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 September 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 October 28, 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 nine months ended September 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 nine months ended September 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 has been operating in a manner so as to qualify and has elected 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 nine months ended September 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 September 30, 2022

	Page
PART I
Item 1. Unaudited Financial Statements	4
Orion Office REIT Inc. Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	4
Orion Office REIT Inc. Consolidated and Combined Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021	5
Orion Office REIT Inc. Consolidated and Combined Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 2021	6
Orion Office REIT Inc. Consolidated and Combined Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021	7
Orion Office REIT Inc. Consolidated and Combined Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	9
Notes to Orion Office REIT Inc. Consolidated and Combined Financial Statements	10
VEREIT Office Assets Combined and Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021	26
VEREIT Office Assets Combined and Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2021	27
VEREIT Office Assets Combined and Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2021	28
Notes to VEREIT Office Assets Combined and Consolidated Financial Statements	29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
Item 4. Controls and Procedures	54
PART II
Item 1. Legal Proceedings	55
Item 1A. Risk Factors	55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	55
Item 4. Mine Safety Disclosures	55
Item 5. Other Information	55
Item 6. Exhibits	56
Signatures	57

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)

	September 30, 2022		December 31, 2021
ASSETS
Real estate investments, at cost:
Land	$	243,726	$	250,194
Buildings, fixtures and improvements	1,137,177		1,231,551
Total real estate investments, at cost	1,380,903		1,481,745
Less: accumulated depreciation	126,097		128,109
Total real estate investments, net	1,254,806		1,353,636
Accounts receivable, net	21,923		17,916
Intangible lease assets, net	223,528		298,107
Cash and cash equivalents	23,282		29,318
Real estate assets held for sale, net	6,383		—
Other assets, net	91,632		60,501
Total assets	$	1,621,554	$	1,759,478
LIABILITIES AND EQUITY
Bridge facility, net	$	—	$	354,357
Mortgages payable, net	351,994		—
Credit facility term loan, net	173,478		172,490
Credit facility revolver	31,000		90,000
Accounts payable and accrued expenses	22,038		17,379
Below-market lease liabilities, net	15,611		20,609
Distributions payable	5,664		—
Other liabilities, net	21,085		16,355
Total liabilities	620,870		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 September 30, 2022 and December 31, 2021, respectively	57		57
Additional paid-in capital	1,146,431		1,145,278
Accumulated other comprehensive income	7,057		299
Accumulated deficit	(154,273)		(58,715)
Total stockholders’ equity	999,272		1,086,919
Non-controlling interest	1,412		1,369
Total equity	1,000,684		1,088,288
Total liabilities and equity	$	1,621,554	$	1,759,478

The accompanying notes are an integral part of these statements.

4

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Rental	$	51,580	$	13,315	$	157,256	$	38,930
Fee income from unconsolidated joint venture	189		—		568		—
Total revenues	51,769		13,315		157,824		38,930
Operating expenses:
Property operating	15,303		1,660		45,773		4,611
General and administrative	4,672		594		11,480		1,665
Depreciation and amortization	32,693		5,912		100,874		17,855
Impairments	44,801		—		54,161		—
Transaction related	194		—		398		—
Spin related	—		2,797		964		2,797
Total operating expenses	97,663		10,963		213,650		26,928
Other (expenses) income:
Interest expense, net	(7,904)		(276)		(22,618)		(1,080)
Gain on disposition of real estate assets	1,059		—		1,059		—
Loss on extinguishment of debt, net	—		(3,499)		(468)		(3,499)
Other income, net	31		—		118		—
Equity in loss of unconsolidated joint venture	(157)		—		(252)		—
Total other (expenses) income, net	(6,971)		(3,775)		(22,161)		(4,579)
(Loss) income before taxes	(52,865)		(1,423)		(77,987)		7,423
Provision for income taxes	(164)		—		(494)		—
Net (loss) income	(53,029)		(1,423)		(78,481)		7,423
Net income attributable to non-controlling interest	(18)		—		(43)		—
Net (loss) income attributable to common stockholders	$	(53,047)	$	(1,423)	$	(78,524)	$	7,423
Weighted-average shares outstanding - basic and diluted	56,635		56,626		56,630		56,626
Basic and diluted net (loss) income per share attributable to common stockholders	$	(0.94)	$	(0.03)	$	(1.39)	$	0.13

The accompanying notes are an integral part of these statements.

5

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net (loss) income	$	(53,029)	$	(1,423)	$	(78,481)	$	7,423
Total other comprehensive income (loss)
Unrealized gain on interest rate derivatives	1,885		—		7,229		—
Reclassification of previous unrealized (gain) loss on interest rate derivatives into net (loss) income	(679)		—		(471)		—
Total other comprehensive income (loss)	1,206		—		6,758		—
Total comprehensive (loss) income	(51,823)		(1,423)		(71,723)		7,423
Comprehensive income attributable to non-controlling interest (1)	(18)		—		(43)		—
Total comprehensive (loss) income	$	(51,841)	$	(1,423)	$	(71,766)	$	7,423

(1)Represents comprehensive income 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, net	—	—		—		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, net	—	—		—		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
Net (loss) income	—	—		—		—		(53,047)		(53,047)		18		(53,029)
Distributions	—	—		—		—		(5,664)		(5,664)		—		(5,664)
Equity-based compensation, net	—	—		444		—		—		444		—		444
Other comprehensive income, net	—	—		—		1,206		—		1,206		—		1,206
Balance, September 30, 2022	56,635,038	$	57	$	1,146,431	$	7,057	$	(154,273)	$	999,272	$	1,412	$	1,000,684

7

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		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
Net income	—	—		—		—		—		(1,423)		(1,423)		—		(1,423)
Contributions from parent company, net	—	—		—		—		—		8,488		8,488		—		8,488
Issuance of common stock, net	100,000	—		1		—		—		—		1		—		1
Balance, September 30, 2021	100,000	$	—	$	1	$	—	$	—	$	502,654	$	502,655	$	—	$	502,655

The accompanying notes are an integral part of these statements.

8

ORION OFFICE REIT INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(78,481)	$	7,423
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	100,874		17,855
Non-cash revenue adjustments	(2,683)		(583)
Amortization of net premiums on mortgages payable	—		(60)
Impairments	54,161		—
Gain on disposition of real estate assets	(1,059)		—
Loss on extinguishment of debt, net	468		3,499
Amortization of deferred financing costs	3,295		—
Equity-based compensation	1,153		—
Equity in loss of unconsolidated joint venture	252		—
Changes in assets and liabilities:
Accounts receivable, net and other assets, net	502		(288)
Accounts payable, accrued expenses and other liabilities, net	7,435		1,652
Net cash provided by operating activities	85,917		29,498
Cash flows from investing activities:
Capital expenditures and leasing costs	(7,392)		(160)
Proceeds from disposition of real estate	22,281		—
Return of investment from unconsolidated joint venture	1,798		—
Net cash provided by (used in) investing activities	16,687		(160)
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	—		(26,851)
Proceeds from credit facility revolver	70,000		—
Repayments of credit facility revolver	(129,000)		—
Distributions paid	(11,327)		—
Distributions to parent company, net	—		(1,887)
Payments of deferred financing costs	(3,096)		—
Other financing activities	(46)		—
Payments upon extinguishment of mortgage notes payable	—		(3,984)
Net cash used in financing activities	(73,495)		(32,722)
Net change in cash and cash equivalents and restricted cash	29,109		(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	$	58,427	$	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	$	23,282	$	—
Restricted cash at the end of the period	35,145		531
Cash and cash equivalents and restricted cash at the end of the period	$	58,427	$	531

The accompanying notes are an integral part of these statements.

9

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 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 has been operating in a manner so as to qualify and has elected 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 September 30, 2022, the Company owned and operated 87 office properties and related assets previously owned by Realty Income and VEREIT, totaling approximately 10.0 million leasable square feet located within 29 states. 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, LLC (“Arch Street Capital Partners”). As of September 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.

10

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 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 nine months ended September 30, 2021 as the ownership interests were under common control and ownership of Realty Income during that period. For the three and nine months ended September 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.

