Orion Properties Inc. 10-Q

Item 1. Financial Statements. ORION OFFICE REIT INC. CONSOLIDATED BALANCE SHEETS (In thousands, except for share and per share data) (Unaudited) June 30, 2022 December 31, 2021 ASSETS Real estate investments, at cost: Land $ 250,724 $ 250,194 Buildings, fixtures and improvements 1,208,475 1,231,551 Total real estate investments, at cost 1,459,199 1,481,745 Less: accumulated depreciation and amortization 138,642 128,109 Total real estate investments, net 1,320,557 1,353,636 Accounts receivable, net 25,731 17,916 Intangible lease assets, net 247,722 298,107 Cash and cash equivalents 19,300 29,318 Real estate assets held for sale, net 9,402 — Other assets, net 91,208 60,501 Total assets $ 1,713,920 $ 1,759,478 LIABILITIES AND EQUITY Bridge facility, net $ — $ 354,357 Mortgages payable, net 351,820 — Credit facility term loan, net 173,133 172,490 Credit facility revolver 71,000 90,000 Accounts payable and accrued expenses 16,855 17,379 Below-market lease liabilities, net 17,381 20,609 Distributions payable 5,663 — Other liabilities, net 20,341 16,355 Total liabilities 656,193 671,190 Common stock, $ 0.001 par value, 100,000,000 shares authorized 56,635,038 and 56,625,650 shares issued and outstanding as of each of June 30, 2022 and December 31, 2021, respectively 57 57 Additional paid-in capital 1,145,987 1,145,278 Accumulated other comprehensive income 5,851 299 Accumulated deficit ( 95,562 ) ( 58,715 ) Total stockholders’ equity 1,056,333 1,086,919 Non-controlling interest 1,394 1,369 Total equity 1,057,727 1,088,288 Total liabilities and equity $ 1,713,920 $ 1,759,478 The accompanying notes are an integral part of this statement. 4 ORION OFFICE REIT INC. CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (In thousands, except for per share data) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Rental $ 52,659 $ 12,587 $ 105,676 $ 25,615 Fee income from unconsolidated joint venture 190 — 379 — Total revenues 52,849 12,587 106,055 25,615 Operating expenses: Property operating 15,156 1,483 30,470 2,951 General and administrative 3,291 515 6,808 1,071 Depreciation and amortization 33,828 5,955 68,181 11,943 Impairments 7,758 — 9,360 — Acquisition related 141 — 204 — Transaction costs 208 — 964 — Total operating expenses 60,382 7,953 115,987 15,965 Other (expenses) income: Interest expense, net ( 7,867 ) ( 338 ) ( 14,714 ) ( 803 ) Loss on extinguishment of debt, net — — ( 468 ) — Other income, net 48 — 87 — Equity in income (loss) of unconsolidated joint venture ( 54 ) — ( 95 ) — Total other (expenses) income, net ( 7,873 ) ( 338 ) ( 15,190 ) ( 803 ) (Loss) income before taxes ( 15,406 ) 4,296 ( 25,122 ) 8,847 Provision for income taxes ( 164 ) — ( 330 ) — Net (loss) income ( 15,570 ) 4,296 ( 25,452 ) 8,847 Net (income) loss attributable to non-controlling interest ( 1 ) — ( 25 ) — Net (loss) income attributable to common stockholders $ ( 15,571 ) $ 4,296 $ ( 25,477 ) $ 8,847 Weighted-average shares outstanding - basic and diluted 56,629 56,626 56,628 56,626 Basic and diluted net (loss) income per share attributable to common stockholders $ ( 0.27 ) $ 0.08 $ ( 0.45 ) $ 0.16 The accompanying notes are an integral part of this statement. 5 ORION OFFICE REIT INC. CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net (loss) income $ ( 15,570 ) $ 4,296 $ ( 25,452 ) $ 8,847 Total other comprehensive income (loss) Unrealized gain on interest rate derivatives 1,526 — 5,344 — Reclassification of previous unrealized (gain) loss on interest rate derivatives into net (loss) income ( 31 ) — 208 — Total other comprehensive income (loss) 1,495 — 5,552 — Total comprehensive (loss) income ( 14,075 ) 4,296 ( 19,900 ) 8,847 Comprehensive (income) loss attributable to non-controlling interests (1) ( 1 ) — ( 25 ) — Total comprehensive (loss) income $ ( 14,076 ) $ 4,296 $ ( 19,925 ) $ 8,847 (1) Represents comprehensive (income) loss attributable to a consolidated joint venture partner. The accompanying notes are an integral part of these statements. 6 ORION OFFICE REIT INC. CONSOLIDATED AND COMBINED 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 Interests Total Equity Balance, January 1, 2022 56,625,650 $ 57 $ 1,145,278 $ 299 $ ( 58,715 ) $ 1,086,919 $ 1,369 $ 1,088,288 Net (loss) income — — — — ( 9,906 ) ( 9,906 ) 24 ( 9,882 ) Distributions — — — — ( 5,707 ) ( 5,707 ) — ( 5,707 ) Equity-based compensation, net — — 270 — — 270 — 270 Other comprehensive income — — — 4,057 — 4,057 — 4,057 Balance, March 31, 2022 56,625,650 $ 57 $ 1,145,548 $ 4,356 $ ( 74,328 ) $ 1,075,633 $ 1,393 $ 1,077,026 Net (loss) income — — — — ( 15,571 ) ( 15,571 ) 1 ( 15,570 ) Distributions — — — — ( 5,663 ) ( 5,663 ) — ( 5,663 ) Equity-based compensation, net 9,388 — 439 — — 439 — 439 Other comprehensive income — — — 1,495 — 1,495 — 1,495 Balance, June 30, 2022 56,635,038 $ 57 $ 1,145,987 $ 5,851 $ ( 95,562 ) $ 1,056,333 $ 1,394 $ 1,057,727 Common Stock Number of Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Net Parent Investment Total Parent Company Equity Non-Controlling Interests Total Equity Balance, January 1, 2021 — $ — $ — $ — $ — $ 497,118 $ 497,118 $ — $ 497,118 Net income — — — — — 4,551 4,551 — 4,551 Distributions to parent company, net — — — — — ( 14,122 ) ( 14,122 ) — ( 14,122 ) Balance, March 31, 2021 — $ — $ — $ — $ — $ 487,547 $ 487,547 $ — $ 487,547 Net income — — — — — 4,296 4,296 — 4,296 Contributions from parent company, net — — — — — 3,746 3,746 — 3,746 Balance, June 30, 2021 — $ — $ — $ — $ — $ 495,589 $ 495,589 $ — $ 495,589 The accompanying notes are an integral part of this statement. 7 ORION OFFICE REIT INC. CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 25,452 ) $ 8,847 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 68,181 11,943 Non-cash revenue adjustments ( 1,830 ) ( 471 ) Amortization of net premiums on mortgages payable — ( 41 ) Impairments 9,360 — Loss on extinguishment of debt, net 468 — Amortization of deferred financing costs 2,228 — Equity-based compensation 709 — Equity in income of unconsolidated joint venture 95 — Changes in assets and liabilities: Accounts receivable, net and other assets, net ( 3,535 ) ( 166 ) Accounts payable, accrued expenses and other liabilities, net 1,570 1,236 Net cash provided by operating activities 51,794 21,348 Cash flows from investing activities: Capital expenditures and leasing costs ( 3,429 ) ( 77 ) Proceeds from disposition of real estate 3,496 — Return of investment from unconsolidated joint venture 1,217 — Net cash provided by (used in) investing activities 1,284 ( 77 ) Cash flows from financing activities: Repayment of bridge facility, including debt extinguishment costs ( 355,026 ) — Proceeds from mortgages payable 355,000 — Payments on mortgages payable — ( 14,279 ) Proceeds from credit facility revolver 70,000 — Repayments of credit facility revolver ( 89,000 ) — Distributions paid ( 5,663 ) — Distributions to parent company, net — ( 10,376 ) Payments of deferred financing costs ( 3,096 ) — Other financing activities ( 46 ) — Net cash used in financing activities ( 27,831 ) ( 24,655 ) Net change in cash and cash equivalents and restricted cash 25,247 ( 3,384 ) Cash and cash equivalents and restricted cash, beginning of period 29,318 3,915 Cash and cash equivalents and restricted cash, end of period $ 54,565 $ 531 Reconciliation of Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents at beginning of period $ 29,318 $ — Restricted cash at beginning of period — 3,915 Cash and cash equivalents and restricted cash at the beginning of the period $ 29,318 $ 3,915 Cash and cash equivalents at end of period $ 19,300 $ — Restricted cash at the end of the period 35,265 531 Cash and cash equivalents and restricted cash at the end of the period $ 54,565 $ 531 The accompanying notes are an integral part of this statement. 8 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Note 1 – Organization Organization Orion Office REIT Inc. (the “Company”, “Orion”, “we” or “us”) was incorporated in the state of Maryland on July 1, 2021 and was capitalized on July 15, 2021. On April 29, 2021, Realty Income Corporation (“Realty Income”) entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, Inc. (“VEREIT”), its operating partnership, VEREIT Operating Partnership, L.P. (“VEREIT OP”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), 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”). 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 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 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”). Approximately $ 595.0 million was distributed by the Company to Realty Income in accordance with the Separation and Distribution Agreement. In connection with the Separation and the Distribution, the Company entered into certain agreements with Realty Income to govern the ongoing relationships between the Company and Realty Income and to provide mechanisms for an orderly transition to the Company’s status as an independent, publicly traded company, including the Separation and Distribution Agreement and a transition services agreement to provide certain administrative and other services between the parties for a limited time. Following the Distribution, the Company became independent and publicly traded and intends to qualify and elect to be taxed as a REIT, commencing with the Company’s initial taxable year ended December 31, 2021. The Company’s common stock, par value $ 0.001 per share, trades on the New York Stock Exchange (the “NYSE”) under the symbol “ONL”. At June 30, 2022, the Company owned and operated 91 office properties and related assets previously owned by Realty Income and VEREIT, totaling approximately 10.4 million leasable square feet located within 29 states and Puerto Rico. 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. As of June 30, 2022, the Arch Street Joint Venture owned a portfolio consisting of six office properties totaling approximately 1.0 million leasable square feet located within six states. Note 2 - Summary of Significant Accounting Policies Basis of Accounting The consolidated and combined statements of the Company presented herein include the accounts of the Company and its consolidated subsidiaries. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The consolidated and combined 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 financial statements should be read in conjunction with the Company’s audited consolidated and combined financial statements and notes thereto as of and for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2022. 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. 9 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Principles of Consolidation and Combination and Basis of Presentation The consolidated and combined statements of the Company include the accounts of 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 financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture, which accounts include the Realty Income Office Assets and the VEREIT Office Assets. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in the Company’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of equity. For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding real estate investment impairments. Revenue Recognition Rental Revenue The Company continually reviews receivables related to rent, straight-line rent and property operating expense reimbursements and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term and the Company recognizes a general allowance on a portfolio-wide basis. 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 six months ended June 30, 2022, the Company did not record a general allowance or any reductions to rental revenue for amounts not probable of collection. For operating leases with minimum scheduled rent increases, the Company recognizes rental revenue on a straight-line basis, including the effect of any free rent periods, over the lease term when collectability of lease payments is probable. Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur. Variable lease payments, including contingent rent, which is paid by a tenant when the tenant’s sales exceed an agreed upon minimum amount, are recognized once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease. 10 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Certain of the Company’s leases also contain provisions for tenants to reimburse the Company for real estate taxes, insurance and maintenance and other property operating expenses. Such reimbursements are included in rental revenue and amounts paid directly by tenants are recorded on a net basis, as applicable. Rental revenue also includes lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as amortization of above and below-market leases. During the three and six months ended June 30, 2022, the Company recognized $ 0.9 million of lease termination income. During the three and six months ended June 30, 2021, the Company did no t recognize any lease termination income. Fee Income from Unconsolidated Joint Venture The Company provides various services to its unconsolidated joint venture entity in exchange for market-based fees. Total asset and property management fees earned in connection with this entity was $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2022, respectively. No such fee income was earned for the three and six months ended June 30, 2021. 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 $ 35.3 million in restricted cash as of June 30, 2022, primarily comprised of reserves held by the lender under the CMBS Loan (as defined in Note 6 – Debt, Net) for future rent concessions and tenant improvement allowances. The Company did not have any restricted cash balances as of December 31, 2021. Restricted cash is included in other assets, net on the Company’s consolidated balance sheets. Recent Accounting Pronouncements In July 2021, the FASB issued ASU 2021-05 establishing Topic 842, Lessors - Certain Leases with Variable Lease Payments. ASU 2021-05 further clarifies ASC 842 classification guidance as it relates to a lessor’s accounting for certain leases with variable lease payments. This guidance requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if either a sales-type lease or direct financing lease classification would trigger a day-one loss. The adoption of ASU 2021-05 did not have a material impact on our consolidated and combined statements. In March 2020, the FASB issued ASU 2020-04 establishing Topic 848, Reference Rate Reform. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. We are currently evaluating the impact that the expected market transition from the London Interbank Offered Rate, commonly referred to as LIBOR, to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04. Note 3 – Real Estate Investments and Related Intangibles Property Acquisitions During the three months ended June 30, 2022, the Company had no acquisitions. During the six months ended June 30, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of the tax advantaged bond and ground lease structure. As a result of the transaction, $ 4.7 million that was previously classified as a finance lease right-of-use asset with respect to such land parcel previously subject to the ground lease was reclassified from other assets, net to real estate investments in the Company’s consolidated balance sheet as of June 30, 2022. During the three and six months ended June 30, 2021, the Company had no acquisitions. 11 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Property Dispositions and Real Estate Assets Held for Sale During the three and six months ended June 30, 2022, the Company disposed of one property for an aggregate gross sales price of $ 3.7 million. The Company recorded a loss of $ 1.1 million related to the disposition, which is included in impairments in the accompanying consolidated and combined statements of operations. During the three and six months ended June 30, 2021, the Company had no dispositions. During the three and six months ended June 30, 2022, there were two properties classified as held for sale with a carrying value of $ 9.4 million, included in real estate assets held for sale, net, primarily comprised of land of $ 2.0 million and building, fixtures and improvements, net of $ 7.4 million, in the accompanying consolidated balance sheets, and which are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. The Company recorded a loss of $ 5.2 million related to held for sale properties, which is included in impairments in the accompanying consolidated and combined statements of operations. Intangible Lease Assets Intangible lease assets consisted of the following (amounts in thousands, except weighted-average useful life): Weighted-Average Useful Life (Years) June 30, 2022 December 31, 2021 Intangible lease assets: In-place leases, net of accumulated amortization of $ 113,602 and $ 65,247 , respectively 5.0 $ 223,234 $ 272,743 Leasing commissions, net of accumulated amortization of $ 955 and $ 456 , respectively 12.7 12,065 10,349 Above-market lease assets, net of accumulated amortization of $ 8,831 and $ 6,239 , respectively 5.2 12,423 15,015 Total intangible lease assets, net $ 247,722 $ 298,107 Intangible lease liabilities: Below-market leases, net of accumulated amortization of $ 17,687 and $ 14,459 , respectively 7.8 $ 17,381 $ 20,609 The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $ 0.3 million and $ 0.6 million for the three and six months ended June 30, 2022, respectively, and $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2021, respectively. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $ 24.6 million and $ 49.8 million for the three and six months ended June 30, 2022, respectively, and $ 1.5 million and $ 3.2 million for the three and six months ended June 30, 2021, respectively. 