following table summarizes the scheduled aggregate principal repayments due on the Company’s debt outstanding as of September 30, 2024 (in thousands):


	Total
October 1, 2024 to December 31, 2024	$	—
2025	—
2026	130,000
2027	355,000


Total	$	485,000

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 “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”) 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”) providing for a six-month, $355.0 million senior bridge term loan facility (the “Bridge Facility”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

In February 2022, as further described below, the Company refinanced the Bridge Facility in full with the $355.0 million CMBS Loan (defined below), and the Bridge Credit Agreement was terminated. In June 2023, as further described below, the Term Loan Facility was repaid and retired with borrowings under the Revolving Facility and, as of September 30, 2024, $130.0 million was outstanding under the Revolving Facility.

The Company and Orion OP have entered into three amendments to the Credit Agreement. The purpose of the first amendment entered into in December 2022 was to change the benchmark rate for borrowings under the Credit Agreement from LIBOR (the London interbank offered rate as administered by the ICE Benchmark Administration) to SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York). The purpose of the second amendment entered into in June 2023 was to repay and retire $175.0 million of outstanding borrowings under the Term Loan Facility with borrowings from the Revolving Facility which was undrawn at the time of the second amendment, provide Orion OP with the option to extend the maturity of the Revolving Facility for an additional 18 months to May 12, 2026 from November 12, 2024 and to effect certain other modifications. On May 3, 2024, the Company entered into a third amendment to the Credit Agreement which resulted in a permanent $75.0 million reduction in the capacity of the Revolving Facility to $350.0 million from $425.0 million, while making a proportional reduction in the minimum value of the unencumbered asset pool required under the Credit Agreement to $500.0 million from $600.0 million and certain other modifications to financial covenants. On May 16, 2024, the Company elected its option to extend the maturity of the Revolving Facility to May 12, 2026.

The interest rate applicable to the loans under the Revolving Facility 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 of 3.25% for SOFR loans and 2.25% for base rate loans. Loans under the Revolving Facility may be prepaid and reborrowed, and unused commitments under the Revolving Facility may be reduced, at any time, in whole or in part, by Orion OP, without premium or penalty (except for SOFR breakage costs).

In December 2022, the Company entered into interest rate swap agreements with an aggregate notional amount of $175.0 million, which effectively fixed the interest rate on $175.0 million of principal under the Revolving Facility (or, until June 29, 2023, the Term Loan Facility) at 3.92% per annum until November 12, 2023. Upon the scheduled expiration of the interest rate swap agreements, the Company entered into interest rate collar agreements on a total notional amount of $60.0 million to hedge against interest rate volatility on the Revolving Facility. Under the agreements, the benchmark rate for the Revolving Facility will float between 5.50% per annum and 4.20% per annum on $25.0 million, and 5.50% per annum and 4.035% per annum on $35.0 million, effective from November 13, 2023 until May 12, 2025. As of September 30, 2024, the weighted average effective interest rate of the Revolving Facility was 8.18%.

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.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

The Revolving Facility is guaranteed pursuant to a 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 Revolving Facility is secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors.

The Revolving Facility requires 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. Pursuant to the second amendment described above, if, on any day, Orion OP has unrestricted cash and cash equivalents in excess of $25.0 million (excluding amounts that are then designated for application or use and are subsequently used for such purposes within 30 days), Orion OP will use such excess amount to prepay loans under the Revolving Facility, without premium or penalty and without any reduction in the lenders’ commitment under the Revolving Facility.

In addition, the Revolving Facility giving effect to the modifications pursuant to the second and third amendments described above requires 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 0.40 to 1.00;

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

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

•the unencumbered asset value maintained by Orion OP must be at least $500.0 million.

Pursuant to the second amendment described above, if the ratio of unsecured debt to unencumbered asset value exceeds 0.35 to 1.00 as of the end of two consecutive fiscal quarters, Orion OP will be required, within 90 days and subject to cure rights, to grant the administrative agent a first priority lien on all the properties included in the pool of unencumbered assets (other than properties identified for disposition by the Company so long as such properties are sold within one year of such identification).

As of September 30, 2024, Orion OP was in compliance with the Revolving Facility financial covenants.

The Revolving Facility includes 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 Revolving Facility. The Revolving Facility also includes 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 Revolving Facility to be immediately due and payable and foreclose on the collateral securing the Revolving Facility.

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.

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

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

governing the CMBS Loan (the “CMBS Loan Agreement”), at any time, 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 September 30, 2024, 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 September 30, 2024 (dollars in thousands):


	Encumbered Properties	Net Carrying Value of Collateralized Properties (1)		Outstanding Balance		Interest Rate		Years to Maturity
Fixed-rate debt	19	$	408,829	$	355,000	4.97	%	2.4

____________________________________

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

The table above does not include non-recourse mortgage notes associated with the Arch Street Joint Venture of $135.7 million, of which the Company’s pro-rata share was $27.1 million, as of September 30, 2024.

Note 7 – Derivatives and Hedging Activities

Cash Flow Hedges of Interest Rate Risk

As of September 30, 2024 and December 31, 2023, the Company had outstanding derivative agreements with an aggregate notional amount of $60.0 million, which were designated as cash flow hedges under U.S. GAAP. The interest rate derivative agreements comprise interest rate collar agreements entered into in order to hedge interest rate volatility with respect to the Company’s borrowings under the Revolving Facility. Under the agreements, the benchmark rate for the Revolving Facility will float between 5.50% per annum and 4.20% per annum on $25.0 million, and 5.50% per annum and 4.035% per annum on $35.0 million, effective from November 13, 2023 until May 12, 2025.

The Company was previously party to derivative agreements with an aggregate notional amount of $175.0 million, which were also designated as cash flow hedges under U.S. GAAP. The interest rate derivative agreements, which expired on November 12, 2023, comprised interest rate swap agreements which effectively fixed the interest rate on the Company’s borrowings under the Revolving Facility (or, until June 29, 2023, the Term Loan Facility) until November 12, 2023.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

The table below presents the fair value of the Company’s derivative financial instruments designated as cash flow hedges as well as their classification in the Company’s consolidated balance sheets as of the periods indicated below (in thousands):


Derivatives Designated as Hedging Instruments	Balance Sheet Location	September 30, 2024		December 31, 2023

Interest rate collars	Other liabilities, net	$	(102)	$	(264)

During the three and nine months ended September 30, 2024, the Company recorded unrealized losses of less than $0.1 million and unrealized gains of $0.2 million, respectively, for changes in the fair value of its cash flow hedge in accumulated other comprehensive income. During the three and nine months ended September 30, 2023, the Company recorded unrealized gains of less than $0.1 million and $0.4 million, respectively, for changes in the fair value of its cash flow hedge in accumulated other comprehensive income.

During the three and nine months ended September 30, 2024, the Company did not reclassify any previous net gains or losses from accumulated other comprehensive loss into interest expense as a result of the hedged transactions impacting earnings. During the three and nine months ended September 30, 2023, the Company reclassified previous gains of $2.1 million and $5.7 million, respectively, 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 less than $0.1 million will be reclassified from accumulated other comprehensive loss to interest expense.

Derivatives Not Designated as Hedging Instruments

As of each of September 30, 2024 and December 31, 2023, the Company had no derivatives 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 the periods indicated below (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
September 30, 2024	$	—	$	(102)	$	—	$	—	$	(102)	$	—	$	—	$	(102)
December 31, 2023	$	—	$	(264)	$	—	$	—	$	(264)	$	—	$	—	$	(264)

Note 8 – Supplemental Cash Flow Disclosures

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


	Nine Months Ended September 30,
	2024		2023
Supplemental disclosures:
Cash paid for interest	$	21,647	$	18,727
Cash paid for income taxes, net of refunds	$	246	$	453
Non-cash investing and financing activities:
Accrued capital expenditures and leasing costs	$	6,920	$	4,628
Accrued deferred financing costs	$	17	$	—


Distributions declared and unpaid	$	5,595	$	5,578
Land acquired upon finance lease termination	$	3,470	$	—

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

Note 9 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following as of the periods indicated below (in thousands):


	September 30, 2024		December 31, 2023
Accrued real estate and other taxes	$	11,571	$	11,794
Accrued capital expenditures and leasing costs	9,669		6,284
Accrued operating and other costs	7,868		8,673
Accrued interest	2,016		2,122
Accounts payable	1,113		1,606
Total	$	32,237	$	30,479

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 concessions and leasing costs 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 September 30, 2024, the Company had the following estimated total outstanding commitments (in thousands):


	Total (1)
Tenant improvement allowances	$	54,118
Reimbursable landlord work (2)	6,551
Non-reimbursable landlord work (2)	6,219
Leasing commissions	323
Total	$	67,211

____________________________________

(1)Outstanding commitments do not include rent concessions as such amounts are recorded as a component of straight-line rent receivable, net, in accordance with U.S. GAAP.

(2)Landlord work represents specific improvements agreed to within the lease agreement to be performed by us, as landlord, as a new and non-recurring obligation and in order to induce the tenant to enter into a new lease or lease renewal or extension. Commitments for reimbursable and non-reimbursable landlord work include estimates and are subject to change.

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 concessions. The restricted cash included in the reserve was $34.7 million as of September 30, 2024, including $23.6 million for tenant improvement allowances and $11.1 million for rent concessions, 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 position or results of operations.

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

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 position or results of operations.

Note 11 – Leases

Lessor

As of September 30, 2024, the Company’s operating leases have non-cancelable lease terms ranging from 0.2 years to 16.3 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).

The components of rental revenue from the Company’s operating leases during the periods indicated below were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Fixed:
Cash rental revenue	$	29,148	$	35,491	$	91,132	$	108,005
Straight-line rental revenue	(1,283)		1,369		(974)		6,328
Lease intangible amortization	(68)		360		651		648
Fixed property operating cost reimbursements	1,531		1,737		4,422		4,520
Other fixed rental revenue	90		—		1,128		235
Total fixed	29,418		38,957		96,359		119,736
Variable:
Variable property operating cost reimbursements	8,786		9,203		27,451		28,364
Other variable rental revenue	772		716		2,084		2,590
Total variable	9,558		9,919		29,535		30,954
Total rental revenue	$	38,976	$	48,876	$	125,894	$	150,690

The following table presents future minimum base rent payments due to the Company under the terms of its operating lease agreements, excluding expense reimbursements, over the next five years and thereafter as of September 30, 2024 (in thousands).


	Future Minimum Base Rent Payments
October 1, 2024 - December 31, 2024	$	26,506
2025	89,393
2026	88,837
2027	68,891
2028	55,236
2029	41,624
Thereafter	211,582
Total	$	582,069

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 September 30, 2024, the Company’s operating leases had remaining lease terms ranging

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ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024 (Unaudited)

from 1.2 years to 60.3 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 3.76% as of September 30, 2024. 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 September 30, 2024 and 2023, and $0.9 million for the nine months ended September 30, 2024 and 2023. No cash paid for operating lease liabilities was capitalized for the three and nine months ended September 30, 2024 and 2023.

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 September 30, 2024 (in thousands).


	Future Minimum Lease Payments
October 1, 2024 - December 31, 2024	$	292
2025	1,184
2026	778
2027	752
2028	761
2029	473
Thereafter	12,044
Total	16,284
Less: imputed interest	5,652
Total	$	10,632

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.

Dividends

During the nine months ended September 30, 2024 and 2023, 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

February 27, 2024

March 29, 2024

April 15, 2024

0.10

May 7, 2024

June 28, 2024

July 15, 2024

0.10

August 7, 2024

September 30, 2024

October 15, 2024

0.10

Declaration Date

Record Date

Paid Date

Distributions Per Share

March 7, 2023

March 31, 2023

April 17, 2023

0.10

May 8, 2023

June 30, 2023

July 17, 2023