Orion Office REIT Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The filing is unaudited. Orion is a U.S. office REIT whose properties are leased primarily on a single-tenant net-lease basis.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $49.1 million | $51.8 million | $151.3 million | $157.8 million |
| Net loss attributable to common stockholders | $16.5 million | $53.0 million | $41.1 million | $78.5 million |
| Basic and diluted loss per share | $0.29 | $0.94 | $0.73 | $1.39 |
| FFO per diluted share | $0.39 | $0.42 | $1.24 | $1.36 |
| Core FFO per diluted share | $0.43 | $0.45 | $1.35 | $1.47 |
Amounts are in U.S. dollars. FFO and Core FFO are non-GAAP supplemental measures, not substitutes for GAAP results or measures of cash available for distributions. The company revised its Core FFO definition in 2023 and retrospectively applied it to comparatives.
- Cash flow, nine months: Operating activities provided $69.6 million, versus $85.9 million a year earlier. Investing activities provided $3.2 million, versus $16.7 million. Financing activities used $27.9 million, versus $73.5 million.
- Liquidity at September 30: Cash and cash equivalents were $32.3 million; restricted cash was $67.9 million, primarily lender reserves and cash pledged for revolver repayment. The revolving facility had $175 million drawn and $250 million of stated available capacity. Management said expected sources, including operating cash flow, dispositions and revolver capacity, should meet needs for the next 12 months.
- Debt: Total consolidated principal debt was $530 million ($527.7 million net of deferred financing costs): a $355 million fixed-rate mortgage loan at 4.971%, maturing February 2027, and $175 million under the revolving facility. Weighted-average debt interest rate was 4.63%; weighted-average maturity was 3.1 years. The company reported compliance with its revolving-facility covenants.
- Balance sheet: Total assets were $1.504 billion, total liabilities $595.1 million, and total equity $909.3 million. Accumulated deficit was $237.0 million.
- Dividends and repurchases: Quarterly dividend was $0.10 per share for each of the first three quarters; a fourth-quarter $0.10 dividend was declared after quarter-end. The company repurchased about 916,000 shares in Q3 for $5.0 million at a weighted-average $5.46 per share.
Changes versus prior comparable periods
- Q3 revenue declined $2.7 million year over year; nine-month revenue declined $6.5 million. Management attributed the decrease principally to vacancies and dispositions.
- Portfolio occupancy was 80.1% for company-owned properties at September 30, compared with 88.0% a year earlier. Including the company’s pro rata share of its joint venture, occupancy was 80.5%; management cited 88.7% adjusted for properties sold after quarter-end or under sale agreement. Portfolio size fell to 79 properties and 9.3 million leasable square feet from 87 properties and 10.0 million square feet a year earlier.
- Q3 impairment expense was $11.4 million, down from $44.8 million; nine-month impairment expense was $27.0 million, down from $54.2 million. The charges related to six properties in the 2023 nine-month period and reflected expected sale proceeds and revised plans or assumptions for sale or leasing.
- Net loss narrowed, primarily alongside lower impairment and depreciation and amortization expenses. FFO and Core FFO per share nevertheless declined year over year.
- Operating cash flow decreased $16.3 million for the nine months, primarily due to lower revenue and increased receivables and other assets. Capital expenditures and leasing costs were $12.7 million in the cash flow statement.
Outlook, commentary and risks
- No specific earnings or FFO guidance was provided. Management said leasing is being hindered by rising rates and inflation, recession concerns, office-space oversupply and ongoing remote-work trends. It expects slower new leasing and said some anticipated leasing may be delayed, reduced or eliminated.
- Lease maturities and vacancies are significant: the weighted-average remaining lease term was 3.9 years. Twelve leases expired or terminated during the first nine months, including approximately 1.1 million square feet associated with a former Walgreens campus. One further lease covering 0.3 million square feet terminated on November 1, 2023.
- Leasing commitments included $44.3 million of tenant improvement allowances and $0.3 million of leasing commissions; timing of cash outlays is uncertain. Management expects these commitments to be funded over 2023–2035.
- The $175 million interest-rate swap was scheduled to expire November 12, 2023. After expiration, the revolver borrowing cost would float with short-term rates unless refinanced or hedged. The company reported $33.2 million in restricted cash set aside to prepay revolver borrowings upon swap expiration.
- Management identified refinancing, interest-rate, tenant credit, vacancy, rent concessions, property values, lease renewals and access to capital as risks. It cautioned that it cannot assure favorable or timely refinancing or asset sales. The revolving facility’s maturity is November 2024, with an extension option to May 2026 subject to conditions and a fee.
- Management stated that dividends may exceed GAAP net income in 2023 and 2024, principally due to non-cash depreciation, amortization and impairment charges. Future dividends remain at the board’s discretion and depend on available funds and REIT distribution requirements.
- Subsequent events included a $1.4 million gross sale of one property in October, two October lease transactions, and agreements as of November 9 to sell nine properties for an aggregate $46.6 million, subject to conditions and possible termination by buyers.
- Impairment valuations depend on management estimates, including sale prices, capitalization and discount rates, operating costs and re-leasing assumptions. The company reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls at quarter-end.
Most important facts for investors to verify
- Whether the nine pending property sales close, at what prices, and how sale proceeds are applied to debt and leasing needs.
- Post-quarter occupancy, lease expirations and renewals, particularly the space affected by the November 1 termination and the ability to re-lease vacant properties.
- The effect of the November 2023 swap expiration on revolver interest costs and whether the planned restricted-cash prepayment or new hedges reduce exposure.
- Available, unrestricted liquidity after lender reserves, required revolver prepayments, tenant improvements and dividends.
- Whether tenant improvement commitments, leasing concessions and the $0.10 quarterly dividend remain supportable under operating cash flows and REIT distribution requirements.