12 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) 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 June 30, 2022 (amounts in thousands) : Remainder of 2022 2023 2024 2025 2026 2027 In-place leases: Total projected to be included in amortization expense $ 45,163 $ 73,846 $ 49,213 $ 21,652 $ 15,499 $ 7,441 Leasing commissions: Total projected to be included in amortization expense $ 577 $ 1,153 $ 1,110 $ 1,042 $ 1,042 $ 1,039 Above-market lease assets and deferred lease incentives: Total projected to be deducted from rental revenue $ 2,578 $ 4,791 $ 2,998 $ 860 $ 682 $ 237 Below-market lease liabilities: Total projected to be added to rental revenue $ 3,216 $ 6,091 $ 3,786 $ 1,036 $ 817 $ 655 Investment in Unconsolidated Entity The following is a summary of the Company’s investment in one unconsolidated entity, the Arch Street Joint Venture, as of June 30, 2022 and for the six months ended June 30, 2022 (dollar amounts in thousands): Ownership % (1) Number of Properties Carrying Amount of Investment Equity in Income (Loss) Six Months Ended (2) Investment June 30, 2022 June 30, 2022 December 31, 2021 June 30, 2022 June 30, 2021 Arch Street Joint Venture (3) (4) 20 % 6 $ 17,283 18,631 $ ( 95 ) — ____________________________________ (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 interests. (2) The interest in the Arch Street Joint Venture was acquired by Realty Income as part of the Mergers, and was transferred to the Company upon the consummation of the Distribution. Therefore, the Company’s equity in income reflects operations following the Merger Effective Time. (3) During the six months ended June 30, 2022, the Arch Street Joint Venture did not acquire any properties. (4) The total carrying amount of the Company’s investment in the unconsolidated joint venture was greater than the underlying equity in net assets by $ 1.4 million as of June 30, 2022. This difference is related to a step up in the fair value of the investment in the unconsolidated joint venture in connection with the Mergers. The step up in fair value was allocated to the Company’s investment in the unconsolidated joint venture and is being amortized in accordance with the Company’s depreciation policy. Note 4 – Receivables and Other Assets : Accounts receivable, net consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 December 31, 2021 Accounts receivable, net $ 16,289 $ 10,194 Straight-line rent receivable, net 9,442 7,722 Total $ 25,731 $ 17,916 13 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Other assets, net consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 December 31, 2021 Restricted cash $ 35,265 $ — Right-of-use assets, net (2) 25,796 30,958 Investment in unconsolidated entity 17,283 18,631 Deferred costs, net (1) 5,166 6,246 Prepaid expenses 1,424 3,730 Other assets, net 6,274 936 Total $ 91,208 $ 60,501 _______________________________________________ (1) Amortization expense for deferred costs related to the revolving credit facility totaled $ 0.5 million and $ 1.1 million for the three and six months ended June 30, 2022, respectively, as compared to no deferred costs for the three and six months ended June 30, 2021. Accumulated amortization for deferred costs related to the revolving credit facility was $ 1.4 million and $ 0.3 million as of June 30, 2022 and December 31, 2021, respectively. (2) Amortization expense for below market right-of-use asset was less than $ 0.1 million for the three and six months ended June 30, 2022. There was no amortization expense for below market right-of-use asset for the three and six months ended June 30, 2021. Includes right-of-use finance leases of $ 9.0 million, right-of-use operating leases of $ 9.8 million, and a below-market right-of-use asset of $ 7.1 million, net of $ 0.1 million in accumulated amortization as of June 30, 2022. Includes right-of-use finance leases of $ 13.8 million, right-of-use operating leases of $ 10.2 million, and a below-market right-of-use asset of $ 7.1 million, net of less than $ 0.1 million in accumulated amortization as of December 31, 2021. 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 June 30, 2022 and December 31, 2021, 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 June 30, 2022 Assets: Derivative assets $ — $ 5,851 $ — $ 5,851 Level 1 Level 2 Level 3 Balance as of December 31, 2021 Assets: Derivative assets $ — $ 299 $ — $ 299 Derivative Assets – The Company’s derivative financial instruments relate to interest rate swaps. 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 June 30, 2022 and December 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. Items Measured at Fair Value on a Non-Recurring Basis Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. 14 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Real Estate and Other Investments – The Company performs quarterly impairment review procedures for real estate investments, leasehold improvements and property and equipment, right of use assets and its investment in the unconsolidated entity, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of such assets may not be recoverable. As part of the Company’s impairment review procedures, net real estate assets representing six properties were deemed to be impaired resulting in impairment charges of $ 9.4 million during the six months ended June 30, 2022, that relate to adjustments to expected sales prices for certain non-core assets which have been identified by management for potential sale. There were no impairment charges recorded during the six months ended June 30, 2021. The following table summarizes our provisions for impairment during the periods indicated below (dollars in thousands): Six Months Ended June 30, 2022 Number of properties 6 Carrying value of impaired properties $ 31,319 Provisions for impairment ( 9,360 ) Estimated fair value $ 21,959 The Company estimates fair values using Level 2 and Level 3 inputs and uses a combined income and market approach, specifically using discounted cash flow analysis and/or recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rate; (2) discount rates; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions including number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of the Company’s tenants. For the Company’s impairment tests for the real estate assets during the quarter ended June 30, 2022, the fair value measurement for its impaired properties was determined by applying a sales price based on market data. Real Estate and Other Investments – Separation Fair Value Assessment – Following the Mergers, Realty Income performed a purchase price allocation assessing the value of the assets acquired and liabilities assumed at the date of acquisition of VEREIT. The assessment of fair value is preliminary and is based on information that was available to Realty Income management at the time the consolidated and combined statements were prepared. Measurement period adjustments, if any, will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. The finalization of Realty Income’s purchase accounting assessment could result in changes in the valuation of real estate assets and liabilities up to one year after the date of the Mergers, and these changes could be material. Fair Value of Financial Instruments The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their carrying value in the accompanying consolidated balance sheets due to their short-term nature. The fair values of the Company’s financial instruments are reported below (dollar amounts in thousands): Level Carrying Amount at June 30, 2022 Fair Value at June 30, 2022 Carrying Amount at December 31, 2021 Fair Value at December 31, 2021 Liabilities (1) : Bridge facility 2 — — $ 355,000 $ 355,000 Mortgages payable 2 355,000 346,826 — — Credit facility term loan 2 175,000 175,000 175,000 175,000 Credit facility revolver 2 71,000 71,000 90,000 90,000 Total $ 601,000 $ 592,826 $ 620,000 $ 620,000 _______________________________________________ (1) Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. Debt – The fair value is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of credit spreads and observable market interest rates, representing level 2 on the fair value hierarchy. 15 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Note 6 – Debt, Net As of June 30, 2022, the Company had $ 596.0 million of debt outstanding, including net deferred financing costs, with a weighted-average years to maturity of 3.4 years and a weighted-average interest rate of 4.34 %. The following table summarizes the carrying value of debt as of June 30, 2022 and December 31, 2021, and the debt activity for the six months ended June 30, 2022 (in thousands): Six Months Ended June 30, 2022 Balance as of December 31, 2021 Debt Issuances Repayments, Extinguishment and Assumptions Accretion and Amortization Balance as of June 30, 2022 Mortgages payable: Outstanding balance $ — $ 355,000 $ — $ — $ 355,000 Deferred costs — ( 3,446 ) — 266 ( 3,180 ) Mortgages payable, net — 351,554 — 266 351,820 Bridge facility: Outstanding balance 355,000 — ( 355,000 ) — — Deferred costs ( 643 ) — 442 201 — Bridge facility, net 354,357 — ( 354,558 ) 201 — Credit facility term loan: Outstanding balance 175,000 — — — 175,000 Deferred costs ( 2,510 ) ( 36 ) — 679 ( 1,867 ) Credit facility term loan, net 172,490 ( 36 ) — 679 173,133 Credit facility revolver: Outstanding balance 90,000 70,000 ( 89,000 ) — 71,000 Credit facility revolver, net 90,000 70,000 ( 89,000 ) — 71,000 Total debt $ 616,847 $ 421,518 $ ( 443,558 ) $ 1,146 $ 595,953 Credit Agreement In connection with the Separation and the Distribution, on November 12, 2021, the Company, as parent, and Orion OP, as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year , $ 425 million senior revolving credit facility (the “Revolving Facility”), including a $ 25 million letter of credit sub-facility, and a two-year , $ 175.0 million senior term loan facility (the “Term Loan Facility,” and together with the Revolving Facility, the “Revolver/Term Loan Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement,” and together with the Revolver/Term Loan Credit Agreement, the “Credit Agreements”) providing for a 6-month , $ 355.0 million senior bridge term loan facility (the “Bridge Facility,” and together with the Revolver/Term Loan Facilities, the “Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. 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. Approximately $ 595.0 million of the net proceeds of the Facilities was distributed by the Company to Realty Income in accordance with the Separation and Distribution Agreement. Orion OP retained the remaining net proceeds of such borrowings as working capital for the general corporate purposes of the Company, Orion OP and Orion OP’s subsidiaries. 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. As of June 30, 2022, the Company had borrowed and outstanding $ 71.0 million under the Revolving Facility and had $ 354.0 million of availability under the Revolving Facility, and no borrowings were outstanding under the Bridge Facility. The interest rate applicable to the loans under the 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. Under the Revolver/Term Loan Facilities, the applicable margin is (1) in the case of the Revolving Facility, 2.50 % for LIBOR loans and 1.50 % for base rate loans and (2) in the case of the 16 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) Term Loan Facility, 2.50 % for LIBOR loans and 1.50 % for base rate loans. Under the Bridge Facility, the applicable margin for LIBOR loans was initially 2.50 % with scheduled increases over time to a maximum of 3.50 % and the applicable margin on base rate loans was initially 1.50 % with scheduled increases over time to a maximum of 2.50 %, in each case, based on the number of days elapsed after November 12, 2021. Loans under the Revolver/Term Loan Facilities may be prepaid, and unused commitments under the Revolver/Term Loan Facilities may be reduced, at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs). To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25 % per annum of the unused portion of the Revolving Facility. The Revolver/Term Loan Facilities are guaranteed pursuant to a Guaranty (the “Revolver/Term Loan Guaranty”) and the Bridge Facility was guaranteed pursuant to a Guaranty (the “Bridge Guaranty”), in each case, by the Company and, subject to certain exceptions, substantially all of Orion OP’s existing and future subsidiaries (including substantially all of its subsidiaries that directly or indirectly own unencumbered real properties), other than certain joint ventures and subsidiaries that own real properties subject to certain other indebtedness (such subsidiaries of Orion OP, the “Subsidiary Guarantors”). The Revolver/Term Loan Facilities are secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors. The Revolver/Term Loan Facilities require that Orion OP comply with various covenants, including, without limitation, covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends. In addition, the Revolver/Term Loan Facilities require that Orion OP satisfy certain financial covenants, including a: • ratio of total debt to total asset value of not more than 0.60 to 1.00; • ratio of adjusted EBITDA to fixed charges of not less than 1.50 to 1.00; • ratio of secured debt to total asset value of not more than 0.45 to 1.00; • ratio of unsecured debt to unencumbered asset value of not more than 0.60 to 1.00; and • ratio of net operating income from all unencumbered real properties to unsecured interest expense of not less than 2.00 to 1.00. As of June 30, 2022, Orion OP was in compliance with these financial covenants. The Revolver/Term Loan Facilities include customary representations and warranties of the Company and Orion OP, which must be true and correct in all material respects as a condition to future extensions of credit under the Revolver/Term Loan Facilities. The Revolver/Term Loan Facilities also include customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of Orion OP under the Revolver/Term Loan Facilities to be immediately due and payable and foreclose on the collateral securing the Revolver/Term Loan Facilities. CMBS Loan On February 10, 2022, certain indirect subsidiaries of the Company (the “Mortgage Borrowers”) obtained a $ 355.0 million fixed rate mortgage loan (the “CMBS Loan”) from Wells Fargo Bank, National Association (together with its successor, the “Lender”), which is secured by the Mortgage Borrowers’ fee simple or ground lease interests in 19 properties owned indirectly by the Company (collectively, the “Mortgaged Properties”). During March 2022, Wells Fargo effected a securitization of the CMBS Loan. The CMBS Loan bears interest 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 governing the CMBS Loan (the “CMBS Loan Agreement”), at any time following the Prepayment Lockout Release Date (as 17 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) defined in the CMBS Loan Agreement) (generally two years after the Loan has been fully securitized), subject to the payment of a yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement. Further, releases of individual properties are permitted in connection with an arms’ length third party sale upon repayment of the Release Price (as defined in the CMBS Loan Agreement) for the applicable individual property and subject to payment of the applicable yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement. The CMBS Loan Agreement also contains customary cash management provisions, including certain trigger events (such as failure of the Mortgage Borrowers to satisfy a minimum debt yield) which allow the Lender to retain any excess cash flow as additional collateral for the Loan, until such trigger event is cured. In connection with the CMBS Loan Agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the “Guaranty”), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than $ 355.0 million and liquid assets of no less than $ 10.0 million, in each case, exclusive of the values of the collateral for the CMBS Loan. As of 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 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 June 30, 2022 (dollar amounts in thousands): Encumbered Properties Net Carrying Value of Collateralized Properties (1) Outstanding Balance Weighted-Average Interest Rate Weighted-Average Years to Maturity Fixed-rate debt 19 $ 480,536 $ 355,000 4.97 % 4.6 _______________________________________________ (1) Net carrying value is real estate assets, including right-of-use assets, net of real estate liabilities. The table above does not include mortgage notes associated with the unconsolidated joint venture of $ 136.7 million. Note 7 – Derivatives and Hedging Activities Cash Flow Hedges of Interest Rate Risk As of each of June 30, 2022 and December 31, 2021, the Company had interest rate swap agreements with an aggregate notional amount of $ 175.0 million, which were designated as cash flow hedges under U.S. GAAP. The interest rate swap agreements were effective on December 1, 2021 and mature on November 12, 2023. The interest rate swap agreements were entered into in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility. The table below presents the fair value of the Company’s derivative financial instrument designated as a cash flow hedge as well as its classification in the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021 (in thousands): Derivatives Designated as Hedging Instruments Balance Sheet Location June 30, 2022 December 31, 2021 Interest rate swaps Other assets, net $ 5,851 $ 299 During the three and six months ended June 30, 2022, the Company recorded unrealized gains of $ 1.5 million and $ 5.3 million, respectively, for changes in the fair value of its cash flow hedge in accumulated other comprehensive income. There were no similar amounts recorded during the three and six months ended June 30, 2021, as the interest rate swap agreement did not exist during such periods. 