UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

	OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _________ to __________

Commission file number: 001-40873

Orion Office REIT Inc.

(Exact name of registrant as specified in its charter)

Maryland			87-1656425
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
2325 E. Camelback Road, Suite 850	Phoenix	AZ	85016
(Address of principal executive offices)			(Zip Code)

(602)	698-1002
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class:		Trading Symbol(s):	Name of each exchange on which registered:
Common Stock	$0.001 par value per share	ONL	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

* The registrant became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, on October 22, 2021.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o	Non-accelerated filer	x
Smaller reporting company	o	Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The Registrant’s shares of common stock, $0.001 par value per share, are listed and trade on the New York Stock Exchange (“NYSE”) and began trading publicly in regular way on November 15, 2021.

There were 56,625,650 shares of common stock of Orion Office REIT Inc. outstanding as of April 29, 2022.

Explanatory Note

This quarterly report of Orion Office REIT Inc. (the “Company”, “Orion”, “we” or “us”) includes the financial statements of the Company, as of and for the three months ended March 31, 2022 and 2021. The financial statements also include VEREIT Office Assets (as defined below), a predecessor of the Company, for the three months ended March 31, 2021, as further described below.

On November 1, 2021, pursuant to the Agreement and Plan of Merger, dated as of April 29, 2021 (as amended, the “Merger Agreement”), by and among Realty Income Corporation (“Realty Income”), VEREIT, Inc. (“VEREIT”), Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income (“Merger Sub 2”) and Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), Merger Sub 2 merged with and into VEREIT Operating Partnership, L.P. (“VEREIT OP”), with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the “Mergers”, and such effective time of the Mergers, the “Merger Effective Time”). Upon the Merger Effective Time, as part of the Mergers, Realty Income acquired certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”). Following the Merger Effective Time, in accordance with the Merger Agreement, Realty Income contributed the portion of the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, “Realty Income Office Assets”) and VEREIT Office Assets (the “Separation”) to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”). On November 12, 2021, following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement, Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the “Distribution”).

The Distribution is more fully described in the preliminary information statement included as Exhibit 99.1 to the Company’s Registration Statement on Form 10 (File No. 001-40873) (the “Form 10”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 4, 2021, the final version of which was included as Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on October 25, 2021 (the “Information Statement”). The Distribution became effective at 4:01 p.m., Eastern Time, on November 12, 2021.

Following the Distribution, the Company became an independent publicly traded company and intends to qualify and elect to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the Company’s initial taxable year ended December 31, 2021. The Company’s common stock trades on the New York Stock Exchange under the symbol “ONL”.

The consolidated and combined financial statements of the Company included in this report include the accounts of Realty Income Office Assets for the three months ended March 31, 2021 as the ownership interests were under common control of Realty Income during that period. From and after the Merger Effective Time, the consolidated and combined financial statements of the Company include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. Therefore, the Company’s consolidated and combined financial statements set forth in this report are not necessarily indicative of the future results of operations or cash flows of the Company as an independent, publicly traded company. Moreover, the combined and consolidated financial statements for the VEREIT Office Assets are not necessarily indicative of the results of operations, cash flows or financial position that would have been obtained if VEREIT Office Assets had been an independent, stand-alone company. For more information regarding the risks related to our business, refer to Part I - Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2022.

ORION OFFICE REIT INC.

For the quarterly period ended March 31, 2022

	Page
PART I
Item 1. Unaudited Financial Statements	4
Orion Office REIT Inc. Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	4
Orion Office REIT Inc. Consolidated and Combined Statements of Operations for the Three Months Ended March 31, 2022 and 2021	5
Orion Office REIT Inc. Consolidated and Combined Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2022 and 2021	6
Orion Office REIT Inc. Consolidated and Combined Statements of Equity for the Three Months Ended March 31, 2022 and 2021	7
Orion Office REIT Inc. Consolidated and Combined Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	8
Notes to Orion Office REIT Inc. Consolidated and Combined Financial Statements	9
VEREIT Office Assets Combined and Consolidated Statement of Operations for the Three Months Ended March 31, 2021	24
VEREIT Office Assets Combined and Consolidated Statement of Equity for the Three Months Ended March 31, 2021	25
VEREIT Office Assets Combined and Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2021	26
Notes to VEREIT Office Assets Combined and Consolidated Financial Statements	27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
Item 4. Controls and Procedures	51
PART II
Item 1. Legal Proceedings	51
Item 1A. Risk Factors	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3. Defaults Upon Senior Securities	51
Item 4. Mine Safety Disclosures	51
Item 5. Other Information	52
Item 6. Exhibits	53
Signatures	55

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

ORION OFFICE REIT INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data) (Unaudited)

	March 31, 2022		December 31, 2021
ASSETS
Real estate investments, at cost:
Land	$	254,786	$	250,194
Buildings, fixtures and improvements	1,231,469		1,231,551
Total real estate investments, at cost	1,486,255		1,481,745
Less: accumulated depreciation and amortization	137,217		128,109
Total real estate investments, net	1,349,038		1,353,636
Accounts receivable, net	22,032		17,916
Intangible lease assets, net	272,623		298,107
Cash and cash equivalents	18,585		29,318
Other assets, net	92,671		60,501
Total assets	$	1,754,949	$	1,759,478
LIABILITIES AND EQUITY
Bridge facility, net	$	—	$	354,357
Mortgages payable, net	351,648		—
Credit facility term loan, net	172,793		172,490
Credit facility revolver	91,000		90,000
Accounts payable and accrued expenses	17,929		17,379
Below-market lease liabilities, net	18,993		20,609
Distributions payable	5,663		—
Other liabilities, net	19,897		16,355
Total liabilities	677,923		671,190
Common stock, $0.001 par value, 100,000,000 shares authorized and 56,625,650 shares issued and outstanding as of each of March 31, 2022 and December 31, 2021	57		57
Additional paid-in capital	1,145,548		1,145,278
Accumulated other comprehensive income	4,356		299
Accumulated deficit	(74,328)		(58,715)
Total stockholders’ equity	1,075,633		1,086,919
Non-controlling interest	1,393		1,369
Total equity	1,077,026		1,088,288
Total liabilities and equity	$	1,754,949	$	1,759,478

The accompanying notes are an integral part of this statement.

