Business Context and Reporting Period
Orion Office REIT Inc. filed a Form 8-K relating to the completion of its spin-off from Realty Income Corporation. Although the report date is November 10, 2021 and the report was signed November 15, the principal separation, financing and distribution events occurred on November 12, 2021.
Orion became an independent, publicly traded REIT with a portfolio of 92 office properties and related assets totaling approximately 10.5 million total leasable square feet. Its common stock, trading under the symbol ONL, was expected to begin regular-way trading on the NYSE on November 15, 2021.
Key Financial Metrics and Capitalization
| Metric | Reported amount or terms |
|---|---|
| Consolidated outstanding indebtedness at separation | $620.0 million |
| Cash at separation | Approximately $15.6 million |
| Revolving facility availability | $335.0 million |
| Revolving facility | $425 million senior unsecured facility, including a $25 million letter-of-credit sub-facility; three-year maturity |
| Term loan facility | $175 million senior unsecured facility; two-year maturity; fully drawn |
| CMBS bridge facility | $355 million senior unsecured bridge facility; six-month maturity, with one six-month extension option; fully drawn |
| Borrowings funded at separation | $90 million under the revolving facility; term loan and CMBS bridge facilities fully drawn |
| Cash distributed to Realty Income | Approximately $595 million of net financing proceeds |
| Portfolio | 92 office properties and approximately 10.5 million total leasable square feet |
| Revenue, net income, funds from operations and operating cash flow | The filing text does not provide clear period-specific values. |
Facility pricing is based on LIBOR or a base rate plus applicable margins. Revolving and term loan margins are 2.50% for LIBOR loans and 1.50% for base-rate loans. The CMBS bridge margin initially ranges from 2.50% for LIBOR loans and 1.50% for base-rate loans, increasing over time to maximums of 3.50% and 2.50%, respectively. A 0.25% quarterly commitment fee applies to unused revolving commitments.
Material Changes Versus the Prior Comparable Period
- Orion was separated from Realty Income and became an independent REIT; the filing does not present comparable prior-period operating results.
- Realty Income distributed one Orion share for every ten Realty Income shares held as of November 2, 2021. Realty Income distributed all of its Orion shares to its stockholders.
- Orion issued 56,525,650 additional common shares to Realty Income, resulting in Realty Income holding 56,625,650 shares before the distribution.
- Orion assumed or received the Orion office-property business and entered into new credit facilities, resulting in $620.0 million of consolidated debt at separation.
- Orion entered into transition, tax, employee matters and separation agreements with Realty Income and related parties.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue, earnings, FFO, occupancy, dividend or other operating guidance.
- Credit agreements impose financial covenants, including total debt to total asset value of no more than 0.60 to 1.00, adjusted EBITDA to fixed charges of at least 1.50 to 1.00, secured debt to total asset value of no more than 0.45 to 1.00, unsecured debt to unencumbered asset value of no more than 0.60 to 1.00, and unencumbered-property net operating income to unsecured interest expense of at least 2.00 to 1.00.
- Defaults could permit lenders to accelerate obligations and foreclose on collateral. The facilities are guaranteed by Orion and, subject to exceptions, substantially all of Orion OP’s existing and future subsidiaries; equity interests in subsidiary guarantors are pledged.
- The CMBS bridge facility creates a near-term refinancing or repayment requirement unless the extension option is exercised.
- Orion entered into an Arch Street joint venture arrangement and granted affiliates of the Arch Street partner warrants to purchase up to 1,120,000 shares. The exercise price is based on 115% of the 30-day volume-weighted average share price during the first 30 trading days.
- A right-of-first-offer agreement generally requires Orion to first offer qualifying office-property acquisitions to the Arch Street joint venture and expires upon specified events, including three years after execution or termination of the joint venture.
- The 2021 Equity Incentive Plan authorizes up to 3,700,000 shares for equity awards. Initial restricted stock unit awards were granted to certain executives and directors.
- The filing reflects substantial execution and integration risk associated with establishing standalone information technology, accounting, administrative, tax, treasury and employee functions. Transition services from Realty Income are intended to support certain functions.
Governance and Organizational Changes
- A five-member board was appointed, with Gregory J. Whyte as non-executive chair. Paul McDowell became chief executive officer and president; Gavin Brandon became chief financial officer, executive vice president, treasurer and secretary; Chris Day became chief operating officer and executive vice president; and Gary Landriau became chief investment officer and executive vice president.
- The amended and restated articles authorized 100 million common shares and 20 million preferred shares and included REIT ownership and transfer restrictions.
- The 2021 Equity Incentive Plan and indemnification agreements for directors and executive officers were adopted in connection with the spin-off.
Important Facts for Investors to Verify
- Confirm the effective date and trading commencement date, given that the report date is November 10 while the distribution and financing events occurred November 12.
- Review the full credit agreements for bridge-loan maturity, extension conditions, interest-rate increases, covenants, guarantees and collateral.
- Assess the refinancing requirement associated with the $355 million CMBS bridge facility.
- Reconcile the $620.0 million debt balance, approximately $15.6 million cash balance and $335.0 million revolving availability to the opening balance sheet.
- Review the Information Statement and separation agreements for transferred assets, assumed liabilities, tax allocations, indemnities and transition-service obligations.
- Evaluate potential dilution from the 1,120,000 Arch Street warrants and the 3,700,000-share equity incentive plan.
- Obtain subsequent filings for operating results, occupancy, dividends, FFO, liquidity and compliance with financial covenants, none of which are clearly provided in this 8-K.