Orion Office REIT Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results. The filing describes an internally managed office REIT with 81 properties and approximately 9.5 million leasable square feet in 29 states; including its pro rata share of a joint venture, the portfolio totaled 9.7 million square feet.
Financial performance and condition
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $50.2 million | $53.2 million |
| Net loss attributable to common stockholders | $8.9 million; $0.16 per share | $9.9 million; $0.17 per share |
| FFO attributable to common stockholders | $23.5 million; $0.41 per diluted share | $26.5 million; $0.47 per diluted share |
| Core FFO attributable to common stockholders | $25.3 million; $0.45 per diluted share | $29.3 million; $0.52 per diluted share |
| Cash from operating activities | $11.4 million | $28.2 million |
| Cash and cash equivalents at quarter-end | $23.8 million | $20.6 million at December 31, 2022 |
| Debt | $530.0 million principal; $526.5 million net carrying value | $530.0 million principal at December 31, 2022 |
Operating expenses were $51.7 million, including $28.2 million depreciation and amortization and $3.8 million impairment charges. Interest expense was $7.1 million. The filing does not provide a conventional profit-margin measure.
At March 31, total assets were $1.547 billion, total liabilities $586.9 million, and total equity $959.9 million. The company also reported $34.7 million of restricted cash, primarily lender-held reserves for tenant improvements and rent concessions; this is not included in cash and cash equivalents.
Principal debt comprised a $355 million fixed-rate CMBS loan at 4.971%, due February 2027, and a $175 million term loan due November 12, 2023. The term loan was effectively fixed at 3.17% through swaps. The $425 million revolving facility had no borrowings, leaving $425 million available. The company reported compliance with its credit covenants.
Material changes and operating developments
- Revenue fell $3.0 million year over year, primarily due to lower occupied square footage from vacancies and dispositions. Property occupancy was 87.2% at March 31, versus 88.1% a year earlier; the broader portfolio metric including the joint venture was 87.5%, down from 89.0% at December 31, 2022.
- Net loss narrowed by $1.0 million, but FFO and Core FFO declined. Lower depreciation and amortization and no repeat of prior-year spin costs helped reported expenses; higher impairments and general and administrative costs partly offset those benefits.
- Operating cash flow decreased $16.7 million year over year, which management attributed primarily to working-capital movements and lower income related to dispositions and vacancies.
- Three properties incurred $3.8 million of impairments, compared with two properties and $1.6 million in Q1 2022. The charges reflected estimates of sale values, leasing prospects, and management’s sale or leasing plans.
- Leasing activity included 15,000 square feet of new leases and 68,000 square feet of renewals. Reported cash rental-rate changes were negative 20.3% for new leases and positive 26.9% for renewals, based on the filing’s stated methodology.
- Two leases expired, reducing occupied space by approximately 0.2 million square feet. Six properties were vacant at quarter-end, two of which were being marketed for sale.
Outlook, risks, and unusual items
- Management expects to extend, repay, refinance, or combine these approaches for the $175 million term loan before its November 2023 maturity. It says available revolver capacity could repay the loan if needed, but gives no assurance refinancing will be timely or on favorable terms. No specific earnings or revenue guidance is provided.
- Management cites elevated interest rates, inflation, recession concerns, office-space oversupply, remote-work trends, tenant credit risk, and constrained commercial real estate lending as risks to leasing, cash flow, and financing.
- As of May 9, 2023, the company had pending agreements to sell eight non-core properties for an aggregate gross price of $41.0 million. The deals remained subject to customary conditions and could be terminated; no Q1 dispositions were completed.
- Outstanding commitments included $50.0 million for tenant improvement allowances and $0.3 million for leasing commissions. The timing of tenant-improvement cash outlays is uncertain; $34.7 million of lender-held restricted cash was available for specified tenant-related reserves.
- Q1 rental revenue included $1.6 million of lease termination income, compared with none in the prior-year quarter. The quarterly dividend was $0.10 per share; the board declared the same amount for Q2 2023.
- Core FFO is a non-GAAP measure whose definition was revised in 2023 and applied retrospectively. The company cautions that FFO and Core FFO are not substitutes for GAAP results or measures of cash available for liquidity needs.
Key facts for investors to verify
- Whether the term loan is refinanced, extended, or repaid before its November 2023 maturity, and the resulting financing cost and covenant headroom.
- Progress and final proceeds from the eight pending property sales, including whether any transactions are terminated or delayed.
- Lease expirations, occupancy, vacant-property leasing or sale plans, and whether reported renewal rental increases offset weak new-lease pricing.
- Actual tenant-improvement spending against the $50.0 million commitment and the availability and permitted use of restricted reserves.
- Whether operating cash flow and FFO remain sufficient to support the dividend amid leasing costs, vacancies, and refinancing needs.
- Impairment assumptions and subsequent changes in estimated property values or leasing prospects.