Business context and reporting period
Orion Office REIT Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The REIT owned 81 office properties totaling approximately 9.5 million leasable square feet in 29 states; including its pro rata share of the Arch Street joint venture, the portfolio totaled approximately 9.7 million square feet. The filing reports U.S. GAAP results and supplemental non-GAAP FFO and Core FFO.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $52.0 million | $52.8 million | $102.2 million | $106.1 million |
| Net loss attributable to common stockholders | $15.7 million | $15.6 million | $24.6 million | $25.5 million |
| Diluted net loss per share | $0.28 | $0.27 | $0.43 | $0.45 |
| FFO attributable to common stockholders | $24.4 million | $26.5 million | $47.9 million | $53.0 million |
| Core FFO attributable to common stockholders | $26.9 million | $28.4 million | $52.2 million | $57.6 million |
For the six months, operating cash flow was $43.9 million, down from $51.8 million. Investing used $5.1 million, compared with $1.3 million provided in the prior-year period; financing used $17.2 million, versus $27.8 million. Capital expenditures and leasing costs were $6.7 million. Cash and cash equivalents at June 30 were $42.2 million; restricted cash of $34.7 million is reported separately.
At June 30, total consolidated debt principal was $530.0 million ($527.5 million net of deferred financing costs): $355.0 million of fixed-rate mortgage debt at 4.971%, maturing February 2027, and $175.0 million drawn on the revolving facility. The revolver had $250.0 million of stated remaining capacity and a scheduled November 2024 maturity, with an option to extend to May 2026 subject to conditions. The company reported a 4.63% weighted-average interest rate and 3.4-year weighted-average maturity. Swaps fixed the $175.0 million revolver borrowing at 3.92% through November 12, 2023. The company was in compliance with its credit covenants.
Total assets were $1.53 billion and total liabilities $590.2 million. Six-month impairments were $15.6 million, compared with $9.4 million a year earlier. The board declared a $0.10-per-share quarterly dividend for Q3 2023, consistent with the first two 2023 quarterly dividends.
Material changes versus the prior comparable period
- Q2 revenue declined $0.8 million and six-month revenue declined $3.8 million, primarily reflecting lower occupied area from vacancies and dispositions. Six-month occupancy was 86.2% for the company’s portfolio, compared with 86.4% at June 30, 2022; the pro rata portfolio occupancy including the joint venture was 86.5%, down from 89.0% at December 31, 2022.
- Net loss was broadly similar in Q2 and improved by $0.9 million for the six-month period. However, FFO and Core FFO declined year over year for both periods. Core FFO’s definition changed in 2023 and prior-period figures were recast.
- Depreciation and amortization fell, partly due to lease intangible amortization ending as leases expired, and property dispositions and impairments. Higher impairment charges and general and administrative expenses partly offset that decline.
- In June, the company repaid its $175.0 million term loan using revolver borrowings. This shifted the debt mix but did not reduce total principal debt.
- The portfolio had seven vacant properties at June 30. During the first half, four leases expired, reducing occupied space by approximately 0.3 million square feet; new and renewed leasing covered approximately 0.1 million square feet.
Outlook, commentary, risks and unusual items
Management said rising interest rates and inflation, economic uncertainty, office oversupply and persistent remote-work trends are weighing on leasing activity and tenant space requirements. It expects some leasing to be delayed, reduced or eliminated, which could lower future rental revenue. The 3.9-year weighted-average remaining lease term and upcoming lease maturities increase the importance of renewals and re-leasing. No numeric earnings or FFO guidance is provided in the filing.
Management stated that cash on hand, operating cash flow, property-sale proceeds and revolver availability are 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. After quarter end, $28.0 million was placed in escrow under the revolver arrangement and is intended to prepay borrowings when the swaps expire in November 2023. The credit agreement requires excess unrestricted cash above $25.0 million to be applied to revolver repayment or escrow, subject to its terms.
As of June 30, three properties with a $16.3 million carrying value were classified as held for sale. One vacant property sold on July 6 for approximately $9.7 million. As of August 9, eight additional property sales were pending for aggregate gross proceeds of approximately $41.0 million; they remained subject to buyer diligence and could fail to close. The company recorded impairments on four properties in the first half, based largely on expected sale proceeds and revised property assumptions. It had $50.0 million of outstanding tenant-improvement commitments and $0.3 million of leasing commission commitments; timing and actual cash outlays are uncertain.
Key risks include tenant defaults, vacancies and lease-renewal terms; leasing concessions and capital needs; property-value declines and further impairments; interest-rate and refinancing exposure; and the ability to comply with debt covenants. The CMBS loan also has cash-management triggers and prepayment restrictions. The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether the pending sales close, their final proceeds and any associated debt-release costs or further impairments.
- Lease expirations, renewals, occupancy trends and the realized economics of new leasing, including tenant concessions and improvement costs.
- Liquidity available after the $28.0 million escrow deposit and the planned revolver prepayment when the swaps expire; the resulting borrowing cost and remaining revolver capacity.
- Debt-extension conditions and refinancing plans for the revolver and the $355.0 million mortgage due in 2027; monitor covenant compliance and CMBS cash-management triggers.
- Whether operating cash flow can support leasing requirements and dividends, and the assumptions underlying management’s liquidity outlook.