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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-03 · 199 added, 137 removed, 286 unchanged (54% of the section changed)

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The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Orion Office REIT Inc.

(the “Company”, “Orion”, “we”, or “us”) makes statements in this section that are forward-looking statements within the meaning of the federal securities laws.

For a complete discussion of forward-looking statements, see the section entitled “ Forward-Looking Statements ” in the Company’s Annual Report on Form 10-K filed on March 24, 2022.

Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion.

For a complete discussion of such risk factors, see Part I - Item 1A.

Risk Factors contained in the Company’s Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” which reflect our expectations and projections regarding future events and plans, future financial condition, results of operations, liquidity and business, including leasing and occupancy, acquisitions, dispositions, rent receipts, the payment of future dividends, the Company’s growth and the impact of the coronavirus (COVID-19) on our business.

This Quarterly Report on Form 10-Q includes “forward-looking statements” which reflect Orion Office REIT Inc.’s (the “Company, “Orion”, “we”, or “us”) expectations and projections regarding future events and plans, future financial condition, results of operations, liquidity and business, including leasing and occupancy, acquisitions, dispositions, rent receipts, the payment of future dividends, the Company’s growth and the impact of the coronavirus (COVID-19) on our business.

Generally, the words “anticipates,” “assumes,” “believes,” “continues,” “could,” “estimates,” “expects,” “goals,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “targets,” “will,” “guidance,” variations of such words and similar expressions identify forward-looking statements.

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The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:

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

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

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

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• our ability to comply with the terms of our credit agreements or to meet the debt obligations on certain of our properties;

• our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or at all;

• our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms and in a timely manner, or at all;

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

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

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

• our ability to renew leases with existing tenants or re-let vacant space to new tenants on favorable terms and in a timely manner, or at all;

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

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• risks associated with the potential volatility of our common stock;

• the risk that we may fail to qualify and maintain our qualification as a REIT;

• other risks and uncertainties detailed from time to time in our SEC filings.

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

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

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

Annualized base rent is not indicative of future performance.

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Orion Office REIT Inc.

was incorporated in the State of Maryland on July 1, 2021 and intends to qualify and elect to be taxed as a REIT for U.S.

was incorporated in the State of Maryland on July 1, 2021 and has been operating in a manner so as to qualify and has elected to be taxed as a REIT for U.S.

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

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

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

The Company had 87 office properties with an aggregate of 10.0 million leasable square feet located in 29 states with an occupancy rate of 88.0% and a weighted-average remaining lease term of 3.9 years as of September 30, 2022.

Including the Company’s pro rata share of square feet and annualized base rent from the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, LLC (“Arch Street Capital Partners”), we owned an aggregate of 10.1 million leasable square feet with an occupancy rate of 88.2% and a weighted-average remaining lease term of 3.9 years as of September 30, 2022.

Merger with Realty Income

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

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

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

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

Office Assets”).

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

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

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

Following the Distribution, we became an independent publicly traded company and have been operating in a manner so as to qualify and have elected to be taxed as a REIT, commencing with our initial taxable year ended December 31, 2021.

On November 12, 2021, in connection with the Distribution, Orion OP also entered into an Amended and Restated Limited Liability Company Agreement (the “LLCA”) of 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.

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Basis of Presentation

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

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

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

For the three and nine months ended September 30, 2022, the consolidated and combined financial statements of the Company include the accounts of the Company and its consolidated

subsidiaries and a consolidated joint venture, which accounts include the Realty Income Office Assets and the VEREIT Office Assets.

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

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The combined and consolidated financial statements of the VEREIT Office Assets reflect charges for certain corporate costs, and we believe such charges are reasonable.

Costs of the services that were charged to the VEREIT Office Assets were based on either actual costs incurred by each business or a proportion of costs estimated to be applicable to each business, based on VEREIT Office Assets’ pro-rata share of annualized base rent.

The historical combined financial information presented does not necessarily include all of the expenses that would have been incurred had VEREIT Office Assets been operating as a separate, standalone company.

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Election as a REIT

We intend to qualify and elect to be taxed as a REIT for U.S.

The Company 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, 2021.

To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders.

As a REIT, except as discussed below, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains).

As a REIT, except as discussed below, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains).

REITs are subject to a number of other organizational and operational requirements.

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• The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss.

• The evaluation of real estate assets for potential impairment requires our management to exercise significant judgment and make certain key assumptions.

• The evaluation of real estate assets for potential impairment requires our management to exercise significant judgment and make certain key assumptions, including the following:

(1) capitalization rate;

(2) discount rate;

(3) number of years the property will be held;

(4) property operating expenses;

and (5) re-leasing assumptions including the number of months to re-lease, market rental revenue and required tenant improvements.

There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of our tenants.

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Significant Transactions Summary

Activity through June 30, 2022

Activity through September 30, 2022

Real Estate Operations

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

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

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

• During the nine months ended September 30, 2022, we closed on the sale of five non-core office properties for an aggregate gross sales price of $23.1 million.

Through November 1, 2022, we closed on the sale of two additional non-core office properties for an aggregate gross sales price of $5.3 million.

As of November 1, 2022, we had pending agreements to dispose of an additional four non-core office properties for an aggregate gross sales price of $15.9 million.

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

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

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

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

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

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

• During the nine months ended September 30, 2022, we have renewed a total of 379,000 square feet of office space across six different properties.

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

During the nine months ended September 30, 2022, eight leases expired or were downsized comprising a total reduction in occupied space of approximately 632,000 leasable square feet.

As of September 30, 2022, the Company had a total of ten vacant properties, three of which are subject to one of the pending disposition agreements described above for an aggregate gross sales price of $4.2 million.

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

The CMBS Loan matures on February 11, 2027.

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

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

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

• As of September 30, 2022, we had $394.0 million of borrowing capacity under the Revolving Facility.

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

The dividends were paid on April 15, 2022, July 15, 2022 and October 17, 2022.

On November 1, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.10 per share for the fourth quarter of 2022, payable on January 17, 2023, to stockholders on record as of December 30, 2022.

Real Estate Portfolio Metrics

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

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

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

Portfolio Metrics

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

(3) Based on annualized base rental income of our real estate portfolio, including the Company’s pro rata share of annualized base rent for properties owned by the unconsolidated joint venture, as of June 30, 2022.

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

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

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2022

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2022

Financial Metrics

Total revenues $ 51,769 $ 157,824

Net (loss) income $ (15,570) $ (25,452)

Basic and diluted net (loss) income per share attributable to common stockholders $ (0.27) $ (0.45)

Net loss $ (53,029) $ (78,481)

Basic and diluted net loss per share attributable to common stockholders $ (0.94) $ (1.39)

FFO attributable to common stockholders (1)

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GAAP measure.

Leasing Activity and Capital Expenditures

The Company remains highly focused on leasing activity, given the 3.9 year weighted-average remaining lease term and the significant lease maturities which will occur across the portfolio over the next few years.

If our tenants decide not to renew their leases, terminate their leases early or default on their leases, we will seek to re-lease the space to new tenants.

We also seek to lease our vacant properties to new tenants.

We may not, however, be able to re-lease the space to suitable replacement tenants on a timely basis, or at all.

Even if we are able to renew leases with existing tenants or enter into new leases with replacement tenants, the terms of renewals or new leases, including the cost of required renovations, improvements or concessions to tenants, particularly commercial tenants, may be less favorable to us than current lease terms.

As a result, our net income and ability to pay dividends to shareholders could be materially adversely affected.

Further, if any of our properties cannot be leased on terms and conditions favorable to us, we may seek to dispose of the property;

however, such property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all, which could inhibit our ability to effectively dispose of those properties and could require us to expend capital to fund necessary capital improvements or alterations.

As an owner of commercial real estate, the Company is required to make capital expenditures with respect to its portfolio, which include normal building improvements to replace obsolete building components and expenditures to extend the useful life of existing assets and lease related expenditures to retain existing tenants or attract new tenants to our properties.

The Company has agreed to provide rent concessions to tenants and incur leasing costs with respect to its properties, including amounts paid directly to tenants to improve their space and/or building systems, or tenant improvement allowances, landlord agreements to perform and pay for certain improvements, and leasing commissions.

The Company anticipates it will continue to agree to tenant improvement allowances, the amount of which may increase in future periods.

These rent concession and leasing cost commitments could be significant and are expected to vary due to factors such as competitive market conditions for leasing of commercial office space and the volume of square footage subject to re-leasing by the Company.

The timing of the Company’s cash outlay for tenant improvement allowances will depend upon the applicable tenant’s timetable for the improvements and corresponding use of the capital.

The Company has funded and intends to continue to fund tenant improvement allowances with cash on hand, which may include proceeds from dispositions.

For assets financed on our CMBS loan, we have funded a reserve with the lender for the amount of tenant improvement allowances.

The restricted cash included in this reserve totaled $35.1 million as of September 30, 2022 and is included in other assets, net in our consolidated balance sheets.

During the three and nine months ended September 30, 2022, we entered into new and renewal leases as summarized in the following tables (square feet in thousands):

Three Months Ended

New Leases Renewals Total

Rentable square feet leased — 35 35

Weighted average rental rate change (cash basis) (1)

Tenant leasing costs and concession commitments (2)

Tenant leasing costs and concession commitments per rentable square foot $ — $ — $ —

Weighted average lease term (by rentable square feet) (years) — 5.0 5.0

Tenant leasing costs and concession commitments per rentable square foot per year $ — $ — $ —

Nine Months Ended

New Leases Renewals Total

Rentable square feet leased 41 379 420

Weighted average rental rate change (cash basis) (1)

N/A (4.2) % (4.2) %

Tenant leasing costs and concession commitments (2)

$ 2,719 $ 7,827 $ 10,546

Tenant leasing costs and concession commitments per rentable square foot $ 66.63 $ 20.65 $ 25.11

Weighted average lease term (by rentable square feet) (years) 11.0 6.2 6.7

Tenant leasing costs and concession commitments per rentable square foot per year $ 6.06 $ 3.33 $ 3.75

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(1) Represents weighted average percentage increase or decrease in (i) the annualized monthly cash amount charged to the applicable tenants (including monthly base rent receivables and certain contractually obligated reimbursements by the applicable tenants) as of the commencement date of the new lease term (excluding any full or partial rent abatement period) compared to (ii) the annualized monthly cash amount charged to the applicable tenants (including the monthly base rent receivables and certain contractually obligated reimbursements by the applicable tenants) as of the expiration date of the prior lease term.

Excludes one new lease for approximately 41,000 square feet of space that had been vacant for more than 12 months at the time the new lease was executed.

(2) Includes commitments for tenant improvement allowances and base building allowances, leasing commissions and free rent (includes estimates of property operating expenses, where applicable).

During the three and nine months ended September 30, 2022, amounts capitalized by the Company for lease related costs, lease incentives and building, fixtures and improvements were as follows:

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2022

Lease related costs (3)

Lease incentives (4)

Building, fixtures and improvements (5)

Total capital expenditures $ 3,730 $ 8,512

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(3) Lease related costs generally include lease commissions paid in association with the execution of new and/or renewed leases.

(4) Lease incentives generally include expenses paid on behalf of the tenant or reimbursed to the tenant, including expenditures related to the construction of tenant-owned improvements.

(5) Building, fixtures and improvements generally include expenditures to replace obsolete building or land components, expenditures that extend the useful life of existing assets and expenditures to construct landlord owned improvements.

Results of Operations

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

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

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

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

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

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

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

At September 30, 2022, we had 87 office properties with an aggregate of 10.0 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet at September 30, 2021.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 vs 2021

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Total revenues $ 51,769 $ 13,315 $ 38,454 $ 157,824 $ 38,930 $ 118,894

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

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

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

The increases in rental revenue of $38.3 million and $118.3 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 were primarily due to the increase in our overall portfolio size resulting from the closing of the Mergers.

Including the rental revenue from the VEREIT Office Assets for the three and nine months ended September 30, 2021, rental revenue decreased by $2.2 million and $3.1 million, respectively, as compared to the same periods in 2021, primarily due to our lower occupancy rate and property dispositions.

Including VEREIT Office Assets, our portfolio occupancy rate would have been 93.9% as of September 30, 2021, and our portfolio occupancy rate was 88.2% as of September 30, 2022.

The Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental revenue.

During the three and nine months ended September 30, 2022, the Company recorded a reduction to rental revenue of $0.5 million for property operating expense reimbursements not probable of collection.

During the three and nine months ended September 30, 2021, the Company did not record any reductions to rental revenue for amounts not probable of collection.

Fee income from unconsolidated joint venture

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

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

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

The increase of $0.2 million and $0.6 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021, was due to fees earned from the Arch Street Joint Venture, including property and asset management fees.

Including the fee income from unconsolidated joint venture from the VEREIT Office Assets for the three and nine months ended September 30, 2021, fee income from unconsolidated joint venture would have been consistent compared to the three and nine months ended September 30, 2022, respectively.

Operating Expenses

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 vs 2021

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Impairments 44,801 — 44,801 54,161 — 54,161

Acquisition-related 141 — 141 204 — 204

Transaction costs 208 — 208 964 — 964

Transaction related 194 — 194 398 — 398

Spin related — 2,797 (2,797) 964 2,797 (1,833)

Total operating expenses $ 97,663 $ 10,963 $ 86,700 $ 213,650 $ 26,928 $ 186,722

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

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

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

The increases in property operating expenses of $13.6 million and $41.2 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 were primarily attributable to the increase in our portfolio size.

Including the property operating expenses from the VEREIT Office Assets for the three and nine months ended September 30, 2021, property operating expenses increased $3.6 million and $10.4 million, respectively, primarily due to expenses for insurance, property owners association, electricity and HVAC repairs and non-reimbursable expenses due to vacancies.

General and Administrative Expenses

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

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

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

General and administrative expenses increased $4.1 million and $9.8 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021, which was primarily due to actual costs recorded during the three and nine months ended September 30, 2022 following the Distribution and the Company’s commencement of operations as a standalone business, as compared with an allocation of amounts for the three and nine months ended September 30, 2021.

Including the general and administrative expenses from the VEREIT Office Assets for the three and nine months ended September 30, 2021, general and administrative expenses increased $2.6 million and $4.8 million, respectively.

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

Depreciation and Amortization Expenses

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

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

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

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

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

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

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

Acquisition-Related Expenses

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

The increases in depreciation and amortization expenses of $26.8 million and $83.0 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 were primarily due to the increase in our portfolio size.

Including the depreciation and amortization expenses from the VEREIT Office Assets for the three and nine months ended September 30, 2021, depreciation and amortization expenses increased $12.0 million and $38.8 million, respectively, primarily due to the fair valuation of the VEREIT Office Assets as a result of the Mergers.

Impairments of $44.8 million and $54.2 million were recorded during the three and nine months ended September 30, 2022 as compared to no impairments during the same periods in 2021.

The impairment charges in the three and nine months ended September 30, 2022, include a total of six and ten properties, respectively, and the charges reflect management’s estimates of lease renewal probability, timing and terms of such renewals, carrying costs for vacant properties, sale probability, estimates of sale proceeds, including where applicable, the negotiated price under a definitive agreement to sell the asset.

See Note 5 - Fair Value Measurements for further information.

Impairments for the VEREIT Office Assets for the three and nine months ended September 30, 2021 were $6.4 million and $28.1 million, respectively, due to three and four real estate assets that were deemed to be impaired, respectively.

Transaction Related Expenses

During the three and nine months ended September 30, 2022, the Company incurred $0.2 million and $0.4 million, respectively, of transaction related expenses, which primarily consist of internal salaries allocated to acquisition-related activities as well as costs incurred for deals that were not consummated.

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

Transaction Costs

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

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

Spin Related Expenses

During the nine months ended September 30, 2022, the Company incurred $1.0 million of spin related expenses, which primarily consist of legal and accountant fees related to the Mergers and the Distribution and the Company’s start-up activities.

There were $2.8 million of spin related expenses during the same period in 2021.

Other (Expense) Income and Provision for Income Taxes

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 vs 2021

3 unchanged sentences

Loss on extinguishment of debt, net $ — $ (3,499) $ (3,499) $ (468) $ (3,499) $ (3,031)

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

Equity in loss of unconsolidated joint venture $ (157) $ — $ 157 $ (252) $ — $ 252

Other income, net $ 31 $ — $ 31 $ 118 $ — $ 118

Provision for income taxes $ (164) $ — $ 164 $ (494) $ — $ 494

Gain on disposition of real estate assets $ 1,059 $ — $ 1,059 $ 1,059 $ — $ 1,059

Interest Expense, net

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

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

The increases in interest expense of $7.6 million and $21.5 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 were primarily due to an increase in debt outstanding from $9.7 million as of September 30, 2021 to $556.5 million as of September 30, 2022, as discussed in Note 6 – Debt, Net.

Including the interest expense from the VEREIT Office Assets for the three and nine months ended September 30, 2021, interest expense increased $5.9 million and $16.0 million primarily due to the increase in debt outstanding in connection with the capitalization of the Company.

Loss on extinguishment of debt, net

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

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

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

Equity in income (loss) of unconsolidated joint venture

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

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

Loss on extinguishment of debt, net was $0.5 million during the nine months ended September 30, 2022, as compared to $3.5 million loss on extinguishment of debt in the same period in 2021.

The loss in the 2022 period relates to the write off of deferred financing costs due to the early extinguishment of the Company’s Bridge Facility, as discussed in Note 6 – Debt, Net.

The loss in the 2021 period was primarily due to a prepayment penalty related to the early repayment of a mortgage completed in September 2021.

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

Equity in loss of unconsolidated joint venture

Equity in loss of the unconsolidated joint venture was $0.2 million and $0.3 million during the three and nine months ended September 30, 2022, respectively, as compared to no equity in income (loss) of the unconsolidated joint venture for the same period in 2021, which relates to the Company’s investment in one unconsolidated joint venture, which interest was transferred to the Company in connection with the Separation and Distribution.

Including the equity in income (loss) of unconsolidated joint venture from the VEREIT Office Assets for the three and nine months ended September 30, 2021, income decreased $0.4 million and $0.9 million, respectively, primarily related to amortization of the step up in basis of the unconsolidated joint venture investment as a result of the Mergers.

Provision for Income Taxes

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

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

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

The provision for income taxes was $0.2 million and $0.5 million during the three and nine months ended September 30, 2022, respectively, as compared to no provision for income taxes prior to the time the Company became an independent, separate public company.

The provisions for income taxes for the VEREIT Office Assets for the three and nine months ended September 30, 2021 were $0.2 million and $0.5 million, respectively.

Gain on disposition of real estate assets

Gain on disposition of real estate assets was $1.1 million for both the three and nine months ended September 30, 2022 as compared to no gain during the three and nine months ended September 30, 2021.

The gain was related to three of the Company’s four dispositions during the three months ended September 30, 2022.

These properties were subject to cumulative impairment losses of $26.6 million in prior periods.

Non-GAAP Measures

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

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

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

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

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

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

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

1 unchanged sentence

Depreciation and amortization of real estate assets 32,674 5,912 100,822 17,855

Gain on disposition of real estate assets (1,059) — (1,059) —

Impairment of real estate 44,801 — 54,161 —

1 unchanged sentence

FFO attributable to common stockholders $ 23,829 $ 4,489 $ 76,782 $ 25,278

Transaction related 194 — 398 —

Spin related (1)

— 2,797 964 2,797

Acquisition-related expenses 141 — 204 —

Transaction costs (2)

Loss (gain) on extinguishment and forgiveness of debt, net — — 468 —

Loss on extinguishment of debt, net — 3,499 468 3,499

Core FFO attributable to common stockholders $ 24,023 $ 10,785 $ 78,612 $ 31,574

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

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

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

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

These errors have been corrected, and the applicable amounts reported

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

As of September 30, 2022, we had $23.3 million of cash and cash equivalents and $394.0 million of borrowing capacity under the Revolving Facility.

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

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and (iii) fund new acquisitions.

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

We believe we will be successful in either repaying or refinancing our debt obligations at or prior to maturity, but we cannot provide any assurance we will be able to do so.

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Approximately $595.0 million of the net proceeds of the Facilities was distributed by the Company to Realty Income in accordance with the Separation and Distribution Agreement.

Orion OP retained the remaining net proceeds of such borrowings as working capital for general corporate purposes of the Company, Orion OP and Orion OP’s subsidiaries.

retained the remaining net proceeds of such borrowings as working capital for general corporate purposes of the Company, Orion OP and Orion OP’s subsidiaries.

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

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

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

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

As of September 30, 2022, the Company had approximately $561.0 million of total consolidated debt outstanding, consisting of a $355.0 million CMBS Loan, a $175.0 million Term Loan Facility and $31.0 million outstanding under a $425.0 million Revolving Facility.

During the three months ended September 30, 2022, as part of its normal cash management strategy, the Company repaid $40.0 million of borrowings under the Revolving Facility, utilizing a combination of cash flows from operations and proceeds from real estate dispositions.

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

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

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 Term Loan Facility, 2.50% for LIBOR loans and 1.50% for base rate loans.

In accordance with its right to elect to do so under the terms of the Revolver/Term Loan Facilities, Orion OP anticipates transitioning from LIBOR to SOFR during the fourth quarter of 2022 or the first quarter of 2023.

Loans under the Revolver/Term Loan Facilities may be prepaid, and unused commitments under the Revolver/Term Loan Facilities may be reduced, at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs).

As of September 30, 2022, the interest rate per annum under our Revolving Credit Facility was 5.53% and the interest rate per annum under our Term Loan was swapped to a fixed rate of 3.19%.

To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25% per annum of the unused portion of the Revolving Facility.

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

Credit Facility Key Covenants Required June 30, 2022

Credit Facility Key Covenants Required September 30, 2022

Ratio of total indebtedness to total asset value ≤ 60% 30.7%

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Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 10.94x

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

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

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

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In connection with the CMBS Loan Agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the “Guaranty”), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than $355.0 million and liquid assets of no less than $10.0 million, in each case, exclusive of the values of the collateral for the CMBS Loan.

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

As of September 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.

1 unchanged sentence

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 following is a summary of the interest rate and scheduled maturities of our consolidated debt obligations as of September 30, 2022 (in thousands):

Principal Amounts Due During the Years Ending December 31,

Interest Rate Maturity Total 2023 2024 2025 2026 2027 Thereafter

Credit facility revolver LIBOR + 2.50% November 2024 31,000 — 31,000 — — — —

Credit facility term loan (1)

LIBOR + 2.50% November 2023 175,000 175,000 — — — — —

Mortgages payable 4.971 % February 2027 355,000 — — — — 355,000 —

Total 561,000 175,000 31,000 — — 355,000 —

________________________________

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

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

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

Also on November 12, 2021, in connection with the entry into the LLCA, we granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of our common stock (the “Arch Street Warrants”).

Also on November 12, 2021, in connection with the entry into the LLCA, we granted the Arch Street Partner and Arch Street Capital Partners warrants to purchase up to 1,120,000 shares of our common stock (the “Arch Street Warrants”).

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

1 unchanged sentence

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

We have agreed that, prior to six months following our eligibility to use Form S-3 for the registration of our securities, we will file with the SEC a registration statement on Form S-3 (the “Registration Statement”) for the registration, under the Securities Act, of the shares of our common stock issuable upon exercise of the Arch Street Warrants.

We have agreed that, prior to six months following our eligibility to use Form S-3 for the registration of our securities, we will file with the SEC a registration statement on Form S-3 for the registration, under the Securities Act, of the shares of our common stock issuable upon exercise of the Arch Street Warrants.

Following the filing of this Quarterly Report on Form 10-Q, the Company expects to file a resale shelf registration statement on Form S-3 with the SEC in satisfaction of this obligation.

We will use our commercially reasonable efforts to cause the registration statement to become effective and to maintain the effectiveness of the registration statement, and a current prospectus relating thereto, until the earlier of (a) the expiration of the Arch Street Warrants, or (b) the shares issuable upon such exercise become freely tradable under United States federal securities laws by anyone who is not an affiliate (as such term is defined in Rule 144 under the Securities Act (or any successor rule)) of us.

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We do not anticipate that the ROFO Agreement will have a material impact on our ability to acquire additional office real properties, although it could result in us acquiring future properties through the Arch Street Joint Venture rather than as sole 100% owner.

We intend to qualify and elect to be taxed as a REIT for U.S.

We have been operating in a manner so as to qualify and have elected to be taxed as a REIT for U.S.

federal income tax purposes beginning with our taxable year commencing on the day prior to the Distribution and ending on December 31, 2021.

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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.

On November 1, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the fourth quarter of 2022 payable on January 17, 2023, to stockholders of record as of December 30, 2022.

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

2 unchanged sentences

In addition, our Articles of Amendment and Restatement allow us to issue shares of preferred equity that could have a preference on dividends, and if we do, the dividend preference on the preferred equity could limit our ability to pay dividends to the holders of our common stock.

Contractual Obligations

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

Payments due by period

Total Less than 1 year 1-3 years 4-5 years More than 5 years

Principal payments - Mortgage notes payable $ 355,000 $ — $ — $ 355,000 $ —

Interest payments - Mortgage notes payable 82,646 17,892 53,725 11,029 —

Principal payments - Credit facility term loan 175,000 — 175,000 — —

Interest payments - Credit facility term loan (1)

7,737 5,668 2,069 — —

Principal payments - credit facility revolver 71,000 — 71,000 — —

Interest payments - credit facility revolver (2)

8,517 3,659 4,858 — —

Operating and ground lease commitments 15,990 491 1,673 887 12,939

$ 715,890 $ 27,710 $ 308,325 $ 366,916 $ 12,939

____________________________________

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

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

(2) Interest payments due in future periods on variable rate debt were calculated using a forward LIBOR curve.

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.

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

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

Six Months Ended June 30,

Universal Shelf Registration Statement

Following the filing of this Quarterly Report on Form 10-Q, the Company expects to file a universal shelf registration statement on Form S-3 (the “Universal Shelf”) with the SEC.

Once the Universal Shelf is declared effective by the SEC, the Company will be able to offer and sell from time to time in multiple transactions, up to $750 million of the Company’s securities, pursuant to the Universal Shelf, including through “at the market” offering programs or firm commitment underwritten offerings.

These securities may include shares of the Company’s common stock, shares of the Company’s preferred stock, depository shares representing interests in shares of the Company’s preferred stock, debt securities, warrants to purchase shares of the Company’s common stock or shares of the Company’s preferred stock and units consisting of two or more shares of common stock, shares of preferred stock, depository shares, debt securities and warrants.

Net proceeds from the securities issued, if any, may be used for general corporate purposes, which may include funding potential acquisitions and repaying outstanding indebtedness.

The Company has no present plans to issue any securities pursuant to the Universal Shelf or otherwise.

Share Repurchase Program

On November 1, 2022, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s outstanding common stock until December 31, 2025, as market conditions warrant (the “Share Repurchase Program”).

Repurchases may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements.

The Share Repurchase Program does not obligate the Company to make any repurchases at a specific time or in a specific situation.

Repurchases are subject to prevailing market conditions, the

trading price of the Company’s common stock, the Company’s liquidity and anticipated liquidity needs, financial performance and other conditions.

Shares of common stock repurchased by the Company under the Share Repurchase Program, if any, will be returned to the status of authorized but unissued shares of common stock.

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

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

Nine Months Ended September 30,

2022 versus 2021

2 unchanged sentences

Net cash used in financing activities $ (73,495) $ (32,722) $ (40,773)

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

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

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

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

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

Net cash provided by operating activities increased $56.4 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 primarily due to the increase in our portfolio size.

Net cash provided by investing activities increased $16.8 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

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

Net cash used in financing activities increased $40.8 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to net repayments of the Company’s revolving credit facility, dividends to stockholders and payments of deferred financing costs related to the CMBS Loan entered into by the Company during the nine months ended September 30, 2022, partially offset by no payments of mortgages payable and no distributions to parent during the nine months ended September 30, 2022 as compared to the same period in 2021.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis