Orion Office REIT Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. The filing is for Orion Office REIT Inc. (NYSE: ONL), an internally managed office REIT. At quarter-end, it owned 91 office properties totaling about 10.4 million leasable square feet; including its pro rata joint-venture interest, the portfolio totaled 10.5 million square feet.
Financial highlights
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Total revenue | $52.8 million | $106.1 million |
| Net income (loss) | $(15.6) million | $(25.5) million |
| Net income (loss) per share, basic and diluted | $(0.27) | $(0.45) |
| FFO attributable to common stockholders | $26.5 million; $0.47 per diluted share | $53.0 million; $0.94 per diluted share |
| Core FFO attributable to common stockholders | $26.8 million; $0.47 per diluted share | $54.6 million; $0.96 per diluted share |
| Net cash from operating activities | Not separately stated here | $51.8 million |
Quarterly revenue included $52.7 million of rental revenue and $0.2 million of joint-venture fee income. Q2 operating expenses were $60.4 million, including $33.8 million of depreciation and amortization and $7.8 million of impairment charges. Interest expense was $7.9 million. GAAP net loss reflects substantial non-cash depreciation and amortization; FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP results or cash flow.
At June 30, total assets were $1.714 billion and total equity was $1.058 billion. Cash and cash equivalents were $19.3 million; a further $35.3 million was restricted, primarily for property rent concessions and tenant-improvement allowances. Six-month investing cash flow was positive $1.3 million and financing cash flow was negative $27.8 million.
Debt, liquidity and distributions
- Debt outstanding was approximately $601 million gross, or $596.0 million net of deferred financing costs. The weighted-average interest rate was 4.34%, with 3.4 years’ weighted-average maturity.
- In February, Orion refinanced its $355 million bridge facility with a $355 million CMBS loan bearing fixed interest at 4.971%, maturing February 2027. The loan is interest-only, secured by 19 properties, and generally has prepayment restrictions. Related reserves included $35.5 million, largely for tenant concessions and improvements.
- At quarter-end, $71 million was drawn on the $425 million revolving facility, leaving $354 million available; the $175 million term loan was also outstanding. The term loan is variable-rate debt hedged with swaps through November 2023. A 100-basis-point rate change was estimated to alter annual interest expense on the unhedged variable-rate debt by about $0.7 million.
- Orion reported compliance with its credit-facility financial covenants and CMBS guaranty requirements. Management said cash, operating cash flow and revolving capacity should meet liquidity needs for the next 12 months, but gave no quantified earnings or FFO guidance.
- The company declared dividends of $0.10 per share for each of Q1 and Q2 2022; the Q2 dividend was paid July 15. A $0.10-per-share Q3 dividend was declared August 2, payable October 17. Management cautioned that dividends are at the board’s discretion and may initially exceed GAAP net income.
Changes, outlook and risks
- Year-over-year reported revenue and expenses rose sharply because the 2022 results include the larger portfolio transferred to Orion after the Realty Income/VEREIT transaction and the November 2021 separation. Thus, reported comparisons are not like-for-like. Management’s adjusted comparison incorporating VEREIT Office Assets indicated rental revenue declined about $1.0 million in Q2 and $0.8 million for six months, principally due to lower occupancy.
- Portfolio occupancy, including Orion’s pro rata joint-venture share, was 86.7%; investment-grade tenants generated 67.3% of annualized base rent, and weighted-average remaining lease term was 4.1 years. Five leases covering about 582,000 square feet expired in the first half; Orion renewed 344,000 square feet and expanded one lease by 41,000 square feet. It had 11 vacant properties at quarter-end.
- Six properties incurred $9.4 million of impairment charges in the first half, related to expected or contracted sales of non-core assets. One property was sold during the period for gross proceeds of $3.7 million; two properties with a $9.4 million carrying value were held for sale. Orion also reported a July sale for net proceeds of about $5.7 million and pending agreements, as of August 3, to sell six more properties for $18.9 million; those transactions were conditional and not assured.
- Key disclosed risks include rising interest rates and refinancing, inflation in property costs, office-market oversupply, tenant credit and lease-renewal risk, vacancies and leasing costs, potential impairments, and uncertainty around future office-space demand, including effects from COVID-19. Tenant concentrations and the single-tenant focus can amplify tenant-default or market risks. Leasing concessions and tenant-improvement commitments could be significant.
- Management reported no material pending legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls at a reasonable-assurance level. The filing identifies no material environmental claim known to the company.
Important facts for investors to verify
- Whether reported occupancy, lease expirations, vacancies and subsequent leasing activity improve, and how these affect rental cash flow.
- Progress and realized proceeds from pending non-core property sales, including any sale-related impairments or CMBS release costs.
- Debt maturities, variable-rate exposure, swap coverage, refinancing access and continued compliance with covenants; the $175 million term loan is due within the facility’s two-year term.
- Unrestricted liquidity after accounting for restricted lender reserves, leasing costs, capital expenditures and dividends.
- Whether dividend distributions remain supported by operating cash flow and REIT taxable-income requirements, rather than borrowing or asset sales.
- The comparability and calculation of FFO/Core FFO. Orion disclosed correction of an inadvertent error in prior-period joint-venture FFO adjustments; the applicable amounts were corrected in this filing.