Orion Office REIT Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing is for Orion Office REIT Inc. (NYSE: ONL); it is an annual report, not a quarterly filing. The company is an internally managed REIT focused on U.S. suburban office properties, primarily leased to single tenants on a net-lease basis.
Business and portfolio
- At year-end, Orion owned and operated 75 properties totaling 8.7 million square feet across 29 states. Including its pro rata share of the Arch Street Joint Venture, the portfolio totaled 8.9 million square feet.
- Portfolio occupancy, including the joint venture, was 80.4%, or 87.2% excluding properties under sale agreement; weighted-average remaining lease term was 4.0 years.
- The General Services Administration was the largest tenant at 13.5% of annualized base rent. Texas represented 17.2%; New Jersey and New York each represented 10.2%.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $195.0 million | $208.1 million |
| Net loss attributable to common stockholders | $57.3 million | $97.5 million |
| Basic and diluted loss per share | $1.02 | $1.72 |
| FFO attributable to common stockholders | $86.6 million; $1.54 per diluted share | $99.7 million; $1.76 per diluted share |
| Core FFO attributable to common stockholders | $94.8 million; $1.68 per diluted share | $108.2 million; $1.91 per diluted share |
| Net cash provided by operating activities | $89.1 million | $114.2 million |
| Capital expenditures and leasing costs | $18.4 million | $11.6 million |
Revenue was primarily rental income ($194.2 million). No operating-margin measure is stated in the filing summary; GAAP operating expenses exceeded revenue, with depreciation, amortization and impairment charges materially affecting reported results. FFO and Core FFO are non-GAAP measures, not substitutes for GAAP earnings or measures of cash available for all obligations.
- Balance sheet and liquidity: Total assets were $1.424 billion and total liabilities $536.9 million. Cash and cash equivalents were $22.5 million; an additional $34.7 million was restricted, principally for tenant improvements and rent concessions. The $425 million revolver had $116.0 million drawn and $309.0 million of stated availability.
- Debt: Consolidated principal debt was $471.0 million: a $355.0 million fixed-rate mortgage loan at 4.971%, maturing February 2027, and $116.0 million under the floating-rate revolver. The revolver’s stated maturity is November 12, 2024, with an option to extend to May 12, 2026 if conditions are met. Its year-end effective rate was 8.66%. The company’s pro rata share of Arch Street JV mortgage debt was $27.3 million; the JV’s total mortgage notes were $136.7 million.
- Dividends: The company declared $0.10 per share each quarter in 2023, or $0.40 per share for the year, and declared another $0.10 quarterly dividend in February 2024. Dividends are at the board’s discretion; the filing expects 2024 and 2025 dividends to exceed GAAP net income because of non-cash expenses.
Changes versus 2022
- Revenue declined $13.1 million, mainly from vacancies and property dispositions. Year-end occupancy including the JV fell to 80.4% from 89.0%; property count declined from 81 to 75 and square footage from 9.7 million to 8.9 million.
- Net loss narrowed by $40.2 million, primarily as impairment charges declined to $33.1 million from $66.4 million and depreciation and amortization declined. The loss nevertheless remained substantial.
- FFO fell $13.0 million and Core FFO fell $13.4 million. Operating cash flow declined $25.1 million.
- Orion recorded $33.1 million of impairment charges across eight properties, mainly tied to assets sold or expected to be sold. It completed six vacant-property sales for $25.4 million and reported $31,000 of disposition gain.
- Leasing remained pressured: 16 leases expired or were downsized, reducing occupied space by about 1.6 million square feet. New and renewal leases covered 261,000 square feet; reported cash rental-rate change was 5.3% overall, including a 19.8% decline on new leases and a 6.8% increase on renewals.
Outlook, risks and unusual items
- Management cited remote and hybrid work, office-market oversupply, slower leasing, inflation, rising interest rates and uncertainty about tenants’ future space needs. It expects slower new leasing and warns some anticipated leasing may be delayed, reduced or eliminated.
- Fifteen leases representing 27.9% of portfolio annualized base rent were scheduled to expire in 2024. At year-end, 12 operating properties were vacant, including three vacant for more than one year. Six of the 12 vacant properties had pending sale agreements.
- The revolver presents a significant refinancing and covenant risk. Orion said it did not expect operating cash to repay the $116.0 million outstanding at scheduled maturity. An extension depends on customary conditions, including covenant compliance and adequate unencumbered asset value. Management reported preliminary lender discussions and said it believed an agreement or satisfaction of extension conditions was probable, but provided no assurance of success. The Arch Street JV’s mortgage notes also mature in November 2024, subject to extension options.
- As of February 27, 2024, seven additional property sales were under agreement for $46.0 million in aggregate, subject to customary conditions and possible termination. Management intends to continue selling vacant and non-core assets; proceeds are expected to support debt reduction, capital spending and leasing costs.
- Outstanding commitments included $42.3 million for tenant improvement allowances and $0.3 million for leasing commissions, with cash outlays expected over 2024–2035. Lease-related commitments and concessions may increase.
- Orion made no acquisitions in 2023. The $100 million ATM program had no sales through year-end. It repurchased approximately 0.9 million shares for $5.0 million during 2023; $45.0 million remained authorized under the repurchase program at year-end.
- The filing reports no material pending litigation and no cybersecurity incident that had materially affected or was reasonably likely to materially affect the company. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness because Orion qualified as an emerging growth company.
Important facts for investors to verify
- Progress and final terms of the revolver extension, refinancing or amendment; covenant headroom and availability of the stated $309.0 million capacity.
- Lease renewals, tenant departures and leasing costs—especially 2024 expirations, the 1.6 million-square-foot reduction in occupied space, and the difference between reported occupancy and occupancy adjusted for sale agreements.
- Completion and net proceeds of the seven pending sales, and whether further dispositions require discounts or impair future rental income.
- Cash available for dividends after debt service, capital expenditure and leasing commitments; note that 2023 distributions were characterized as 100% nondividend distributions for tax purposes, and future dividends are not assured.
- The assumptions and valuations behind impairment charges, seller-financed property loans, and the Arch Street JV’s debt extension or refinancing.