4

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(In thousands, except for per share data) (Unaudited)

	Three Months Ended March 31,
	2022		2021
Rental	$	53,017	$	13,028
Fee income from unconsolidated joint venture	189		—
Total revenues	53,206		13,028
Operating expenses:
Property operating	15,314		1,468
General and administrative	3,517		556
Depreciation and amortization	34,353		5,988
Impairments	1,602		—
Acquisition related	63		—
Transaction costs	756		—
Total operating expenses	55,605		8,012
Other (expenses) income:
Interest expense	(6,847)		(465)
Loss on extinguishment of debt, net	(468)		—
Other income, net	39		—
Equity in income of unconsolidated joint venture	(41)		—
Total other (expenses) income, net	(7,317)		(465)
(Loss) income before taxes	(9,716)		4,551
Provision for income taxes	(166)		—
Net (loss) income	(9,882)		4,551
Net (income) loss attributable to non-controlling interest	(24)		—
Net (loss) income attributable to common stockholders	$	(9,906)	$	4,551
Weighted-average shares outstanding - basic and diluted	$	56,626	$	56,626
Basic and diluted net (loss) income per share attributable to common stockholders	$	(0.17)	$	0.08

The accompanying notes are an integral part of this statement.

5

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

	Three Months Ended March 31,
	2022		2021
Net (loss) income	$	(9,882)	$	4,551
Total other comprehensive income (loss)
Unrealized gain on interest rate derivatives	3,818		—
Reclassification of previous unrealized loss on interest rate derivatives into net (loss) income	239		—
Total other comprehensive income (loss)	4,057		—
Total comprehensive (loss) income	(5,825)		4,551
Comprehensive (income) loss attributable to non-controlling interests (1)	(24)		—
Total comprehensive (loss) income	$	(5,849)	$	4,551

(1)Represents comprehensive (income) loss attributable to a consolidated joint venture partner.

The accompanying notes are an integral part of these statements.

6

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(In thousands, except for share and per share data) (Unaudited)

	Common Stock
	Number of Shares	Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity		Non-Controlling Interests		Total Equity
Balance, January 1, 2022	56,625,650	$	57	$	1,145,278	$	299	$	(58,715)	$	1,086,919	$	1,369	$	1,088,288
Net (loss) income	—	—		—		—		(9,906)		(9,906)		24		(9,882)
Distributions	—	—		—		—		(5,707)		(5,707)		—		(5,707)
Equity-based compensation, net	—	—		270		—		—		270		—		270
Other comprehensive income	—	—		—		4,057		—		4,057		—		4,057
Balance, March 31, 2022	56,625,650	$	57	$	1,145,548	$	4,356	$	(74,328)	$	1,075,633	$	1,393	$	1,077,026

	Common Stock
	Number of Shares	Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Net Parent Investment		Total Parent Company Equity		Non-Controlling Interests		Total Equity
Balance, January 1, 2021	—	$	—	$	—	$	—	$	—	$	497,118	$	497,118	$	—	$	497,118
Net income	—	—		—		—		—		4,551		4,551		—		4,551
Distributions to parent company, net	—	—		—		—		—		(14,122)		(14,122)		—		(14,122)
Balance, March 31, 2021	—	$	—	$	—	$	—	$	—	$	487,547	$	487,547	$	—	$	487,547

The accompanying notes are an integral part of this statement.

7

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(9,882)	$	4,551
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	34,353		5,988
Non-cash revenue adjustments	(1,092)		(390)
Amortization of net premiums on mortgages payable	—		(21)
Impairments	1,602		—
Loss on extinguishment of debt, net	468		—
Amortization of deferred financing costs	1,172		—
Equity-based compensation	270		—
Equity in income of unconsolidated joint venture	41		—
Changes in assets and liabilities:
Accounts receivable, net and other assets, net	(1,989)		(226)
Accounts payable, accrued expenses and other liabilities, net	3,210		1,248
Net cash provided by operating activities	28,153		11,150
Cash flows from investing activities:
Capital expenditures and leasing costs	(1,836)		(55)
Return of investment from unconsolidated joint venture	601		—
Net cash used in investing activities	(1,235)		(55)
Cash flows from financing activities:
Repayment of bridge facility, including debt extinguishment costs	(355,026)		—
Proceeds from mortgage notes payable	355,000		—
Payments on mortgage notes payable	—		(163)
Proceeds from credit facility revolver	70,000		—
Repayments of credit facility revolver	(69,000)		—
Distributions to parent company, net	—		(14,122)
Payments of deferred financing costs	(3,096)		—
Other financing activities	(46)		—
Net cash used in financing activities	(2,168)		(14,285)
Net change in cash and cash equivalents and restricted cash	24,750		(3,190)
Cash and cash equivalents and restricted cash, beginning of period	29,318		3,915
Cash and cash equivalents and restricted cash, end of period	$	54,068	$	725
Reconciliation of Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents at beginning of period	$	29,318	$	—
Restricted cash at beginning of period	—		3,915
Cash and cash equivalents and restricted cash at the beginning of the period	$	29,318	$	3,915
Cash and cash equivalents at end of period	$	18,585	$	—
Restricted cash at the end of the period	35,483		725
Cash and cash equivalents and restricted cash at the end of the period	$	54,068	$	725

The accompanying notes are an integral part of this statement.

8

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Note 1 – Organization

Organization

Orion Office REIT Inc. (the “Company”, “Orion”, “we” or “us”) was incorporated in the state of Maryland on July 1, 2021 and was capitalized on July 15, 2021.

On April 29, 2021, Realty Income Corporation (“Realty Income”) entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, Inc. (“VEREIT”), its operating partnership, VEREIT Operating Partnership, L.P. (“VEREIT OP”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), and Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income (“Merger Sub 2”). On November 1, 2021, pursuant to the Merger Agreement, Merger Sub 2 merged with and into VEREIT OP, with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the “Mergers”, and such effective time of the Mergers, the “Merger Effective Time”). Upon the Merger Effective Time, as part of the Mergers, Realty Income acquired certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”). Following the Merger Effective Time, in accordance with the Merger Agreement, Realty Income contributed the portion of the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, “Realty Income Office Assets”) and VEREIT Office Assets (the “Separation”) to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”). On November 12, 2021, following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement, Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the “Distribution”). Approximately $595.0 million was distributed by the Company to Realty Income in accordance with the Separation and Distribution Agreement. In connection with the Separation and the Distribution, the Company entered into certain agreements with Realty Income to govern the ongoing relationships between the Company and Realty Income and to provide mechanisms for an orderly transition to the Company’s status as an independent, publicly traded company, including the Separation and Distribution Agreement and a transition services agreement to provide certain administrative and other services between the parties for a limited time. Following the Distribution, the Company became independent and publicly traded and intends to qualify and elect to be taxed as a REIT, commencing with the Company’s initial taxable year ended December 31, 2021.

The Company’s common stock, par value $0.001 per share, trades on the New York Stock Exchange (the “NYSE”) under the symbol “ONL”.

At March 31, 2022, the Company owned and operated 92 office properties and related assets previously owned by Realty Income and VEREIT, totaling approximately 10.5 million leasable square feet located within 29 states and Puerto Rico. In addition, the Company owns an equity interest in an unconsolidated joint venture with an affiliate of Arch Street Capital Partners (the “Arch Street Joint Venture”), which, as of March 31, 2022 owned a portfolio consisting of six office properties totaling approximately 1.0 million leasable square feet located within six states.

Note 2 - Summary of Significant Accounting Policies

Basis of Accounting

The consolidated and combined statements of the Company presented herein include the accounts of the Company and its consolidated subsidiaries. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The consolidated and combined financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These adjustments are considered to be of a normal, recurring nature.

The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company’s audited consolidated and combined financial statements and notes thereto as of and for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2022. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC and U.S. GAAP.

9

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Principles of Consolidation and Combination and Basis of Presentation

The consolidated and combined statements of the Company include the accounts of Realty Income Office Assets presented on a combined basis for the three months ended March 31, 2021 as the ownership interests were under common control and ownership of Realty Income during that period. For the three months ended March 31, 2022, the consolidated and combined financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in the Company’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity.

For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. The Company consolidates entities that are not VIEs if it has a majority voting interest or other rights that result in effectively controlling the entity.

The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company continually evaluates the need to consolidate VIEs based on standards set forth in U.S. GAAP.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding real estate investment impairments.

Revenue Recognition

Rental Revenue

The Company continually reviews receivables related to rent, straight-line rent and property operating expense reimbursements and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term and the Company recognizes a general allowance on a portfolio-wide basis. For leases that are deemed not probable of collection, revenue is recorded as cash is received and the Company reduces rental revenue for any straight-line rent receivables. The Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental revenue. During the three months ended March 31, 2022, the Company did not record a general allowance or any reductions to rental revenue for amounts not probable of collection.

For operating leases with minimum scheduled rent increases, the Company recognizes rental revenue on a straight-line basis, including the effect of any free rent periods, over the lease term when collectability of lease payments is probable. Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur. Variable lease payments, including contingent rent, which is paid by a tenant when the tenant’s sales exceed an agreed upon minimum amount, are recognized once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease.

10

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Certain of the Company’s leases also contain provisions for tenants to reimburse the Company for real estate taxes, insurance and maintenance and other property operating expenses. Such reimbursements are included in rental revenue and amounts paid directly by tenants are recorded on a net basis, as applicable.

Rental revenue also includes lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as amortization of above and below-market leases. During the quarters ended March 31, 2022 and 2021, the Company did not recognize any lease termination income.

Fee Income from Unconsolidated Joint Venture

The Company provides various services to our unconsolidated joint venture entity in exchange for market-based fees. Total asset and property management and acquisition fees earned in connection with this entity was $0.2 million for the quarter ended March 31, 2022. No such fee income was earned for the quarter ended March 31, 2021.

Cash and Cash Equivalents

Cash and cash equivalents include cash in bank accounts, as well as investments in highly-liquid funds with original maturities of three months or less. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed federally insured levels. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held.

Restricted cash

The Company had $35.5 million in restricted cash as of March 31, 2022, primarily comprised of reserves held by the lender under the CMBS Loan (as defined in Note 6 – Debt, Net) for future rent concessions and tenant improvement allowances. The Company did not have any restricted cash balances as of December 31, 2021. Restricted cash is included in Other Assets, net on the Company’s consolidated and combined balance sheets.

Recent Accounting Pronouncements

In July 2021, the FASB issued ASU 2021-05 establishing Topic 842, Lessors - Certain Leases with Variable Lease Payments. ASU 2021-05 further clarifies ASC 842 classification guidance as it relates to a lessor’s accounting for certain leases with variable lease payments. This guidance requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if either a sales-type lease or direct financing lease classification would trigger a day-one loss. The adoption of ASU 2021-05 did not have a material impact on our consolidated and combined statements.

In March 2020, the FASB issued ASU 2020-04 establishing Topic 848, Reference Rate Reform. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. We are currently evaluating the impact that the expected market transition from the London Interbank Offered Rate, commonly referred to as LIBOR, to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04.

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the three months ended March 31, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of a ground lease. As a result of the transaction, $4.7 million that was previously classified as a finance lease right-of-use asset with respect to such land parcel previously subject to the ground lease was reclassified from other assets, net to real estate investments in the Company’s consolidated balance sheet as of March 31, 2022. During the three months ended March 31, 2021, the Company had no acquisitions.

11

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Intangible Lease Assets

Intangible lease assets consisted of the following (amounts in thousands, except weighted-average useful life):

	Weighted-Average Useful Life (Years)	March 31, 2022		December 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $90,129 and $65,247, respectively	4.9	$	247,807	$	272,743
Leasing commissions, net of accumulated amortization of $694 and $456, respectively	13.0	11,097		10,349
Above-market lease assets, net of accumulated amortization of $7,535 and $6,239, respectively	5.1	13,719		15,015
Total intangible lease assets, net		$	272,623	$	298,107
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $16,075 and $14,459, respectively	7.6	$	18,993	$	20,609

The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $0.3 million for the three months ended March 31, 2022. The aggregate amount of amortization of above-market and below-market leases included as a net decrease to rental revenue was $0.2 million for the three months ended March 31, 2021. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $25.2 million and $1.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of March 31, 2022 (amounts in thousands):

	Remainder of 2022		2023		2024		2025		2026		2027
In-place leases:
Total projected to be included in amortization expense	$	69,724	$	73,858	$	49,213	$	21,652	$	15,499	$	7,441
Leasing commissions:
Total projected to be included in amortization expense	$	759	$	1,012	$	969	$	901	$	901	$	901
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue	$	3,874	$	4,791	$	2,998	$	860	$	682	$	237
Below-market lease liabilities:
Total projected to be added to rental revenue	$	4,828	$	6,091	$	3,786	$	1,036	$	817	$	655

12

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Investment in Unconsolidated Entity

The following is a summary of the Company’s investment in one unconsolidated entity, Arch Street Joint Venture, as of March 31, 2022 and for the three months ended March 31, 2022 (dollar amounts in thousands):

	Ownership % (1)	Number of Properties	Carrying Amount of Investment			Equity in Income
						Three Months Ended (2)
Investment	March 31, 2022		March 31, 2022		December 31, 2021	March 31, 2022		March 31, 2021
Arch Street Joint Venture (3) (4)	20%	6	$	17,952	18,631	$	(41)	—

____________________________________

(1)The Company’s ownership interest reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest because of various provisions in the joint venture agreement regarding capital contributions, distributions of cash flow based on capital account balances and allocations of profits and losses. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.

(2)The interest in the Arch Street Joint Venture was acquired by Realty Income as part of the Mergers, and was transferred to the Company upon the consummation of the Distribution. Therefore, the Company’s equity in income reflects operations following the Merger Effective Time.

(3)During three months ended March 31, 2022, the Arch Street Joint Venture did not acquire any properties.

(4)The total carrying amount of the Company’s investment in the unconsolidated joint venture was greater than the underlying equity in net assets by $1.7 million as of March 31, 2022. This difference is related to a step up in the fair value of the investment in the unconsolidated joint venture in connection with the Mergers. The step up in fair value was allocated to the Company’s investment in the unconsolidated joint venture and is being amortized in accordance with the Company’s depreciation policy.

Note 4 – Receivables and Other Assets:

Accounts receivable, net consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):

	March 31, 2022		December 31, 2021
Accounts receivable, net	13,271		10,194
Straight-line rent receivable, net	$	8,761	$	7,722
Total	$	22,032	$	17,916

Other assets, net consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):

	March 31, 2022		December 31, 2021
Restricted cash	35,483		—
Right-of-use assets, net (2)	26,023		30,958
Investment in unconsolidated entity	17,953		18,631
Deferred costs, net (1)	5,709		6,246
Prepaid expenses	2,813		3,730
Other assets, net	4,690		936
Total	$	92,671	$	60,501

_______________________________________________

(1)Amortization expense for deferred costs related to the revolving credit facility totaled $0.5 million for the three months ended March 31, 2022 as compared to no deferred costs for the three months ended March 31, 2021. Accumulated amortization for deferred costs related to the revolving credit facility was $0.8 million and $0.3 million as of March 31, 2022 and December 31, 2021, respectively.

(2)Amortization expense for below market right-of-use asset was less than $0.1 million for the three months ended March 31, 2022. There was no amortization expense for below market right-of-use asset for the three months ended March 31, 2021. Includes right-of-use finance leases of $9.0 million, right-of-use operating leases of $10.0 million, and a below-market right-of-use asset of $7.1 million, net of less than $0.1 million in accumulated amortization as of March 31, 2022. Includes right-of-use finance leases of $13.8 million, right-of-use operating leases of $10.2 million, and a below-market right-of-use asset of $7.1 million, net of less than $0.1 million in accumulated amortization as of December 31, 2021.

13

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Note 5 – Fair Value Measures

Items Measured at Fair Value on a Recurring Basis

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, aggregated by the level in the fair value hierarchy within which those instruments fall (in thousands):

	Level 1		Level 2		Level 3		Balance as of March 31, 2022
Assets:
Derivative assets	$	—	$	4,356	$	—	$	4,356

	Level 1		Level 2		Level 3		Balance as of December 31, 2021
Assets:
Derivative assets	$	—	$	299	$	—	$	299

Derivative Assets – The Company’s derivative financial instruments relate to interest rate swaps. The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.

Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2022 and December 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Items Measured at Fair Value on a Non-Recurring Basis

Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Real Estate and Other Investments – The Company performs quarterly impairment review procedures for real estate investments, leasehold improvements and property and equipment, right of use assets and its investment in the unconsolidated entity, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of such assets may not be recoverable.

As part of the Company’s impairment review procedures, net real estate assets representing two properties were deemed to be impaired resulting in impairment charges of $1.6 million during the three months ended March 31, 2022 that relate to adjustments to expected sales prices for certain non-core assets which have been identified by management for potential sale.

There were no impairment charges recorded during the three months ended March 31, 2021.

The following table summarizes our provisions for impairment during the periods indicated below (dollars in thousands):

	Three Months Ended March 31,
	2022
Number of properties	2
Carrying value of impaired properties	$	8,728
Provisions for impairment	(1,602)
Estimated fair value	$	7,126

14

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

The Company estimates fair values using Level 2 and Level 3 inputs and uses a combined income and market approach, specifically using discounted cash flow analysis and/or recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rate; (2) discount rates; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions including number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of the Company’s tenants. For the Company’s impairment tests for the real estate assets during the quarter ended March 31, 2022, the fair value measurement for its impaired properties was determined by applying a sales price based on market data.

Real Estate and Other Investments – Separation Fair Value Assessment – Following the Mergers, Realty Income performed a purchase price allocation assessing the value of the assets acquired and liabilities assumed at the date of acquisition of VEREIT. The assessment of fair value is preliminary and is based on information that was available to Realty Income management at the time the consolidated and combined statements were prepared. Measurement period adjustments, if any, will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. The finalization of Realty Income’s purchase accounting assessment could result in changes in the valuation of real estate assets and liabilities up to one year after the date of the Mergers, and these changes could be material.

Fair Value of Financial Instruments

The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their carrying value in the accompanying consolidated balance sheets due to their short-term nature. The fair values of the Company’s financial instruments are reported below (dollar amounts in thousands):

	Level	Carrying Amount at March 31, 2022		Fair Value at March 31, 2022		Carrying Amount at December 31, 2021		Fair Value at December 31, 2021
Liabilities (1):
Bridge facility, net	2	—		—		$	355,000	$	355,000
Mortgages payable, net	2	355,000		359,166		—		—
Credit facility term loan, net	2	175,000		175,000		175,000		175,000
Credit facility revolver	2	91,000		91,000		90,000		90,000
Total		$	621,000	$	625,166	$	620,000	$	620,000

_______________________________________________

(1)Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs.

Debt – The fair value is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of credit spreads and observable market interest rates, representing level 2 on the fair value hierarchy.

15

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Note 6 – Debt, Net

As of March 31, 2022, the Company had $615.4 million of debt outstanding, including net deferred financing costs, with a weighted-average years to maturity of 3.6 years and a weighted-average interest rate of 4.17%. The following table summarizes the carrying value of debt as of March 31, 2022 and December 31, 2021, and the debt activity for the three months ended March 31, 2022 (in thousands):

			Three Months Ended March 31, 2022
	Balance as of December 31, 2021		Debt Issuances		Repayments, Extinguishment and Assumptions		Accretion and Amortization		Balance, March 31, 2022
Mortgages payable:
Outstanding balance	$	—	$	355,000	$	—	$	—	$	355,000
Deferred costs	—		(3,446)		—		94		(3,352)
Mortgages payable, net	—		351,554		—		94		351,648
Bridge facility:
Outstanding balance	355,000		—		(355,000)		—		—
Deferred costs	(643)		—		442		201		—
Bridge facility, net	354,357		—		(354,558)		201		—
Credit facility term loan:
Outstanding balance	175,000		—		—		—		175,000
Deferred costs	(2,510)		(36)		—		339		(2,207)
Credit facility term loan, net	172,490		(36)		—		339		172,793
Credit facility revolver:
Outstanding balance	90,000		70,000		(69,000)		—		91,000
Credit facility revolver, net	90,000		70,000		(69,000)		—		91,000
Total debt	$	616,847	$	421,518	$	(423,558)	$	634	$	615,441

Credit Agreement

In connection with the Separation and the Distribution, on November 12, 2021, the Company, as parent, and Orion Office REIT LP (“Orion OP”), as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year, $425 million senior revolving credit facility (the “Revolving Facility”), including a $25 million letter of credit sub-facility, and a two-year, $175.0 million senior term loan facility (the “Term Loan Facility,” and together with the Revolving Facility, the “Revolver/Term Loan Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement,” and together with the Revolver/Term Loan Credit Agreement, the “Credit Agreements”) providing for a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility,” and together with the Revolver/Term Loan Facilities, the “Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

On November 12, 2021, Orion OP borrowed $90.0 million under the Revolving Facility, and each of the Term Loan Facility and the Bridge Facility was fully drawn. Approximately $595.0 million of the net proceeds of the Facilities was distributed by the Company to Realty Income in accordance with the Separation and Distribution Agreement. Orion OP retained the remaining net proceeds of such borrowings as working capital for the general corporate purposes of the Company, Orion OP and Orion OP’s subsidiaries. In February 2022, as further described below, the Company refinanced the Bridge Facility in full with the $355.0 million CMBS Loan (defined below), and the Bridge Credit Agreement was terminated. As of March 31, 2022, the Company had borrowed and outstanding $91.0 million under the Revolving Facility and had $334.0 million of availability under the Revolving Facility, and no borrowings were outstanding under the Bridge Facility.

The interest rate applicable to the loans under the Facilities may, at the election of Orion OP, be determined on the basis of LIBOR or a base rate, in either case, plus an applicable margin. Under the Revolver/Term Loan Facilities, the applicable margin is (1) in the case of the Revolving Facility, 2.50% for LIBOR loans and 1.50% for base rate loans and (2) in the case of the

16

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Term Loan Facility, 2.50% for LIBOR loans and 1.50% for base rate loans. Under the Bridge Facility, the applicable margin for LIBOR loans was initially 2.50% with scheduled increases over time to a maximum of 3.50% and the applicable margin on base rate loans was initially 1.50% with scheduled increases over time to a maximum of 2.50%, in each case, based on the number of days elapsed after November 12, 2021. Loans under the Revolver/Term Loan Facilities may be prepaid, and unused commitments under the Revolver/Term Loan Facilities may be reduced, at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs).

To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25% per annum of the unused portion of the Revolving Facility.

The Revolver/Term Loan Facilities are guaranteed pursuant to a Guaranty (the “Revolver/Term Loan Guaranty”) and the Bridge Facility was guaranteed pursuant to a Guaranty (the “Bridge Guaranty”), in each case, by the Company and, subject to certain exceptions, substantially all of Orion OP’s existing and future subsidiaries (including substantially all of its subsidiaries that directly or indirectly own unencumbered real properties), other than certain joint ventures and subsidiaries that own real properties subject to certain other indebtedness (such subsidiaries of Orion OP, the “Subsidiary Guarantors”).

The Revolver/Term Loan Facilities are secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors.

The Revolver/Term Loan Facilities require that Orion OP comply with various covenants, including, without limitation, covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends. In addition, the Revolver/Term Loan Facilities require that Orion OP satisfy certain financial covenants, including a:

•ratio of total debt to total asset value of not more than 0.60 to 1.00;

•ratio of adjusted EBITDA to fixed charges of not less than 1.50 to 1.00;

•ratio of secured debt to total asset value of not more than 0.45 to 1.00;

•ratio of unsecured debt to unencumbered asset value of not more than 0.60 to 1.00; and

•ratio of net operating income from all unencumbered real properties to unsecured interest expense of not less than 2.00 to 1.00.

As of March 31, 2022, Orion OP was in compliance with these financial covenants.

The Revolver/Term Loan Facilities include customary representations and warranties of the Company and Orion OP, which must be true and correct in all material respects as a condition to future extensions of credit under the Revolver/Term Loan Facilities. The Revolver/Term Loan Facilities also include customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of Orion OP under the Revolver/Term Loan Facilities to be immediately due and payable and foreclose on the collateral securing the Revolver/Term Loan Facilities.

CMBS Loan

On February 10, 2022, certain indirect subsidiaries of the Company (the “Mortgage Borrowers”) obtained a $355.0 million fixed rate mortgage loan (the “CMBS Loan”) from Wells Fargo Bank, National Association (together with its successor, the “Lender”), which is secured by the Mortgage Borrowers’ fee simple or ground lease interests in 19 properties owned indirectly by the Company (collectively, the “Mortgaged Properties”). During March 2022, Wells Fargo effected a securitization of the CMBS Loan. The CMBS Loan bears interest a fixed rate of 4.971% per annum and matures on February 11, 2027.

The CMBS Loan requires monthly payments of interest only and all principal is due at maturity. The proceeds of the CMBS Loan were used to repay the Bridge Facility. Upon closing of the CMBS Loan, the Mortgage Borrowers funded $35.5 million of loan reserves primarily for future rent concessions and tenant improvement allowances under the leases with respect to the 19 Mortgaged Properties. These amounts, as well as the transaction expenses incurred in connection with the CMBS Loan, were funded with cash on hand and borrowings under the Company’s Revolving Facility.

The CMBS Loan is secured by, among other things, first priority mortgages and deeds of trust granted by the Mortgage Borrowers and encumbering the Mortgaged Properties.

The CMBS Loan is generally not freely prepayable by the Mortgage Borrowers without payment of certain prepayment premiums and costs. The CMBS Loan may be prepaid in whole, but not in part, except as provided in the loan agreement governing the CMBS Loan (the “CMBS Loan Agreement”), at any time following the Prepayment Lockout Release Date (as

17

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

defined in the CMBS Loan Agreement) (generally two years after the Loan has been fully securitized), subject to the payment of a yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement. Further, releases of individual properties are permitted in connection with an arms’ length third party sale upon repayment of the Release Price (as defined in the CMBS Loan Agreement) for the applicable individual property and subject to payment of the applicable yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement.

The CMBS Loan Agreement also contains customary cash management provisions, including certain trigger events (such as failure of the Mortgage Borrowers to satisfy a minimum debt yield) which allow the Lender to retain any excess cash flow as additional collateral for the Loan, until such trigger event is cured.

In connection with the CMBS Loan Agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the “Guaranty”), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than $355.0 million and liquid assets of no less than $10.0 million, in each case, exclusive of the values of the collateral for the CMBS Loan. As of March 31, 2022, the Company was in compliance with these financial covenants.

The Mortgage Borrowers and the Company also provided a customary environmental indemnity agreement, pursuant to which the Mortgage Borrowers and the Company agreed to protect, defend, indemnify, release and hold harmless the Lender from and against certain environmental liabilities relating to the Mortgaged Properties.

The loan documents evidencing the CMBS Loan include customary representations, warranties and covenants of the Mortgage Borrowers and the Company. The loan documents also include customary events of default, the occurrence of which, following any applicable grace period, would permit the Lender to, among other things, declare the principal, accrued interest and other obligations of the Mortgage Borrowers under the loan documents to be immediately due and payable and foreclose on the Mortgaged Properties.

The Company’s mortgages payable consisted of the following as of March 31, 2022 (dollar amounts in thousands):

	Encumbered Properties	Net Carrying Value of Collateralized Properties (1)		Outstanding Balance		Weighted-Average Interest Rate		Weighted-Average Years to Maturity
Fixed-rate debt	19	$	489,157	$	355,000	4.97	%	4.9

_______________________________________________

(1)Net carrying value is real estate assets, including right-of-use assets, net of real estate liabilities.

The table above does not include mortgage notes associated with the unconsolidated joint venture of $136.7 million.

Note 7 – Derivatives and Hedging Activities

Cash Flow Hedges of Interest Rate Risk

As of each of March 31, 2022 and December 31, 2021, the Company had interest rate swap agreements with an aggregate notional amount of $175.0 million, which were designated as cash flow hedges under U.S. GAAP. The interest rate swap agreements were effective on December 1, 2021 and mature on November 12, 2023.

The table below presents the fair value of the Company’s derivative financial instrument designated as a cash flow hedge as well as its classification in the Company’s consolidated balance sheets as of March 31, 2022 and December 31, 2021 (in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	March 31, 2022		December 31, 2021
Interest rate swaps	Other assets, net	$	4,356	$	299

During the three months ended March 31, 2022, the Company recorded unrealized gains of $3.8 million for changes in the fair value of its cash flow hedge in accumulated other comprehensive income. There were no similar amounts recorded during the three months ended March 31, 2021, as the interest rate swap agreement did not exist during such period.

18

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

The Company reclassified previous losses of $0.2 million for the three months ended March 31, 2022 from accumulated other comprehensive income into interest expense as a result of the hedged transactions impacting earnings. There were no similar amounts recorded during the three months ended March 31, 2021.

During the next twelve months, the Company estimates that an additional $1.9 million will be reclassified from other comprehensive income as a decrease to interest expense.

Derivatives Not Designated as Hedging Instruments

As of each of March 31, 2022 and December 31, 2021, the Company had no interest rate swaps that were not designated as qualifying hedging relationships.

Tabular Disclosure of Offsetting Derivatives

The table below details a gross presentation, the effects of offsetting and a net presentation of the Company’s derivatives as of March 31, 2022 and December 31, 2021 (in thousands). The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value.

	Offsetting of Derivative Assets and Liabilities
	Gross Amounts of Recognized Assets		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2022	$	4,356	$	—	$	—	$	4,356	$	—	$	—	$	—	$	4,356
December 31, 2021	$	299	$	—	$	—	$	299	$	—	$	—	$	—	$	299

Note 8 – Supplemental Cash Flow Disclosures

Supplemental cash flow information was as follows during the periods indicated below (in thousands):

	Three Months Ended March 31,
	2022		2021
Supplemental disclosures:
Cash paid for interest	$	5,019	$	421
Cash paid for income taxes	$	145	$	—
Non-cash investing and financing activities:
Accrued capital expenditures and leasing costs	$	610	$	—
Distributions declared and unpaid	$	5,663	$	—
Land acquired upon finance lease termination	$	4,707	$	—

Note 9 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):

	March 31, 2022		December 31, 2021
Accrued real estate and other taxes	$	7,640	$	10,322
Accrued other	5,698		4,159
Accounts payable	2,953		1,805
Accrued interest	1,638		1,093
Total	$	17,929	$	17,379

19

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Note 10 – Commitments and Contingencies

Leasing

As part of its ordinary re-leasing activities, the Company has agreed and anticipates that it will continue to agree to provide rent concessions to tenants and incur leasing costs with respect to its properties, including tenant improvement allowances, landlord agreements to pay for certain improvements, as well as leasing commissions. These rent concession and leasing cost commitments could be significant.

Litigation

The Company is party to various legal proceedings which it believes are routine in nature and incidental to the operation of its business. The Company does not believe that any of these outstanding claims against it are expected to have a material adverse effect upon its consolidated and combined position or results of operations.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition, in each case, that it believes will have a material adverse effect upon its consolidated and combined position or results of operations.

Note 11 – Leases

Lessor

As of March 31, 2022, the Company is the lessor for its 92 office properties. The Company’s operating leases have non-cancelable lease terms ranging from 0.3 to 16.0 years as of March 31, 2022. Certain leases with tenants include options to extend or terminate the lease agreements or to purchase the underlying assets. Lease agreements may also contain rent increases that are based on an index or rate (e.g., the consumer price index or LIBOR).

The following table presents future minimum operating lease payments due to the Company over the next five years and thereafter as of March 31, 2022 (in thousands).

	Future Minimum Operating Lease Payments
April 1, 2022 - December 31, 2022	$	113,038
2023	130,444
2024	99,069
2025	66,974
2026	64,401
2027	45,012
Thereafter	200,614
Total	$	719,552

Lessee

The Company is the lessee under ground lease arrangements and corporate office leases, which meet the criteria under U.S. GAAP for an operating lease. As of March 31, 2022, the Company’s operating leases had remaining lease terms ranging from 0.6 years to 62.8 years, which includes options to extend. Under the operating leases, the Company pays rent and may also pay variable costs, including property operating expenses and common area maintenance. The weighted-average discount rate used to measure the lease liability for the Company’s operating leases was 3.16% as of March 31, 2022. As the Company’s leases do not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the lease guidance adoption date or the Merger Effective Time, as applicable, in determining the present value of lease payments.

Operating lease costs were $0.3 million and less than $0.1 million for the three months ended March 31, 2022 and March 31, 2021, respectively. No cash paid for operating lease liabilities was capitalized.

20

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for ground and corporate office lease obligations as of March 31, 2022 (in thousands).

	Future Minimum Lease Payments
April 1, 2022 - December 31, 2022	750
2023	778
2024	452
2025	442
2026	442
2027	445
Thereafter	12,939
Total	16,248
Less: imputed interest	6,170
Total	$	10,078

The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for ground and corporate office lease obligations as of December 31, 2021 (in thousands).

	Future Minimum Lease Payments
2022	1,008
2023	778
2024	452
2025	442
2026	442
Thereafter	13,383
Total	16,505
Less: imputed interest	6,248
Total	$	10,257

Note 12 – Stockholders’ Equity

Common Stock

The Company was initially capitalized on July 15, 2021 with the issuance of 100,000 shares of common stock ($0.01 par value per share) to Realty Income for a total of $1,000.

On November 10, 2021, the Company issued 56,525,650 additional shares of common stock to Realty Income, such that Realty Income owned 56,625,650 shares of the Company’s common stock. Also on November 10, 2021, in connection with the filing of the Company’s Articles of Amendment, the Company changed the par value of its common stock from $0.01 per share to $0.001 per share. On November 12, 2021, Realty Income effected the Distribution.

On March 22, 2022, the Company’s Board of Directors declared the Company’s first quarterly dividend as an independent public company. The dividend, which was for the first quarter of 2022, was in the amount of $0.10 per share, and was paid on April 15, 2022, to stockholders of record as of March 31, 2022.

Stock Warrants

On November 12, 2021, in connection with the Distribution, Orion OP entered into an Amended and Restated Limited Liability Company Agreement (the “LLCA”) of OAP/VER Venture, LLC (the “Arch Street Joint Venture”), by and between Orion OP and OAP Holdings LLC (the “Arch Street Partner”), an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P. to Orion OP.

21

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

March 31, 2022 (Unaudited)

Also on November 12, 2021, in connection with the entry into the LLCA, the Company granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of the Company’s common stock (the “Arch Street Warrants”). The Arch Street Warrants entitle the respective holders to purchase shares of the Company’s common stock at a price per share equal to $22.42, at any time. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Company common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) 10 years after issuance and (b) the later of the termination of the Arch Street Joint Venture and seven years after issuance.

Note 13 - Equity Based Compensation

The Company has an equity-based incentive award plan (the “Equity Plan”) for officers, employees, non-employee directors and consultants who provide services to the Company. Awards under the Equity Plan are accounted for under U.S. GAAP as share-based payments. The expense for such awards is recognized over the vesting period or when the requirements for exercise of the award have been met. Under the Equity Plan, the Company may grant various types of awards, including restricted stock units that will vest if the recipient maintains employment with the Company over the requisite service period (the “Time-Based Restricted Stock Units”) and restricted stock units that may vest in a number ranging from 0% to 100% of the total number of units granted, based on the Company’s total shareholder return measured on an absolute basis (“TSR-Based Restricted Stock Units”) and certain operational performance metrics (“Metrics-Based Restricted Stock Units”), in each case during a three-year performance period, subject to the recipient’s continued service with the Company (collectively, the “Performance-Based Restricted Stock Units”).

During the three months ending March 31, 2022, the Company granted Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units to certain officers and employees of the Company. The fair value of the Time-Based Restricted Stock Units granted to non-executive directors and employees under the Equity Plan is generally determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis. The fair value of the TSR-Based Restricted Stock Units granted to employees under the Equity Plan is determined using a Monte Carlo simulation which takes into account multiple input variables that determine the probability of satisfying the required total shareholder return, and such fair value is expensed over the performance period. The fair value of the Metrics-Based Restricted Stock Units is determined when the likelihood of achieving the performance metrics becomes probable. As of March 31, 2022, the Company determined that the likelihood of achieving the performance metrics was improbable and recognized no compensation expense related to the Metrics-Based Restricted Stock Units.

Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units do not provide for any rights of a common stockholder prior to the vesting of such restricted stock units. Equity-based compensation expense related to Orion Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units for the three months ended March 31, 2022, was $0.1 million. As of March 31, 2022, total unrecognized compensation expense related to Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units was approximately $2.4 million, with an aggregate weighted-average remaining term of 2.9 years. Equity-based compensation expense for the three months ended March 31, 2022, related to Realty Income time-based restricted stock units and stock options granted in connection with the Mergers, was $0.1 million. As of March 31, 2022, total unrecognized compensation expense related to Realty Income time-based restricted stock units and stock options was approximately $0.5 million, with an aggregate weighted-average remaining term of 1.6 years.

Note 14 - Net Income (Loss) Per Share