Orion Properties Inc. 10-K

Item 7. 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 and combined financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Orion Office REIT Inc. (the 29 Table of Contents “Company,” “Orion,” “we,” or “us”) makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “ Forward-Looking Statements ”. 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 ”. Overview Orion is an internally managed real estate investment trust (“REIT”) engaged in the ownership, acquisition, and management of a diversified portfolio of office buildings located in high-quality suburban markets across the U.S. and leased primarily on a single-tenant net lease basis to creditworthy tenants. Our portfolio is comprised of traditional office buildings, as well as government office, medical office, office/laboratory, office/research and office/flex properties. 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 has been operating as an independent publicly traded company, and the Company has elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with its initial taxable year ended December 31, 2021. As of December 31, 2023, we owned and operated 75 office properties with an aggregate of 8.7 million leasable square feet located in 29 states with an occupancy rate of 80.0% and a weighted-average remaining lease term of 3.9 years. Including our pro rata share of leasable square feet and annualized base rent from the Arch Street Joint Venture, we owned an aggregate of 8.9 million leasable square feet with an occupancy rate of 80.4%, or 87.2% adjusted for properties that are currently under agreement to be sold, and a weighted-average remaining lease term of 4.0 years, as of December 31, 2023. Executive Summary Despite the challenged macroeconomic environment, our real estate portfolio generally performed as expected during the year ended December 31, 2023, 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, 2023, while general and administrative expenses were modestly below our 2023 budget, as the Company benefited from lower professional services costs due to its continued designation as an emerging growth company. General and administrative expenses are expected to increase in 2024 primarily as a result of an increase in stock-based compensation cost. Our interest expense was generally in line with what we had budgeted for the year ended December 31, 2023, 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. Despite the tight credit markets, we successfully secured an amendment to our $425.0 million senior revolving credit facility (the “Revolving Facility”), which retired our $175.0 million borrowed under our senior term loan facility (the “Term Loan Facility”) ahead of schedule and provided us with continued access to liquidity and the ability to extend the Revolving Facility to May 12, 2026. Additionally, we executed two interest rate collar agreements on a total notional amount of $60.0 million to hedge against interest rate volatility on the Revolving Facility, following the scheduled expiration of our swap agreements on the total notional amount of $175.0 million. The Company did not acquire any new properties during the year ended December 31, 2023, primarily due to the impact of rapidly rising interest rates and disruptions in the financing markets. Our ability to execute on 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 the year ended December 31, 2023, we completed approximately 0.3 million square feet of lease renewals, expansions and new leases, while our weighted average remaining lease term decreased slightly from 4.1 years as of December 31, 2022 to 4.0 years as of December 31, 2023, and our occupancy level declined from 89.0% as of December 31, 2022 to 80.4% as of December 31, 2023, or 87.2% adjusted for properties that are currently under agreement to be sold. Our efforts to address upcoming lease maturities and vacancies have been adversely impacted by economic conditions, such as 30 Table of Contents rising interest rates, rising inflation and recession fears, along with persistent remote and hybrid 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, 2023, the Company made aggregate commitments for tenant improvement allowances and base building allowances, leasing commissions and free rent of $2.9 million, or $11.23 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, 2023 was to continue 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, 2023, we closed on six fully vacant dispositions totaling 0.8 million square feet for an aggregate sale price of $25.4 million, equating to a price per square foot of approximately $29.78, and primarily used the proceeds to pay down debt and to fund capital expenditures and leasing costs. We expect to continue this non-core asset disposition strategy in 2024. 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. Emerging Growth Company Status We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we rely on the exemptions available to us as an emerging growth company. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies until we can no longer avail ourselves of the exemptions applicable to emerging growth companies or until we affirmatively and irrevocably opt out of the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 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, 2023, 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, 2024. Basis of Presentation 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, as the ownership interests were 31 Table of Contents under common control and ownership of Realty Income during this period. From and after the November 1, 2021, 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 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 rental income. 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 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 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, and federal income taxes on certain income and excise taxes on our undistributed income. Critical Accounting Estimates Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, expectations and projections regarding future events and plans, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policy involves significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 – Summary of Significant Accounting Policies to our consolidated and combined financial statements. Real Estate Impairment We invest in real estate assets and subsequently monitor those investments quarterly for impairment. The risks and uncertainties involved in applying the principles related to real estate impairment include, but are not limited to, the following: • The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss. 32 Table of Contents • The evaluation of real estate assets for potential impairment requires our management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rate; (2) discount rate; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions including the number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of our tenants. • Changes related to management’s intent to sell or lease the real estate assets used to develop the forecasted cash flows may have a material impact on our financial results. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are described in Note 2 – Summary of Significant Accounting Policies to our consolidated and combined financial statements. Significant Transactions Summary Activity during the year ended December 31, 2023 Real Estate Operations • During the year ended December 31, 2023, we closed on the sale of six vacant properties for an aggregate gross sales price of $25.4 million. As of February 27, 2024, we had pending agreements to dispose of an additional seven properties for an aggregate gross sales price of $46.0 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 year ended December 31, 2023, we completed approximately 0.3 million square feet of lease renewals and entered into new leases across six different properties. We also entered into a lease expansion covering 11,000 square feet with an existing tenant at one property. During the year ended December 31, 2023, 16 leases expired or were downsized comprising a total reduction in occupied space of approximately 1.6 million leasable square feet. As of December 31, 2023, the Company had a total of 12 vacant properties, six of which had pending agreements for sale. The Company’s plans with respect to vacant properties are subject to change. Debt • On June 29, 2023, the Company closed an amendment of its credit agreement. Under the terms of the amendment, the Company used borrowings from its $425.0 million-capacity Revolving Facility to repay and retire its $175.0 million Term Loan Facility which was scheduled to mature on November 12, 2023. The amendment also provides the Company with the option to extend the Revolving Facility for an additional 18 months to May 12, 2026 from the current scheduled maturity of November 12, 2024 and to effect certain other modifications. The extension option is subject to customary conditions including there being no default or event of default, such as the failure to satisfy a financial or other covenant, and the payment of an extension fee. • During the year ended December 31, 2023, following the scheduled expiration of our swap agreements which effectively fixed the interest rate on the notional amount of $175.0 million at 3.92% per annum until November 12, 2023, the Company entered into interest rate collar agreements on a total notional amount of $60.0 million to hedge against interest rate volatility on the Revolving Facility. Under the agreements, the benchmark rate for the credit facility revolver will float between 5.50% per annum and 4.20% per annum on $25.0 million, and 5.50% per annum and 4.035% per annum on $35.0 million, effective from November 13, 2023 until May 12, 2025. • During the year ended December 31, 2023, we made net repayments of debt obligations of $59.0 million, utilizing a combination of cash flows from operations and proceeds from real estate dispositions. As of December 31, 2023, we had $116.0 million of outstanding borrowings under our Revolving Facility and $309.0 million of borrowing capacity thereunder. Equity • The Company’s Board of Directors declared quarterly cash dividends of $0.10 per share for each of the four quarters of 2023, which were paid on April 17, 2023, July 17, 2023, October 16, 2023 and January 16, 2024. On February 27, 33 Table of Contents 2024, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the first quarter of 2024, payable on April 15, 2024, to stockholders of record as of March 29, 2024. • During the year ended December 31, 2023, the Company repurchased approximately 0.9 million shares of common stock in multiple open market transactions, at a weighted average share price of $5.46 for an aggregate purchase price of $5.0 million as part of the Share Repurchase Program, which are currently deemed to be authorized but unissued shares of common stock. Real Estate Portfolio Metrics Our financial performance is impacted by the timing of dispositions and the operating performance of our operating properties. The following table shows the property statistics of our operating properties as of December 31, 2023 and 2022, including our pro rata share of the applicable statistics of the properties owned by the Arch Street Joint Venture: December 31, 2023 December 31, 2022 Portfolio Metrics Operating properties 75 81 Arch Street Joint Venture properties 6 6 Rentable square feet (in thousands) (1) 8,884 9,732 Occupancy rate (2) 80.4% 89.0% Investment-grade tenants (3) 70.6% 73.3% Weighted-average remaining lease term (in years) 4.0 4.1 ____________________________________ (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. The occupancy rate as of December 31, 2023 equals 87.2% adjusted for properties that are currently under agreement to be sold. (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, 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. The ratings may reflect those assigned by Standard & Poor’s Financial Services LLC or Moody’s Investor Service, Inc. to the lease guarantor or the parent company, as applicable. 34 Table of Contents Operating Performance In addition, management uses the following financial metrics to assess our operating performance (in thousands, except per share amounts). Year Ended December 31, 2023 2022 Financial Metrics Total revenues $ 195,041 $ 208,118 Net loss attributable to common stockholders $ (57,302) $ (97,494) Basic and diluted net loss per share attributable to common stockholders $ (1.02) $ (1.72) FFO attributable to common stockholders (1) $ 86,641 $ 99,657 FFO attributable to common stockholders per diluted share (1) $ 1.54 $ 1.76 Core FFO attributable to common stockholders (1) (2) $ 94,770 $ 108,178 Core FFO attributable to common stockholders per diluted share (1) (2) $ 1.68 $ 1.91 ____________________________________ (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. (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 The Company remains highly focused on leasing activity, given the 4.0 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 may not, however, be able to re-lease the space to suitable replacement tenants on a timely basis, or at all. Our properties may not be as attractive to existing or new tenants as properties owned by our competitors due to age of buildings, physical condition, lack of amenities or other similar factors. 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, 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 has agreed to provide rent concessions to tenants and incur leasing costs with respect to its properties, including amounts paid directly to tenants to improve their space and/or building systems, or tenant improvement allowances, landlord agreements to perform and pay for certain improvements, and leasing commissions. The Company anticipates it will continue to agree to tenant improvement allowances, the amount of which may increase in future periods. These rent concession and leasing cost commitments could be significant and are expected to vary due to factors such as competitive market conditions for leasing of commercial office space and the volume of square footage subject to re-leasing by the Company. As of December 31, 2023, the Company had outstanding commitments of $42.3 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 2024 and 2035. 35 Table of Contents 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, 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 year ended December 31, 2023, we entered into new and renewal leases as summarized in the following table (dollars and square feet in thousands): Year Ended December 31, 2023 New Leases Renewals Total Rentable square feet leased 21 240 261 Weighted average rental rate change (cash basis) (1) (2) (19.8) % 6.8 % 5.3 % Tenant leasing costs and concession commitments (3) $ 881 $ 2,053 $ 2,934 Tenant leasing costs and concession commitments per rentable square foot $ 41.89 $ 8.54 $ 11.23 Weighted average lease term (by rentable square feet) (years) (4) 8.1 9.1 9.0 Tenant leasing costs and concession commitments per rentable square foot per year $ 5.15 $ 0.94 $ 1.24 ___________________________________ (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 fixed 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 fixed 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 two new leases for approximately 7,000 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). (4) Weighted average lease term does not include specified periods of the stated lease term during which a tenant has the right to terminate their space without a termination fee, or “non-firm terms.” The total weighted average lease term for new leases and renewals executed during the year ended December 31, 2023 would be 10.6 years if such non-firm terms were included. During the year ended December 31, 2023, amounts capitalized by the Company for lease related costs, lease incentives and building, fixtures and improvements were as follows (in thousands): Year Ended December 31, 2023 Lease related costs (1) $ 1,405 Lease incentives (2) 2,431 Building, fixtures and improvements (3) 17,476 Total capital expenditures $ 21,312 ____________________________________ (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, 2023, see the Lease Expirations table under “Item 2. Properties” in this Annual Report on Form 10-K. 36 Table of Contents Results of Operations Comparison of the year ended December 31, 2023 to the year ended December 31, 2022 (dollars in thousands) The results of operations discussed in this section include the accounts of the Company and its consolidated subsidiaries for the years ended December 31, 2023 and 2022. Revenues 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, 2023 2022 2023 vs 2022 Increase/(Decrease) Rental $ 194,241 $ 207,353 $ (13,112) Fee income from unconsolidated joint venture 800 765 35 Total revenues $ 195,041 $ 208,118 $ (13,077) Rental The decrease in rental revenue of $13.1 million during the year ended December 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 property dispositions. Our portfolio occupancy rate was 80.0% and we had 75 properties with an aggregate of 8.7 million leasable square feet as of December 31, 2023, as compared to a portfolio occupancy rate of 88.8% and 81 properties with an aggregate of 9.5 million leasable square feet as of December 31, 2022. During the years ended December 31, 2023 and 2022, the Company recognized $4.3 million and $1.4 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 Arch Street Joint Venture. Fee income from unconsolidated joint venture remained consistent at $0.8 million during the years ended December 31, 2023 and 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): Year Ended December 31, 2023 2022 2023 vs 2022 Increase/(Decrease) Property operating $ 60,783 $ 61,519 $ (736) General and administrative 18,720 15,908 2,812 Depreciation and amortization 109,111 131,367 (22,256) Impairments 33,112 66,359 (33,247) Transaction related 504 675 (171) Spin related — 964 (964) Total operating expenses $ 222,230 $ 276,792 $ (54,562) 37 Table of Contents Property operating expenses Property operating expenses such as taxes, insurance, ground rent and maintenance include both reimbursable and non-reimbursable property expenses. Property operating expenses decreased during the year ended December 31, 2023 as compared to the same period in 2022, primarily due to property dispositions, offset by increases from additional property vacancies which resulted in the recognition of certain operating expenses which were previously paid directly by the tenant such as property taxes. General and administrative expenses General and administrative expenses increased $2.8 million during the year ended December 31, 2023 as compared to the same period in 2022, primarily due to increased stock compensation expense for additional equity award issuances during the year ended December 31, 2023 as well as merit base salary increases and higher employee headcount. Depreciation and amortization expenses Depreciation and amortization expenses decreased $22.3 million during the year ended December 31, 2023 as compared to the same period in 2022, primarily due to the full amortization of certain intangible assets as a result of leases expiring in accordance with their terms and early terminations, as well as disposition and impairment of real estate assets. Impairments Impairments decreased $33.2 million during the year ended December 31, 2023 as compared to the same period in 2022. The impairment charges of $33.1 million in the year ended December 31, 2023 include a total of eight properties and the charges were incurred primarily with respect to real estate assets that were sold or expected to be sold and reflect the Company’s future cash flow assumptions for agreed-upon or estimated sale proceeds, as well as changes to assumptions with regard to management’s intent to sell or lease the real estate assets. Impairment charges totaling $66.4 million with respect to 18 properties were recorded during the same period in 2022. See Note 5 – Fair Value Measures for further information. Transaction related expenses Transaction related expense remained relatively consistent during the year ended December 31, 2023 as compared to the same period in 2022. Spin related expenses During the year ended December 31, 2023, the Company incurred no spin related expenses. During the year ended December 31, 2022, the Company incurred $1.0 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): Year Ended December 31, 2023 2022 2023 vs 2022 Increase/(Decrease) Interest expense, net $ (29,669) $ (30,171) $ (502) Loss on extinguishment of debt, net $ (504) $ (468) $ 36 Other income, net $ 911 $ 223 $ 688 Equity in loss of unconsolidated joint venture, net $ (435) $ (524) $ (89) Gain on disposition of real estate assets $ 31 $ 2,352 $ (2,321) Provision for income taxes $ (456) $ (212) $ 244 38 Table of Contents Interest expense, net Interest expense, net decreased $0.5 million during the year ended December 31, 2023 as compared to the same period in 2022, which was primarily due to lower outstanding debt during the year ended December 31, 2023, partially offset by higher interest rates. The Company’s average debt outstanding for the year ended December 31, 2023 was $500.5 million, as compared to $575.0 million during the same period in 2022. Interest expense for the year ended December 31, 2023 included offsets of $6.7 million of reclassified previous gains on interest rate derivatives from accumulated other comprehensive income (loss), compared with $1.8 million reclassified gains during the same period in 2022. Loss on extinguishment of debt, net Loss on extinguishment of debt, net during the year ended December 31, 2023 related to the write off of deferred financing costs due to the early extinguishment of the Company’s Term Loan Facility, as defined below and discussed in Note 6 – Debt, Net. Loss on extinguishment of debt, net during the year ended December 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. Other income, net Other income, net increased $0.7 million during the year ended December 31, 2023 as compared to the same period in 2022, which was primarily due to interest income from money market accounts and an escrow account with the administrative agent under the Revolving Facility, as defined below. Equity in loss of unconsolidated joint venture, net Equity in loss of the unconsolidated joint venture remained relatively consistent during the year ended December 31, 2023 as compared to the same period in 2022. Gain on disposition of real estate assets Gain on disposition of real estate assets was less than $0.1 million for the year ended December 31, 2023 as compared to $2.4 million during the year ended December 31, 2022. The gain recognized in the year ended December 31, 2023 was related to three of the Company’s dispositions. These properties were subject to cumulative impairment losses of $16.0 million in prior periods. Provision for income taxes The provision for income taxes consists of certain state and local income and franchise taxes. The provision for income taxes increased $0.2 million during the year ended December 31, 2023 as compared to the same period in 2022. Comparison of the year ended December 31, 2022 to the year ended December 31, 2021 (dollars in thousands) For a comparison of the year ended December 31, 2022 to the year ended December 31, 2021, see “Item. 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K filed on March 8, 2023. Non-GAAP Measures Our results are presented in accordance with U.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. M anagement uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP. Funds From Operations (“FFO”) and Core Funds from Operations (“Core FFO”) Attributable to Orion Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“Nareit”), an industry trade group, has promulgated a supplemental performance measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental performance measure to reflect 39 Table of Contents the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined under U.S. GAAP. Nareit defines FFO as net income or loss computed in accordance with U.S. GAAP adjusted for gains or losses from disposition of real estate assets, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to the unconsolidated joint venture. We calculate FFO in accordance with Nareit’s definition described above. In addition to FFO, we use Core FFO as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. Core FFO, as defined by the Company, excludes from FFO items that we believe do not reflect the ongoing operating performance of our business such as transaction related expenses, spin related expenses and gains or losses on extinguishment of swaps and/or debt, and our pro rata share of Core FFO adjustments related to the unconsolidated joint venture. Beginning in 2023, the Company 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. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and Core FFO the same way, so comparisons with other REITs may not be meaningful. FFO and Core FFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither the SEC, Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate Core FFO and its use as a non-GAAP financial performance measure. 40 Table of Contents The table below presents a reconciliation of FFO and Core FFO to net loss attributable to common stockholders, the most directly comparable U.S. GAAP financial measure, for the years ended December 31, 2023, 2022 and 2021 (in thousands, except per share amounts): Year Ended December 31, 2023 2022 Net loss attributable to common stockholders $ (57,302) $ (97,494) Depreciation and amortization of real estate assets 109,011 131,297 Gain on disposition of real estate assets (31) (2,352) Impairment of real estate 33,112 66,359 Proportionate share of adjustments for unconsolidated joint venture 1,851 1,847 FFO attributable to common stockholders $ 86,641 $ 99,657 Transaction related 504 675 Spin related (1) — 964 Amortization of deferred financing costs (2) 3,974 4,364 Amortization of deferred lease incentives, net (2) 302 116 Equity-based compensation (2) 2,728 1,756 Loss on extinguishment of debt, net 504 468 Proportionate share of adjustments for unconsolidated joint venture 117 178 Core FFO attributable to common stockholders $ 94,770 $ 108,178 Weighted-average shares of common stock outstanding - basic and diluted 56,410 56,632 FFO attributable to common stockholders per diluted share $ 1.54 $ 1.76 Core FFO attributable to common stockholders per diluted share $ 1.68 $ 1.91 ____________________________________ (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. Liquidity and Capital Resources General Our principal liquidity needs for the next twelve months are to: (i) fund operating expenses; (ii) pay interest on our debt; (iii) pay dividends to our stockholders; (iv) fund capital expenditures and leasing costs at properties we own; and (v) fund new acquisitions, including acquisitions related to the Arch Street Joint Venture. We believe that our principal sources of short-term liquidity, which are our cash and cash equivalents on hand, cash flows from operations, proceeds from real estate dispositions, and borrowings under the Revolving Facility, are sufficient to meet our liquidity needs for the next twelve months. As of December 31, 2023, we had $22.5 million of cash and cash equivalents and $309.0 million of borrowing capacity under the Revolving Facility. Our Revolving Facility is scheduled to mature in November 2024, and we have the option to extend the maturity an additional 18 months until May 12, 2026. The extension option is subject to customary conditions, including there being no default or event of default, such as the failure to satisfy a financial or other covenant. Our ability to satisfy these conditions and continue to comply with the terms of the Revolving Facility is partially dependent upon us having a sufficient level of unencumbered asset value as defined in the credit agreement with respect to the Revolving Facility. The level of unencumbered asset value is partially dependent upon future leasing activity at the underlying properties and/or us acquiring additional properties to add to the unencumbered asset pool, and there is uncertainty about our ability to renew or re-lease properties and/or acquire additional properties at a sufficient level to meet the requirements to extend and continue to comply with the Revolving Facility. Accordingly, the extension option may not be available to us. Additionally, we do not expect to have generated sufficient cash from operations to repay the principal outstanding under the Revolving Facility, which was $116.0 million as of December 31, 2023, on its scheduled maturity date. 41 Table of Contents We have had preliminary discussions with the administrative agent of the Revolving Facility to potentially amend the facility in a manner that would result in an extension of the facility and a reduction in the amount of unencumbered asset value required under the financial covenants of the Revolving Facility. However, there is no assurance that we will be able to reach an agreement with the lenders of the Revolving Facility on favorable terms and in a timely manner, or at all. If we are unable to meet the conditions to extend and continue to comply with the Revolving Facility, or otherwise modify the Revolving Facility to allow us to extend and continue to comply with, or otherwise refinance, this facility, we might be forced to sell assets to generate cash, which might be on unfavorable terms, if at all, or we might not be able to make all required payments of principal and interest on our debt, which could result in a default, result in our lenders foreclosing on our assets, or otherwise have a material adverse effect on our financial condition and results of operations. The mortgage notes associated with the Arch Street Joint Venture are also scheduled to mature in November 2024, and the Arch Street Joint Venture has two successive one-year options to extend the maturity until November 27, 2026. The extension options are subject to satisfaction of certain conditions, including satisfaction of certain financial and operating covenants. We believe the Arch Street Joint Venture will be able to satisfy the extension conditions or otherwise extend the loan on terms mutually acceptable to the Arch Street Joint Venture and the existing lenders, but we cannot provide any assurance it will be able to do so. If the Arch Street Joint Venture is unable to extend or refinance the mortgage notes, our investment in the Arch Street Joint Venture could be materially adversely affected. Our principal liquidity needs beyond the next twelve months are to: (i) repay, extend 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 generally believe we will be able to satisfy these liquidity needs by a combination of cash flows from operations, borrowings under the Revolving Facility, proceeds from real estate dispositions, new borrowings such as bank term loans or other secured or unsecured debt, and issuances of equity securities. We believe we will be successful in either repaying or refinancing our debt obligations at or prior to maturity, but we cannot provide any assurance we will be able to do so. Our ability to extend or refinance debt, raise capital and/or sell assets will be affected by various factors existing at the relevant time, such as capital and credit market conditions, the state of the national and regional economies, commercial real estate market conditions, available interest rate levels, the lease terms for and equity in and value of any related collateral, our financial condition and the operating history of the collateral, if any. Credit Agreements Summary The following is a summary of the interest rate and scheduled maturities of our consolidated debt obligations as of December 31, 2023 (in thousands): Principal Amounts Due During the Years Ending December 31, Interest Rate Maturity Total 2024 2025 2026 2027 Credit facility revolver (1) (2) SOFR + 3.35% May 2026 $ 116,000 $ — $ — $ 116,000 $ — Mortgages payable (3) 4.971 % February 2027 355,000 — — — 355,000 Total $ 471,000 $ — $ — $ 116,000 $ 355,000 ____________________________________ (1) Includes interest rate margin of 3.25% plus SOFR adjustment of 0.10%. As of December 31, 2023, we had $60.0 million of variable rate debt outstanding under the Revolving Facility which was subject to interest rate collar agreements to hedge against interest rate volatility. Under the agreements, the benchmark rate for the Revolving Facility will float between 5.50% per annum and 4.20% per annum on $25.0 million, and 5.50% per annum and 4.035% per annum on $35.0 million, effective from November 13, 2023 until May 12, 2025. (2) The credit facility revolver matures on November 12, 2024 with an option to extend the maturity an additional 18 months to May 12, 2026 if customary conditions are satisfied. This table assumes exercise of the extension option, however, as described above, we cannot provide any assurance we will be able to satisfy the extension conditions. (3) The table above does not include mortgage notes associated with the Arch Street Joint Venture of $136.7 million as of December 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 “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”) with Wells Fargo Bank, National Association, as administrative agent, and the 42 Table of Contents lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement”) providing for a six-month, $355.0 million senior bridge term loan facility (the “Bridge Facility”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. 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. In June 2023, as further described below, the Term Loan Facility was repaid and retired with borrowings under the Revolving Facility. As of December 31, 2023, the Company had $471.0 million of total consolidated debt outstanding, consisting of a $355.0 million CMBS Loan and $116.0 million outstanding under our Revolving Facility. During the year ended December 31, 2023, the Company made net repayments of debt obligations of $59.0 million, 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, 2023. We have entered into two amendments to the Credit Agreement. The purpose of the first amendment entered into in December 2022 was to change the benchmark rate for borrowings under the Credit Agreement from LIBOR to SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York). The purpose of the second amendment entered into in June 2023 was to repay and retire $175.0 million of outstanding borrowings under the Term Loan Facility with borrowings from the Revolving Facility (which was undrawn at the time of the second amendment), provide us with the option to extend the maturity of the Revolving Facility for an additional 18 months to May 12, 2026 from November 12, 2024 and to effect certain other modifications. The extension option is subject to customary conditions including there being no default or event of default, such as the failure to satisfy a financial or other covenant, and the payment of an extension fee. As described in greater detail above, there is uncertainty about our ability to meet the requirements to extend and continue to comply with the Revolving Facility and we cannot provide any assurance we will be able to do so. Giving effect to the amendments described above, the interest rate applicable to the loans under the Revolving Facility 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 of 3.25% for SOFR loans and 2.25% for base rate loans. Loans under the Revolving Facility may be prepaid and reborrowed, and unused commitments under the Revolving Facility may be reduced, at any time, in whole or in part, by Orion OP, without premium or penalty (except for SOFR breakage costs). In December 2022, we entered into interest rate swap agreements with an aggregate notional amount of $175.0 million, which effectively fixed the interest rate on $175.0 million of principal under the Revolving Facility at 3.92% per annum until November 12, 2023. Upon the scheduled expiration of the interest rate swap agreements, we entered into interest rate collar agreements on a total notional amount of $60.0 million to hedge against interest rate volatility on the Revolving Facility. Under the agreements, the benchmark rate for the Revolving Facility will float between 5.50% per annum and 4.20% per annum on $25.0 million, and 5.50% per annum and 4.035% per annum on $35.0 million, effective from November 13, 2023 until May 12, 2025. To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25% per annum of the unused portion of the Revolving Facility. The Revolving Facility is guaranteed pursuant to a guaranty by us and, subject to certain exceptions, substantially all of Orion OP’s existing and future subsidiaries (including substantially all of its subsidiaries that directly or indirectly own unencumbered real properties), other than certain joint ventures and subsidiaries that own real properties subject to certain other indebtedness (such subsidiaries of Orion OP, the “Subsidiary Guarantors”). The Revolving Facility is secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors. Revolving Facility Covenants The Revolving Facility requires 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. Pursuant to the second amendment described above, if, on any day, Orion OP has unrestricted cash and cash equivalents in excess of $25.0 million (excluding amounts that are then designated for application or use and are subsequently used for such purposes within 30 days), 43 Table of Contents Orion OP will use such excess amount to prepay loans under the Revolving Facility, without premium or penalty and without any reduction in the lenders’ commitment under the Revolving Facility. In addition, the Revolving Facility requires that Orion OP satisfy certain financial covenants. The following is a summary of financial covenants for the Company’s Revolving Facility and the Company’s compliance therewith as of December 31, 2023, as calculated per the terms of the Credit Agreement, giving effect to the modifications pursuant to the second amendment described above. 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. Revolving Facility Financial Covenants Required December 31, 2023 Ratio of total indebtedness to total asset value ≤ 60% 38.3% Ratio of adjusted EBITDA to fixed charges ≥ 1.5x 3.5x Ratio of secured indebtedness to total asset value ≤ 40% 29.2% Ratio of unsecured indebtedness to unencumbered asset value ≤ 60% (1) 13.9% Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 7.8x Unencumbered asset value ≥ $600.0 million $775.2 million ____________________________________ (1) Pursuant to the second amendment described above, if the ratio of unsecured debt to unencumbered asset value exceeds 35% as of the end of two consecutive fiscal quarters, Orion OP will be required, within 90 days and subject to cure rights, to grant the administrative agent a first priority lien on all the properties included in the pool of unencumbered assets (other than properties identified for disposition by us so long as such properties are sold within one year of such identification). As of December 31, 2023, Orion OP was in compliance with these financial covenants. The Revolving Facility includes 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 Revolving Facility. The Revolving Facility also includes 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 Revolving Facility to be immediately due and payable and foreclose on the collateral securing the Revolving Facility. CMBS Loan On February 10, 2022, certain indirect subsidiaries of the Company (the “Mortgage Borrowers”) obtained a $355.0 million fixed rate mortgage loan (the “CMBS Loan”) from Wells Fargo Bank, National Association (together with its successor, the “Lender”), which is secured by the Mortgage Borrowers’ fee simple or ground lease interests in 19 properties owned indirectly by the Company (collectively, the “Mortgaged Properties”). During March 2022, Wells Fargo effected a securitization of the CMBS Loan. The CMBS Loan bears interest at a fixed rate of 4.971% per annum and matures on February 11, 2027. The CMBS Loan requires monthly payments of interest only and all principal is due at maturity. The proceeds of the CMBS Loan were used to repay the Bridge Facility. Upon closing of the CMBS Loan, the Mortgage Borrowers funded $35.5 million of loan reserves primarily for future rent concessions and tenant improvement allowances under the leases with respect to the 19 Mortgaged Properties. These amounts, as well as the transaction expenses incurred in connection with the CMBS Loan, were funded with cash on hand and borrowings under the Company’s Revolving Facility. The CMBS Loan is secured by, among other things, first priority mortgages and deeds of trust granted by the Mortgage Borrowers and encumbering the Mortgaged Properties. The CMBS Loan is generally not freely prepayable by the Mortgage Borrowers without payment of certain prepayment premiums and costs. The CMBS Loan may be prepaid in whole, but not in part, except as provided in the loan agreement governing the CMBS Loan (the “CMBS Loan Agreement”), at any time following the Prepayment Lockout Release Date (as defined in the CMBS Loan Agreement) (generally in March 2024, 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. 44 Table of Contents The CMBS Loan Agreement also contains customary cash management provisions, including certain trigger events (such as failure of the Mortgage Borrowers to satisfy a minimum debt yield) which allow the Lender to retain any excess cash flow as additional collateral for the Loan, until such trigger event is cured. In connection with the CMBS Loan Agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the “Guaranty”), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than $355.0 million and liquid assets of no less than $10.0 million, in each case, exclusive of the values of the collateral for the CMBS Loan. As of December 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. 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. Equity On November 10, 2021, we issued 56,525,650 additional shares of our common stock to Realty Income, such that Realty Income owned 56,625,650 shares of our common stock. On November 12, 2021, Realty Income effected the Distribution. See the section “Dividends” below for disclosure with regard to the Company’s dividend policy. 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. to Orion OP. Also on November 12, 2021, in connection with the entry into the LLCA, we granted the Arch Street Partner and Arch Street Capital Partners warrants to purchase up to 1,120,000 shares of our common stock (the “Arch Street Warrants”). The Arch Street Warrants entitle the respective holders to purchase shares of our common stock at a price per share equal to $22.42, at any time. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of our common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) if the Arch Street Joint Venture is terminated, the later of the termination of the Arch Street Joint Venture and seven years after issuance. 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. 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 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) November 12, 2024 (the third anniversary of its 45 Table of Contents 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 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, we 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. During the year ended December 31, 2022, in connection with the transition of the benchmark rate for borrowings under the Credit Agreement from LIBOR to SOFR, we 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 our borrowings under the Term Loan Facility. These swap agreements remained in effect for the $175.0 million of borrowings under the Revolving Facility used to pay down the Term Loan Facility until November 12, 2023. Upon the scheduled expiration of the interest rate swap agreements, we entered into interest rate collar agreements on a total notional amount of $60.0 million to hedge against interest rate volatility on the Revolving Facility. Under the agreements, the benchmark rate for the Revolving Facility will float between 5.50% per annum and 4.20% per annum on $25.0 million, and 5.50% per annum and 4.035% per annum on $35.0 million, effective from November 13, 2023 until May 12, 2025. Dividends We 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, 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 May 3, 2023 June 30, 2023 July 17, 2023 $0.10 August 8, 2023 September 29, 2023 October 16, 2023 $0.10 November 9, 2023 December 29, 2023 January 16, 2024 $0.10 On February 27, 2024, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the first quarter of 2024, payable on April 15, 2024, to stockholders of record as of March 29, 2024. 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 for the years ended December 31, 2024 and 2025, our dividends will exceed our net income under U.S. GAAP because of non-cash expenses, mainly depreciation and amortization expense and impairment charges, 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 46 Table of Contents 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. ATM Program 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, 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 capital expenditures and leasing costs at our properties 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. During the year ended December 31, 2023, the Company repurchased approximately 0.9 million shares of common stock in multiple open market transactions, at a weighted average share price of $5.46 for an aggregate purchase price of $5.0 million as part of the Share Repurchase Program, which are currently deemed to be authorized but unissued shares of common stock. Cash Flow Analysis for the Year Ended December 31, 2023 The following table summarizes the changes in cash flows for the year ended December 31, 2023 compared to the year ended December 31, 2022 (in thousands): Year Ended December 31, 2023 vs 2022 Increase/(Decrease) 2023 2022 Net cash provided by operating activities $ 89,088 $ 114,232 $ (25,144) Net cash provided by investing activities $ 5,289 $ 22,477 $ (17,188) Net cash used in financing activities $ (92,490) $ (110,716) $ 18,226 Net cash provided by operating activities decreased $25.1 million during the year ended December 31, 2023, compared to the same period in 2022 primarily due to a decrease in revenues overall as a result of dispositions and vacancies and an increase in general and administrative expenses due to merit base salary increases and higher employee headcount. Net cash provided by investing activities decreased $17.2 million during the year ended December 31, 2023, compared to the same period in 2022, primarily due to a decrease in proceeds from the disposition of real estate of $10.8 million as a result of fewer dispositions and an increase in capital expenditures and leasing costs of $6.8 million during the year ended December 31, 2023, compared to the same period in 2022. The Company used $18.2 million less of net cash in financing activities during the year ended December 31, 2023, compared to the same period in 2022, primarily due to lower net repayments on the Company’s Revolving Facility during the 47 Table of Contents year ended December 31, 2023 of $31.0 million, partially offset by repurchases of common stock under the Share Repurchase Program of $5.0 million, increased cash dividends to stockholders of $5.6 million and higher payments of deferred financing costs of $2.6 million during the year ended December 31, 2023, compared to the same period in 2022. VEREIT OFFICE ASSETS Critical Accounting Policies - VEREIT Office Assets Real Estate Investments VEREIT management performed quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable. Impairment indicators that VEREIT management considered included, but were not limited to, decrease in operating income, bankruptcy or other credit concerns of a property’s major tenant or tenants or a significant decrease in a property’s revenues due to lease terminations, vacancies or reduced lease rates. When impairment indicators are identified or if a property is considered to have a more likely than not probability of being disposed of within the next 12 to 24 months, VEREIT management assessed the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. U.S. GAAP required VEREIT Office Assets to utilize the expected holding period of its properties when assessing recoverability. In the event that such expected undiscounted future cash flows did not exceed the carrying value, the real estate assets have been adjusted to their respective fair values and an impairment loss has been recognized. There are inherent uncertainties in making estimates of expected future cash flows such as market conditions and performance and sustainability of the tenants. Goodwill Impairment VEREIT evaluated goodwill for impairment annually or more frequently when an event occurred or circumstances changed that indicated the carrying value may not be recoverable. To determine whether it was necessary to perform a quantitative goodwill impairment test, VEREIT first assessed qualitative factors, including, but not limited to macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or sustained decrease in VEREIT’s stock price on either an absolute basis or relative to peers. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e., greater than 50% chance) that the fair value of a reporting unit is less than its carrying 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 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. The results of the VEREIT impairment tests carry over to VEREIT Office Assets, therefore no impairments were recorded in the accompanying statements of operations. Results of Operations - VEREIT Office Assets 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 2022 and 2021 Annual Reports on Form 10-K filed on March 8, 2023 and March 24, 2022, respectively. Liquidity and Capital Resources - VEREIT Office Assets Cash Flows For a comparison of the changes in cash flows for 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 Liquidity and Capital Resources” in our 2022 and 2021 Annual Reports on Form 10-K filed on March 8, 2023 and March 24, 2022, respectively. 48 Table of Contents