What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-05-04 · 125 added, 100 removed, 298 unchanged (43% of the section changed)

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• the risk of rising interest rates, including that our borrowing costs may increase and we may be unable to refinance our debt obligations on favorable terms or at all;

• the risk of inflation, including that our operating costs, such as insurance premiums, utilities, real estate taxes and capital expenditures and repair and maintenance costs, may rise;

• the risk of inflation, including that our operating costs, such as insurance premiums, utilities, real estate taxes, capital expenditures and repair and maintenance costs, may rise;

• conditions associated with the global market, including an oversupply of office space, tenant credit risk and general economic conditions;

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• changes in the real estate industry and in performance of the financial markets and interest rates and our ability to effectively hedge against interest rate changes;

• the risk of tenant defaults on their lease obligations, which are heightened due to our focus on single tenant properties;

• our ability to renew leases with existing tenants or re-let space to new tenants on favorable terms or at all;

• the risk of tenants defaulting on their lease obligations, which is heightened due to our focus on single tenant properties;

• our ability to renew leases with existing tenants or re-let vacant space to new tenants on favorable terms or at all;

• the cost of rent concessions, tenant improvement allowances and leasing commissions;

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• risks associated with the ownership and development of real property;

• risks accompanying the management of the Arch Street Joint Venture, our unconsolidated joint venture, as defined in the MD&A Overview, in which we hold a non-controlling ownership interest;

• risks accompanying the management of OAP/VER Venture, LLC (the “Arch Street Joint Venture”), our unconsolidated joint venture, in which we hold a non-controlling ownership interest;

• our ability to close pending real estate transactions, which may be subject to conditions that are outside of our control;

• risks associated with acquisitions, including the integration of the office portfolios of Realty Income Corporation (“Realty Income”) and VEREIT, Inc.

• Realty Income’s inability or failure to perform under the various transaction agreements effecting the Separation and the Distribution;

(“VEREIT”) into Orion;

• Realty Income’s inability or failure to perform under the various transaction agreements effecting the Separation (as defined below) and the Distribution (as defined below);

• risks associated with the fact that we have a limited operating history and our future performance is difficult to predict;

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We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings:

When we refer to “annualized base rent,” we mean the monthly aggregate cash amount charged to tenants under our leases (including monthly base rent receivables and certain contractually obligated reimbursements by our tenants), as of March 31, 2022, multiplied by 12, including the Company’s pro rata share of such amounts from its unconsolidated joint venture with an affiliate of Arch Street Capital Partners.

When we refer to “annualized base rent,” we mean the monthly aggregate cash amount charged to tenants under our leases (including monthly base rent receivables and certain contractually obligated reimbursements by our tenants), as of June 30, 2022, multiplied by 12, including the Company’s pro rata share of such amounts from the Arch Street Joint Venture, the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners.

Annualized base rent is not indicative of future performance.

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federal income tax purposes, commencing with our initial taxable year ended December 31, 2021.

The Company has 92 office properties with an aggregate of 10.5 million leasable square feet located in 29 states and Puerto Rico, with an occupancy rate of 88.1% and a weighted-average remaining lease term of 4.0 years as of March 31, 2022.

Including the Company’s pro rata share of square feet and annualized base rent from the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, we owned an aggregate of 10.6 million leasable square feet with an occupancy rate of 88.3% and a weighted-average remaining lease term of 4.1 years as of March 31, 2022.

The Company has 91 office properties with an aggregate of 10.4 million leasable square feet located in 29 states and Puerto Rico, with an occupancy rate of 86.4% and a weighted-average remaining lease term of 4.0 years as of June 30, 2022.

Including the Company’s pro rata share of square feet and annualized base rent from the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, we owned an aggregate of 10.5 million leasable square feet with an occupancy rate of 86.7% and a weighted-average remaining lease term of 4.1 years as of June 30, 2022.

Merger with Realty Income

On April 29, 2021, Realty Income entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, Inc.

(“VEREIT”), its operating partnership, VEREIT Operating Partnership, L.P.

On April 29, 2021, Realty Income entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, its operating partnership, VEREIT Operating Partnership, L.P.

(“VEREIT OP”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), and Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income (“Merger Sub 2”).

On November 1, 2021, pursuant to the Merger Agreement, Merger Sub 2 merged with and into VEREIT OP, with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the “Mergers”, and such effective time of the Mergers, the “Merger Effective Time”).

Upon the Merger Effective Time, as part of the Mergers, Realty Income acquired certain office real properties and related assets previously owned by subsidiaries of

VEREIT (collectively, “VEREIT Office Assets”).