Reclassification

Acquisition, disposition, and leasing deal related costs incurred by the Company, previously included in the acquisition related line on the statements of operations, have been presented in the transaction related line for prior periods presented to be consistent with the current period presentation. Spin related costs are costs incurred by the Company in connection with the Separation and the Distribution. These costs were previously included in the transaction costs line on the statements of operations and have been presented in the spin related line for prior periods presented to be consistent with the current period presentation. These reclassifications had no effect on the reported results of operations.

11

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 2022 (Unaudited)

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. 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 nine months ended September 30, 2022, the Company recorded a reduction to rental revenue of $0.5 million for property operating expense reimbursements not probable of collection. During the three and nine months ended September 30, 2021, the Company did not record 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.

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 (i.e., the property operating expenses paid directly by tenants are not included in the Company’s financial statements).

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 and lease incentives. During the nine months ended September 30, 2022, the Company recognized $0.9 million of lease termination income. During the three months ended September 30, 2022 and the three and nine months ended September 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 $0.6 million for the three and nine months ended September 30, 2022, respectively. No such fee income was earned for the three and nine months ended September 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 $35.1 million in restricted cash as of September 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.

12

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 2022 (Unaudited)

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 have evaluated 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 and do not expect it to have a material impact on our consolidated and combined statements.

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the three months ended September 30, 2022, the Company had no acquisitions. During the nine months ended September 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 September 30, 2022. During the three and nine months ended September 30, 2021, the Company had no acquisitions.

Property Dispositions and Real Estate Assets Held for Sale

During the nine months ended September 30, 2022, the Company disposed of five properties for an aggregate gross sales price of $23.1 million. The Company recorded a loss of $1.1 million related to two dispositions, which is included in impairments in the accompanying consolidated and combined statements of operations. Additionally, the Company recorded a gain of $1.1 million related to the remaining three dispositions, which is included in gain on disposition of real estate assets in the accompanying consolidated and combined statements of operations. During the nine months ended September 30, 2021, the Company had no dispositions.

As of September 30, 2022, there were three properties classified as held for sale with a carrying value of $6.4 million, included in real estate assets held for sale, net, primarily comprised of land of $1.2 million and building, fixtures and improvements, net of $5.2 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. During the nine months ended September 30, 2022, the Company recorded a loss of $6.0 million related to held for sale properties, which is included in impairments in the accompanying consolidated and combined statements of operations.

13

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 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)	September 30, 2022		December 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $129,123 and $65,247, respectively	5.2	$	199,336	$	272,743
Leasing commissions, net of accumulated amortization of $1,244 and $456, respectively	12.7	11,776		10,349
Above-market lease assets, net of accumulated amortization of $10,127 and $6,239, respectively	5.4	11,127		15,015
Deferred lease incentives, net of accumulated amortization of $36	4.5	1,289		—
Total intangible lease assets, net		$	223,528	$	298,107
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $15,706 and $14,459, respectively	8.1	$	15,611	$	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 $0.9 million for the three and nine months ended September 30, 2022, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2021, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was less than $0.1 million for the three and nine months ended September 30, 2022, as compared to no impact to rental revenue for the three and nine months ended September 30, 2021. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $23.7 million and $73.5 million for the three and nine months ended September 30, 2022, respectively, and $1.6 million and $4.8 million for the three and nine months ended September 30, 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 September 30, 2022 (amounts in thousands):

	Remainder of 2022		2023		2024		2025		2026		2027
In-place leases:
Total projected to be included in amortization expense	$	21,496	$	73,615	$	49,213	$	21,652	$	15,499	$	7,441
Leasing commissions:
Total projected to be included in amortization expense	$	288	$	1,153	$	1,110	$	1,042	$	1,042	$	1,039
Above-market lease assets:
Total projected to be deducted from rental revenue	$	1,282	$	4,791	$	2,998	$	860	$	682	$	237
Deferred lease incentives:
Total projected to be deducted from rental revenue	$	76	$	306	$	306	$	289	$	191	$	119
Below-market lease liabilities:
Total projected to be added to rental revenue	$	1,543	$	5,994	$	3,786	$	1,036	$	817	$	655

14

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 2022 (Unaudited)

Investment in Unconsolidated Joint Venture

The following is a summary of the Company’s investment in one unconsolidated entity, the Arch Street Joint Venture, as of September 30, 2022 and December 31, 2021 and for the nine months ended September 30, 2022 and 2021 (dollar amounts in thousands):

	Ownership % (1)	Number of Properties	Carrying Amount of Investment			Equity in Loss
						Nine Months Ended (2)
Investment	September 30, 2022		September 30, 2022		December 31, 2021	September 30, 2022		September 30, 2021
Arch Street Joint Venture (3) (4)	20%	6	$	16,544	18,631	$	(252)	—

____________________________________

(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 loss reflects operations following the Merger Effective Time.

(3)During the nine months ended September 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 $1.2 million as of September 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 September 30, 2022 and December 31, 2021 (in thousands):

	September 30, 2022		December 31, 2021
Accounts receivable, net	$	11,567	$	10,194
Straight-line rent receivable, net	10,356		7,722
Total	$	21,923	$	17,916

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

	September 30, 2022		December 31, 2021
Restricted cash	$	35,145	$	—
Right-of-use assets, net (1)	25,567		30,958
Investment in unconsolidated entity	16,544		18,631
Derivative assets	7,057		299
Deferred costs, net (2)	4,616		6,246
Prepaid expenses	2,058		3,730
Other assets, net	645		637
Total	$	91,632	$	60,501

_______________________________________________

(1)Amortization expense for below market right-of-use asset was less than $0.1 million for the three and nine months ended September 30, 2022. There was no amortization expense for below market right-of-use asset for the three and nine months ended September 30, 2021. Includes right-of-use finance leases of $9.0 million, right-of-use operating leases of $9.6 million, and a below-market right-of-use asset of $7.1 million, net of $0.2 million in accumulated amortization as of September 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.

(2)Amortization expense for deferred costs related to the revolving credit facility totaled $0.5 million and $1.6 million for the three and nine months ended September 30, 2022, respectively, as compared to no amortization expense for deferred costs for the three and nine months ended September 30, 2021. Accumulated amortization for deferred costs related to the revolving credit facility was $1.9 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively.

15

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 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 September 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 September 30, 2022
Assets:
Derivative assets	$	—	$	7,057	$	—	$	7,057

	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 swap agreements entered into in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility (as defined in Note 6 - Debt, Net). 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 September 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.

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 ten properties were deemed to be impaired resulting in impairment charges of $54.2 million during the nine months ended September 30, 2022, that relate to adjustments to expected sales prices for certain non-core assets which have been identified by management for potential sale or management determined would not be re-leased by the existing tenant.

There were no impairment charges recorded during the nine months ended September 30, 2021.The following table summarizes our provisions for impairment during the periods indicated below (dollars in thousands):

	Nine Months Ended September 30,
	2022
Number of properties	10
Carrying value of impaired properties	$	98,633
Provisions for impairment	(54,161)
Estimated fair value	$	44,472

16

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 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 nine months ended September 30, 2022, the fair value measurement for eight impaired properties was determined by applying an estimated sales price based on market data and two impaired properties by applying a discount rate of 8.5% and capitalization rate of 8.0%. During the nine months ended September 30, 2022, impairment charges of $44.0 million were recorded for held and used properties, $1.6 million for held for sale properties, and $8.6 million for disposed properties.

The following table presents certain of the Company’s assets measured at fair value on a non-recurring basis as of September 30, 2022, aggregated by the level in the fair value hierarchy within which those assets fall (in thousands):

	Level 1		Level 2(1)		Level 3(1)		Balance as of September 30, 2022
Assets of properties held and used	$	—	$	1,000	$	22,339	$	23,339
Assets of properties held for sale(2)	—		4,782		—		4,782
	$	—	$	5,782	$	22,339	$	28,121

______________________________________________

(1)The fair value of the level 2 category was derived using negotiated sales prices and the fair value of the level 3 category was derived using discounted cash flow analysis and management estimates of selling prices.

(2)An additional property is included in real estate assets held for sale, net on the balance sheets at a carrying value of $1.6 million.