Orion Office REIT Inc. — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022, Orion owned 92 office properties totaling approximately 10.5 million leasable square feet across 29 states and Puerto Rico. Including its pro rata share of an unconsolidated joint venture, the portfolio comprised 10.6 million square feet, was 88.3% occupied, and had a 4.1-year weighted-average remaining lease term. Orion became an independent public company in November 2021 after the Realty Income/VEREIT transaction and intends to qualify as a REIT.
Period comparisons require caution: 2022 reflects Orion and its subsidiaries, while the 2021 comparison in the primary statements reflects Realty Income Office Assets under common control. VEREIT Office Assets are presented separately for 2021. The filing says these historical results are not necessarily indicative of Orion as an independent company.
Financial and operating performance
| Metric | Q1 2022 | Comparable period / balance date |
|---|---|---|
| Total revenue | $53.2 million | $13.0 million in the primary 2021 comparison |
| Net income (loss) attributable to common stockholders | $(9.9) million; $(0.17) per share | $4.6 million; $0.08 per share in the primary 2021 comparison |
| FFO / Core FFO attributable to common stockholders | $26.7 million / $28.0 million; $0.47 / $0.49 per diluted share | $10.5 million for each measure in 2021 |
| Cash provided by operating activities | $28.2 million | $11.2 million in 2021 |
| Cash and cash equivalents | $18.6 million | $29.3 million at December 31, 2021 |
| Restricted cash | $35.5 million | None at December 31, 2021 |
| Debt | $621.0 million outstanding principal; $615.4 million net carrying amount | $620.0 million outstanding principal at December 31, 2021 |
Revenue and operating expenses rose substantially in the reported comparison largely because Orion’s portfolio grew following the transaction. Including VEREIT Office Assets in the 2021 comparison, management said rental revenue increased $1.9 million, primarily from reimbursements, partly offset by $2.1 million related primarily to vacancies. GAAP net loss included $34.4 million of depreciation and amortization and $1.6 million of impairment charges. No conventional operating-margin guidance or target was provided.
Net cash used in investing activities was $1.2 million and net cash used in financing activities was $2.2 million. Cash, cash equivalents and restricted cash totaled $54.1 million, of which $35.5 million was restricted, primarily for future rent concessions and tenant improvements. The $425 million revolving facility had $91 million drawn and $334 million available. Consolidated debt had a 4.17% weighted-average interest rate and 3.6-year weighted-average maturity; the company’s pro rata share of unconsolidated joint-venture mortgage debt was $27.3 million.
Debt, distributions and material developments
- In February 2022, Orion refinanced its $355 million bridge facility with a $355 million fixed-rate CMBS loan bearing 4.971% interest and maturing February 11, 2027. The loan is interest-only, secured by 19 properties, and generally has significant prepayment restrictions. The refinancing generated a $0.5 million debt-extinguishment loss.
- Orion had $175 million of term-loan debt, effectively fixed through interest-rate swaps, and $91 million outstanding on its variable-rate revolver. A 100-basis-point rate change would affect annual interest expense on the unhedged variable-rate debt by approximately $0.9 million, based on the filing’s sensitivity analysis.
- Orion reported compliance with its credit-facility financial covenants and the CMBS guaranty’s minimum-net-worth and liquidity requirements as of March 31, 2022.
- The board declared a first independent-company quarterly dividend of $0.10 per share, paid April 15, 2022. A further $0.10-per-share dividend was declared May 3, payable July 15, 2022.
- During the quarter, three leases covering approximately 425,000 square feet expired; Orion reported ten vacant properties. It delivered or expanded about 44,000 square feet of space and extended three leases covering approximately 137,000 square feet.
- Orion entered binding contracts to sell two properties for $9.3 million in total; the sales remained subject to customary conditions, including buyer due diligence, and could fail to close.
Outlook, risks and contingencies
Management said cash on hand, operating cash flow and revolver availability were expected to meet liquidity needs for the next 12 months. Longer-term needs include debt repayment or refinancing, property capital expenditures and acquisitions; management cannot assure that refinancing, capital raising or asset sales will be available on favorable terms. No specific earnings or revenue guidance was provided.
Key risks cited include rising interest rates and inflation, office-space supply and demand, tenant credit and defaults, vacancies and lease renewals, leasing concessions and tenant-improvement costs, refinancing and capital-market access, COVID-19 effects, impairments, and execution of property sales and acquisitions. CMBS cash-management provisions may allow the lender to retain excess cash if specified triggers occur. Re-leasing commitments, including concessions and tenant improvements, could be significant. Orion reported no material pending legal proceedings and no known environmental matter expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess comparability of the 2021 carve-out results with Orion’s post-separation results, including the impact of merger-related fair-value accounting and standalone public-company costs.
- Track occupancy, the ten vacant properties, lease expirations and renewals, and the costs of concessions and tenant improvements.
- Review the maturity and refinancing profile, variable-rate exposure, swap coverage, CMBS prepayment limits and cash-reserve restrictions.
- Confirm whether the two proposed property sales close and whether proceeds or impairments differ from current estimates.
- Evaluate dividend sustainability against cash generation and FFO; FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Monitor REIT qualification and distribution requirements, as well as tenant and office-market conditions that could affect rent collection and asset values.