18 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) During the three and six months ended June 30, 2022, the Company reclassified previous gains of less than $ 0.1 million and previous losses of $ 0.2 million, respectively, from accumulated other comprehensive income into interest expense as a result of the hedged transactions impacting earnings. There were no similar amounts recorded during the three and six months ended June 30, 2021. During the next twelve months, the Company estimates that an additional $ 4.2 million will be reclassified from other comprehensive income as a decrease to interest expense. Derivatives Not Designated as Hedging Instruments As of each of June 30, 2022 and December 31, 2021, the Company had no interest rate swaps that were not designated as qualifying hedging relationships. Tabular Disclosure of Offsetting Derivatives The table below details a gross presentation, the effects of offsetting and a net presentation of the Company’s derivatives as of June 30, 2022 and December 31, 2021 (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 June 30, 2022 $ 5,851 $ — $ — $ 5,851 $ — $ — $ — $ 5,851 December 31, 2021 $ 299 $ — $ — $ 299 $ — $ — $ — $ 299 Note 8 – Supplemental Cash Flow Disclosures Supplemental cash flow information was as follows during the periods indicated below (in thousands): Six Months Ended June 30, 2022 2021 Supplemental disclosures: Cash paid for interest $ 11,880 $ 846 Cash paid for income taxes $ 528 $ — Non-cash investing and financing activities: Accrued capital expenditures and leasing costs $ 1,382 $ — Distributions declared and unpaid $ 5,663 $ — Land acquired upon finance lease termination $ 4,707 $ — Note 9 – Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 December 31, 2021 Accrued real estate and other taxes $ 9,194 $ 10,322 Accrued other 4,317 4,159 Accrued interest 1,764 1,093 Accounts payable 1,580 1,805 Total $ 16,855 $ 17,379 19 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) 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 tenant improvement allowances, landlord agreements to pay for certain improvements, as well as leasing commissions. These rent concession and leasing cost commitments could be significant. Litigation From time to time, the Company may be party to various legal proceedings which it believes are routine in nature and incidental to the operation of its business. The Company does not believe that any such legal proceedings will have a material adverse effect upon its consolidated and combined position or results of operations. Environmental Matters In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition, in each case, that it believes will have a material adverse effect upon its consolidated and combined position or results of operations. Note 11 – Leases Lessor As of June 30, 2022, the Company’s operating leases have non-cancelable lease terms ranging from 0.1 to 15.8 years. Certain leases with tenants include 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 or LIBOR). The following table presents future minimum base rent payments due to the Company over the next five years and thereafter as of June 30, 2022 (in thousands). Future Minimum Base Rent Payments July 1, 2022 - December 31, 2022 $ 75,579 2023 134,731 2024 103,756 2025 65,905 2026 62,719 2027 43,254 Thereafter 160,315 Total $ 646,259 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 June 30, 2022, the Company’s operating leases had remaining lease terms ranging from 0.4 years to 62.5 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 3.18 % as of June 30, 2022. 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 guidance adoption date or the Merger Effective Time, as applicable, in determining the present value of lease payments. Operating lease costs were $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2022, respectively, and less than $ 0.1 million for each of the three and six months ended June 30, 2021. No cash paid for operating lease liabilities was capitalized. 20 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) 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 June 30, 2022 (in thousands). Future Minimum Lease Payments July 1, 2022 - December 31, 2022 491 2023 778 2024 453 2025 442 2026 442 2027 445 Thereafter 12,939 Total 15,990 Less: imputed interest 6,094 Total $ 9,896 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 ($ 0.01 par value per share) 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. Also on November 10, 2021, in connection with the filing of the Company’s Articles of Amendment, the Company changed the par value of its common stock from $ 0.01 per share to $ 0.001 per share. On November 12, 2021, Realty Income effected the Distribution. 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 March 22, 2022, the Company’s Board of Directors declared a quarterly dividend of $ 0.10 per share for the first quarter of 2022, which was paid on April 15, 2022, to stockholders of record as of March 31, 2022. Stock Warrants On November 12, 2021, in connection with the Distribution, Orion OP 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. to Orion OP. Also on November 12, 2021, in connection with the entry into the LLCA, the Company granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of the Company’s common stock (the “Arch Street Warrants”). The Arch Street Warrants entitle the respective holders to purchase shares of the Company’s 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 Company common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) 10 years after issuance and (b) the later of the termination of the Arch Street Joint Venture and seven years after issuance. Note 13 - Equity Based Compensation The Company has an equity-based incentive award plan (the “Equity Plan”) for officers, employees, non-employee directors and consultants who provide services to the Company. Awards under the Equity Plan are accounted for under U.S. GAAP as share-based payments. The expense for such awards is recognized over the vesting period or when the requirements 21 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) for exercise of the award have been met. Under the Equity Plan, the Company may grant various types of awards, including restricted stock units that will vest if the recipient maintains employment with the Company over the requisite service period (the “Time-Based Restricted Stock Units”) and restricted stock units that may vest in a number ranging from 0 % to 100 % of the total number of units granted, based on the Company’s total shareholder return measured on an absolute basis (“TSR-Based Restricted Stock Units”) and certain operational performance metrics (“Metrics-Based Restricted Stock Units”), in each case during a three-year performance period, subject to the recipient’s continued service with the Company (collectively, the “Performance-Based Restricted Stock Units”). During the three and six months ended June 30, 2022, the Company granted Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units to certain officers and employees of the Company. The fair value of the Time-Based Restricted Stock Units granted to non-executive directors and employees under the Equity Plan is determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis. The fair value of the TSR-Based Restricted Stock Units granted to employees under the Equity Plan is determined using a Monte Carlo simulation which takes into account multiple input variables that determine the probability of satisfying the required total shareholder return, and such fair value is expensed over the performance period. The fair value of the Metrics-Based Restricted Stock Units is determined using the closing stock price on the grant date and is expensed over the requisite service period to the extent that the likelihood of achieving the performance metrics is probable. As of June 30, 2022, the Company determined that the likelihood of achieving the performance metrics was improbable and recognized no compensation expense related to the Metrics-Based Restricted Stock Units. Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units do not provide for any rights of a common stockholder prior to the vesting of such restricted stock units. Equity-based compensation expense related to Orion Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units for the three and six months ended June 30, 2022, was $ 0.3 million and $ 0.5 million, respectively. As of June 30, 2022, total unrecognized compensation expense related to Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units was approximately $ 3.0 million, with an aggregate weighted-average remaining term of 2.4 years. The Company is also required under GAAP to recognize equity-based compensation expense for awards to its employees of Realty Income time-based restricted stock units and stock options granted in connection with the Mergers. Equity-based compensation expense for the three and six months ended June 30, 2022, related to such Realty Income equity-based compensation awards, was $ 0.1 million and $ 0.2 million, respectively. As of June 30, 2022, total unrecognized compensation expense related to Realty Income time-based restricted stock units and stock options was approximately $ 0.4 million, with an aggregate weighted-average remaining term of 1.4 years. Note 14 - Net Income (Loss) Per Share The computation of basic and diluted earnings per share is as follows for the three months ended June 30, 2022 and June 30, 2021 (in thousands, except share and per share data): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net (loss) income $ ( 15,570 ) $ 4,296 $ ( 25,452 ) $ 8,847 (Income) loss attributable to non-controlling interests ( 1 ) — ( 25 ) — Net (loss) income available to common stockholders used in basic and diluted net income per share ( 15,571 ) 4,296 ( 25,477 ) 8,847 Weighted average number of Common Stock outstanding - basic 56,629,467 56,625,650 56,627,569 56,625,650 Effect of dilutive securities (1) — — — — Weighted average number of common shares - diluted 56,629,467 56,625,650 56,627,569 56,625,650 Basic and diluted net (loss) income per share attributable to common stockholders $ ( 0.27 ) $ 0.08 $ ( 0.45 ) $ 0.16 _______________________________________________ (1) As of June 30, 2021, there were no adjustments to the weighted average common shares outstanding used in the diluted calculation given there were no potentially dilutive shares. 22 ORION OFFICE REIT INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) The following were excluded from diluted net (loss) income per share attributable to common stockholders, as the effect would have been antidilutive: Six Months Ended June 30, 2022 2021 Weighted average unvested Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units (1) — — Weighted average stock warrants 1,120,000 — _______________________________________________ (1) Net of assumed repurchases in accordance with the treasury stock method. Note 15 – Subsequent Events Distributions 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. Dispositions During July 2022, we closed on the sale of one additional non-core office property for net proceeds of approximately $ 5.7 million. 23 VEREIT OFFICE ASSETS COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2021 Rental revenue (including reimbursable) $ 41,111 $ 80,894 Fee income from unconsolidated joint venture 301 440 Total revenues 41,412 81,334 Operating expenses: Property operating (including reimbursable) 10,924 20,814 General and administrative 1,911 3,575 Depreciation and amortization 14,487 29,444 Impairments 445 21,624 Total operating expenses 27,767 75,457 Other (expenses) income: Other income, net 47 52 Interest expense ( 1,784 ) ( 3,816 ) Gain (loss) on extinguishment of debt, net 37 ( 80 ) Equity in income of unconsolidated joint venture 208 410 Total other expenses, net ( 1,492 ) ( 3,434 ) Income before taxes 12,153 2,443 Provision for income taxes ( 157 ) ( 313 ) Net income 11,996 2,130 Net loss attributable to non-controlling interest 29 31 Net income attributable to VEREIT Office Assets $ 12,025 $ 2,161 The accompanying notes are an integral part of this statement. 24 VEREIT OFFICE ASSETS COMBINED AND CONSOLIDATED STATEMENT OF EQUITY (In thousands) (Unaudited) Total Equity Balance, January 1, 2021 $ 1,161,434 Contributions, net 18,927 Net loss ( 9,866 ) Balance, March 31, 2021 $ 1,170,495 Distributions, net ( 4,395 ) Net income 11,996 Balance, June 30, 2021 $ 1,178,096 The accompanying notes are an integral part of this statement. 25 VEREIT OFFICE ASSETS COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 2021 Cash flows from operating activities: Net income $ 2,130 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,421 Impairments 21,624 Loss on extinguishment of debt, net 80 Equity in income of unconsolidated joint venture ( 410 ) Distributions from unconsolidated joint venture 410 Changes in assets and liabilities: Rents and tenant receivables, operating lease right-of-use and other assets, net 1,318 Accounts payable and accrued expenses ( 4,265 ) Deferred rent, operating lease and other liabilities 481 Net cash provided by operating activities 50,789 Cash flows from investing activities: Capital expenditures and leasing costs ( 3,956 ) Real estate developments ( 27 ) Investments in unconsolidated joint venture ( 2,180 ) Return of investment from unconsolidated joint venture 649 Proceeds from the settlement of property-related insurance claims 70 Net cash used in investing activities ( 5,444 ) Cash flows from financing activities: Payments on mortgage notes payable ( 59,513 ) Refunds of deferred financing costs 280 Net contributions from parent 14,532 Net cash used in financing activities ( 44,701 ) Net change in cash and cash equivalents and restricted cash 644 Cash and cash equivalents and restricted cash, beginning of period 3,414 Cash and cash equivalents and restricted cash, end of period $ 4,058 Supplemental disclosures: Cash paid for interest $ 4,207 Non-cash investing and financing activities: Accrued capital expenditures and real estate developments $ ( 386 ) The accompanying notes are an integral part of this statement. 26 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) Note 1 – Organization and Summary of Significant Accounting Policies Organization On April 29, 2021, Realty Income Corporation (“Realty Income”) entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, Inc. (“VEREIT”), its operating partnership, VEREIT Operating Partnership, L.P. (“VEREIT OP”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), 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”). 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 Orion Office REIT Inc. (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 dated as of November 11, 2021, by and among Realty Income, the Company and Orion OP, 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, Orion operates as a separate, publicly-traded company and intends to qualify and elect to be taxed as a REIT, commencing with the Company’s initial taxable year ended December 31, 2021. VEREIT Office Assets includes the combined accounts related to certain of the office properties of VEREIT, historically operated through subsidiaries of VEREIT, and contains certain corporate costs. As of June 30, 2021, VEREIT Office Assets had one reportable segment which owned 52 properties, including one property owned by a consolidated joint venture, totaling approximately 7.6 million leasable square feet located in 25 states in the United States and Puerto Rico, and an investment in one unconsolidated joint venture that owned five office properties totaling approximately 0.8 million leasable square feet located within five states. Summary of Significant Accounting Policies Principles of Combination and Basis of Accounting and Presentation The accompanying combined and consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of VEREIT Office Assets on a combined and consolidated basis as the ownership interests were under common control and ownership of VEREIT, including a consolidated joint venture. Any applicable intercompany accounts and transactions have been eliminated in consolidation and combination. The portion of the consolidated joint venture not previously owned by VEREIT, is presented as non-controlling interest in VEREIT Office Assets’ combined and consolidated statements of operations. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results for the entire year or any subsequent interim period. These combined and consolidated financial statements should be read in conjunction with the audited combined and consolidated financial statements of VEREIT Office Assets and notes thereto as of and for the ten months ended October 31, 2021, included in the Form 10-K for Orion Office REIT Inc. filed on March 24, 2022. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC and GAAP. For legal entities being evaluated for consolidation, VEREIT Office Assets 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. VEREIT Office Assets’ evaluation includes consideration of fees paid to VEREIT Office Assets where VEREIT’s management, on behalf of VEREIT Office Assets, acts as a decision maker or service provider to the entity being evaluated. If VEREIT Office Assets 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 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 27 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) - (Continued) the entity, or (c) the right to receive the expected returns of the entity. VEREIT Office Assets consolidates entities that are not VIEs if it has a majority voting interest or other rights that result in effectively controlling the entity. VEREIT Office Assets 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, VEREIT Office Assets’ 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. VEREIT Office Assets consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to VEREIT Office Assets’ combined and consolidated financial statements. VEREIT Office Assets continually evaluates the need to consolidate these VIEs based on standards set forth in GAAP. These combined and consolidated financial statements were derived from the books and records of VEREIT and were carved out from VEREIT at a carrying value reflective of historical cost in such VEREIT records. VEREIT Office Assets’ historical financial results reflect charges for certain corporate costs and, we believe such charges are reasonable. Costs of the services that were charged to VEREIT Office Assets were based on either actual costs incurred or a proportion of costs estimated to be applicable to this entity, based on VEREIT Office Assets’ pro rata share of VEREIT’s annualized rental income. Annualized rental income is rental revenue on a straight-line basis, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any adjustments to rental income due to changes in the collectability assessment, contingent rent, such as percentage rent, and operating expense reimbursements. The historical combined and consolidated financial information presented may therefore not be indicative of the results of operations, financial position or cash flows that would have been obtained if there had been an independent, stand-alone public company during the periods presented or of the Company’s future performance as an independent, stand-alone company. Use of Estimates The preparation of financial statements in conformity with 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. Real Estate Investments Real estate and related assets acquired are recorded at cost and accumulated depreciation and amortization are assessed based on the period of future benefit of the asset. Depreciation and amortization are computed using a straight-line method over the estimated useful life of 40 years for buildings and building improvements, 15 years for land improvements and the remaining lease term for tenant improvements and intangible lease assets. VEREIT management performed quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable. Impairment indicators that VEREIT management considered included, but were not limited to, decrease in operating income, bankruptcy or other credit concerns of a property’s major tenant or tenants or a significant decrease in a property’s revenues due to lease terminations, vacancies or reduced lease rates. When impairment indicators are identified or if a property is considered to have a more likely than not probability of being disposed of within the next 12 to 24 months, VEREIT management assessed the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. GAAP required VEREIT Office Assets to utilize the expected holding period of its properties when assessing recoverability. In the event that such expected undiscounted future cash flows did not exceed the carrying value, the real estate assets have been adjusted to their respective fair values and an impairment loss has been recognized. There are inherent uncertainties in making estimates of expected future cash flows such as market conditions and performance and sustainability of the tenants. Investment in Unconsolidated Joint Venture As of June 30, 2021, VEREIT Office Assets owned a 20 % ownership interest in an unconsolidated joint venture, the Arch Street Joint Venture, that owned five properties with total real estate investments, at cost, of $ 196.0 million and total debt outstanding of $ 118.4 million, which was non-recourse to VEREIT Office Assets. 28 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) - (Continued) VEREIT Office Assets accounted for its investment in the unconsolidated joint venture using the equity method of accounting as VEREIT Office Assets had the ability to exercise significant influence, but not control, over operating and financing policies of the joint venture. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for VEREIT Office Assets’ share of equity in the joint venture’s earnings and distributions. VEREIT Office Assets recorded its proportionate share of net income (loss) from the unconsolidated joint venture in equity in income of unconsolidated joint venture in the combined and consolidated statements of operations. VEREIT Office Assets was required to determine whether an event or change in circumstances had occurred that may have had a significant adverse effect on the fair value of its investment in the unconsolidated joint venture. If an event or change in circumstance had occurred, VEREIT Office Assets’ management was required to evaluate its investment in the unconsolidated joint venture for potential impairment and determine if the carrying value of its investment exceeded its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether an impairment is other-than-temporary, VEREIT Office Assets’ management considered whether it had the ability and intent to hold the investment until the carrying value is fully recovered. The evaluation of an investment in an unconsolidated joint venture for potential impairment required VEREIT Office Assets’ management to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. No impairments were identified during the three and six months ended June 30, 2021. Goodwill Impairment VEREIT evaluated goodwill for impairment annually or more frequently when an event occurred or circumstances changed that indicated the carrying value may not be recoverable. To determine whether it was necessary to perform a quantitative goodwill impairment test, VEREIT first assessed qualitative factors, including macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or sustained decrease in VEREIT’s stock price on either an absolute basis or relative to peers. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no quantitative testing is required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying amount, the provisions of guidance require that the fair value be compared to the carrying value. Goodwill is considered impaired if the carrying value exceeds the fair value. No impairments of VEREIT’s goodwill were recorded during the three and six months ended June 30, 2021. The results of the VEREIT impairment tests carry over to VEREIT Office Assets, therefore no impairments were recorded in the accompanying combined and consolidated statements of operations. Cash and Cash Equivalents VEREIT Office Assets considers all highly liquid instruments with maturities when purchased of three months or less to be cash equivalents. VEREIT Office Assets considers investments in highly liquid money market accounts to be cash equivalents. Restricted Cash As of June 30, 2021, restricted cash included $ 2.7 million in lender reserves. Reserves relate to lease expirations, as well as maintenance, structural and debt service reserves. Rent and Tenant Receivables and Other Assets, Net Rent and tenant receivables and other assets, net primarily includes amounts to be collected in future periods related to the recognition of rental income on a straight-line basis over the lease term and cost recoveries due from tenants. Prepaid expenses as of the balance sheet date relate to future periods and will be expensed or reclassified to another account during the period to which the costs relate. Any amounts with no future economic benefit are charged to earnings when identified. 29 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) - (Continued) Deferred Financing Costs Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. Deferred financing costs are presented on the combined and consolidated balance sheet as a direct deduction from the carrying amount of the related debt liability. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. Unamortized deferred financing costs are written off when the associated debt is refinanced or repaid before maturity. Costs incurred in connection with potential financial transactions that are not completed are expensed in the period in which it is determined the financing will not be completed. Leases - Lessor At the inception of a new lease arrangement, including new leases that arise from amendments, the terms and conditions are assessed to determine the proper lease classification. When the terms of a lease effectively transfer control of the underlying asset, the lease is classified as a sales-type lease. When a lease does not effectively transfer control of the underlying asset to the lessee, but a guarantee is obtained for the value of the asset from a third party, the lease is classified as a direct financing lease. All other leases are classified as operating leases. As of June 30, 2021, no leases were classified as sales-type or direct financing leases. For operating leases with minimum scheduled rent increases, rental revenue is recognized 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. VEREIT Office Assets adopted Accounting Standards Codification Topic 842, Leases effective as of January 1, 2019. Two separate lease components were identified as follows: (i) land lease component and (ii) single property lease component comprised of building, land improvements and tenant improvements. The leases also contain provisions for tenants to reimburse VEREIT Office Assets for real estate taxes and insurance, which are considered noncomponents of the lease, and maintenance and other property operating expenses, which are considered to be non-lease components. VEREIT Office Assets elected the practical expedient to combine lease and non-lease components and the non-lease components will be included with the single property lease component as the predominant component. VEREIT Office Assets 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. All changes in the collectability assessment for an operating lease are recognized as an adjustment to rental income. During the year ended December 31, 2020, there was a global outbreak of a new strain of coronavirus, COVID-19. The global and domestic response to the COVID-19 outbreak continues to evolve. Federal, state, and local authorities have responded in a variety of ways, including temporary closure of or imposed limitations on the operations of certain non-essential businesses. Since the COVID-19 outbreak began, each of VEREIT Office Assets’ tenants has almost entirely continued to meet its payment obligations under its respective lease. In consideration of each tenant’s payment history, among other factors, there have been no changes in the collectability assessment for any of VEREIT Office Assets’ operating leases. Though the COVID-19 outbreak did not have a material impact on VEREIT Office Assets’ results of operations, cash flows or financial condition for the three and six months ended June 30, 2021, it could negatively impact tenant operations at VEREIT Office Assets’ properties in the future, which could result in a material impact to VEREIT Office Assets’ future results of operations, cash flows and financial condition. 30 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) - (Continued) Leases - Lessee To account for leases for which VEREIT Office Assets is the lessee, contracts must be analyzed upon inception to determine if the arrangement is, or contains, a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lease classification tests and measurement procedures are performed at the lease commencement date. The lease liability is initially measured as the present value of the lease payments over the lease term, discounted using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the lessee’s incremental borrowing rate is used. The incremental borrowing rate is determined based on the estimated rate of interest that the lessee would pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The lease term is the noncancelable period of the lease and includes any renewal and termination options VEREIT Office Assets is reasonably certain to exercise. The lease liability balance is amortized using the effective interest method. The lease liability is remeasured when the contract is modified, upon the resolution of a contingency such that variable payments become fixed or if the assessment of exercising an extension, termination or purchase option changes. The operating lease right-of-use (“ROU”) asset balance is initially measured as the lease liability amount, adjusted for any lease payments made prior to the commencement date, initial direct costs, estimated costs to dismantle, remove, or restore the underlying asset and incentives received. Income Taxes As of June 30, 2021, VEREIT Office Assets was owned by VEREIT, which had elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2011. VEREIT believed it was organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year ended December 31, 2021. As a REIT, VEREIT was generally not subject to federal income tax on taxable income that it distributed to its stockholders so long as it distributed annually at least 90% of its REIT taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). Accordingly, no provision has been made for federal income taxes in the accompanying combined and consolidated financial statements of VEREIT Office Assets. During the three and six months ended June 30, 2021, VEREIT Office Assets recognized state and local income and franchise tax expense of $ 0.2 million and $ 0.3 million, respectively. Amounts are included in provision for income taxes in the accompanying combined and consolidated statements of operations. VEREIT Office Assets had no unrecognized tax benefits as of or during the three and six months ended June 30, 2021. Any interest and penalties related to unrecognized tax benefits would be recognized in provision for income taxes in the accompanying combined and consolidated statements of operations. As of June 30, 2021, VEREIT Office Assets had no material uncertain income tax positions. Recent Accounting Pronouncements In March 2020, the FASB issued ASU 2020-04 establishing Topic 848, Reference Rate Reform. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. We are currently evaluating the impact that the expected market transition from the London Interbank Offered Rate, commonly referred to as LIBOR, to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04. Note 2 – Real Estate Investments and Related Intangibles Property Acquisitions/Dispositions There were no property acquisitions or dispositions during the six months ended June 30, 2021. 31 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) - (Continued) Consolidated Joint Venture VEREIT Office Assets had an interest in one consolidated joint venture that owned one property as of June 30, 2021. As of June 30, 2021, the consolidated joint venture had total assets of $ 32.5 million, of which $ 28.3 million were real estate investments, net of accumulated depreciation and amortization. The property was secured by a mortgage note payable, which was non-recourse to VEREIT Office Assets and had a net balance of $ 14.9 million as of June 30, 2021. The joint venture partner is the managing member of the joint venture. However, in accordance with the joint venture agreement, VEREIT Office Assets had the ability to control operating and financing policies of the consolidated joint venture and the joint venture partner must obtain VEREIT Office Assets’ approval for any major transactions. VEREIT Office Assets and the joint venture partner were subject to the provisions of the joint venture agreement, which included provisions for when additional contributions may be required to fund certain cash shortfalls. Impairments VEREIT management performed quarterly impairment review procedures for real estate investments, leasehold improvements and property and equipment and right of use assets, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable. As part of VEREIT management’s quarterly impairment review procedures, net real estate assets representing two properties of VEREIT Office Assets were deemed to be impaired resulting in impairment charges of $ 0.4 million and $ 21.6 million during the three and six months ended June 30, 2021, respectively. The impairment charges related to properties that VEREIT management identified for potential sale or were determined, based on discussions with the current tenants, would not be re-leased by the tenant and VEREIT management believed the properties would not be leased to another tenant at a rental rate that supported the book value. VEREIT estimated fair values using Level 3 inputs and used a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment required VEREIT’s management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rate; (2) discount rates; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions, including number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of VEREIT Office Assets’ tenants. For VEREIT’s impairment tests for the real estate assets during the six months ended June 30, 2021, VEREIT used a discount rate of 8.6 % and a capitalization rate of 8.1 %. Note 3 – Commitments and Contingencies Litigation VEREIT Office Assets is party to various legal proceedings which it believes are routine in nature and incidental to the operation of its business. VEREIT Office Assets does not believe that any of these outstanding claims against it will have a material adverse effect upon its consolidated financial position or results of operations. Environmental Matters In connection with the ownership and operation of real estate, VEREIT Office Assets may potentially be liable for costs and damages related to environmental matters. VEREIT Office Assets 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 results of operations. Note 4 – Leases Lessor As of June 30, 2021, VEREIT Office Assets’ operating leases had non-cancelable lease terms ranging from 0.2 years to 11.9 years. Certain leases with tenants include 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 or LIBOR). VEREIT Office Assets believes the residual value risk is not a primary risk because of the long-lived nature of the assets. 32 VEREIT OFFICE ASSETS NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) - (Continued) The components of rental revenue from VEREIT Office Assets’ operating leases were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2021 Fixed: Cash rent $ 32,278 $ 64,424 Straight-line rent ( 694 ) ( 1,459 ) Lease intangible amortization ( 51 ) ( 82 ) Property operating cost reimbursements 973 1,921 Total fixed 32,506 64,804 Variable (1) 8,605 16,090 Total rental revenue $ 41,111 $ 80,894 ____________________________________ (1) Includes costs reimbursed related to property operating expenses, common area maintenance and percentage rent. Lessee VEREIT Office Assets is the lessee under one ground lease arrangement, which meets the criteria of an operating lease. As of June 30, 2021, VEREIT Office Assets’ lease has a remaining lease term of 36.1 years, which includes options to extend. Under the ground lease arrangement, VEREIT Office Assets pays variable costs, including property operating expenses and common area maintenance. The discount rate for VEREIT Office Assets’ operating lease was 5.17 % as of June 30, 2021. As VEREIT Office Assets’ lease does not provide an implicit rate, VEREIT Office Assets used an estimated incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments. Operating lease costs for the three and six months ended June 30, 2021 were $ 0.1 million and $ 0.2 million, respectively. No cash paid for operating lease liabilities was capitalized. Note 5 – Subsequent Events VEREIT Office Assets evaluated subsequent events through August 3, 2022 and no items have come to the attention of management that require recognition or disclosure, except as set forth below. Debt Subsequent to June 30, 2021, each of the outstanding mortgage notes of VEREIT Office Assets were repaid in full by VEREIT on behalf of VEREIT Office Assets. Mergers, Separation and Distribution On November 1, 2021, the Mergers were completed. Following the Merger Effective Time, the Separation was completed. On November 12, 2021, following the Separation, the Distribution was completed. 33 Table of Contents