Orion Office REIT Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Orion is a publicly traded office REIT (NYSE: ONL), spun off from Realty Income in November 2021. The 2021 comparative results largely reflect Realty Income office assets before the spin-off; the periods are not directly comparable in scale or as standalone-company results.
Business and portfolio
At September 30, Orion owned 87 office properties totaling approximately 10.0 million rentable square feet across 29 states, plus a 20% interest in a joint venture owning six properties. Including its pro rata share of the joint venture, occupancy was 88.2%, 69.9% of annualized base rent came from investment-grade tenants, and the weighted-average remaining lease term was 3.9 years.
Financial performance
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Total revenue | $51.8 million | $157.8 million |
| Net income (loss) | $(53.0) million | $(78.5) million |
| Net income (loss) per share | $(0.94) | $(1.39) |
| FFO attributable to common stockholders | $23.8 million; $0.42 per diluted share | $76.8 million; $1.36 per diluted share |
| Core FFO attributable to common stockholders | $24.0 million; $0.42 per diluted share | $78.6 million; $1.39 per diluted share |
Revenue rose sharply against the reported 2021 periods primarily because the portfolio expanded following the 2021 merger and separation. On a broader comparison including VEREIT Office Assets, management said rental revenue declined $2.2 million in Q3 and $3.1 million for the nine months, primarily reflecting lower occupancy and dispositions. Occupancy was 88.2% at September 2022 versus 93.9% at September 2021 on that comparable portfolio basis.
Impairments were $44.8 million in Q3 and $54.2 million for the nine months, reflecting ten properties identified for potential sale or not expected to be re-leased by existing tenants. Depreciation and amortization was $32.7 million in Q3 and $100.9 million year to date. The filing does not present a single operating-margin measure.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $85.9 million; investing cash flow was positive $16.7 million, including real estate sale proceeds; financing cash flow was negative $73.5 million.
- At September 30, cash and cash equivalents were $23.3 million. Restricted cash was $35.1 million, primarily lender-held reserves for rent concessions and tenant improvements; it is not freely available liquidity.
- Gross consolidated debt was approximately $561 million ($556.5 million net of deferred financing costs), with a 4.45% weighted-average interest rate and 3.2-year weighted-average maturity. The debt comprises a $355 million fixed-rate CMBS loan, a $175 million term loan, and $31 million drawn on the revolver.
- The CMBS loan carries a 4.971% fixed rate, is interest-only, and matures in February 2027. The term loan matures in November 2023 and is swapped to a fixed rate of 3.19%; the revolver rate was 5.53% at quarter-end. The revolver had $394 million available.
- Management reported compliance with debt covenants. The reported total debt-to-asset-value ratio was 30.7% against a 60% maximum, and adjusted EBITDA-to-fixed-charges was 4.42x against a 1.5x minimum.
Changes, outlook and risks
Orion refinanced its $355 million bridge facility in February 2022 with the CMBS loan. During the first nine months, it sold five non-core properties for $23.1 million; through November 1, it sold two more for $5.3 million and had agreements to sell four additional properties for $15.9 million, subject to buyer due diligence and other customary conditions. Three properties were classified as held for sale at quarter-end.
Leasing activity included renewals covering 379,000 square feet and a 41,000-square-foot expansion. Eight lease expirations or downsizings reduced occupied space by approximately 632,000 square feet. New and renewal leases signed during the nine months had a weighted-average cash rental-rate change of negative 4.2%; tenant leasing costs and concession commitments totaled $10.5 million. Management emphasized leasing and expected rent concessions and leasing costs to vary with market conditions and upcoming expirations.
No numeric earnings or operating guidance is provided. Management said cash, operating cash flow, dispositions and revolver availability were expected to meet liquidity needs for the next 12 months, while noting there is no assurance it can refinance debt or raise capital on favorable terms. The board declared a $0.10-per-share Q4 2022 dividend after three $0.10 quarterly dividends earlier in 2022. Management cautioned dividends are discretionary and may exceed GAAP net income; future distributions could depend on borrowing or asset sales.
Principal risks include office-market oversupply, tenant credit and lease-renewal risks, vacancies and concession costs, inflation, rising interest rates and refinancing, asset-sale execution, and impairment estimates that rely on management assumptions. The CMBS loan has prepayment restrictions and lender cash-management triggers. No material pending legal proceedings were reported; management stated disclosure controls were effective.
Important facts for investors to verify
- Whether pending non-core property sales close at the stated prices and how proceeds affect debt and liquidity.
- Lease expirations, occupancy trends, tenant credit quality, and the cost and rental terms of re-leasing space.
- Ability to refinance the November 2023 term loan and meet future debt obligations, including covenant compliance and variable-rate exposure.
- Availability and intended use of the $35.1 million restricted reserve, and whether operating cash flow supports dividends and leasing needs.
- Impairment assumptions and the continuing effect of property valuations and dispositions on reported earnings and FFO.