What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-02 · 202 added, 212 removed, 273 unchanged (60% of the section changed)

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Forward-Looking Statements

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

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

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

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

• the extent to which the ongoing COVID-19 pandemic or any future pandemic or outbreak of a highly infectious or contagious disease or fear of such pandemics or outbreaks impacts our business, operating results, financial condition and prospects, which is highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the COVID-19 pandemic and its impact on the U.S.

economy and potential changes in tenant behavior that could adversely affect the use of and demand for office space;

• the extent to which changes in workplace practices and office space utilization, including remote work arrangements, will continue and the impact that may have on demand for office space at our properties;

• our ability to acquire new properties and sell non-core assets on favorable terms and in a timely manner, or at all;

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

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

(“VEREIT”) into Orion;

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

• risks associated with acquisitions, including the risk that we may not be in a position, or have the opportunity in the future, to make suitable property acquisitions on advantageous terms and/or that such acquisitions will fail to perform as expected;

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

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

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

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

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

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

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

When we refer to “annualized base rent,” we mean the monthly aggregate cash amount charged to tenants under our leases (including monthly base rent receivables and certain contractually obligated reimbursements by our tenants), as of March 31, 2023, multiplied by 12, including the Company’s pro rata share of such amounts from the Arch Street Joint Venture, the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, LLC (“Arch Street Capital Partners”).

Annualized base rent is not indicative of future performance.

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Accordingly, the owner receives the rent “net” of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease.

Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease.

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

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

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

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

Merger with Realty Income

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

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

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

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

Office Assets”).

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

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

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

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

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

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

As of March 31, 2023, 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 87.2% and a weighted-average remaining lease term of 3.9 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 87.5% and a weighted-average remaining lease term of 4.0 years as of March 31, 2023.

Business Environment

Our efforts to address upcoming lease maturities and vacancies continue to be adversely impacted by economic conditions, which have included rising interest rates, rising inflation and recession fears, along with remote working trends which resulted from the COVID-19 pandemic and have persisted even after many other economic and social activities have returned to at or near pre-COVID-19 levels.

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.

Financial institutions in the United States and abroad have recently come under significant financial stress, which, among other things, initially resulted in the failures of two regional banks, Silicon Valley Bank and Signature Bank, along with rapid deposit outflows at many other regional banks, followed most recently by the failure of a third regional bank, First Republic Bank.

These recent events, together with inflation, the high interest rate environment and recessionary fears, have adversely affected the commercial real estate lending markets generally and may adversely affect the Company’s access to credit or the terms under which it may do so.

We are party to a credit agreement which provides the Company with a $425.0 million senior

revolving credit facility, and a $175.0 million senior term loan facility, with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto.

The term loan facility is scheduled to mature on November 12, 2023, and the revolving credit facility is scheduled to mature on November 12, 2024.

We expect to extend, repay or refinance (or some combination of the foregoing) the revolver/ and 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.

The Company has sufficient available capacity under the revolving credit facility to repay the term loan facility, if needed.

The Separation and the Distribution

The Company was initially formed as a wholly-owned subsidiary of Realty Income Corporation (“Realty Income”).

Following completion of the merger transaction involving Realty Income and VEREIT, Inc.

(“VEREIT”) on November 1, 2021, Realty Income contributed the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income, and certain office real properties and related assets previously owned by subsidiaries of VEREIT (the “Separation”), to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”), and, on November 12, 2021, effected a special distribution to its stockholders of all the outstanding shares of common stock of the Company (the “Distribution”).

Following the Distribution, the Company became independent and publicly traded and our common stock, par value $0.001 per share, trades on the NYSE under the symbol “ONL”.

Through November 12, 2021, we had not conducted any business as a separate company other than start-up related activities.

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As such, we are eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved.

We cannot predict if investors will find our common stock less attractive because we will rely on the exemptions available to us as an emerging growth company.

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 volatile.

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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 million, and therefore, we anticipate remaining an “emerging growth company” for fiscal year 2022.

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 three and nine months ended September 30, 2021 as the ownership interests were under common control and ownership of Realty Income during that period.

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

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

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

These combined financial results were derived from the books and records of and carved out from VEREIT.

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

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

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

Such historical combined and consolidated financial information may not be indicative of the results of operations, financial position or cash flows that would have been obtained if the VEREIT Office Assets had been an independent, standalone public company during the periods presented or of the future performance of the Company as an independent, standalone company.

For the three months ended March 31, 2023 and 2022, the consolidated financial statements of the Company include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture.

Election as a REIT

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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.

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).

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Even if we maintain our qualification for taxation as a REIT, we may become subject to certain state and local taxes on our income and property, federal income taxes on certain income and excise taxes on our undistributed income.

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

Critical Accounting Estimates

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Significant Transactions Summary

Activity through September 30, 2022

Activity for the quarter ended March 31, 2023

Real Estate Operations

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

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

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

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

• We did not complete any dispositions during the three months ended March 31, 2023.

As of May 9, 2023, we had pending agreements to dispose of an additional eight non-core office properties for an aggregate gross sales price of $41.0 million.

These pending transactions remain subject to customary conditions for real estate transactions of this

nature, including conditions related to the buyer’s due diligence, and may be terminated by the buyer in its sole discretion.

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

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

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

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

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

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

The CMBS Loan matures on February 11, 2027.

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

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

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

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

• During the three months ended March 31, 2023, we have renewed a total of 68,000 square feet across two different properties.

We also entered into a lease expansion covering 11,000 square feet with an existing tenant at one property and entered into a new lease for 4,000 square feet at another property.

During the three months ended March 31, 2023, two leases expired comprising a total reduction in occupied space of approximately 0.2 million leasable square feet.

As of March 31, 2023, the Company had a total of six vacant properties, two of which are being marketed for sale.

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

• As of March 31, 2023, we had $425.0 million of borrowing capacity under our revolving credit facility and no outstanding borrowings thereunder.

• The Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the first quarter of 2023, which was paid on April 17, 2023.

On May 8, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the second quarter of 2023, payable on July 17, 2023 to stockholders of record as of June 30, 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 as of September 30, 2022, including our pro rata share of the applicable statistics of the properties owned by our unconsolidated joint venture:

The following table shows the property statistics of our operating properties as of March 31, 2023, including our pro rata share of the applicable statistics of the properties owned by the Arch Street Joint Venture:

March 31, 2023 December 31, 2022

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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(1) Represents leasable square feet of operating properties and the Company’s pro rata share of leasable square feet of properties owned by the unconsolidated joint venture.

(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 September 30, 2022.

(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 March 31, 2023.

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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Operating Performance

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

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2022

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

Three Months Ended

March 31, 2023 March 31, 2022

Financial Metrics

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GAAP measure.

(2) The Company has revised its definition of Core FFO beginning in 2023 and has applied this change retrospectively for comparison purposes.

See the Non-GAAP Measures section below for further discussion of the change.

Leasing Activity and Capital Expenditures

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

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

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.

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

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

As of March 31, 2023, the Company had outstanding commitments of $50.0 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, we have funded a reserve with the lender for the amount of tenant improvement allowances.

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

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

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 March 31, 2023, 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 three months ended March 31, 2023, we entered into new and renewal leases as summarized in the following table (dollars and square feet in thousands):

Three Months Ended

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

Tenant leasing costs and concession commitments (2)

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

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

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

Nine Months Ended

New Leases Renewals Total

Rentable square feet leased 41 379 420

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

N/A (4.2) % (4.2) %

(20.3) % 26.9 % 19.7 %

Tenant leasing costs and concession commitments (3)

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

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 4,000 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 three and nine months ended September 30, 2022, amounts capitalized by the Company for lease related costs, lease incentives and building, fixtures and improvements were as follows:

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2022

During the three months ended March 31, 2023 and 2022, amounts capitalized by the Company for lease related costs, lease incentives and building, fixtures and improvements were as set forth in the following table.

Three Months Ended Three Months Ended

March 31, 2023 March 31, 2022

Lease related costs (1)

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

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Results of Operations

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

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

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

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

The results of operations discussed in this section include the accounts of the Company and its consolidated subsidiaries for the three months ended March 31, 2023 and 2022 (in thousands).

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

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

Three Months Ended March 31,

2023 2022 2023 vs 2022

Increase/(Decrease) 2022 2021 2022 vs 2021

Increase/(Decrease)

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Total revenues $ 50,190 $ 53,206 $ (3,016)

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

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

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

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

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

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

The decrease in rental revenue of $3.0 million during the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to the decrease in our overall occupied square footage due to scheduled vacancies and dispositions.

Our portfolio occupancy rate was 87.2% and 88.1% as of March 31, 2023 and 2022, respectively.

During the three months ended March 31, 2023, the Company recognized $1.6 million of lease termination income.

During the three months ended March 31, 2022, the Company did not recognize any 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 $0.2 million and $0.6 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021, was due to fees earned from the Arch Street Joint Venture, including property and asset management fees.

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

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

Fee income from unconsolidated joint venture remained consistent at $0.2 million during the three months ended March 31, 2023 as compared to the same period in 2022.

Operating Expenses

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

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

Three Months Ended March 31,

2023 2022 2023 vs 2022

Increase/(Decrease) 2022 2021 2022 vs 2021

Increase/(Decrease)

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

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

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

Property operating expenses remained consistent at $15.3 million during the three months ended March 31, 2023 as compared to the same period in 2022, which is the net result of decreases in expenses resulting from property dispositions, offset by increases due to timing and nature of certain operating costs including property taxes accrued for near-term vacancies.

General and Administrative Expenses

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

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

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

General and administrative expenses increased $0.8 million during the three months ended March 31, 2023 as compared to the same period in 2022, which was primarily due to higher employee headcount and increased stock compensation expense for additional equity award issuances during the three months ended March 31, 2023 as compared to the same period in 2022.

Depreciation and Amortization Expenses

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

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

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

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

The decrease in depreciation and amortization expenses of $6.2 million during the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to the full amortization of certain intangible assets as a result of leases expiring in accordance with their terms, as well as disposition and impairment of real estate assets.

Impairments increased $2.2 million during the three months ended March 31, 2023 as compared to the same period in 2022.

The impairment charges of $3.8 million in the three months ended March 31, 2023, include a total of three 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 $1.6 million with respect to two properties were recorded during the same period in 2022.

See Note 5 - Fair Value Measurements for further information.

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

Transaction Related Expenses

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

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

Transaction related expense remained relatively consistent at $0.1 million during the three months ended March 31, 2023 as compared to the same period in 2022.

Spin Related Expenses

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

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

During the three months ended March 31, 2023, the company incurred no spin related expenses.

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

Other (Expense) Income and Provision for Income Taxes

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

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

Three Months Ended March 31,

2023 2022 2023 vs 2022

Increase/(Decrease) 2022 2021 2022 vs 2021

Increase/(Decrease)

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

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

Other income, net $ 36 $ 39 $ (3)

Equity in loss of unconsolidated joint venture, net $ (123) $ (41) $ 82

Provision for income taxes $ (160) $ (166) $ (6)

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

Interest Expense, net

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

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

Interest expense, net increased $0.3 million during the three months ended March 31, 2023 as compared to the same period in 2022, which was primarily due to higher interest rates, partially offset by lower outstanding debt during the three months ended March 31, 2023.

The Company’s average debt outstanding and weighted-average interest rate on its debt obligations were $530.0 million and 4.38%, respectively for the three months ended March 31, 2023, compared to $620.5 million and 4.17%, respectively, for the three months ended March 31, 2022.

Interest expense for the three months ended March 31, 2023 included an offset of $1.7 million of reclassified previous gains on interest rate swaps from accumulated other comprehensive income, compared with $0.2 million of reclassified losses in the three months ended March 31, 2022.

Loss on extinguishment of debt, net

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

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

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

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

Equity in loss of unconsolidated joint venture

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

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

Loss on extinguishment of debt, net during the three months ended March 31, 2022 related to the write off of deferred financing costs due to the early extinguishment of the Company’s Bridge Facility, as defined below and discussed in Note 6 – Debt, Net.

There were no such costs incurred during the three months ended March 31, 2023.

Equity in loss of unconsolidated joint venture, net

Equity in loss of the unconsolidated joint venture remained relatively consistent during the three months ended March 31, 2023 as compared to the same period in 2022.

Provision for Income Taxes

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

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

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

Gain on disposition of real estate assets

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

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

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

The provision for income taxes remained consistent at $0.2 million during the three months ended March 31, 2023 as compared to the same period in 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 items that we believe do not reflect the ongoing operating performance of our business such as transaction related expenses, spin related expenses and gains or losses on extinguishment of swaps and/or debt.

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

Beginning in 2023, the Company has revised 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.

This change in definition has also been applied retrospectively for comparison purposes.

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 an equivalent measure, are routinely reported by publicly-traded REITs, each adjust for items that we believe do not reflect the ongoing operating performance of our business and we believe are often used by analysts and investors for comparison purposes.

For all of these reasons, we believe FFO and Core FFO, in addition to net income (loss), as defined by U.S.

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

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

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

2022 2021 2022 2021

Net (loss) income attributable to common stockholders $ (53,047) $ (1,423) $ (78,524) $ 7,423

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 three months ended March 31, 2023 and 2022 (dollars in thousands):

Three Months Ended March 31,

Net loss attributable to common stockholders $ (8,885) $ (9,906)

Depreciation and amortization of real estate assets 28,142 34,337

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Impairment of real estate 3,754 1,602

Proportionate share of adjustments for unconsolidated entity 460 — 1,382 —

Proportionate share of adjustments for unconsolidated joint venture 462 461

FFO attributable to common stockholders $ 23,473 $ 26,494

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Spin related (1)

— 2,797 964 2,797

Amortization of deferred financing costs (2)

Amortization of deferred lease incentives, net (2)

Equity-based compensation (2)

Loss on extinguishment of debt, net — 468

Proportionate share of adjustments for unconsolidated entity 29 67

Core FFO attributable to common stockholders $ 25,283 $ 29,289

(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.

Weighted-average shares of common stock outstanding - basic 56,641,805 56,625,650

Effect of weighted-average dilutive securities (3)

Weighted-average shares of common stock outstanding - diluted 56,659,336 56,626,415

FFO attributable to common stockholders per diluted share $ 0.41 $ 0.47

Core FFO attributable to common stockholders per diluted share $ 0.45 $ 0.52

____________________________________

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

(2) The Company has revised its definition of Core FFO beginning in 2023 and has applied this change retrospectively for comparison purposes.

(3) Dilutive securities include unvested restricted stock units.

Such shares are not included when calculating net loss per diluted share applicable to the Company for the three months ended March 31, 2023 and 2022 as the effect would be antidilutive.

Liquidity and Capital Resources

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(i) fund operating expenses;

(ii) pay principal and interest on our debt;

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

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

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

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

As of March 31, 2023, we had $23.8 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 or prior to maturity;

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

and (iii) fund new acquisitions.

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

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

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

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

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.

The following is a summary of the interest rate and scheduled maturities of our consolidated debt obligations as of March 31, 2023 (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

____________________________________

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

(2) As of March 31, 2023, we did not have any amounts outstanding under our $425.0 million Revolving Facility.

(3) As of March 31, 2023, 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 March 31, 2023.

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.

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

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

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

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

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

Under the Revolver/Term Loan Facilities, the applicable margin is (1) in the case of the Revolving Facility, 2.50% for LIBOR loans and 1.50% for base rate loans and (2) in the case of the Term Loan Facility, 2.50% for LIBOR loans and 1.50% for base rate loans.

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

As of March 31, 2023, 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 March 31, 2023, we did not have any amounts outstanding under our $425.0 million Revolving Facility.

In addition, the Company’s pro rata share of the mortgage notes of the Arch Street Joint Venture was $27.3 million as of March 31, 2023.

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

As of March 31, 2023, 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.

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

Credit Facility Key Covenants Required September 30, 2022

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 March 31, 2023

Ratio of total indebtedness to total asset value ≤ 60% 33.0%

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Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 12.85x

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

As of March 31, 2023, Orion OP was in compliance with these financial covenants.

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

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The CMBS Loan is generally not freely prepayable by the Mortgage Borrowers without payment of certain prepayment premiums and costs.

The CMBS Loan may be prepaid in whole, but not in part, except as provided in the loan agreement governing the CMBS Loan (the “CMBS Loan Agreement”), at any time following the Prepayment Lockout Release Date (as defined in the CMBS Loan Agreement) (generally two years after the Loan has been fully securitized), subject to the payment of a yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement.

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 September 30, 2022, the Company was in compliance with these financial covenants.

As of March 31, 2023, 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.

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

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

Principal Amounts Due During the Years Ending December 31,

Interest Rate Maturity Total 2023 2024 2025 2026 2027 Thereafter

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

Credit facility term loan (1)

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

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

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

________________________________

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

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

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 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”).

Arch Street Warrants

On November 12, 2021, in connection with the Distribution, Orion OP entered into an amendment and restatement of the limited liability agreement (the “LLCA”) for 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, 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 for the registration, under the Securities Act, of the shares of our common stock issuable upon exercise of the Arch Street Warrants.

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

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

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.

Also in connection with the entry into the LLCA, the Arch Street Joint Venture’s lender consented to the transfer of the interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P.

to Orion OP, and, in connection therewith, Orion OP agreed to become a guarantor of certain limited customary recourse obligations and provide certain customary environmental indemnities under the Arch Street Joint Venture’s existing indebtedness.

Derivatives and Hedging Activities

During the year ended December 31, 2021, the Company entered into interest rate swap agreements with an aggregate notional amount of $175.0 million, effective on December 1, 2021 and maturing on November 12, 2023, which were designated as cash flow hedges, in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility.

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.

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 agreed not to acquire or purchase a fee simple or ground leasehold interest in any office real property, including by way of an acquisition of equity interests, within certain investing parameters without first offering the property for purchase to the Arch Street Joint Venture.

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

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

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

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.

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 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.

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

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

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

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

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

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

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

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

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 three months ended March 31, 2023, the Company’s Board of Directors declared quarterly cash dividends on shares of our common stock as follows:

Declaration Date Record Date Paid Date Distributions Per Share

March 7, 2023 March 31, 2023 April 17, 2023 $0.10

On May 8, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the second quarter of 2023, payable on July 17, 2023, to stockholders of record as of June 30, 2023.

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

In particular, we expect that, initially, our dividends will exceed our net income under GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income.

To the extent that our funds available for distribution are less than the amount we must distribute to our stockholders to satisfy the requirements to qualify as a REIT, we may consider various means to cover any such shortfall, including borrowing under our Revolving Facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring taxable share dividends.

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

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

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

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

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 March 31, 2023, 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 present plans to issue any securities pursuant to the Universal Shelf or otherwise.

The Company has no immediate plans to issue any securities for capital raising purposes pursuant to the Universal Shelf or otherwise.

Share Repurchase Program

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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.

Repurchases are subject to prevailing market conditions, the trading price of the Company’s common stock, the Company’s liquidity and anticipated liquidity needs, financial performance and other conditions.

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

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

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

Nine Months Ended September 30,

2022 versus 2021

The Company did not repurchase any shares under the Share Repurchase Program during the three months ended March 31, 2023, and it has not repurchased any shares under the Share Repurchase Program through May 9, 2023.

Cash Flow Analysis for the Three Months Ended March 31, 2023

The following table summarizes the changes in cash flows for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31, 2023 vs 2022 Increase/(Decrease)

Net cash provided by operating activities $ 11,441 $ 28,153 $ (16,712)

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Net cash used in financing activities $ (5,844) $ (2,168) $ (3,676)

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

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

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

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

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

Net cash provided by operating activities decreased $16.7 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to a decrease in accounts payable, accrued expenses and other liabilities, net and an increase in accounts receivable, net and other assets, net, and a decrease in income overall due to dispositions, vacancies, and timing and nature of certain operating costs.

Net cash used in investing activities increased $1.2 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The change was primarily due to an increase in capital expenditures and leasing costs associated with lease renewals.

Net cash used in financing activities increased $3.7 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to payments of dividends to stockholders during the three months ended March 31, 2023 and net proceeds from the Company’s Revolving Facility during the three months ended March 31, 2022, partially offset by decreased payments of deferred financing costs during the three months ended March 31, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis