Orion Properties Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Forward-Looking Statements 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. These forward-looking statements are based on information currently available to us and involve a number of known and unknown assumptions and risks, uncertainties and other factors, which may be difficult to predict and beyond the Company’s control, that could cause actual events and plans or could cause our business, financial condition, liquidity and results of operations to differ materially from those expressed or implied in the forward-looking statements. These factors include, among other things, those discussed below. Information regarding historical rent collections should not serve as an indication of future rent collection. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or factors, new information, future events or otherwise, except as may be required by law. 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 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; • conditions associated with the global market, including an oversupply of office space, tenant credit risk and general economic conditions; • the extent to which the ongoing COVID-19 pandemic or any future pandemic or outbreak of a highly infectious or contagious disease or fear of such pandemics or outbreaks impacts our business, operating results, financial condition and prospects, which is highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the COVID-19 pandemic and its impact on the U.S. economy and potential changes in tenant behavior that could adversely affect the use of and demand for office space; • our ability to acquire new properties and sell non-core assets on favorable terms and in a timely manner, or at all; • 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 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 and in a timely manner, or at all; • the cost of rent concessions, tenant improvement allowances and leasing commissions; • the potential for termination of existing leases pursuant to tenant termination rights; • the amount, growth and relative inelasticity of our expenses; • risks associated with the ownership and development of real property; • risks accompanying the management of OAP/VER Venture, LLC (the “Arch Street Joint Venture”), our unconsolidated joint venture, in which we hold a non-controlling ownership interest; • our ability to close pending real estate transactions, which may be subject to conditions that are outside of our control; 36 Table of Contents • risks associated with acquisitions, including the integration of the office portfolios of Realty Income Corporation (“Realty Income”) and VEREIT, Inc. (“VEREIT”) into Orion; • Realty Income’s inability or failure to perform under the various transaction agreements effecting the Separation (as defined below) and the Distribution (as defined below); • risks associated with the fact that we have a limited operating history and our future performance is difficult to predict; • our properties may be subject to impairment charges; • risks resulting from losses in excess of insured limits or uninsured losses; • 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; and • other risks and uncertainties detailed from time to time in our SEC filings. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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 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. Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require that the tenant pay all expenses associated with the property ( e.g. , real estate taxes, insurance, maintenance and repairs). Double net leases typically require that the tenant pay all operating expenses associated with the property ( e.g. , real estate taxes, insurance and maintenance), but excludes some or all major repairs ( e.g. , roof, structure and parking lot). Accordingly, the owner receives the rent “net” of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. Overview Orion is an internally managed REIT engaged in the ownership, acquisition, and management of a diversified portfolio of mission-critical regional and corporate headquarters office buildings located in high quality suburban markets across the U.S. and leased primarily on a single-tenant net lease basis to creditworthy tenants. Orion Office REIT Inc. 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 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 On April 29, 2021, Realty Income entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, its operating partnership, VEREIT Operating Partnership, L.P. (“VEREIT OP”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), and Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income (“Merger Sub 2”). On November 1, 2021, pursuant to the Merger Agreement, Merger Sub 2 merged with and into VEREIT OP, with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the “Mergers”, and such effective time of the Mergers, the “Merger Effective Time”). Upon the Merger Effective Time, as part of the Mergers, Realty Income acquired certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT 37 Table of Contents 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 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. to Orion OP. Our common stock, par value $0.001 per share, trades on the NYSE under the symbol “ONL”. Through November 12, 2021, we had not conducted any business as a separate company other than start-up related activities. Emerging Growth Company Status We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on the exemptions available to us as an emerging growth company. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies until we can no longer avail ourselves of the exemptions applicable to emerging growth companies or until we affirmatively and irrevocably opt out of the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. As of June 30, 2022, the market value of our common stock held by non-affiliates was less than $700 million, and therefore, we anticipate remaining an “emerging growth company” for fiscal year 2022. Basis of Presentation The Company’s consolidated and combined financial statements include the accounts of the Realty Income Office Assets presented on a combined basis for the three 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 38 Table of Contents 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. These combined financial results were derived from the books and records of and carved out from VEREIT. 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 rental income. 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. Such historical combined and consolidated financial information may not be indicative of the results of operations, financial position or cash flows that would have been obtained if the VEREIT Office Assets had been an independent, standalone public company during the periods presented or of the future performance of the Company as an independent, standalone company. 39 Table of Contents Election as a REIT 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 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. Even if we maintain our qualification for taxation as a REIT, we may become subject to certain state and local taxes on our income and property, federal income taxes on certain income and excise taxes on our undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year ended December 31, 2021. Critical Accounting Estimates Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policy involves significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements. Real Estate Impairment We invest in real estate assets and subsequently monitor those investments quarterly for impairment. The risks and uncertainties involved in applying the principles related to real estate impairment include, but are not limited to, the following: • 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, 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. • Changes related to management’s intent to sell or lease the real estate assets used to develop the forecasted cash flows may have a material impact on our financial results. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are described in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements. 40 Table of Contents Significant Transactions Summary Activity through September 30, 2022 Real Estate Operations • 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 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. Debt • 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 September 30, 2022, we had $394.0 million of borrowing capacity under the Revolving Facility. Equity • 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. 41 Table of Contents 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 September 30, 2022, including our pro rata share of the applicable statistics of the properties owned by our unconsolidated joint venture: 2022 Portfolio Metrics Operating properties 87 Unconsolidated joint venture properties 6 Rentable square feet (in thousands) (1) 10,149 Occupancy rate (2) 88.2% Investment-grade tenants (3) 69.9% Weighted-average remaining lease term (in years) 3.9 ____________________________________ (1) Represents leasable square feet of operating properties and the Company’s pro rata share of leasable square feet of properties owned by the unconsolidated joint venture. (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 September 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. The ratings may reflect those assigned by Standard & Poor’s Financial Services LLC or Moody’s Investor Service, Inc. to the lease guarantor or the parent company, as applicable. Operating Performance In addition, management uses the following financial metrics to assess our operating performance (dollar amounts in thousands, except per share amounts). Three Months Ended Nine Months Ended September 30, 2022 September 30, 2022 Financial Metrics Total revenues $ 51,769 $ 157,824 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) $ 23,829 $ 76,782 FFO attributable to common stockholders per diluted share (1) $ 0.42 $ 1.36 Core FFO attributable to common stockholders (1) $ 24,023 $ 78,612 Core FFO attributable to common stockholders per diluted share (1) $ 0.42 $ 1.39 ____________________________________ (1) See the Non-GAAP Measures section below for descriptions of our non-GAAP measures and reconciliations to the most comparable U.S. 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. 42 Table of Contents 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 ________________________________ (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). 43 Table of Contents 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) $ — $ 2,216 Lease incentives (4) 1,325 1,325 Building, fixtures and improvements (5) 2,405 4,971 Total capital expenditures $ 3,730 $ 8,512 ________________________________ (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 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. Revenues The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 vs 2021 Increase/(Decrease) 2022 2021 2022 vs 2021 Increase/(Decrease) Rental $ 51,580 $ 13,315 $ 38,265 $ 157,256 $ 38,930 $ 118,326 Fee income from unconsolidated joint venture 189 — 189 568 — 568 Total revenues $ 51,769 $ 13,315 $ 38,454 $ 157,824 $ 38,930 $ 118,894 Rental 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. 44 Table of Contents 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 $0.6 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 September 30, Nine Months Ended September 30, 2022 2021 2022 vs 2021 Increase/(Decrease) 2022 2021 2022 vs 2021 Increase/(Decrease) Property operating 15,303 1,660 13,643 45,773 4,611 41,162 General and administrative 4,672 594 4,078 11,480 1,665 9,815 Depreciation and amortization 32,693 5,912 26,781 100,874 17,855 83,019 Impairments 44,801 — 44,801 54,161 — 54,161 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 Property Operating Expenses 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 $13.6 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 $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 $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. 45 Table of Contents Impairments 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. 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 September 30, Nine Months Ended September 30, 2022 2021 2022 vs 2021 Increase/(Decrease) 2022 2021 2022 vs 2021 Increase/(Decrease) Interest expense, net $ (7,904) $ (276) $ 7,628 $ (22,618) $ (1,080) $ 21,538 Loss on extinguishment of debt, net $ — $ (3,499) $ (3,499) $ (468) $ (3,499) $ (3,031) 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 $7.6 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 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. 46 Table of Contents 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 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 Our results are presented in accordance with U.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. M anagement uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP. Funds From Operations (“FFO”) and Core Funds from Operations (“Core FFO”) Attributable to Orion Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“Nareit”), an industry trade group, has promulgated a supplemental performance measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined under U.S. GAAP. Nareit defines FFO as net income or loss computed in accordance with U.S. GAAP adjusted for gains or losses from disposition of real estate assets, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to the unconsolidated joint venture. We calculate FFO in accordance with Nareit’s definition described above. 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 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. For all of these reasons, we believe FFO and Core FFO, in addition to net income (loss), as defined by U.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and Core FFO the same way, so comparisons with other REITs may not be meaningful. FFO and Core FFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. 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. 47 Table of Contents 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 Net (loss) income attributable to common stockholders $ (53,047) $ (1,423) $ (78,524) $ 7,423 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 — Proportionate share of adjustments for unconsolidated entity 460 — 1,382 — 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 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 (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 General Our principal liquidity needs for the next twelve months are to: (i) fund operating expenses; (ii) pay principal and interest on our debt; (iii) make distributions to our stockholders, as required for us to qualify as a REIT; (iv) fund capital expenditures and leasing costs at properties we own; and (v) fund new acquisitions, including acquisitions related to the Arch Street Joint Venture. We believe that our principal sources of short-term liquidity, which are our cash and cash equivalents on hand, cash flows from operations, 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: (i) repay or refinance debt at or prior to maturity; (ii) fund capital expenditures and leasing costs at properties we own; and (iii) fund new acquisitions. We generally believe we will be able to satisfy these liquidity needs by a combination of cash flows from operations, borrowings under the Revolving Facility, proceeds from real estate dispositions, new borrowings such as bank term loans or other secured or unsecured debt, and issuances of equity securities. 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. Our ability to refinance debt, raise capital and/or sell assets will be affected by various factors existing at the relevant time, such as capital and credit market conditions, the state of the national and regional economies, commercial real estate market conditions, available interest rate levels, the lease terms for and equity in and value of any related collateral, our financial condition and the operating history of the collateral, if any. Credit Agreements Summary and Obligations In connection with the Separation and the Distribution, on November 12, 2021, we, as parent, and Orion OP, as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year, $425.0 million Revolving Facility, including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million Term Loan Facility with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement,” and together with the Revolver/Term Loan Credit Agreement, the “Credit Agreements”) providing for a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility,” and together with the Revolver/Term Loan Facilities, the “Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. On November 12, 2021, Orion OP borrowed $90.0 million under the Revolving Facility, and each of the Term Loan Facility and the Bridge Facility was fully drawn. 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 48 Table of Contents 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 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. The Revolver/Term Loan Facilities are guaranteed pursuant to a Guaranty (the “Revolver/Term Loan Guaranty”) by us 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. Revolver/Term Loan Facility Covenants 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. The following is a summary of key financial covenants for the Company’s Revolver/Term Loan Facilities and the Company’s compliance therewith, as calculated per the terms of the Revolver/Term Loan Credit Agreement. 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 September 30, 2022 Ratio of total indebtedness to total asset value ≤ 60% 30.7% Ratio of adjusted EBITDA to fixed charges ≥ 1.5x 4.42x Ratio of secured indebtedness to total asset value ≤ 45% 19.8% Ratio of unsecured indebtedness to unencumbered asset value ≤ 60% 15.5% Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 10.94x 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. 49 Table of Contents 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 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 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. 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 following is a summary of the interest rate and scheduled maturities of our consolidated debt obligations as of September 30, 2022 (in thousands): 50 Table of Contents 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. Equity 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. Also on November 10, 2021, in connection with the filing of our Articles of Amendment, we changed the par value of our common stock from $0.01 per share to $0.001 per share. On November 12, 2021, Realty Income effected the Distribution. See the section “Dividends” below for disclosure with regard to the Company’s dividend policy. On November 12, 2021, in connection with the Distribution, Orion OP entered into the Arch Street Joint Venture with the Arch Street Partner, an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P. to Orion OP. 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. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of our common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) if the Arch Street Joint Venture is terminated, the later of the termination of the Arch Street Joint Venture and seven years after issuance. 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. The holders of the Arch Street Warrants will also remain subject to the ownership limitations pursuant to our organizational documents. Also in connection with the entry into the LLCA, the Arch Street Joint Venture’s lender consented to the transfer of the interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P. to Orion OP, and, in connection therewith, Orion OP agreed to become a guarantor of certain limited customary recourse obligations and provide certain customary environmental indemnities under the Arch Street Joint Venture’s existing indebtedness. Derivatives and Hedging Activities During the year ended December 31, 2021, the Company entered into interest rate swap agreements with an aggregate notional amount of $175.0 million, effective on December 1, 2021 and maturing on November 12, 2023, which were designated as cash flow hedges, in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility. 51 Table of Contents Right of First Offer Agreement In connection with the entry into the LLCA, we and the Arch Street Joint Venture entered into that certain Right of First Offer Agreement (the “ROFO Agreement”), dated November 12, 2021, pursuant to which, subject to certain limitations, we, on behalf of ourselves and our affiliates, agreed not to acquire or purchase a fee simple or ground leasehold interest in any office real property, including by way of an acquisition of equity interests, within certain investing parameters without first offering the property for purchase to the Arch Street Joint Venture. The ROFO Agreement will expire upon the earlier of (1) the third anniversary of its execution, (2) the date on which the Arch Street Joint Venture is terminated or (3) the date on which the Arch Street Joint Venture’s gross book value of assets is below $50.0 million. If the Arch Street Joint Venture decides not to acquire any such property, we may seek to acquire the property independently, subject to certain restrictions. 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. Dividends 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. We intend to make regular distributions to our stockholders to satisfy the requirements to qualify as a REIT. On March 22, 2022, the Company’s Board of Directors declared the Company’s first quarterly dividend as an independent public company. The dividend, which was for the first quarter of 2022, was in the amount of $0.10 per share, and was paid on April 15, 2022, to stockholders of record as of March 31, 2022. On May 3, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.10 per share for the second quarter of 2022, which was paid on July 15, 2022, to stockholders of record as of June 30, 2022. On August 2, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the third quarter of 2022 payable on October 17, 2022, to stockholders of record as of September 30, 2022. 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. In particular, we expect that, initially, our dividends will exceed our net income under GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income. To the extent that our funds available for distribution are less than the amount we must distribute to our stockholders to satisfy the requirements to qualify as a REIT, we may consider various means to cover any such shortfall, including borrowing under our Revolving Facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring taxable share dividends. 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. 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 52 Table of Contents 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 2022 2021 Net cash provided by operating activities $ 85,917 $ 29,498 $ 56,419 Net cash provided by (used in) investing activities $ 16,687 $ (160) $ 16,847 Net cash used in financing activities $ (73,495) $ (32,722) $ (40,773) 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. 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. 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.