Upon the Merger Effective Time, as part of the Mergers, Realty Income

acquired certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”).

Following the Merger Effective Time, in accordance with the Merger Agreement, Realty Income contributed the portion of the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, “Realty Income Office Assets”) and the VEREIT Office Assets (the “Separation”) to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”).

On November 12, 2021, following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement, Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the “Distribution”).

On November 12, 2021, following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement dated as of November 11, 2021, by and among Realty Income, the Company and Orion OP (the “Separation and Distribution Agreement”), Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the “Distribution”).

Following the Distribution, we became an independent publicly traded company and intend to qualify and elect to be taxed as a REIT, commencing with our initial taxable year ended December 31, 2021.

On November 12, 2021, in connection with the Distribution, Orion OP also entered into an Amended and Restated Limited Liability Company Agreement (the “LLCA”) of OAP/VER Venture, LLC (the “Arch Street Joint Venture”), by and between Orion OP and OAP Holdings LLC (the “Arch Street Partner”), an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P.

On November 12, 2021, in connection with the Distribution, Orion OP also entered into an Amended and Restated Limited Liability Company Agreement (the “LLCA”) of the Arch Street Joint Venture, by and between Orion OP and OAP Holdings LLC (the “Arch Street Partner”), an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P.

Our common stock, par value $0.001 per share, trades on the NYSE under the symbol “ONL”.

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We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

As of June 30, 2022, the market value of our common stock held by non-affiliates was less than $700 million, and therefore, we anticipate remaining an “emerging growth company” for fiscal year 2022.

Basis of Presentation

The Company’s consolidated and combined financial statements include the accounts of the Realty Income Office Assets presented on a combined basis for the three months ended March 31, 2021 as the ownership interests were under common control and ownership of Realty Income during that period.

For the three months ended March 31, 2022, the consolidated and combined financial statements of the Company include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture.

The Company’s consolidated and combined financial statements include the accounts of the Realty Income Office Assets presented on a combined basis for the three and six months ended June 30, 2021 as the ownership interests were under common control and ownership of Realty Income during that period.

For the three and six months ended June 30, 2022, the consolidated and combined financial statements of the Company include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture, which accounts include the Realty Income Office Assets and the VEREIT Office Assets.

The historical combined and consolidated financial results for the VEREIT Office Assets include the accounts of the VEREIT Office Assets on a combined basis as the ownership interests were under common control and ownership of VEREIT.

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We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year ended December 31, 2021.

Significant Accounting Estimates

Critical Accounting Estimates

Our accounting policies have been established to conform with U.S.

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Recently issued accounting pronouncements are described in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements.

Operating Highlights and Key Performance Indicators

Quarter Ended March 31, 2022 Activity

Significant Transactions Summary

Activity through June 30, 2022

Real Estate Operations

• We entered into binding contracts to sell two properties for total purchase price of $9.3 million.

As of March 31, 2022, these transactions remain subject to customary conditions for real estate transactions of this nature, including conditions related to the buyer’s due diligence, and may be terminated by the buyer in its sole discretion.

• During the three months ended June 30, 2022, we closed on the sale of one non-core office property for net proceeds of approximately $3.5 million.

During July 2022, we closed on the sale of one additional non-core office property for net proceeds of approximately $5.7 million.

As of August 3, 2022, we had pending agreements to dispose of an additional six non-core office properties for a total sale price of $18.9 million.

These pending transactions remain subject to customary conditions for real estate transactions of this nature, including conditions related to the buyer’s due diligence, and may be terminated by the buyer in its sole discretion.

There can be no assurance these pending sale transactions will be completed on their existing terms or at all.

• We delivered space under one new lease and expanded the premises related to an existing lease comprising a total of approximately 44,000 leasable square feet and extended a total of three leases comprising a total of approximately 137,000 leasable square feet.

During the quarter, three leases expired comprising a total of approximately 425,000 leasable square feet.

As of March 31, 2022, the Company had a total of ten vacant properties.

• During the six months ended June 30, 2022, we have renewed a total of 344,000 square feet of office space across five different properties.

We also entered into a lease expansion with an existing tenant at one office property covering 41,000 square feet.

During the six months ended June 30, 2022, five leases expired comprising a total of approximately 582,000 leasable square feet.

As of June 30, 2022, the Company had a total of 11 vacant properties.

• We refinanced the $355.0 million Bridge Facility on February 10, 2022 with a $355.0 million CMBS Loan at a fixed rate of 4.971%.

The CMBS Loan matures on February 11, 2027.

• As of March 31, 2022, we had $334.0 million of borrowing capacity under the Revolving Facility.

• We declared a quarterly dividend of $0.10 per share for the first quarter of 2022.

The dividend was paid on April 15, 2022.

• As of June 30, 2022, we had $354.0 million of borrowing capacity under the Revolving Facility.

• We declared quarterly dividends of $0.10 per share for each of the first and second quarters of 2022.

The dividends were paid on April 15, 2022 and July 15, 2022.

Real Estate Portfolio Metrics

Our financial performance is impacted by the timing of acquisitions and dispositions and the operating performance of our operating properties.

The following table shows the property statistics of our operating properties as of March 31, 2022, including our pro rata share of the applicable statistics of the properties owned by our unconsolidated joint venture:

The following table shows the property statistics of our operating properties as of June 30, 2022, including our pro rata share of the applicable statistics of the properties owned by our unconsolidated joint venture:

Portfolio Metrics

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(2) Occupancy rate equals the sum of leased square feet divided by rentable square feet.

(3) Based on annualized base rental income of our real estate portfolio, including the Company’s pro rata share of annualized base rent for properties owned by the unconsolidated joint venture, as of March 31, 2022.

Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s Financial Services LLC or a credit rating of Baa3 or higher by Moody’s Investor Service, Inc.

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In addition, management uses the following financial metrics to assess our operating performance (dollar amounts in thousands, except per share amounts).

Three Months Ended March 31,

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2022

Financial Metrics

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FFO attributable to common stockholders (1)

$ 26,459 $ 52,953

FFO attributable to common stockholders per diluted share (1)

$ 0.47 $ 0.94

Core FFO attributable to common stockholders (1)

$ 26,808 $ 54,589

Core FFO attributable to common stockholders per diluted share (1)

$ 0.47 $ 0.96

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(1) See the Non-GAAP Measures section below for descriptions of our non-GAAP measures and reconciliations to the most comparable U.S.

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Results of Operations

The results of operations discussed in this section include the accounts of the Company and its consolidated subsidiaries for the period ended March 31, 2022 and the accounts of Realty Income Office Assets for the period ended March 31, 2021.

Comparison of the three months ended March 31, 2022 to the three months ended March 31, 2021 (dollars in thousands)

The Company’s portfolio size significantly increased as a result of the Mergers, which contributed to an increase in revenues and expenses when comparing the three months ended March 31, 2022 to the same period in 2021.

2022, we had 92 office properties with an aggregate of 10.5 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet at March 31, 2021.

The results of operations discussed in this section include the accounts of the Company and its consolidated subsidiaries for the period ended June 30, 2022 and the accounts of Realty Income Office Assets for the period ended June 30, 2021.

Comparison of the three and six months ended June 30, 2022 to the three and six months ended June 30, 2021 (dollars in thousands)

The Company’s portfolio size significantly increased as a result of the Mergers, which contributed to an increase in revenues and expenses when comparing the three and six months ended June 30, 2022 to the same periods in 2021.

2022, we had 91 office properties with an aggregate of 10.4 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet at June 30, 2021.

The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 vs 2021

Increase/(Decrease) 2022 2021 2022 vs 2021

Increase/(Decrease)

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Total revenues $ 52,849 $ 12,587 $ 40,262 $ 106,055 $ 25,615 $ 80,440

The increase in rental revenue of $40.0 million during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily due to the increase in our overall portfolio size resulting from the closing of the Mergers.

Including the rental revenue from the VEREIT Office Assets for the quarter ended March 31, 2021, rental revenue increased $1.9 million primarily due to reimbursement revenue, offset by a decrease of $2.1 million primarily due to vacancies.

The increases in rental revenue of $40.1 million and $80.1 million during the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 were primarily due to the increase in our overall portfolio size resulting from the closing of the Mergers.

Including the rental revenue from the VEREIT Office Assets for the three and six months ended June 30, 2021, rental revenue decreased by $1.0 million and $0.8 million, respectively, as compared to the same periods in 2021, primarily due to our lower occupancy rate.

Including VEREIT Office Assets, our portfolio occupancy rate would have been 94.4% as of June 30, 2021, and our portfolio occupancy rate was 86.7% as of June 30, 2022.

Fee income from unconsolidated joint venture

Fee income from unconsolidated joint venture consists of fees earned for providing various services to the Company’s unconsolidated joint venture.

The increase of $0.2 million during the three months ended March 31, 2022 as compared to the same period in 2021 was due to fees earned from the Arch Street Joint Venture, including property and asset management fees.

Fee income from unconsolidated joint venture from the VEREIT Office Assets for the quarter ended March 31, 2021 was $0.1 million due to fees earned from the Arch Street Joint Venture, including property and asset management fees.

The increase of $0.2 million and $0.4 million during the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021, was due to fees earned from the Arch Street Joint Venture, including property and asset management fees.

Fee income from unconsolidated joint venture from the VEREIT Office Assets for the three and six months ended June 30, 2021 was $0.3 million and $0.4 million, respectively, due to fees earned from the Arch Street Joint Venture, including property and asset management fees.

Operating Expenses

The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 vs 2021

Increase/(Decrease) 2022 2021 2022 vs 2021

Increase/(Decrease)

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Property operating expenses such as taxes, insurance, ground rent and maintenance include both reimbursable and non-reimbursable property expenses.

The increase in property operating expenses of $13.8 million during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to the increase in our portfolio size.

Including the property operating expenses from the VEREIT Office Assets for the quarter ended March 31, 2021, property operating expenses increased $4.0 million primarily due to reimbursable expenses for property owners association, electricity and HVAC repairs and non-reimbursable expenses due to vacancies.

The increases in property operating expenses of $13.7 million and $27.5 million during the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 were primarily attributable to the increase in our portfolio size.

Including the property operating expenses from the VEREIT Office Assets for the three and six months ended June 30, 2021, property operating expenses increased $2.7 million and $6.7 million, respectively, primarily due to expenses for insurance, property owners association, electricity and HVAC repairs and non-reimbursable expenses due to vacancies.

General and Administrative Expenses

General and administrative expenses increased $3.0 million during the three months ended March 31, 2022 as compared to the same period in 2021, which was primarily due to actual costs recorded during the three months ended March 31, 2022

following the Distribution and the Company’s commencement of operations as a standalone business, as compared with an allocation of amounts for the three months ended March 31, 2021.

Including the general and administrative expenses from the VEREIT Office Assets for the quarter ended March 31, 2021, general and administrative expenses increased $1.3 million.

General and administrative expenses for Realty Income Office Assets and VEREIT Office Assets for the three months ended March 31, 2021 are primarily an allocation from Realty Income and VEREIT general and administrative expenses, and therefore, do not reflect the full general and administrative expenses of an independent, separate public company.

General and administrative expenses increased $2.8 million and $5.7 million during the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021, which was primarily due to actual costs recorded during the three and six months ended June 30, 2022 following the Distribution and the Company’s commencement of operations as a standalone business, as compared with an allocation of amounts for the three and six months ended June 30, 2021.

Including the general and administrative expenses from the VEREIT Office Assets for the three and six months ended June 30, 2021, general and administrative expenses increased $0.9 million and $2.2 million, respectively.

General and administrative expenses for Realty Income Office Assets and VEREIT Office Assets for the three and six months ended June 30, 2021 are primarily an allocation from Realty Income and VEREIT general and administrative expenses, and therefore, do not reflect the full general and administrative expenses of an independent, separate public company.

Depreciation and Amortization Expenses

The increase in depreciation and amortization expenses of $28.4 million during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily due to the increase in our portfolio size.

Including the depreciation and amortization expenses from the VEREIT Office Assets for the quarter ended March 31, 2021, depreciation and amortization expenses increased $13.4 million primarily due to the fair valuation of the VEREIT Office Assets as a result of the Mergers.

Impairments of $1.6 million were recorded during the three months ended March 31, 2022 as compared to no impairments during the same period in 2021.

The increases in depreciation and amortization expenses of $27.9 million and $56.2 million during the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 were primarily due to the increase in our portfolio size.

Including the depreciation and amortization expenses from the VEREIT Office Assets for the three and six months ended June 30, 2021, depreciation and amortization expenses increased $13.4 million and $26.8 million, respectively, primarily due to the fair valuation of the VEREIT Office Assets as a result of the Mergers.

Impairments of $7.8 million and $9.4 million were recorded during the three and six months ended June 30, 2022 as compared to no impairments during the same periods in 2021.

As part of the consummation of the Distribution, the Company’s portfolio became subject to new management which identified certain non-core assets for potential sale.

Based on management’s estimates, the carrying value of certain assets was determined to be unrecoverable, resulting in the recognition of impairment losses during the period.

Impairments for the VEREIT Office Assets for the quarter ended March 31, 2021 was $21.2 million due to one real estate asset that was deemed to be impaired.

Based on management’s estimates or, in certain circumstances, the negotiated price under a definitive agreement to sell the asset, the carrying value of certain assets was determined to be unrecoverable, resulting in the recognition of impairment losses during the applicable period.

Approximately $7.5 million of the impairments recognized during the three and six months ended June 30, 2022 related to entering into contracts to dispose of the applicable properties and are based on the contract sales price.

Impairments for the VEREIT Office Assets for the three and six months ended June 30, 2021 were $0.4 million and $21.6 million, respectively, due to two real estate assets that were deemed to be impaired.

Acquisition-Related Expenses

During the three months ended March 31, 2022, the Company incurred $0.1 million of acquisition-related expenses, which primarily consist of internal salaries allocated to acquisition-related activities as well as costs incurred for deals that were not consummated.

No such costs were incurred during the same period in 2021.

During the three and six months ended June 30, 2022, the Company incurred $0.1 million and $0.2 million, respectively, of acquisition-related expenses, which primarily consist of internal salaries allocated to acquisition-related activities as well as costs incurred for deals that were not consummated.

No such costs were incurred during the same periods in 2021.

Transaction Costs

During the three months ended March 31, 2022, the Company incurred $0.8 million of transaction costs, which primarily consist of legal and accountant fees related to the Mergers and the Distribution and the Company’s start-up activities.

During the three and six months ended June 30, 2022, the Company incurred $0.2 million and $1.0 million, respectively, of transaction costs, which primarily consist of legal and accountant fees related to the Mergers and the Distribution and the Company’s start-up activities.

No such costs were incurred during the same period in 2021.

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The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 vs 2021

Increase/(Decrease) 2022 2021 2022 vs 2021

Increase/(Decrease)

Interest expense $ (6,847) $ (465) $ 6,382

Interest expense, net $ (7,867) $ (338) $ 7,529 $ (14,714) $ (803) $ 13,911

Loss on extinguishment of debt, net $ — $ — $ — $ (468) $ — $ 468

Equity in income of unconsolidated joint venture $ (41) $ — $ 41

Equity in income (loss) of unconsolidated joint venture $ (54) $ — $ 54 $ (95) $ — $ 95

Other income, net $ 48 $ — $ (48) $ 87 $ — $ (87)

Provision for income taxes $ (164) $ — $ 164 $ (330) $ — $ 330

Interest Expense

The increase in interest expense of $6.4 million during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily due to an increase in debt outstanding from $36.9 million as of March 31, 2021 to $615.4 million as of March 31, 2022, as discussed in Note 6 – Debt, Net.

Including the interest expense from the VEREIT Office Assets for the quarter ended March 31, 2021, interest expense increased $4.4 million primarily due to the increase in debt outstanding in connection with the capitalization of the Company.

Interest Expense, net

The increases in interest expense of $7.5 million and $13.9 million during the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 were primarily due to an increase in debt outstanding from $22.7 million as of June 30, 2021 to $596.0 million as of June 30, 2022, as discussed in Note 6 – Debt, Net.

Including the interest expense from the VEREIT Office Assets for the three and six months ended June 30, 2021, interest expense increased $5.7 million and $10.1 million primarily due to the increase in debt outstanding in connection with the capitalization of the Company.

Loss on extinguishment of debt, net

Loss on extinguishment of debt, net increased $0.5 million during the three months ended March 31, 2022 as compared to no loss on extinguishment of debt in the same period in 2021.

Loss on extinguishment of debt, net was $0.5 million during the six months ended June 30, 2022, as compared to no loss on extinguishment of debt in the same period in 2021.

The loss relates to the write off of deferred financing costs due to the early extinguishment of the Company’s Bridge Facility, as discussed in Note 6 – Debt, Net.

Loss on extinguishment of debt for the VEREIT Office Assets for the quarter ended March 31, 2021 was $0.1 million which primarily related to the write off of deferred financing costs due to the early extinguishment of mortgage notes payable.

Equity in income of unconsolidated joint venture

Equity in income of the unconsolidated joint venture was a loss of $41,000 during the three months ended March 31, 2022 as compared to no equity in income of the unconsolidated joint venture for the same period in 2021, which relates to the Company’s investment in one unconsolidated joint venture, which interest was transferred to the Company in connection with the Separation and Distribution.

Including the equity in income of unconsolidated joint venture from the VEREIT Office Assets for the quarter ended March 31, 2021, income decreased $0.2 million primarily related to amortization of the step up in basis of the investment as a result of the Mergers.

Loss on extinguishment of debt, net for the VEREIT Office Assets was less than $0.1 million for both the three and six months ended June 30, 2021, which primarily related to the write off of deferred financing costs due to the early extinguishment of mortgage notes payable.

Equity in income (loss) of unconsolidated joint venture

Equity in income (loss) of the unconsolidated joint venture was a loss of $0.1 million during both the three and six months ended June 30, 2022, respectively, as compared to no equity in income (loss) of the unconsolidated joint venture for the same period in 2021, which relates to the Company’s investment in one unconsolidated joint venture, which interest was transferred to the Company in connection with the Separation and Distribution.

Including the equity in income (loss) of unconsolidated joint venture from the VEREIT Office Assets for the three and six months ended June 30, 2021, income decreased $0.3 million and $0.5 million, respectively, primarily related to amortization of the step up in basis of the investment as a result of the Mergers.

Provision for Income Taxes

The provision for income taxes consists of certain state and local income and franchise taxes.

The increase to $0.2 million during the three months ended March 31, 2022, as compared to no provision for income taxes prior to the time the Company became an independent, separate public company.

The provision for income taxes for the VEREIT Office Assets for the quarter ended March 31, 2021 was $0.2 million.

The increase to $0.2 million and $0.3 million during the three and six months ended June 30, 2022, as compared to no provision for income taxes prior to the time the Company became an independent, separate public company.

The provisions for income taxes for the VEREIT Office Assets for the three and six months ended June 30, 2021 were $0.2 million and $0.3 million, respectively.

Non-GAAP Measures

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In addition to FFO, we use Core FFO as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company.

Core FFO, as defined by the Company, excludes from FFO non-recurring or infrequent items such as acquisition-related expenses, transaction costs and gains or losses on extinguishment of swaps and/or debt.

Core FFO, as defined by the Company, excludes from FFO items that we believe do not reflect the ongoing operating performance of our business such as acquisition-related expenses, transaction costs and gains or losses on extinguishment of swaps and/or debt.

We believe that FFO and Core FFO allow for a comparison of the performance of our operations with other publicly-traded REITs, as FFO and Core FFO, or equivalent measures, are routinely reported by publicly-traded REITs, each adjust for items that we believe do not reflect the ongoing operating performance of our business and we believe are often used by analysts and investors for comparison purposes.

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Neither the SEC, Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate Core FFO and its use as a non-GAAP financial performance measure.

The table below presents a reconciliation of FFO and Core FFO to net (loss) income attributable to common stockholders, the closest GAAP financial measure, for the three months ended March 31, 2022 and 2021 (dollars in thousands):

Three Months Ended March 31,

The table below presents a reconciliation of FFO and Core FFO to net (loss) income attributable to common stockholders, the closest GAAP financial measure, for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Net (loss) income attributable to common stockholders $ (15,571) $ 4,296 $ (25,477) $ 8,847

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FFO attributable to common stockholders (1)

$ 26,459 $ 10,251 $ 52,953 $ 20,790

Acquisition-related expenses 141 — 204 —

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Core FFO attributable to common stockholders (1)

$ 26,808 $ 10,251 $ 54,589 $ 20,790

(1) During the three months ended June 30, 2022, the Company identified an inadvertent error in its calculation of the line item “Proportionate share of adjustments for

unconsolidated entity” resulting in a $219,000 overstatement of the amount previously reported in this line item for the three months ended March 31, 2022 and a $117,000

overstatement of the amount previously reported in this line item for the year ended December 31, 2021.

These errors have been corrected, and the applicable amounts reported

herein for the six months ended June 30, 2022 reflect such correction.

The applicable amounts reported in future filings will also reflect such correction.

(2) Transaction costs primarily consist of attorney fees and accountant fees related to the Mergers and the Distribution and the Company’s start-up activities.

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(i) fund operating expenses;

(ii) meet our debt service requirements;

(ii) pay principal and interest on our debt;

(iii) make distributions to our stockholders, as required for us to qualify as a REIT;

(iv) fund capital expenditures at properties we own;

(iv) fund capital expenditures and leasing costs at properties we own;

and (v) fund new acquisitions, including acquisitions related to the Arch Street Joint Venture.

We believe that our principal sources of short-term liquidity, which are our cash and cash equivalents on hand, cash flows from operations, and borrowings under the Revolving Facility, are sufficient to meet our liquidity needs for the next twelve months.

As of March 31, 2022, we had $18.6 million of cash and cash equivalents and $334.0 million of borrowing capacity under the Revolving Facility.

As of June 30, 2022, we had $19.3 million of cash and cash equivalents and $354.0 million of borrowing capacity under the Revolving Facility.

Our principal liquidity needs beyond the next twelve months are to:

(i) repay or refinance debt at maturity, (ii) fund capital expenditures at properties we own and (iii) fund new acquisitions.

(i) repay or refinance debt at or prior to maturity;

(ii) fund capital expenditures and leasing costs at properties we own;

and (iii) fund new acquisitions.

We generally believe we will be able to satisfy these liquidity needs by a combination of cash flows from operations, borrowings under the Revolving Facility, proceeds from real estate dispositions, new borrowings such as bank term loans or other secured or unsecured debt, issuances of equity securities, and/or proceeds from the sale of assets.

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Summary and Obligations

In connection with the Separation and the Distribution, on November 12, 2021, we, as parent, and Orion Office REIT LP (“Orion OP”), as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year, $425.0 million Revolving Facility, including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million 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,” 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.

In connection with the Separation and the Distribution, on November 12, 2021, we, as parent, and Orion OP, as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year, $425.0 million Revolving Facility, including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million 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,” 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.

On November 12, 2021, Orion OP borrowed $90.0 million under the Revolving Facility, and each of the Term Loan Facility and the Bridge Facility was fully drawn.

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In February 2022, as further described below, we refinanced the Bridge Facility in full with the $355.0 million CMBS Loan (defined below), and the Bridge Credit Agreement was terminated.

As of March 31, 2022, the Company had approximately $621.0 million of total consolidated debt outstanding, consisting of a $355.0 million CMBS Loan, a $175.0 million Term Loan Facility and a $425.0 million Revolving Facility, $91.0 million of which was outstanding.

In addition, the Company’s pro rata share of the mortgage notes of the unconsolidated joint venture was $27.3 million as of March 31, 2022.

As of June 30, 2022, the Company had approximately $601.0 million of total consolidated debt outstanding, consisting of a $355.0 million CMBS Loan, a $175.0 million Term Loan Facility and $71.0 million outstanding under a $425.0 million Revolving Facility.

During the three months ended June 30, 2022, as part of its normal cash management strategy, the Company repaid $20.0 million of borrowings under the Revolving Facility.

In addition, the Company’s pro rata share of the mortgage notes of the unconsolidated joint venture was $27.3 million as of June 30, 2022.

The interest rate applicable to the loans under the Revolver/Term Loan Facilities may, at the election of Orion OP, be determined on the basis of LIBOR or a base rate, in either case, plus an applicable margin.

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The following is a summary of key financial covenants for the Company’s Revolver/Term Loan Facilities and the Company’s compliance therewith, as calculated per the terms of the Revolver/Term Loan Credit Agreement.

Credit Facility Key Covenants Required March 31, 2022

These calculations, which are not based on GAAP measurements, are presented to show the Company’s compliance with the financial covenants and are not measures of the Company’s liquidity or performance.

Credit Facility Key Covenants Required June 30, 2022

Ratio of total indebtedness to total asset value ≤ 60% 32.5%

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Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 11.36x

As of March 31, 2022, Orion OP was in compliance with these financial covenants.

As of June 30, 2022, Orion OP was in compliance with these financial covenants.

The Revolver/Term Loan Facilities include customary representations and warranties of us and Orion OP, which must be true and correct in all material respects as a condition to future extensions of credit under the Revolver/Term Loan Facilities.

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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, 2022, the Company was in compliance with these financial covenants.

As of June 30, 2022, the Company was in compliance with these financial covenants.

The Mortgage Borrowers and the Company also provided a customary environmental indemnity agreement, pursuant to which the Mortgage Borrowers and the Company agreed to protect, defend, indemnify, release and hold harmless the Lender from and against certain environmental liabilities relating to the Mortgaged Properties.

The loan documents evidencing the CMBS Loan include customary representations, warranties and covenants of the Mortgage Borrowers and the Company.

The loan documents also include 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 under the loan documents to be immediately due and payable and foreclose on 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.

On November 10, 2021, we issued 56,525,650 additional shares of our common stock to Realty Income, such that Realty Income owned 56,625,650 shares of our common stock.

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On November 12, 2021, Realty Income effected the Distribution.

On March 22, 2022, the Company’s Board of Directors declared the Company’s first quarterly dividend as an independent public company.

The dividend, which was for the first quarter of 2022, was in the amount of $0.10 per share, and was paid on April 15, 2022, to stockholders of record as of March 31, 2022.

See the section “Dividends” below for disclosure with regard to the Company’s dividend policy.

On November 12, 2021, in connection with the Distribution, Orion OP entered into the Arch Street Joint Venture with the Arch Street Partner, an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P.

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The Arch Street Warrants entitle the respective holders to purchase shares of our common stock at a price per share equal to $22.42, at any time.

The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of our common stock determined according to the formula set forth in the

Arch Street Warrants.

The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) if the Arch Street Joint Venture is terminated, the later of the termination of the Arch Street Joint Venture and seven years after issuance.

