Business context and reporting period
This is Orion Office REIT Inc.’s Form 10-K for the fiscal year ended December 31, 2022, not a standalone fourth-quarter report. The company is an internally managed REIT focused on suburban U.S. office properties, primarily leased to single tenants on a net-lease basis. Orion became independent in November 2021 after Realty Income’s separation and distribution of the business. Accordingly, 2021 comparisons include predecessor and merger-related periods and are not fully comparable with 2022.
Financial and operating highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $208.1 million | $79.7 million |
| Net loss | $97.5 million | $47.5 million |
| Net loss per share | $1.72 | $0.84 |
| FFO per diluted share | $1.76 | $0.82 |
| Core FFO per diluted share | $1.80 | $1.03 |
| Cash from operating activities | $114.2 million | $56.1 million |
- Revenue growth primarily reflects the larger portfolio following the November 2021 merger and separation. On a comparison including the VEREIT office assets’ pre-merger 2021 results, rental revenue decreased $6.8 million, primarily due to lower occupancy and property dispositions.
- Net loss includes $66.4 million of real estate impairment charges, compared with $49.9 million in 2021, and $131.4 million of depreciation and amortization. FFO and Core FFO are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
- Cash from investing activities was $22.5 million, including $31.9 million of disposition proceeds; cash used in financing activities was $110.7 million. Cash and cash equivalents were $20.6 million at year-end; an additional $34.7 million was restricted, primarily for tenant improvements and concessions.
- Gross consolidated debt was $530 million at year-end: a $355 million fixed-rate mortgage loan at 4.971% due February 2027 and a $175 million term loan due November 2023, swapped to a fixed 3.17% rate. Debt carrying value, net of financing costs, was approximately $526 million. The $425 million revolving facility was undrawn. Orion reported compliance with its debt covenants.
- Portfolio including Orion’s pro rata share of its unconsolidated joint venture: 9.7 million square feet, 89.0% occupancy and 4.1-year weighted-average remaining lease term at year-end. Occupancy declined from 91.9% in 2021; investment-grade tenants represented 73.3% of annualized base rent.
Material changes and notable items
- Orion completed no property acquisitions in 2022. It sold 11 non-core properties for gross proceeds of $33.1 million and reported $2.4 million of disposition gains. As of March 8, 2023, seven additional sales were pending, with a stated aggregate gross price of $36.6 million; completion was not assured.
- Lease expirations and downsizing reduced occupied space by approximately 0.9 million square feet, while the company completed approximately 0.8 million square feet of new, renewal and expansion leases. It committed $30.1 million to leasing costs and concessions during 2022; year-end outstanding commitments included $51.2 million for tenant improvements and $0.3 million for leasing commissions.
- The board declared quarterly dividends of $0.10 per share throughout 2022 and declared the same rate for first-quarter 2023. The 2022 dividends were characterized as 100% nondividend distributions for federal tax purposes.
- In November 2022, Orion established a $100 million at-the-market stock offering program and authorized up to $50 million of share repurchases through December 31, 2025. It had made no ATM sales or program repurchases through the dates disclosed in the filing.
Outlook, risks and contingencies
- Management said leasing has been affected by rising rates and inflation, recession concerns and persistent remote-work trends. It expects slower new leasing and uncertainty around tenant space needs, which could reduce future rental revenue. No numerical earnings or revenue guidance was provided.
- Management considers cash, operating cash flow, dispositions and revolving-facility capacity sufficient for the next 12 months, including to address the $175 million term-loan maturity in November 2023; refinancing or repayment on favorable terms is not assured.
- Key risks include vacancies and lease renewals, single-tenant and government-tenant concentration, tenant defaults or early terminations, office-market demand, refinancing and interest rates, inflation-driven costs, and asset impairments. The General Services Administration accounted for 11.9% of annualized base rent; Texas and New Jersey accounted for 15.0% and 12.0%, respectively.
- Management recorded impairments on 18 properties in 2022, based on estimated sales values and leasing assumptions. Those estimates are sensitive to market conditions, lease-up timing, rents, tenant improvements and capitalization and discount rates.
- The filing reports no material pending legal proceedings and no known environmental matter expected to have a material adverse effect. Management concluded disclosure controls and internal control over financial reporting were effective; the external auditor did not provide an internal-control attestation because Orion qualified as an emerging growth company.
Important facts for investors to verify
- Progress and terms for refinancing or repaying the November 2023 term loan, and continued compliance with debt covenants.
- Lease expirations, renewals, vacancy trends and actual leasing costs, especially for 2023–2025 maturities.
- Whether pending property sales close at expected prices and how proceeds are used.
- Cash available for distributions after debt service, capital spending and tenant-improvement commitments; the board may change the dividend.
- The assumptions supporting impairment valuations and management’s Core FFO definition, which changes in 2023 to exclude additional non-cash items.