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 June 30, 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

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

There were 56,635,038 shares of common stock of Orion Office REIT Inc. outstanding as of July 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 and six months ended June 30, 2022 and 2021. This quarterly report also includes the financial statements of VEREIT Office Assets (as defined below), a predecessor of the Company, for the three and six months ended June 30, 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 dated as of November 11, 2021, by and among Realty Income, the Company and Orion OP, 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 and six months ended June 30, 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, which accounts include the Realty Income Office Assets and the VEREIT Office Assets. 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 the Company’s 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 June 30, 2022

	Page
PART I
Item 1. Unaudited Financial Statements	4
Orion Office REIT Inc. Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	4
Orion Office REIT Inc. Consolidated and Combined Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	5
Orion Office REIT Inc. Consolidated and Combined Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021	6
Orion Office REIT Inc. Consolidated and Combined Statements of Equity for the Three and Six Months Ended June 30, 2022 and 2021	7
Orion Office REIT Inc. Consolidated and Combined Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	8
Notes to Orion Office REIT Inc. Consolidated and Combined Financial Statements	9
VEREIT Office Assets Combined and Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021	24
VEREIT Office Assets Combined and Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2021	25
VEREIT Office Assets Combined and Consolidated Statement of Cash Flows for the Six Months Ended June 30, 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	34
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	52
Signatures	53

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)

	June 30, 2022		December 31, 2021
ASSETS
Real estate investments, at cost:
Land	$	250,724	$	250,194
Buildings, fixtures and improvements	1,208,475		1,231,551
Total real estate investments, at cost	1,459,199		1,481,745
Less: accumulated depreciation and amortization	138,642		128,109
Total real estate investments, net	1,320,557		1,353,636
Accounts receivable, net	25,731		17,916
Intangible lease assets, net	247,722		298,107
Cash and cash equivalents	19,300		29,318
Real estate assets held for sale, net	9,402		—
Other assets, net	91,208		60,501
Total assets	$	1,713,920	$	1,759,478
LIABILITIES AND EQUITY
Bridge facility, net	$	—	$	354,357
Mortgages payable, net	351,820		—
Credit facility term loan, net	173,133		172,490
Credit facility revolver	71,000		90,000
Accounts payable and accrued expenses	16,855		17,379
Below-market lease liabilities, net	17,381		20,609
Distributions payable	5,663		—
Other liabilities, net	20,341		16,355
Total liabilities	656,193		671,190
Common stock, $0.001 par value, 100,000,000 shares authorized 56,635,038 and 56,625,650 shares issued and outstanding as of each of June 30, 2022 and December 31, 2021, respectively	57		57
Additional paid-in capital	1,145,987		1,145,278
Accumulated other comprehensive income	5,851		299
Accumulated deficit	(95,562)		(58,715)
Total stockholders’ equity	1,056,333		1,086,919
Non-controlling interest	1,394		1,369
Total equity	1,057,727		1,088,288
Total liabilities and equity	$	1,713,920	$	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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Rental	$	52,659	$	12,587	$	105,676	$	25,615
Fee income from unconsolidated joint venture	190		—		379		—
Total revenues	52,849		12,587		106,055		25,615
Operating expenses:
Property operating	15,156		1,483		30,470		2,951
General and administrative	3,291		515		6,808		1,071
Depreciation and amortization	33,828		5,955		68,181		11,943
Impairments	7,758		—		9,360		—
Acquisition related	141		—		204		—
Transaction costs	208		—		964		—
Total operating expenses	60,382		7,953		115,987		15,965
Other (expenses) income:
Interest expense, net	(7,867)		(338)		(14,714)		(803)
Loss on extinguishment of debt, net	—		—		(468)		—
Other income, net	48		—		87		—
Equity in income (loss) of unconsolidated joint venture	(54)		—		(95)		—
Total other (expenses) income, net	(7,873)		(338)		(15,190)		(803)
(Loss) income before taxes	(15,406)		4,296		(25,122)		8,847
Provision for income taxes	(164)		—		(330)		—
Net (loss) income	(15,570)		4,296		(25,452)		8,847
Net (income) loss attributable to non-controlling interest	(1)		—		(25)		—
Net (loss) income attributable to common stockholders	$	(15,571)	$	4,296	$	(25,477)	$	8,847
Weighted-average shares outstanding - basic and diluted	56,629		56,626		56,628		56,626
Basic and diluted net (loss) income per share attributable to common stockholders	$	(0.27)	$	0.08	$	(0.45)	$	0.16

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net (loss) income	$	(15,570)	$	4,296	$	(25,452)	$	8,847
Total other comprehensive income (loss)
Unrealized gain on interest rate derivatives	1,526		—		5,344		—
Reclassification of previous unrealized (gain) loss on interest rate derivatives into net (loss) income	(31)		—		208		—
Total other comprehensive income (loss)	1,495		—		5,552		—
Total comprehensive (loss) income	(14,075)		4,296		(19,900)		8,847
Comprehensive (income) loss attributable to non-controlling interests (1)	(1)		—		(25)		—
Total comprehensive (loss) income	$	(14,076)	$	4,296	$	(19,925)	$	8,847

(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 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
Net (loss) income	—	—		—		—		(15,571)		(15,571)		1		(15,570)
Distributions	—	—		—		—		(5,663)		(5,663)		—		(5,663)
Equity-based compensation, net	9,388	—		439		—		—		439		—		439
Other comprehensive income	—	—		—		1,495		—		1,495		—		1,495
Balance, June 30, 2022	56,635,038	$	57	$	1,145,987	$	5,851	$	(95,562)	$	1,056,333	$	1,394	$	1,057,727

	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
Net income	—	—		—		—		—		4,296		4,296		—		4,296
Contributions from parent company, net	—	—		—		—		—		3,746		3,746		—		3,746
Balance, June 30, 2021	—	$	—	$	—	$	—	$	—	$	495,589	$	495,589	$	—	$	495,589

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)

	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(25,452)	$	8,847
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	68,181		11,943
Non-cash revenue adjustments	(1,830)		(471)
Amortization of net premiums on mortgages payable	—		(41)
Impairments	9,360		—
Loss on extinguishment of debt, net	468		—
Amortization of deferred financing costs	2,228		—
Equity-based compensation	709		—
Equity in income of unconsolidated joint venture	95		—
Changes in assets and liabilities:
Accounts receivable, net and other assets, net	(3,535)		(166)
Accounts payable, accrued expenses and other liabilities, net	1,570		1,236
Net cash provided by operating activities	51,794		21,348
Cash flows from investing activities:
Capital expenditures and leasing costs	(3,429)		(77)
Proceeds from disposition of real estate	3,496		—
Return of investment from unconsolidated joint venture	1,217		—
Net cash provided by (used in) investing activities	1,284		(77)
Cash flows from financing activities:
Repayment of bridge facility, including debt extinguishment costs	(355,026)		—
Proceeds from mortgages payable	355,000		—
Payments on mortgages payable	—		(14,279)
Proceeds from credit facility revolver	70,000		—
Repayments of credit facility revolver	(89,000)		—
Distributions paid	(5,663)		—
Distributions to parent company, net	—		(10,376)
Payments of deferred financing costs	(3,096)		—
Other financing activities	(46)		—
Net cash used in financing activities	(27,831)		(24,655)
Net change in cash and cash equivalents and restricted cash	25,247		(3,384)
Cash and cash equivalents and restricted cash, beginning of period	29,318		3,915
Cash and cash equivalents and restricted cash, end of period	$	54,565	$	531
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	$	19,300	$	—
Restricted cash at the end of the period	35,265		531
Cash and cash equivalents and restricted cash at the end of the period	$	54,565	$	531

The accompanying notes are an integral part of this statement.

8

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

June 30, 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 dated as of November 11, 2021, by and among Realty Income, the Company and Orion OP (the “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 June 30, 2022, the Company owned and operated 91 office properties and related assets previously owned by Realty Income and VEREIT, totaling approximately 10.4 million leasable square feet located within 29 states and Puerto Rico. In addition, the Company owns an equity interest in OAP/VER Venture, LLC (the “Arch Street Joint Venture”), an unconsolidated joint venture with an affiliate of Arch Street Capital Partners. As of June 30, 2022, the Arch Street Joint Venture 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

June 30, 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 and six months ended June 30, 2021 as the ownership interests were under common control and ownership of Realty Income during that period. For the three and six months ended June 30, 2022, the consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture, which accounts include the Realty Income Office Assets and the VEREIT Office Assets. 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 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 and six months ended June 30, 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

June 30, 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 three and six months ended June 30, 2022, the Company recognized $0.9 million of lease termination income. During the three and six months ended June 30, 2021, the Company did not recognize any lease termination income.

Fee Income from Unconsolidated Joint Venture

The Company provides various services to its unconsolidated joint venture entity in exchange for market-based fees. Total asset and property management fees earned in connection with this entity was $0.2 million and $0.4 million for the three and six months ended June 30, 2022, respectively. No such fee income was earned for the three and six months ended June 30, 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 $35.3 million in restricted cash as of June 30, 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 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 June 30, 2022, the Company had no acquisitions. During the six months ended June 30, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of the tax advantaged bond and ground lease structure. 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 June 30, 2022. During the three and six months ended June 30, 2021, the Company had no acquisitions.

11

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

June 30, 2022 (Unaudited)

Property Dispositions and Real Estate Assets Held for Sale

During the three and six months ended June 30, 2022, the Company disposed of one property for an aggregate gross sales price of $3.7 million. The Company recorded a loss of $1.1 million related to the disposition, which is included in impairments in the accompanying consolidated and combined statements of operations. During the three and six months ended June 30, 2021, the Company had no dispositions.

During the three and six months ended June 30, 2022, there were two properties classified as held for sale with a carrying value of $9.4 million, included in real estate assets held for sale, net, primarily comprised of land of $2.0 million and building, fixtures and improvements, net of $7.4 million, in the accompanying consolidated balance sheets, and which are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. The Company recorded a loss of $5.2 million related to held for sale properties, which is included in impairments in the accompanying consolidated and combined statements of operations.

Intangible Lease Assets

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

	Weighted-Average Useful Life (Years)	June 30, 2022		December 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $113,602 and $65,247, respectively	5.0	$	223,234	$	272,743
Leasing commissions, net of accumulated amortization of $955 and $456, respectively	12.7	12,065		10,349
Above-market lease assets, net of accumulated amortization of $8,831 and $6,239, respectively	5.2	12,423		15,015
Total intangible lease assets, net		$	247,722	$	298,107
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $17,687 and $14,459, respectively	7.8	$	17,381	$	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 and $0.6 million for the three and six months ended June 30, 2022, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2021, respectively. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $24.6 million and $49.8 million for the three and six months ended June 30, 2022, respectively, and $1.5 million and $3.2 million for the three and six months ended June 30, 2021, respectively.

12

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

June 30, 2022 (Unaudited)

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 June 30, 2022 (amounts in thousands):

	Remainder of 2022		2023		2024		2025		2026		2027
In-place leases:
Total projected to be included in amortization expense	$	45,163	$	73,846	$	49,213	$	21,652	$	15,499	$	7,441
Leasing commissions:
Total projected to be included in amortization expense	$	577	$	1,153	$	1,110	$	1,042	$	1,042	$	1,039
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue	$	2,578	$	4,791	$	2,998	$	860	$	682	$	237
Below-market lease liabilities:
Total projected to be added to rental revenue	$	3,216	$	6,091	$	3,786	$	1,036	$	817	$	655

Investment in Unconsolidated Entity

The following is a summary of the Company’s investment in one unconsolidated entity, the Arch Street Joint Venture, as of June 30, 2022 and for the six months ended June 30, 2022 (dollar amounts in thousands):

	Ownership % (1)	Number of Properties	Carrying Amount of Investment			Equity in Income (Loss)
						Six Months Ended (2)
Investment	June 30, 2022		June 30, 2022		December 31, 2021	June 30, 2022		June 30, 2021
Arch Street Joint Venture (3) (4)	20%	6	$	17,283	18,631	$	(95)	—

____________________________________

(1)The Company’s ownership interest reflects its legal ownership interest. The Company’s legal ownership interest 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 the six months ended June 30, 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 $1.4 million as of June 30, 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 June 30, 2022 and December 31, 2021 (in thousands):

	June 30, 2022		December 31, 2021
Accounts receivable, net	$	16,289	$	10,194
Straight-line rent receivable, net	9,442		7,722
Total	$	25,731	$	17,916

13

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

June 30, 2022 (Unaudited)

Other assets, net consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):

	June 30, 2022		December 31, 2021
Restricted cash	$	35,265	$	—
Right-of-use assets, net (2)	25,796		30,958
Investment in unconsolidated entity	17,283		18,631
Deferred costs, net (1)	5,166		6,246
Prepaid expenses	1,424		3,730
Other assets, net	6,274		936
Total	$	91,208	$	60,501

_______________________________________________

(1)Amortization expense for deferred costs related to the revolving credit facility totaled $0.5 million and $1.1 million for the three and six months ended June 30, 2022, respectively, as compared to no deferred costs for the three and six months ended June 30, 2021. Accumulated amortization for deferred costs related to the revolving credit facility was $1.4 million and $0.3 million as of June 30, 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 and six months ended June 30, 2022. There was no amortization expense for below market right-of-use asset for the three and six months ended June 30, 2021. Includes right-of-use finance leases of $9.0 million, right-of-use operating leases of $9.8 million, and a below-market right-of-use asset of $7.1 million, net of $0.1 million in accumulated amortization as of June 30, 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.

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 June 30, 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 June 30, 2022
Assets:
Derivative assets	$	—	$	5,851	$	—	$	5,851

	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 June 30, 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.

14

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

June 30, 2022 (Unaudited)

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 six properties were deemed to be impaired resulting in impairment charges of $9.4 million during the six months ended June 30, 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 six months ended June 30, 2021.

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

	Six Months Ended June 30,
	2022
Number of properties	6
Carrying value of impaired properties	$	31,319
Provisions for impairment	(9,360)
Estimated fair value	$	21,959

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 June 30, 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 June 30, 2022		Fair Value at June 30, 2022		Carrying Amount at December 31, 2021		Fair Value at December 31, 2021
Liabilities (1):
Bridge facility	2	—		—		$	355,000	$	355,000
Mortgages payable	2	355,000		346,826		—		—
Credit facility term loan	2	175,000		175,000		175,000		175,000
Credit facility revolver	2	71,000		71,000		90,000		90,000
Total		$	601,000	$	592,826	$	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

June 30, 2022 (Unaudited)

Note 6 – Debt, Net

As of June 30, 2022, the Company had $596.0 million of debt outstanding, including net deferred financing costs, with a weighted-average years to maturity of 3.4 years and a weighted-average interest rate of 4.34%. The following table summarizes the carrying value of debt as of June 30, 2022 and December 31, 2021, and the debt activity for the six months ended June 30, 2022 (in thousands):

			Six Months Ended June 30, 2022
	Balance as of December 31, 2021		Debt Issuances		Repayments, Extinguishment and Assumptions		Accretion and Amortization		Balance as of June 30, 2022
Mortgages payable:
Outstanding balance	$	—	$	355,000	$	—	$	—	$	355,000
Deferred costs	—		(3,446)		—		266		(3,180)
Mortgages payable, net	—		351,554		—		266		351,820
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)		—		679		(1,867)
Credit facility term loan, net	172,490		(36)		—		679		173,133
Credit facility revolver:
Outstanding balance	90,000		70,000		(89,000)		—		71,000
Credit facility revolver, net	90,000		70,000		(89,000)		—		71,000
Total debt	$	616,847	$	421,518	$	(443,558)	$	1,146	$	595,953

Credit Agreement

In connection with the Separation and the Distribution, on November 12, 2021, the Company, as parent, and 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 June 30, 2022, the Company had borrowed and outstanding $71.0 million under the Revolving Facility and had $354.0 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

June 30, 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 June 30, 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 indirectl