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Right of First Offer Agreement

In connection with the entry into the LLCA, we and the Arch Street Joint Venture entered into that certain Right of First Offer Agreement (the “ROFO Agreement”), dated November 12, 2021, pursuant to which, subject to certain limitations, we, on behalf of ourselves and our affiliates, agreed not to acquire or purchase a fee simple or ground leasehold interest in any office real property, including by way of an acquisition of equity interests, within certain investing parameters without first offering the property for purchase to the Arch Street Joint Venture, which will expire upon the earlier of (1) the third anniversary of the execution of the ROFO Agreement, (2) the date on which the Arch Street Joint Venture is terminated or (3) the date on which the Arch Street Joint Venture’s gross book value of assets is below $50.0 million.

The ROFO Agreement will expire upon the earlier of (1) the third anniversary of its execution, (2) the date on which the Arch Street Joint Venture is terminated or (3) the date on which the Arch Street Joint Venture’s gross book value of assets is below $50.0 million.

If the Arch Street Joint Venture decides not to acquire any such property, we may seek to acquire the property independently, subject to certain restrictions.

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The dividend, which was for the first quarter of 2022, was in the amount of $0.10 per share, and was paid on April 15, 2022, to stockholders of record as of March 31, 2022.

On May 3, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.10 per share for the second quarter of 2022 payable on July 15, 2022, to stockholders of record as of June 30, 2022.

On May 3, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.10 per share for the second quarter of 2022, which was paid on July 15, 2022, to stockholders of record as of June 30, 2022.

On August 2, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the third quarter of 2022 payable on October 17, 2022, to stockholders of record as of September 30, 2022.

Our dividend policy is established at the discretion of the Company’s Board of Directors and future dividends may be funded from a variety of sources.

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Contractual Obligations

The following is a summary of our contractual obligations as of March 31, 2022 (in thousands):

The following is a summary of our contractual obligations as of June 30, 2022 (in thousands):

Payments due by period

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____________________________________

(1) As of March 31, 2022, we had $175.0 million of variable rate debt on the Credit Facility Term Loan effectively fixed through the use of interest rate swap agreements.

(1) As of June 30, 2022, we had $175.0 million of variable rate debt on the Credit Facility Term Loan effectively fixed through the use of interest rate swap agreements.

We used the interest rates effectively fixed under our swap agreements to calculate the debt payment obligations in future periods.

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These rent concession and leasing cost commitments could be significant.

Cash Flow Analysis for the three months ended March 31, 2022

The following table summarizes the changes in cash flows for the three months ended March 31, 2022 and 2021 (dollars in millions):

Three Months Ended March 31,

Cash Flow Analysis for the six months ended June 30, 2022

The following table summarizes the changes in cash flows for the six months ended June 30, 2022 and 2021 (dollars in millions):

Six Months Ended June 30,

2022 versus 2021

Net cash provided by operating activities $ 51,794 $ 21,348 $ 30,446

Net cash used in investing activities $ (1,235) $ (55) $ (1,180)

Net cash provided by (used in) investing activities $ 1,284 $ (77) $ 1,361

Net cash used in financing activities $ (27,831) $ (24,655) $ (3,176)

Net cash provided by operating activities increased $17.0 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021 primarily due to the increase in our portfolio size.

At March 31, 2022, we had 92 office properties with an aggregate of 10.5 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet at March 31, 2021.

Net cash used in investing activities increased $1.2 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The change was primarily due to an increase in capital expenditures and leasing costs associated with lease renewals, partially offset by $0.6 million of distributions received from the Company’s unconsolidated joint venture during the three months ended March 31, 2022.

Net cash used in financing activities decreased $12.1 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to no distributions to parent during the three months ended March 31, 2022 as compared to the same period in 2021.

Net cash provided by operating activities increased $30.4 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021 primarily due to the increase in our portfolio size.

At June 30, 2022, we had 91 office properties with an aggregate of 10.4 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet at June 30, 2021.

Net cash provided by investing activities increased $1.4 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The change was primarily due to proceeds from the disposition of real estate and distributions received from the Company’s unconsolidated joint venture during the six months ended June 30, 2022, partially offset by an increase in capital expenditures and leasing costs associated with lease renewals.

Net cash used in financing activities increased $3.2 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to net repayments of the Company’s revolving credit facility, dividends to stockholders and payments of deferred financing costs related to the CMBS Loan entered into by the Company during the six months ended June 30, 2022, partially offset by no payments of mortgages payable and no distributions to parent during the six months ended June 30, 2022 as compared to the same period in 2021.

Following the Merger Effective Time, Realty Income was no longer the parent of Realty Income Office Assets, and therefore, no further distributions occurred.

The reduction in distributions to parent were partially offset by payments of deferred financing costs related to the CMBS Loan entered into by the Company during the three months ended March 31, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis