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Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-24 · 333 added, 324 removed, 228 unchanged (74% of the section changed)

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 Annual Report on Form 10-K.

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

Orion Office REIT Inc.

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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 the section in this report entitled “ Risk Factors ”.

For a complete discussion of such risk factors, see the section in this report entitled “ Ri sk Facto rs ”.

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.

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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.

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

The Company has 92 office properties with an aggregate of 10.5 million square feet located in 29 states and Puerto Rico, with an occupancy rate of 91.8% and a weighted-average remaining lease term of 4.0 years as of December 31, 2021.

Including the Company’s pro rata share of square feet and annualized base rent from the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, we owned an aggregate of 10.6 million square feet with an occupancy rate of 91.9% and a weighted-average remaining lease term of 4.1 years as of December 31, 2021.

Merger with Realty Income

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

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.

As of December 31, 2022, the Company owned and operated 81 office properties with an aggregate of 9.5 million leasable square feet located in 29 states with an occupancy rate of 88.8% and a weighted-average remaining lease term of 4.0 years.

Including the Company’s pro rata share of square feet and annualized base rent from the Arch Street Joint Venture, the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, LLC (“Arch Street Capital Partners”), we owned an aggregate of 9.7 million leasable square feet with an occupancy rate of 89.0% and a weighted-average remaining lease term of 4.1 years as of December 31, 2022.

Executive Summary

Despite the challenged macroeconomic environment, our real estate portfolio generally performed as expected during the year ended December 31, 2022, with no material amount of scheduled rent payments determined to be uncollectible.

Property operating expenses were generally in line with what we had budgeted for the year ended December 31, 2022.

General and administrative expenses were modestly below our 2022 budget, as the Company benefited from lower annual meeting costs and lower amortization of stock-based compensation.

General and administrative expenses are expected to increase in 2023 and beyond as subsidies provided by Realty Income at the Distribution (as defined below) expire, and as stock-based compensation cost increases and public company compliance costs increase due to additional Sarbanes-Oxley compliance costs and costs associated with the SEC’s expected climate change rules.

Our interest expense was generally in line with what we had budgeted for the year ended December 31, 2022, as increases in interest rates on our floating rate indebtedness were offset by lower amounts of debt outstanding as the Company utilized cash from operations and proceeds from real estate dispositions to repay debt on the Revolving Facility.

The Company did not acquire any new properties during year ended December 31, 2022, primarily due to the impact of rapidly rising interest rates and disruptions in the financing markets.

Our ability to resume asset acquisition activity will be highly dependent upon favorable market conditions, including attractive yields on properties and access to requisite financing.

We cannot provide any assurance as to whether we will be able to acquire assets on favorable terms and in a timely manner, or at all.

During year ended December 31, 2022, we completed approximately 0.8 million square feet of lease renewals, expansions and new leases, while our weighted average remaining lease term remained consistent at 4.1 years as of December 31, 2022 and 2021, and our occupancy level declined from 91.9% as of December 31, 2021 to 89.0% as of December 31, 2022.

Our efforts to address upcoming lease maturities and vacancies have been adversely impacted by economic conditions, such as rising interest rates, rising inflation and recession fears, along with persistent remote working trends as a result of the COVID-19 pandemic.

We have experienced and we expect we will continue to experience slower new leasing and there remains uncertainty over existing tenants’ long-term space requirements.

Some of the anticipated leasing we expected to realize is either going to be delayed, reduced or eliminated.

Overall, this could reduce our future rental revenues.

We cannot provide any assurance as to whether we will be able 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 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.

During year ended December 31, 2022, the Company made aggregate commitments for tenant improvement allowances and base building allowances, leasing commissions and free rent of $30.1 million, or $37.41 per rentable square foot leased.

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

One of our main asset management strategies during year ended December 31, 2022 was to sell vacant and identified non-core assets that do not fit our long-term investment objectives.

The sale of these assets will allow us to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with re-tenanting.

During year ended December 31, 2022, we closed on 11 dispositions totaling 0.9 million square feet for an aggregate sale price of $33.1 million, equating to a price per square foot of approximately $36.42, and primarily used the proceeds to pay down debt and capital expenditures and leasing costs.

We expect to continue this non-core asset disposition strategy in 2023.

We cannot provide any assurance as to whether we will be able to sell non-core assets on favorable terms and in a timely manner, or at all.

The Separation and the Distribution

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

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

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

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

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 ending December 31, 2021.

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

On November 12, 2021, 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 OAP/VER Venture, LLC (the “Arch Street Joint Venture”), with OAP Holdings LLC (the “Arch Street Partner”), an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P.

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

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We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).

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.

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 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

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.

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We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 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 $700.0 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 $1.0 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 $700.0 million, and therefore, we expect to remain an “emerging growth company” at least until the next measuring date, which is June 30, 2023.

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 period from January 1, 2021 to October 31, 2021 and all prior periods presented as the ownership interests were under common control and ownership of Realty Income during the respective periods.

From and after the Merger Effective Time, the consolidated and combined financial statements of the Company include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture.

The consolidated and combined financial statements of the Company include the accounts of the Realty Income Office Assets presented on a combined basis for the period from January 1, 2021 to October 31, 2021 and for the year ended December 31, 2020, as the ownership interests were under common control and ownership of Realty Income during the respective periods.

From and after the Merger Effective Time, the consolidated and combined financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture, which accounts include the Realty Income Office Assets and the VEREIT Office Assets.

The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in the Company’s consolidated and combined balance sheets, statements of operations, statements of comprehensive income (loss) and statements of equity.

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.

These combined and consolidated 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 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.

The historical combined and consolidated 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.

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).

To maintain our qualification 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 ending December 31, 2021.

ORION OFFICE REIT INC.

Critical Accounting Policies and Significant Accounting Estimates

Critical Accounting Estimates

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

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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.

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 and combined financial statements.

Real Estate Impairment

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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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Recently Issued Accounting Pronouncements

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

Operating Highlights and Key Performance Indicators

2021 Activity

• Consummated the Mergers on November 1, 2021, and completed the Separation and the Distribution on November 12, 2021.

• Acquired interest in one property through our unconsolidated joint venture for a purchase price of $30.5 million, for which the Company’s investment and ownership percentage is 20%.

• On November 12, 2021, entered into a credit agreement providing for a three-year, $425.0 million senior revolving credit facility (the “Revolving Facility”) and a two-year, $175.0 million senior term loan facility (the “Term Loan Facility”).

Also, on November 12, 2021, the Company entered into a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility” and collectively with the Revolving Facility and Term Loan Facility, the “Facilities”).

The Bridge Facility was subsequently refinanced with a $355.0 million mortgage loan during February 2022.

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

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

• As of December 31, 2021, the Company had $335.0 million of borrowing capacity under the Revolving Facility.

• Entered into interest rate swap agreements with an aggregate notional amount of $175.0 million in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility.

• Issued 56,525,650 shares of common stock to Realty Income, such that Realty Income owned 56,625,650 shares of the Company’s common stock and effected the Distribution of such shares to its stockholders on November 12, 2021.

• Granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of the Company’s common stock (the “Arch Street Warrants”).

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

Significant Transactions Summary

Activity during the year ended December 31, 2022

Real Estate Operations

• During the year ended December 31, 2022, we closed on the sale of 11 non-core assets that do not fit our long-term investment objectives for an aggregate gross sales price of $33.1 million.

As of March 8, 2023, we had pending agreements to dispose of an additional seven non-core assets for an aggregate gross sales price of $36.6 million.

These pending transactions remain subject to customary conditions for real estate transactions of this nature, which may include conditions related to the buyer’s due diligence and the buyer’s right to terminate the agreement 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 year ended December 31, 2022, we completed approximately 0.8 million square feet of lease renewals, expansions and new leases across 11 different properties.

During the year ended December 31, 2022, 11 leases expired or were downsized comprising a total reduction in occupied space of approximately 0.9 million leasable square feet.

As of December 31, 2022, the Company had a total of five vacant properties, two of which are being marketed for sale.

The Company’s plans with respect to vacant properties are subject to change.

• 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.

• During the year ended December 31, 2022, we borrowed and repaid amounts under the Revolving Facility, which amounts aggregate to net repayments of $90.0 million of borrowings under the Revolving Facility, utilizing a combination of cash flows from operations and proceeds from real estate dispositions.

As of December 31, 2022, the Company did not have any borrowings under the Revolving Facility and, therefore, had $425.0 million of availability under the Revolving Facility.

• During December 2022, we transitioned the benchmark rate for borrowings under the Revolver/Term Loan Agreement from LIBOR to SOFR.

In connection with that transition, we terminated the interest rate swap agreements that had been entered into during the year ended December 2021 to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility, and we entered into new interest rate swap agreements with an aggregate notional amount of $175.0 million.

• The Company’s Board of Directors declared quarterly cash dividends of $0.10 per share for each of the four quarters of 2022.

The dividends were paid on April 15, 2022, July 15, 2022, October 17, 2022 and January 17, 2023.

On March 7, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the first quarter of 2023, payable on April 17, 2023, to stockholders of record as of March 31, 2023.

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, including our pro rata share of the applicable statistics of the properties owned by our unconsolidated joint venture as of December 31, 2021:

The following table shows the property statistics of our operating properties as of December 31, 2022 and 2021, including our pro rata share of the applicable statistics of the properties owned by the Arch Street Joint Venture:

December 31, 2022 December 31, 2021

Portfolio Metrics

Operating properties

Unconsolidated joint venture properties 6

Arch Street Joint Venture properties 6 6

Rentable square feet (in thousands) (1)

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Investment-grade tenants (3)

Weighted-average lease term (in years) 4.1

Weighted-average remaining lease term (in years) 4.1 4.1

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(1) 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.

(1) Represents leasable square feet of operating properties and the Company’s pro rata share of leasable square feet of properties owned by the Arch Street 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 December 31, 2021.

(3) Based on annualized base rent of our real estate portfolio, including the Company’s pro rata share of annualized base rent for properties owned by the Arch Street Joint Venture, as of December 31, 2022.

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

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Total revenues $ 208,118 $ 79,731

Net (loss) income $ (47,464)

Basic and diluted net (loss) income per share attributable to common stockholders $ (0.84)

Net loss $ (97,474) $ (47,464)

Basic and diluted net loss per share attributable to common stockholders $ (1.72) $ (0.84)

FFO attributable to common stockholders (1)

$ 99,657 $ 46,572

FFO attributable to common stockholders per diluted share (1)

$ 1.76 $ 0.82

Core FFO attributable to common stockholders (1)

$ 101,764 $ 58,263

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

$ 1.80 $ 1.03

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

GAAP measure.

Future Lease Expirations

The following is a summary of lease expirations for the next 10 years and beyond at the operating properties we owned as of December 31, 2021, including our pro rata share of properties owned by our unconsolidated joint venture (dollar amounts and square feet in thousands):

Year of Expiration Number of Leases

Square Feet Square Feet as a % of Total Portfolio Annualized Base Rent Expiring Annualized Base Rent Expiring as a % of Total Portfolio

2022 14 1,168 11.0 % 21,923 12.2 %

2023 22 2,156 20.3 % 32,564 18.1 %

2024 18 2,029 19.1 % 40,024 22.3 %

2025 11 1,046 9.8 % 18,344 10.2 %

2026 12 741 7.0 % 16,222 9.0 %

2027 11 884 8.3 % 14,883 8.3 %

2028 8 348 3.3 % 6,961 3.9 %

Leasing Activity and Capital Expenditures

The Company remains highly focused on leasing activity, given the 4.1 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 stockholders 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.

In general, when we sell properties that are vacant or soon to be vacant, the valuation will be discounted to reflect that the new owner will bear carrying costs until the property has been leased up and take the risk that the property may not be leased up on a timely basis, favorable terms or at all.

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 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.

As of December 31, 2022, the Company had outstanding commitments of $51.2 million for tenant improvement allowances and $0.3 million for leasing commissions.

The actual amount we pay for tenant improvement allowances may be lower than the commitment in the applicable lease and will depend upon the tenant’s use of the capital on the agreed upon timeline.

The timing of the Company’s cash outlay for tenant improvement allowances is significantly uncertain and will depend upon the applicable tenant’s schedule for the improvements and corresponding use of capital, if any.

The Company estimates that the foregoing tenant improvement allowances and leasing commissions will be funded between 2023 and 2035.

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, the Company has funded reserves with the lender

for tenant improvement allowances and rent concession commitments.

The restricted cash included in this reserve totaled $34.7 million as of December 31, 2022, including $23.6 million for tenant improvement allowances and $11.1 million for rent concession commitments, and is included in other assets, net in the Company’s consolidated balance sheets.

During the year ended December 31, 2022, we entered into new and renewal leases as summarized in the following table (dollars and square feet in thousands):

Year Ended December 31, 2022

New Leases Renewals Total

Rentable square feet leased 119 686 805

Weighted average rental rate change (cash basis) (1) (2)

(6.0) % 5.7 % 4.1 %

Tenant leasing costs and concession commitments (3)

$ 4,237 $ 25,874 $ 30,111

Tenant leasing costs and concession commitments per rentable square foot $ 35.53 $ 37.73 $ 37.41

Weighted average lease term (by rentable square feet) (years) 7.3 7.2 7.3

Tenant leasing costs and concession commitments per rentable square foot per year $ 4.85 $ 5.21 $ 5.16

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Thereafter 8 847 7.8 % 17,825 9.9 %

Total 110 9,720 91.3 % $ 179,272 99.7 %

(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, which may include estimates) 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, which may include estimates) as of the expiration date of the prior lease term.

If a space has been vacant for more than 12 months prior to the execution of a new lease, the lease will be excluded from this calculation.

(2) 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.

(3) 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 year ended December 31, 2022, amounts capitalized by the Company for lease related costs, lease incentives and building, fixtures and improvements were as follows:

December 31, 2022

Lease related costs (1)

Lease incentives (2)

Building, fixtures and improvements (3)

Total capital expenditures $ 14,624

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(1) The Company has certain properties that are subject to multiple leases.

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

(2) 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.

(3) 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.

Future Lease Expirations

For a tabular summary of scheduled lease expirations in our property portfolio as of December 31, 2022, see the Lease Expirations table under “Item 2.

Properties” in this Annual Report on Form 10-K.

Results of Operations

The results of operations discussed in this section include the accounts of Realty Income Office Assets from January 1, 2021 to October 31, 2021 and all prior periods presented and the accounts of the Company and its consolidated subsidiaries from and after the Merger Effective Time.

For the periods presented prior to the date of the Distribution, our historical consolidated and combined financial results reflect charges for certain legal, accounting and other costs related to the Distribution, which were incurred and paid by Realty Income on our behalf and are reflected as capital contributions.

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

At December 31, 2021, we had 92 office properties with an aggregate of 10.5 million square feet as compared to 40 properties with approximately 3.0 million leasable square feet at December 31, 2020.

As of December 31, 2022, we had 81 office properties with an aggregate of 9.5 million leasable square feet as compared to 40 properties with approximately 3.0 million leasable square feet as of October 31, 2021, prior to the Merger Effective Time.

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

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Total revenues $ 208,118 $ 79,731 $ 128,387

The increase in rental revenue of $26.0 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to the increase in our overall portfolio size resulting from the closing of the Merger.

The increase in rental revenue of $127.9 million during the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to the increase in our overall portfolio size resulting from the closing of the Mergers, which was partially offset by our lower occupancy rate and property dispositions.

Including the rental revenue from the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021, rental revenue decreased by $6.8 million primarily due to our lower occupancy rate and property dispositions.

Our portfolio occupancy rate was 88.8% and 91.8% as of December 31, 2022 and 2021, respectively.

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

During the year ended December 31, 2022 the Company recorded a reduction to rental revenue of $1.5 million primarily for property operating expense reimbursements not probable of collection.

During the year ended December 31, 2021, the Company did not have any reductions to rental revenue for amounts not probable of collection.

Rental revenue also includes lease termination income collected from tenants to allow for tenants to settle their lease obligations and/or vacate their space prior to their scheduled termination dates, as well as amortization of above and below market leases and lease incentives.

During the years ended December 31, 2022 and 2021, the Company recognized $1.4 million and $0.3 million, respectively, of lease termination income.

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 $0.3 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to fees earned from the Arch Street Joint Venture, including $0.2 million of acquisition fees for the purchase of one property in the partnership in December 2021.

Fee income from unconsolidated joint venture consists of fees earned for providing various services to the Arch Street Joint Venture.

The increase of $0.5 million during the year ended December 31, 2022 as compared to the same period in 2021 was due to a full year of fees earned from the Arch Street Joint Venture, including property and asset management fees, in 2022 as compared to two months of fees in 2021.

Including the fee income from unconsolidated joint venture from the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021, fee income from unconsolidated joint venture would have been consistent.

Operating Expenses

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Increase/(Decrease)

Transaction costs 7,909 — 7,909

Property operating $ 61,519 $ 13,411 $ 48,108

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Impairments 66,359 49,859 16,500

Transaction related 675 — 675

Spin related 964 7,909 (6,945)

Total operating expenses $ 276,792 $ 118,933 $ 157,859

Transaction Costs

During the year ended December 31, 2021, the Company incurred $7.9 million of transaction costs, which primarily consist of integration costs, and attorney fees and accountant fees related to the Mergers and the Distribution.

The integration costs consist of expenses related to the fair value of the warrants issued to affiliates of the Arch Street Partner as well as appraisal fees.

No such costs were incurred during the same period in 2020.

Property Operating Expenses

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The increase in property operating expenses of $48.1 million during the year ended December 31, 2022 as compared to the same period in 2021 was primarily attributable to the increase in our portfolio size.

Including the property operating expenses from the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021, property operating expenses increased $11.9 million 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 $1.8 million during the year ended December 31, 2021 as compared to the same period in 2020, which was primarily due to actual costs recorded during the last two months of 2021 following the Distribution and the Company’s commencement of operations as a standalone business, as compared with an allocation of amounts for 2020 and the first ten months of 2021.

General and administrative expenses for Realty Income Office Assets for the ten months of 2021 and the full year 2020 are primarily an allocation from Realty Income 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 $12.1 million during the year ended December 31, 2022 as compared to the same period in 2021, which was primarily due to actual costs recorded during the year ended December 31, 2022 following the Distribution and the Company’s commencement of operations as a standalone business, as compared with an allocation of amounts for the first ten months of the year ended December 31, 2021.

Including the general and administrative expenses from the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021, general and administrative expenses increased $6.5 million.

General and administrative expenses for Realty Income Office Assets and VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021 are primarily an allocation from Realty Income and VEREIT general and administrative expenses, and therefore, do not reflect the full general and administrative expenses of an independent, separate public company.

Depreciation and Amortization Expenses

The increase in depreciation and amortization expenses of $18.0 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to the increase in our portfolio size.

Impairments of $49.9 million and $18.7 million were recorded during the years ended December 31, 2021 and 2020, respectively.

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

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

The increase in depreciation and amortization expenses of $87.4 million during the year ended December 31, 2022 as compared to the same period 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 period from January 1, 2021 to October 31, 2021, depreciation and amortization expenses increased $38.5 million, primarily due to the fair valuation of the VEREIT Office Assets as a result of the Mergers.

Impairments of $66.4 million were recorded during the year ended December 31, 2022 as compared to $49.9 million impairments during the same period in 2021.

The impairment charges in the year ended December 31, 2022 include a total of 18 properties 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.

Impairment charges totaling $12.2 million with respect to 11 properties were recorded during the three months ended December 31, 2022.

See Note 5 – Fair Value Measures for further information.

Impairments for the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021 were $28.1 million, due to four real estate assets that were deemed to be impaired.

Transaction Related Expenses

During the year ended December 31, 2022 the Company incurred $0.7 million 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 period in 2021.

Spin Related Expenses

During the year ended December 31, 2022, the Company incurred $1.0 million of spin related expenses as compared to $7.9 million of spin related expenses during the same period in 2021.

Such expenses primarily consist of legal and professional fees associated with the formation and organization of the Company, the Mergers and the Distribution.

Such costs also include expenses related to the fair value of the warrants issued to the Arch Street Partner and one of its affiliates during the year ended December 31, 2021.

Other (Expense) Income and Provision for Income Taxes

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Increase/(Decrease)

Interest expense $ (4,267) $ (2,931) $ 1,336

Interest expense, net $ (30,171) $ (4,267) $ 25,904

Gain on disposition of real estate assets $ 2,352 $ — $ 2,352

Loss on extinguishment of debt, net $ (468) $ (3,782) $ (3,314)

Equity in income of unconsolidated joint venture $ (56) $ — $ 56

Other income, net $ 223 $ — $ 223

Equity in loss of unconsolidated joint venture, net $ (524) $ (56) $ 468

Provision for income taxes $ (212) $ (157) $ 55

Interest Expense

The increase in interest expense of $1.3 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to an increase in debt outstanding from $37.1 million as December 31, 2020 to $616.8 million as of December 31, 2021 in connection with the capitalization of the Company in connection with the Separation and the Distribution, as discussed in Note 6 – Debt, Net.

Interest Expense, net

The increase in interest expense of $25.9 million during the year ended December 31, 2022 as compared to the same period in 2021 was primarily due to an increase in debt outstanding from and after the Distribution.

Prior to the Distribution, the Company had no outstanding debt, as compared to $526.0 million as of December 31, 2022, as discussed in Note 6 – Debt, Net.

Including the interest expense from the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021, interest expense increased $19.9 million primarily due to the increase in debt outstanding in connection with the capitalization of the Company.

Gain on disposition of real estate assets

Gain on disposition of real estate assets was $2.4 million for the year ended December 31, 2022 as compared to no gain during the same period in 2021.

The gain was related to five of the Company’s 11 dispositions during the year ended December 31, 2022.

Four of these properties were subject to cumulative impairment losses of $22.2 million in prior periods.

Loss on extinguishment of debt, net

Loss on extinguishment of debt, net increased $3.8 million during the year ended December 31, 2021 as compared to no loss on extinguishment of debt in the same period in 2020.

The loss is the result of early extinguishment of Realty Income’s mortgage debt prior to the consummation of the Mergers on the properties contributed to the Company.

Equity in income of unconsolidated joint venture

Equity in income of the unconsolidated joint venture of $0.1 million during the year ended December 31, 2021 as compared to no equity in income of the unconsolidated joint venture for the same period in 2020 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.

Loss on extinguishment of debt, net was $0.5 million during the year ended December 31, 2022 as compared to $3.8 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 $5.3 million for the period from January 1, 2021 to October 31, 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, net

Equity in loss of the unconsolidated joint venture, net was $0.5 million during the year ended December 31, 2022 as compared to equity in loss of the unconsolidated joint venture, net of less than $0.1 million for the same period in 2021.

These amounts relate to the Company’s investment in the Arch Street Joint Venture, which interest was transferred to the Company in connection with the Distribution.

Including the equity in income (loss) of unconsolidated joint venture from the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021, income decreased $1.2 million primarily related to amortization of the step up in basis in the Company’s investment in the Arch Street Joint Venture as a result of the Mergers.

Provision for Income Taxes

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

The increase to $0.2 million during the year ended December 31, 2021, as compared to no provision for income taxes prior to the time the Company became an independent, separate public company.

The provision for income taxes was $0.2 million during the year ended December 31, 2022 as compared to $0.2 million for the same period in 2021.

The provision for income taxes for the VEREIT Office Assets for the period from January 1, 2021 to October 31, 2021 was $0.5 million.

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020 (dollars in thousands)

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

Year Ended December 31,

2020 2019 2020 vs 2019

Increase/(Decrease)

Rental $ 53,474 $ 53,465 $ 9

Rental revenue (including reimbursable) remained constant at $53.5 million during both of the years ended December 31, 2020 and December 31, 2019.

There were no acquisitions or dispositions in the years ended December 31, 2020 and December 31, 2019, which led to stable rental revenues during these periods.

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):

Year Ended December 31,

2020 2019 2020 vs 2019

Increase/(Decrease)

Property operating 5,770 5,898 (128)

General and administrative 2,051 2,044 7

Depreciation and amortization 25,950 26,923 (973)

Impairments 18,671 — 18,671

Total operating expenses $ 52,442 $ 34,865 $ 17,577

Property Operating Expenses

Property (including reimbursable) expenses decreased $0.1 million during the year ended December 31, 2020, compared to the year ended December 31, 2019.

General and Administrative Expenses

General and administrative expenses remained constant at $2.0 million during both of the years ended December 31, 2020 and December 31, 2019.

General and administrative expenses for Realty Income Office Assets are primarily an allocation from Realty Income general and administrative expenses.

Depreciation and Amortization Expenses

Depreciation and amortization expense decreased $1.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a $0.8 million decrease in amortization expense of in-place leases as a result of certain assets reaching the end of their lease term during 2020, and a $0.2 million decrease in depreciation expense associated with an office property impairment (discussed below), resulting in a lower cost basis for depreciation.

During the year ended December 31, 2020, Realty Income Office Assets recorded a $18.7 million pre-tax non-cash impairment loss related to one office property that was triggered by a near term lease expiration, combined with a mortgage loan maturity.

Realty Income Office Assets did not record any impairment losses on properties during the year ended December 31, 2019.

Other (Expense) Income

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

Year Ended December 31,

2020 2019 2020 vs 2019

Increase/(Decrease)

Interest expense (2,931) (3,316) (385)

Interest Expense

Interest expense decreased $0.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This decrease is primarily attributable to Realty Income repaying three mortgages in full for $31.8 million during the second half of the year ended December 31, 2020, on behalf of Realty Income Office Assets, reducing the mortgage payable balance at December 31, 2020 by $33.1 million as compared to December 31, 2019.

For a comparison of the year ended December 31, 2021 to the year ended December 31, 2020, see “Item.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K filed on March 24, 2022.

Non-GAAP Measures

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

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

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

Beginning in 2023, the Company will be revising its definition of Core FFO to also exclude the following non-cash charges which management believes do not reflect the ongoing operating performance of our business:

(i) amortization of deferred lease incentives, (ii) amortization of deferred financing costs, (iii) equity-based compensation, and (iv) amortization of premiums and discounts on debt, net.

If this definitional change had been made in 2022, the impact would have been an increase to Core FFO for the year ended December 31, 2022 of $6.4 million, or $0.11 per share.

This change in definition will be applied retrospectively beginning January 1, 2023.

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 years ended December 31, 2021 and 2020 (dollars in thousands):

The table below presents a reconciliation of FFO and Core FFO to net (loss) income attributable to common stockholders, the most directly comparable U.S.

GAAP financial measure, for the year ended December 31, 2022 and 2021 (in thousands, except share and per share data):

Year Ended December 31,

Net (loss) income attributable to common stockholders $ (47,481) $ (1,899)

Net loss attributable to common stockholders $ (97,494) $ (47,481)

Depreciation and amortization of real estate assets 131,297 43,914

Gain on disposition of real estate assets (2,352) —

Impairment of real estate 66,359 49,859

Proportionate share of adjustments for unconsolidated entity 397 —

Proportionate share of adjustments for unconsolidated joint venture 1,847 280

FFO attributable to common stockholders $ 99,657 $ 46,572

Transaction costs (1)

Loss (gain) on extinguishment and forgiveness of debt, net 3,782 —

Transaction related 675 —

Spin related (1)

Loss on extinguishment of debt, net 468 3,782

Core FFO attributable to common stockholders $ 101,764 $ 58,263

(1) Transaction costs primarily consist of integration costs and attorney fees and accountant fees related to the Mergers and the Distribution.

Integration costs consist of expenses

related to the fair value of the warrants issued to affiliates of the Arch Street Partner as well as appraisal fees.

Liquidity and Capital Resources

Weighted-average shares of common stock outstanding - basic and diluted 56,631,826 56,625,650

FFO attributable to common stockholders per diluted share $ 1.76 $ 0.82

Core FFO attributable to common stockholders per diluted share $ 1.80 $ 1.03

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(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.

Such costs also include expenses related to the fair value of warrants issued to the Arch Street Partner and one of its affiliates during the year ended December 31, 2021.

Liquidity and Capital Resources - Orion Office REIT Inc.

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

(i) fund operating expenses;

(ii) meet our debt service requirements;

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

(iv) fund capital expenditures at properties we own;

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

We expect 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.

(ii) pay interest on our debt;

(iii) repay or refinance the Term Loan Facility (as defined below) which is scheduled to mature on November 12, 2023;

(iv) pay dividends to our stockholders;

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

and (vi) 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 December 31, 2022, we had $20.6 million of cash and cash equivalents and $425.0 million of borrowing capacity under the Revolving Facility.

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

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

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.

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

(ii) pay dividends to our stockholders;

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

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

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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Credit Agreements

Summary and Obligations

In connection with the Separation and the Distribution, on November 12, 2021, we, as parent, and Orion Office REIT LP (“Orion OP”), as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year, $425.0 million Revolving Facility, including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million Term Loan Facility with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement,” and together with the Revolver/Term Loan Credit Agreement, the “Credit Agreements”) providing for a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility,” and together with the Revolver/Term Loan Facilities, the “Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

The following is a summary of the interest rate and scheduled maturities of our consolidated debt obligations as of December 31, 2022 (in thousands):

Principal Amounts Due During the Years Ending December 31,

Interest Rate Maturity Total 2023 2024 2025 2026 2027

Credit facility revolver (1) (2)

SOFR + 2.60% November 2024 $ — $ — $ — $ — $ — $ —

Credit facility term loan (1) (3)

SOFR + 2.60% November 2023 175,000 175,000 — — — —

Mortgages payable (4)

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

Total $ 530,000 $ 175,000 $ — $ — $ — $ 355,000

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(1) Includes interest rate margin of 2.50% plus SOFR adjustment of 0.10%.

(2) As of December 31, 2022, we did not have any amounts outstanding under our $425.0 million Revolving Facility.

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

(4) The table above does not include mortgage notes associated with the Arch Street Joint Venture of $136.7 million as of December 31, 2022.

Credit Agreement 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 senior revolving credit facility (the “Revolving Facility”), including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million senior term loan facility (the “Term Loan Facility” and collectively with the Revolving Facility, the “Revolver/Term Loan Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement,” and together with the Revolver/Term Loan Credit Agreement, the “Credit Agreements”) providing for a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility,” and together with the Revolver/Term Loan Facilities, the “Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

The Term Loan Facility is scheduled to mature on November 12, 2023, and the Revolving Facility is scheduled to mature on November 12, 2024.

We expect to extend, repay or refinance (or some combination of the foregoing) the Revolver/Term Loan Facilities on or prior to maturity, but we cannot provide any assurance we will be able to do so on favorable terms, in a timely manner, or at all.

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 to Realty Income in accordance with the Separation and Distribution Agreement.

Orion OP retained the remaining net proceeds of such borrowings as working capital that will be used for our general corporate purposes, Orion OP and Orion OP’s subsidiaries.

As of December 31, 2021, the Company had approximately $620.0 million of total consolidated debt outstanding, consisting of a $355.0 million Bridge Facility, a $175.0 million Term Loan Facility and a $425.0 million Revolving Facility, $90.0 million of which was outstanding.

In addition, the Company’s pro rata share of the mortgage notes of the unconsolidated joint venture was $27.3 million as of December 31, 2021.

The Bridge Facility is subject to one 6-month extension option at the election of Orion OP.

The exercise of such extension option requires the payment of an extension fee and the satisfaction of certain other customary conditions.

The Bridge Facility was refinanced with a $355.0 million mortgage loan during February 2022 (see “CMBS Loan” below).

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.

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.

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 December 31, 2022, the Company had approximately $530.0 million of total consolidated debt outstanding, consisting of a $355.0 million CMBS Loan and $175.0 million borrowed under our Term Loan Facility.

As of December 31,

2022, we did not have any amounts outstanding under our $425.0 million Revolving Facility.

During the year ended December 31, 2022, as part of its normal cash management strategy, the Company borrowed and repaid amounts under the Revolving Facility, which amounts aggregate to net repayments of $90.0 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 Arch Street Joint Venture was $27.3 million as of December 31, 2022.

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

On December 1, 2022, we, as parent, and Orion OP, as borrower, entered into that certain First Amendment to the Revolver/Term Loan Credit Agreement (the “Amendment”).

The Amendment, among other things, (i) changed the benchmark rate under the Revolver/Term Loan Credit Agreement for borrowings from LIBOR to SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York), subject to certain adjustments specified in the Revolver/Term Loan Credit Agreement, and (ii) updated certain other provisions regarding successor interest rates to LIBOR.

Following the effectiveness of the Amendment, the interest rate applicable to the loans under the Revolver/Term Loan Facilities may be determined, at the election of Orion OP, on the basis of Daily Simple SOFR, Term SOFR or a base rate, in the case of a SOFR loan, plus a SOFR adjustment of 0.10% per annum, and in the case of a SOFR loan or a base rate loan, plus an applicable margin.

This applicable margin was not adjusted as a result of the Amendment other than the change from LIBOR to SOFR and is now (1) in the case of the Revolving Facility, 2.50% for SOFR loans and 1.50% for base rate loans, and (2) in the case of the Term Loan Facility, 2.50% for SOFR loans and 1.50% for base rate loans.

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 December 31, 2022, the interest rate per annum under our Term Loan was swapped to a fixed rate of 3.17%.

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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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.

Revolver/Term Loan Facilities Covenants

The Revolver/Term Loan Facilities require that Orion OP comply with various covenants, including covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends.

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:

Credit Facility Key Covenants Required December 31, 2021

The following is a summary of 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 are presented to show the Company’s compliance with the financial covenants and are not measures of the Company’s liquidity or performance.

Revolver/Term Loan Facilities Financial Covenants Required December 31, 2022

Ratio of total indebtedness to total asset value ≤ 60% 29.0%

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Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 13.32x

As of December 31, 2021, Orion OP was in compliance with these financial covenants, and Orion anticipates maintaining compliance for the foreseeable future.

As of December 31, 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.

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.

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 (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”).

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.

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.

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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 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.

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 CMBS 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.

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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 December 31, 2022, the Company was in compliance with these financial covenants.

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

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

The loan documents also include customary events of default, the occurrence of which, following any applicable grace period, would permit the Lender to, among other things, declare the principal, accrued interest and other obligations of the Mortgage Borrowers under the loan documents to be immediately due and payable and foreclose on the Mortgaged Properties.

The CMBS Loan Agreement includes customary representations, warranties and covenants of the Mortgage Borrowers and the Company.

The CMBS Loan Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the Lender to, among other things, declare the principal, accrued interest and other obligations of the Mortgage Borrowers to be immediately due and payable and foreclose on the Mortgaged Properties.

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

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.

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, the Company 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.

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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 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.

In accordance with our obligation under the Arch Street Warrants, on November 2, 2022, we filed 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, and the registration statement was declared effective by the SEC on November 14, 2022.

We will use our commercially reasonable efforts 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.

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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.

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 terminating 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.

During the year ended December 31, 2022, in connection with the transition of the benchmark rate for borrowings under the Revolver/Term Loan Credit Agreement from LIBOR to SOFR, the Company terminated the interest rate swap agreements that had been entered into during the year ended December 31, 2021, and entered into new interest rate swap agreements with an aggregate notional amount of $175.0 million, effective on December 1, 2022 and terminating on November 12, 2023, which were designated as cash flow hedges, to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility.

Right of First Offer Agreement

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

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

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

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 are a newly formed company that has recently commenced operations, and as a result, we have not paid any dividends as of December 31, 2021.

We intend to qualify and elect 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 a quarterly dividend of $0.10 per share for the first quarter of 2022 payable on April 15, 2022, to stockholders of record as of March 31, 2022.

Our 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.

Contractual Obligations

The following is a summary of our contractual obligations as of December 31, 2021 (in thousands):

Payments due by period

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

Principal payments - Bridge Facility (1)

$ 355,000 $ 355,000 $ — $ — $ —

Interest payments - Bridge Facility (2)

3,538 3,538 — — —

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

Interest payments - Credit facility term loan (3)

10,554 5,668 4,886 — —

Principal payments - credit facility revolver 90,000 — 90,000 — —

Interest payments - credit facility revolver (2)

10,061 2,938 7,123 — —

Operating and ground lease commitments 16,505 1,008 1,672 442 13,383

$ 660,658 $ 368,152 $ 278,681 $ 442 $ 13,383

____________________________________

(1) The Bridge Facility was refinanced with a $355.0 million mortgage loan during February 2022.

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

(3) As of December 31, 2021, 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.

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.

For example, during November 2021, in connection with the 11-year extension of Merrill Lynch, Pierce, Fenner & Smith Incorporated at the Company’s largest property measured by annualized base rent, the Company agreed to $11.1 million of future rent concessions and to fund up to $22.9 million of tenant improvement allowances, the full amount of which was funded as loan reserves as part of the closing of the CMBS Loan in February 2022.

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

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 ended December 31, 2021.

We intend to make regular distributions to our stockholders to satisfy the requirements to maintain our qualification as a REIT.

During the year ended December 31, 2022, the Company’s Board of Directors declared quarterly cash dividends on shares of our common stock as follows (in thousands, except per share data):

Declaration Date Record Date Paid Date Distributions Per Share

March 22, 2022 March 31, 2022 April 15, 2022 $0.10

May 3, 2022 June 30, 2022 July 15, 2022 $0.10

August 2, 2022 September 30, 2022 October 17, 2022 $0.10

November 1, 2022 December 30, 2022 January 17, 2023 $0.10

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 U.S.

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 maintain our qualification 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 share dividends.

In addition, our organizational documents permit 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

On November 2, 2022, the Company filed a universal shelf registration statement on Form S-3 (the “Universal Shelf”) with the SEC, and the Universal Shelf was declared effective by the SEC on November 14, 2022.

Pursuant to the Universal Shelf, the Company is able to offer and sell from time to time in multiple transactions, up to $750.0 million of the Company’s securities, 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.

In November 2022, the Company established, as part of its Universal Shelf, an “at the market” offering program for its common stock (the “ATM Program”).

Pursuant to the ATM Program, the Company may from time to time offer and sell shares of its common stock, having an aggregate offering price of up to $100.0 million.

Such offers or sales of shares of the Company’s common stock may be made in privately negotiated transactions, including block trades, brokers’ transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange, or through forward transactions under separate master forward sale confirmations and related supplemental confirmations for the sale of shares of the Company’s common stock on a forward basis.

As of December 31, 2022, we had not sold any shares of common stock pursuant to the ATM Program.

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 immediate plans to issue any securities for capital raising purposes 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.

The Company did not repurchase any shares under

the Share Repurchase Program during the year ended December 31, 2022, and it has not repurchased any shares under the Share Repurchase Program through March 8, 2023.

Cash Flow Analysis for the Year Ended December 31, 2022

The following table summarizes the changes in cash flows for the year ended December 31, 2021 and 2020 (dollars in millions):

Year Ended December 31,

2021 versus 2020

The following table summarizes the changes in cash flows for the year ended December 31, 2022 compared to the year ended December 31, 2021 (in thousands):

Year Ended December 31, 2022 vs 2021

Increase/(Decrease)

Net cash provided by operating activities $ 114,232 $ 56,108 $ 58,124

$ 56,108 $ 42,327 $ 13,781

Net cash used in investing activities $ (12,261) $ (464) $ (11,797)

Net cash provided by (used in) investing activities $ 22,477 $ (12,261) $ 34,738

Net cash used in financing activities $ (110,716) $ (18,444) $ (92,272)

Net cash provided by operating activities increased $13.8 million during the year ended December 31, 2021, compared to the year ended December 31, 2020 primarily due to the increase in our portfolio size.

At December 31, 2021, we had 92 office properties with an aggregate of 10.5 million square feet as compared to 40 properties with approximately 3.0 million leasable square feet at December 31, 2020.

Net cash used in investing activities increased $11.8 million during the year ended December 31, 2021, compared to the year ended December 31, 2020.

The change was primarily due to an increase in capital expenditures and leasing costs associated with lease renewals, as well as an additional investment of $2.5 million in the Company’s unconsolidated joint venture during the year ended December 31, 2021.

Amounts for the 2021 period include $9.0 million of leasing commissions paid in connection with the early extension of the Company’s lease with Merrill Lynch, Pierce, Fenner & Smith Incorporated at a property in Hopewell, New Jersey.

Net cash used in financing activities decreased $23.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the aggregate proceeds of $620.0 million from the Facilities, offset by an increase of $578.2 million in net distributions to parent, including approximately $595.0 million distributed to Realty Income related to the Separation and Distribution.

Net cash provided by operating activities increased $58.1 million during the year ended December 31, 2022, compared to the same period in 2021 primarily due to the increase in our portfolio size as a result of the Mergers.

Net cash provided by investing activities increased $34.7 million during the year ended December 31, 2022, compared to the same period in 2021.

The change was primarily due to proceeds from the disposition of real estate and distributions received from the Arch Street Joint Venture during the year ended December 31, 2022, partially offset by an increase in capital expenditures and leasing costs associated with lease renewals.

Net cash used in financing activities increased $92.3 million during the year ended December 31, 2022, compared to the same period in 2021, primarily due to net repayments on the Company’s Revolving Facility and payments of dividends to stockholders during the year ended December 31, 2022.

Financing activities during the year ended December 31, 2021, included the initial debt capitalization of the Company in connection with the Separation and the Distribution, as well as payments on and extinguishment of mortgages payable and net distributions to parent company prior to the Distribution.

Following the Distribution, Realty Income was no longer the parent of Realty Income Office Assets, and therefore, no further distributions to Realty Income occurred.

VEREIT OFFICE ASSETS

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or other events such as an expectation that a reporting unit will be sold or sustained decrease in VEREIT’s stock price on either an absolute basis or relative to peers.

If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e.

greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required.

If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e., greater than 50% chance) that the fair value of a reporting unit is less than its carrying value, the quantitative impairment test is required.

Otherwise, no quantitative testing is required.

If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying amount, the provisions of guidance require that the fair value be compared to the carrying value.

If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying value, the provisions of guidance require that the fair value be compared to the carrying value.

Goodwill is considered impaired if the carrying value exceeds the fair value.

No impairments of VEREIT’s goodwill were recorded during the ten months ended October 31, 2021 and year ended December 31, 2020 and 2019.

No impairments of VEREIT’s goodwill were recorded during the ten months ended October 31, 2021 and year ended December 31, 2020.

The results of the VEREIT impairment tests carry over to VEREIT Office Assets, therefore no impairments were recorded in the accompanying statements of operations.

Recent Accounting Pronouncements

Accounting guidance that VEREIT Office Assets has recently adopted, as well as accounting guidance that has been recently issued but not yet adopted, is included in Note 1 — Organization and Summary of Significant Accounting Policies of the annual combined and consolidated financial statements of VEREIT Office Assets, included elsewhere in this Annual Report on Form 10-K.

Results of Operations

Comparison of the period from January 1, 2021 to October 31, 2021 (the date immediately prior to the closing date of the Mergers (the “2021 period”) to the year ended December 31, 2020 (the “2020 period”)) (dollars in thousands)

Operations for certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”) ended on October 31, 2021 (the date immediately prior to the closing date of the Mergers).

The VEREIT Office Assets were owned for all of 2020 resulting in a decrease in revenues and expenses between the periods due to the 2021 period having only 304 days of activity.

For a comparison of the results of operations for certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”) for the period from January 1, 2021 to October 31, 2021 to the year ended December 31, 2020, see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K filed on March 24, 2022.

Ten Months Ended October 31, 2021 Year Ended December 31, 2020 Increase / (Decrease)

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Net income $ 5,691 $ 43,533 $ (37,842)

Rental Revenue .

Rental revenue decreased $35.6 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

Additionally, rental revenue decreased approximately $4.2 million due to the disposition of three properties that were sold to the unconsolidated joint venture during 2020 and a decrease of approximately $3.5 million due to vacancies.

Fee Income from Unconsolidated Joint Venture .

Fee income from the unconsolidated joint venture increased $0.1 million primarily due to additional acquisition and property management fees earned during the 2021 period offset by a decrease due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

Property Operating Expenses .

Property operating expenses decreased $10.4 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

Additionally, property operating expenses decreased approximately $1.2 million due to the disposition of three properties that were sold to the unconsolidated joint venture during 2020.

General and Administrative Expenses .

General and administrative expenses decreased $1.4 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

General and administrative expenses for VEREIT Office Assets are an allocation from overall VEREIT general and administrative expenses.

Depreciation and Amortization Expense .

Depreciation and amortization expense decreased $13.7 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

Additionally, depreciation and amortization expense decreased $1.2 million due to the write-off of an intangible asset related to an early lease termination and $0.7 million due to the disposition of three properties that were sold to the unconsolidated joint venture during 2020.

Impairments .

Impairments increased $18.8 million between the 2020 period and the 2021 period.

As part of VEREIT Office Assets’ impairment review procedures, net real estate assets representing four properties were deemed to be impaired, resulting in impairment charges of $28.1 million during the 2021 period.

Net real estate assets related to two properties were deemed to be impaired, resulting in impairment charges of $9.3 million during the 2020 period.

The 2021 and 2020 impairments related to properties that management identified for potential sale or determined, based on discussions at the time with the existing tenants, would not be released by the tenant and management believed that the property would not be leased to another tenant at a rental rate that supports the current book value.

Interest Expense.

Interest expense decreased $3.9 million primarily due to the early repayment of mortgage notes payable on properties in connection with the consummation of the Mergers and due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

Gain on Disposition of Real Estate Assets, Net .

Gain on disposition of real estate assets, net was $9.8 million for the 2020 period, which was related to the three properties sold to the unconsolidated joint venture during the year ended December 31, 2020 for an aggregate gross sales price of $135.5 million.

No such gain was recorded during the 2021 period.

Loss on Extinguishment of Debt, Net.

Loss on extinguishment of debt, net was $5.3 million and $1.7 million in the 2021 and 2020 periods, respectively, due to the early extinguishment of mortgage notes payable.

Equity in Income of Unconsolidated Joint Venture .

Equity in income of unconsolidated joint venture increased $0.2 million primarily due to three properties acquired by the unconsolidated joint venture in 2020.

Other Income, Net .

Other income, net remained constant between the 2020 period and 2021 period.

Provision for Income Taxes .

Provision for income taxes decreased $0.1 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period.

Net income was $5.7 million and $43.5 million for the 2021 period and 2020 period, respectively, for a decrease of $37.8 million.

Comparison of the year ended December 31, 2020 to the year ended December 31, 2019 (dollars in thousands)

Year Ended December 31,

2020 2019 Increase / (Decrease)

Rental revenue $ 170,304 $ 182,069 $ (11,765)

Fee income from unconsolidated joint venture 596 — 596

Total revenues 170,900 182,069 (11,169)

Property operating 46,597 47,248 (651)

General and administrative 7,029 7,800 (771)

Depreciation and amortization 62,662 70,859 (8,197)

Impairments 9,306 3,511 5,795

Total operating expenses 125,594 129,418 (3,824)

Other (expenses) income:

Other income, net 158 549 (391)

Interest expense (9,905) (12,056) (2,151)

Gain on disposition of real estate assets, net 9,765 — 9,765

Loss on extinguishment of debt, net (1,686) (40) 1,646

Equity in income of unconsolidated joint venture 535 — 535

Total other expenses, net (1,133) (11,547) (10,414)

Income before taxes 44,173 41,104 3,069

Provision for income taxes (640) (517) 123

Net income $ 43,533 $ 40,587 $ 2,946

Rental Revenue .

Rental revenue decreased $11.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020.

Fee Income from Unconsolidated Joint Venture .

Fee income from the unconsolidated joint venture was $0.6 million for the year ended December 31, 2020.

No such income was recorded during the year ended December 31, 2019.

VEREIT Office Assets provides various services to the unconsolidated joint venture, which were performed during the year ended December 31, 2020, in exchange for fees.

Property Operating Expenses .

Property operating expenses decreased $0.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020.

General and Administrative Expenses .

General and administrative expenses decreased $0.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

General and administrative expenses for VEREIT Office Assets are an allocation from overall VEREIT general and administrative expenses.

The decrease is primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020.

Depreciation and Amortization Expense .

Depreciation and amortization expense decreased $8.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020.

Impairments .

Impairments increased $5.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

As part of VEREIT Office Assets’ impairment review procedures, net real estate assets representing two properties were deemed to be impaired, resulting in impairment charges of $9.3 million during the year ended December 31, 2020.

During the year ended December 31, 2019, net real estate assets related to two properties were deemed to be impaired, resulting in impairment charges of $3.5 million.

The 2020 and 2019 impairments related to properties that management identified for potential sale or determined, based on discussions at the time with the existing tenants, would not be released by the tenant and management believed that the property would not be leased to another tenant at a rental rate that supported the book value.

Interest Expense.

Interest expense decreased $2.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the early payoff of $75.7 million of mortgage notes payable and principal payments of $3.8 million subsequent to January 1, 2019.

Gain on Disposition of Real Estate Assets, Net .

Gain on disposition of real estate assets, net was $9.8 million for the year ended December 31, 2020, which was related to the three properties sold to the unconsolidated joint venture during the year ended December 31, 2020 for an aggregate gross sales price of $135.5 million.

No such gain was recorded during the year ended December 31, 2019.

Loss on Extinguishment of Debt, Net.

Loss on extinguishment of debt, net was $1.7 million for the year ended December 31, 2020 which was related to losses on the early extinguishment of a mortgage note payable.

No significant losses were recorded during the year ended December 31, 2019.

Equity in Income of Unconsolidated Joint Venture .

Equity in income of unconsolidated joint venture was $0.5 million for the year ended December 31, 2020.

No such income was recorded during the year ended December 31, 2019, as the unconsolidated joint venture was formed during the year ended December 31, 2020.

Other Income, Net .

Other income, net decreased $0.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to property insurance settlement proceeds received during the year ended December 31, 2019, with no comparable proceeds received during the same period in 2020.

Provision for Income Taxes .

Provision for income taxes increased by $0.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019.

Net income was $43.5 million and $40.6 million for the years ended December 31, 2020 and 2019, respectively, an increase of $2.9 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Liquidity and Capital Resources

The following table summarizes the changes in cash flows for the ten months ended October 31, 2021, the year ended December 31, 2020 and the year ended December 31, 2019 (dollars in millions):

Liquidity and Capital Resources - VEREIT Office Assets

The following table summarizes the changes in cash flows for the ten months ended October 31, 2021 compared to the year ended December 31, 2020 (dollars in millions):

Ten Months Ended October 31, Year Ended December 31

10 months 2021 to 2020

Change 2020 to 2019 Change

2021 2020 2019

Net cash provided by operating activities $ 83.7 $ 108.5 $ (24.8)

$ 83.7 $ 108.5 $ 112.6 $ (24.8) $ (4.1)

Net cash (used in) provided by investing activities $ (9.2) $ 111.4 $ (120.6)

$ (9.2) $ 111.4 $ (17.1) $ (120.6) $ 128.5

Net cash used in financing activities $ (77.9) $ (219.4) $ 141.5

Net cash provided by operating activities decreased $24.8 million during the ten months ended October 31, 2021 compared to the year ended December 31, 2020 primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period, as well as a decrease in rental income due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020.

Net cash provided by operating activities decreased $4.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020.

Net cash provided by operating activities decreased $24.8 million during the ten months ended October 31, 2021 compared to the year ended December 31, 2020 primarily due to having only 304 days of activity in the 2021 period versus a full year in the 2020 period, as well as a decrease in rental income due to the disposition of three properties that were sold to the Arch Street Joint Venture during the year ended December 31, 2020.

Net cash used in investing activities was $9.2 million during the ten months ended October 31, 2021, as compared to net cash provided by investing activities of $111.4 million during the year ended December 31, 2020.

The change was primarily due to the three properties sold to the unconsolidated joint venture during year ended December 31, 2020 for proceeds of $116.4 million after closing costs.

Net cash provided by investing activities was $111.4 million during the year ended December 31, 2020, as compared to net cash used in investing activities of $17.1 million during the year ended December 31, 2019.

The change was primarily due to the three properties sold to the unconsolidated joint venture during year ended December 31, 2020 for proceeds of $116.4 million after closing costs.

The change was primarily due to the three properties sold to the Arch Street Joint Venture during the year ended December 31, 2020 for proceeds of $116.4 million after closing costs.

Net cash used in financing activities decreased $141.5 million during the ten months ended October 31, 2021, compared to the year ended December 31, 2020, primarily due to a decrease of $337.4 million in net distributions to parent, offset by an increase of $194.8 million in the repayment of mortgage notes payable.

Net cash used in financing activities decreased $124.9 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase of $150.1 million in net distributions to parent, offset by a decrease of $24.7 million in the repayment of mortgage notes payable.

Contractual Obligations

VEREIT Office Assets was subject to the following contractual obligations at October 31, 2021 (in thousands).

VEREIT Office Assets was subject to the following contractual obligations as of October 31, 2021 (in thousands).

Payments Due by Period

2 unchanged sentences

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What changed 10-K

Item 7. Management’s Discussion and Analysis