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, 2023

	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.)
2398 E. Camelback Road, Suite 1060	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	x	Non-accelerated filer	o
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 55,780,054 shares of common stock of Orion Office REIT Inc. outstanding as of November 3, 2023.

ORION OFFICE REIT INC.

For the quarterly period ended September 30, 2023

	Page
PART I
Item 1. Unaudited Financial Statements	3
Orion Office REIT Inc. Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	3
Orion Office REIT Inc. Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022	4
Orion Office REIT Inc. Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022	5
Orion Office REIT Inc. Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2023 and 2022	6
Orion Office REIT Inc. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	8
Notes to Orion Office REIT Inc. Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	44
PART II
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	45
Item 3. Defaults Upon Senior Securities	45
Item 4. Mine Safety Disclosures	45
Item 5. Other Information	46
Item 6. Exhibits	46
Signatures	47

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements.

ORION OFFICE REIT INC.

CONSOLIDATED BALANCE SHEETS

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

	September 30, 2023		December 31, 2022
ASSETS
Real estate investments, at cost:
Land	$	227,203	$	238,225
Buildings, fixtures and improvements	1,106,383		1,128,400
Total real estate investments, at cost	1,333,586		1,366,625
Less: accumulated depreciation	156,904		133,379
Total real estate investments, net	1,176,682		1,233,246
Accounts receivable, net	26,911		21,641
Intangible lease assets, net	144,304		202,832
Cash and cash equivalents	32,286		20,638
Real estate assets held for sale, net	3,818		2,502
Other assets, net	120,390		90,214
Total assets	$	1,504,391	$	1,571,073
LIABILITIES AND EQUITY
Mortgages payable, net	$	352,683	$	352,167
Credit facility term loan, net	—		173,815
Credit facility revolver	175,000		—
Accounts payable and accrued expenses	30,570		26,161
Below-market lease liabilities, net	9,481		14,068
Distributions payable	5,578		5,664
Other liabilities, net	21,811		23,340
Total liabilities	595,123		595,215
Common stock, $0.001 par value, 100,000,000 shares authorized 55,780,054 and 56,639,040 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	56		57
Additional paid-in capital	1,143,825		1,147,014
Accumulated other comprehensive income	986		6,308
Accumulated deficit	(237,026)		(178,910)
Total stockholders’ equity	907,841		974,469
Non-controlling interest	1,427		1,389
Total equity	909,268		975,858
Total liabilities and equity	$	1,504,391	$	1,571,073

The accompanying notes are an integral part of these statements.

3

ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Rental	$	48,876	$	51,580	$	150,690	$	157,256
Fee income from unconsolidated joint venture	200		189		600		568
Total revenues	49,076		51,769		151,290		157,824
Operating expenses:
Property operating	15,506		15,303		46,337		45,773
General and administrative	4,367		4,672		13,241		11,480
Depreciation and amortization	27,013		32,693		83,056		100,874
Impairments	11,403		44,801		26,976		54,161
Transaction related	101		194		356		398
Spin related	—		—		—		964
Total operating expenses	58,390		97,663		169,966		213,650
Other (expenses) income:
Interest expense, net	(7,380)		(7,904)		(21,741)		(22,618)
Gain on disposition of real estate assets	18		1,059		18		1,059
Loss on extinguishment of debt, net	—		—		(504)		(468)
Other income, net	437		31		638		118
Equity in loss of unconsolidated joint venture, net	(108)		(157)		(326)		(252)
Total other (expenses) income, net	(7,033)		(6,971)		(21,915)		(22,161)
Loss before taxes	(16,347)		(52,865)		(40,591)		(77,987)
Provision for income taxes	(160)		(164)		(505)		(494)
Net loss	(16,507)		(53,029)		(41,096)		(78,481)
Net income attributable to non-controlling interest	(12)		(18)		(38)		(43)
Net loss attributable to common stockholders	$	(16,519)	$	(53,047)	$	(41,134)	$	(78,524)
Weighted-average shares outstanding - basic and diluted	56,543		56,635		56,621		56,630
Basic and diluted net loss per share attributable to common stockholders	$	(0.29)	$	(0.94)	$	(0.73)	$	(1.39)

The accompanying notes are an integral part of these statements.

4

ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(16,507)	$	(53,029)	$	(41,096)	$	(78,481)
Total other comprehensive income (loss):
Unrealized gain on interest rate derivatives	37		1,885		386		7,229
Reclassification of previous unrealized gain on interest rate derivatives into net loss	(2,077)		(679)		(5,708)		(471)
Total other comprehensive income (loss)	(2,040)		1,206		(5,322)		6,758
Total comprehensive loss	(18,547)		(51,823)		(46,418)		(71,723)
Comprehensive income attributable to non-controlling interest	(12)		(18)		(38)		(43)
Total comprehensive loss attributable to common stockholders	$	(18,559)	$	(51,841)	$	(46,456)	$	(71,766)

The accompanying notes are an integral part of these statements.

5

ORION OFFICE REIT INC.

CONSOLIDATED 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 Interest		Total Equity
Balance, January 1, 2023	56,639,040	$	57	$	1,147,014	$	6,308	$	(178,910)	$	974,469	$	1,389	$	975,858
Net (loss) income	—	—		—		—		(8,885)		(8,885)		11		(8,874)
Distributions	—	—		—		—		(5,721)		(5,721)		—		(5,721)
Repurchases of common stock to settle tax obligations	(12,728)	—		(74)		—		—		(74)		—		(74)
Equity-based compensation, net	37,615	—		526		—		—		526		—		526
Other comprehensive income, net	—	—		—		(1,768)		—		(1,768)		—		(1,768)
Balance, March 31, 2023	56,663,927	$	57	$	1,147,466	$	4,540	$	(193,516)	$	958,547	$	1,400	$	959,947
Net (loss) income	—	—		—		—		(15,730)		(15,730)		15		(15,715)
Distributions	—	—		—		—		(5,683)		(5,683)		—		(5,683)
Equity-based compensation, net	31,764	—		689		—		—		689		—		689
Other comprehensive income, net	—	—		—		(1,514)		—		(1,514)		—		(1,514)
Balance, June 30, 2023	56,695,691	$	57	$	1,148,155	$	3,026	$	(214,929)	$	936,309	$	1,415	$	937,724
Net (loss) income	—	—		—		—		(16,519)		(16,519)		12		(16,507)
Distributions	—	—		—		—		(5,578)		(5,578)		—		(5,578)
Repurchases of common stock under Share Repurchase Program	(915,637)	(1)		(5,017)		—		—		(5,018)		—		(5,018)
Equity-based compensation, net	—	—		687		—		—		687		—		687
Other comprehensive income, net	—	—		—		(2,040)		—		(2,040)		—		(2,040)
Balance, September 30, 2023	55,780,054	$	56	$	1,143,825	$	986	$	(237,026)	$	907,841	$	1,427	$	909,268

6

ORION OFFICE REIT INC.

CONSOLIDATED 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 Interest		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

The accompanying notes are an integral part of these statements.

7

ORION OFFICE REIT INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(41,096)	$	(78,481)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	83,056		100,874
Non-cash revenue adjustments, net	(6,562)		(2,683)
Impairments	26,976		54,161
Gain on disposition of real estate assets	(18)		(1,059)
Loss on extinguishment of debt, net	504		468
Amortization of deferred financing costs	3,041		3,295
Equity-based compensation	1,902		1,153
Equity in loss of unconsolidated joint venture, net	326		252
Changes in assets and liabilities:
Accounts receivable, net and other assets, net	(2,545)		502
Accounts payable, accrued expenses and other liabilities, net	4,004		7,435
Net cash provided by operating activities	69,588		85,917
Cash flows from investing activities:
Capital expenditures and leasing costs	(12,746)		(7,392)
Proceeds from disposition of real estate, net	13,767		22,281
Return of investment from unconsolidated joint venture	1,374		1,798
Deposits for real estate assets	(2,340)		—
Refunds of deposits for real estate assets	2,340		—
Proceeds from the settlement of property-related insurance claims	757		—
Net cash provided by investing activities	3,152		16,687
Cash flows from financing activities:
Repayment of bridge facility, including debt extinguishment costs	—		(355,026)
Proceeds from mortgages payable	—		355,000
Proceeds from credit facility revolver	175,000		70,000
Repayments of credit facility revolver	—		(129,000)
Repayment of credit facility term loan	(175,000)		—
Payments of deferred financing costs	(5,654)		(3,096)
Repurchases of common stock under Share Repurchase Program	(5,018)		—
Repurchases of common stock to settle tax obligations	(74)		—
Payments of deferred equity offering costs	(41)		—
Distributions paid	(17,000)		(11,327)
Other financing activities	(68)		(46)
Net cash used in financing activities	(27,855)		(73,495)
Net change in cash and cash equivalents and restricted cash	44,885		29,109
Cash and cash equivalents and restricted cash, beginning of period	55,311		29,318
Cash and cash equivalents and restricted cash, end of period	$	100,196	$	58,427
Reconciliation of Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents at beginning of period	$	20,638	$	29,318
Restricted cash at beginning of period	34,673		—
Cash and cash equivalents and restricted cash at beginning of period	$	55,311	$	29,318
Cash and cash equivalents at end of period	$	32,286	$	23,282
Restricted cash at end of period	67,910		35,145
Cash and cash equivalents and restricted cash at end of period	$	100,196	$	58,427

The accompanying notes are an integral part of these statements.

8

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

Note 1 – Organization

Organization

Orion Office REIT Inc. (the “Company”, “Orion”, “we” or “us”) is an internally managed real estate investment trust (“REIT”) engaged in the ownership, acquisition, and management of a diversified portfolio of mission-critical regional and corporate headquarters office buildings located in high-quality suburban markets across the U.S. and leased primarily on a single-tenant net lease basis to creditworthy tenants. The Company was incorporated in the state of Maryland on July 1, 2021 and has been operating in a manner so as to qualify and has elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with its initial taxable year ended December 31, 2021.

The Company was initially formed as a wholly-owned subsidiary of Realty Income Corporation (“Realty Income”). Following completion of the merger transaction involving Realty Income and VEREIT, Inc. (“VEREIT”) on November 1, 2021, Realty Income contributed the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income, and certain office real properties and related assets previously owned by subsidiaries of VEREIT (the “Separation”), to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”), and on November 12, 2021, effected a special distribution to its stockholders of all the outstanding shares of common stock of the Company (the “Distribution”).

Following the Distribution, the Company became independent and publicly traded and its common stock, par value $0.001 per share, trades on the New York Stock Exchange (the “NYSE”) under the symbol “ONL”.

As of September 30, 2023, the Company owned and operated 79 office properties and related assets totaling approximately 9.3 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, 2023, 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 Presentation

The consolidated 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 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 consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2023. 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.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in the Company’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of 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

9

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

its activities without additional subordinated financial support or where equity investors, as a group, lack one or more 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 U.S. 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

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.

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 on a gross basis. Property operating expenses paid directly by tenants are recorded on a net basis (i.e., treated as fully offset by an identical amount of assumed reimbursement revenue) and, therefore, are not included in the Company’s consolidated financial statements.

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, 2023, the Company recorded a reduction to rental revenue of less than $0.1 million for income not probable of collection. 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.

Rental revenue also includes lease termination income collected from tenants to allow for the tenants to settle their lease obligations and/or 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 three and nine months ended September 30, 2023, the Company recognized $1.0 million and $4.1 million of lease termination income, respectively. During the nine months ended September 30, 2022, the Company recognized $0.9 million of lease termination income.

Fee Income from Unconsolidated Joint Venture

The Company provides various services to the Arch Street Joint Venture in exchange for market-based fees. Total asset and property management fees earned in connection with this entity was $0.2 million for the three months ended September 30, 2023 and 2022 and $0.6 million for the nine months ended September 30, 2023 and 2022.

10

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

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 $67.9 million and $34.7 million in restricted cash as of September 30, 2023 and December 31, 2022, primarily comprised of reserves held by the lender under the CMBS Loan (as defined in Note 6 – Debt, Net) for future rent concessions and tenant improvement allowances and excess cash held by the administrative agent under the Revolving Facility (as defined in Note 6 – Debt, Net) to be used to prepay borrowings under the Revolving Facility upon the scheduled expiration in November 2023 (or earlier termination) of the Company’s interest rate swap agreements with respect to $175.0 million of borrowings thereunder. Restricted cash is included in other assets, net on the Company’s consolidated balance sheets.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that the Company has yet to adopt as of September 30, 2023, that are expected to have a significant impact on its consolidated financial statements.

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the three and nine months ended September 30, 2023, 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. The Company did not have any other acquisitions during the three and nine months ended September 30, 2022.

Property Dispositions and Real Estate Assets Held for Sale

The following table summarizes the Company’s property dispositions for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Total dispositions	2		4		2		5
Aggregate gross sales price	$	14,050	$	19,530	$	14,050	$	23,130
Gain on disposition of real estate assets	$	18	$	1,059	$	18	$	1,059
Property count	2		3		2		3
Impairments on disposition of real estate assets	$	—	$	21	$	—	$	1,098
Property count	—		1		—		2

As of September 30, 2023, the Company had two properties classified as held for sale with a carrying value of $3.8 million, primarily comprised of land of $1.1 million and building, fixtures and improvements, net, of $2.7 million, included in real estate assets held for sale, net in the accompanying consolidated balance sheets, which it expects to be sold in the next 12 months as part of its portfolio management strategy. During the nine months ended September 30, 2023 and 2022, the Company recorded losses of $4.4 million and $6.0 million, respectively, related to held for sale properties, which are included in impairments in the accompanying consolidated statements of operations. One of the properties classified as held for sale as of September 30, 2023 was sold during October 2023. See Note 15 – Subsequent Events, below.

11

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

Intangible Lease Assets and Liabilities

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

	Weighted-Average Useful Life (Years)	September 30, 2023		December 31, 2022
Intangible lease assets:
In-place leases, net of accumulated amortization of $185,587 and $144,798, respectively	6.1	$	121,165	$	177,698
Leasing commissions, net of accumulated amortization of $2,651 and $1,553, respectively	12.4	13,493		13,614
Above-market lease assets, net of accumulated amortization of $13,798 and $11,391, respectively	6.5	6,052		9,826
Deferred lease incentives, net of accumulated amortization of $303 and $116, respectively	9.1	3,594		1,694
Total intangible lease assets, net		$	144,304	$	202,832
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $21,769 and $17,249, respectively	9.9	$	9,481	$	14,068

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 $0.8 million for the three and nine months ended September 30, 2023, respectively, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2022, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was $0.2 million for the nine months ended September 30, 2023, as compared to less than $0.1 million for the three and nine months ended September 30, 2022. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $18.5 million and $57.4 million for the three and nine months ended September 30, 2023, respectively, and $23.7 million and $73.5 million for the three and nine months ended September 30, 2022, 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, 2023 (in thousands):

	Remainder of 2023		2024		2025		2026		2027		2028
In-place leases:
Total projected to be included in amortization expense	$	17,157	$	49,039	$	21,608	$	15,499	$	7,441	$	4,592
Leasing commissions:
Total projected to be included in amortization expense	$	373	$	1,450	$	1,382	$	1,379	$	1,356	$	1,207
Above-market lease assets:
Total projected to be deducted from rental revenue	$	1,042	$	2,964	$	850	$	682	$	237	$	115
Deferred lease incentives:
Total projected to be deducted from rental revenue	$	84	$	338	$	321	$	223	$	200	$	186
Below-market lease liabilities:
Total projected to be added to rental revenue	$	1,407	$	3,786	$	1,036	$	817	$	655	$	571

12

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

Investment in Unconsolidated Joint Venture

The following is a summary of the Company’s investment in the Arch Street Joint Venture, as of September 30, 2023 and December 31, 2022 and for the nine months ended September 30, 2023 and 2022 (dollars in thousands):

	Ownership % (1)	Number of Properties	Carrying Value of Investment			Equity in Loss, Net
						Nine Months Ended
Investment	September 30, 2023		September 30, 2023		December 31, 2022	September 30, 2023		September 30, 2022
Arch Street Joint Venture (2) (3)	20%	6	$	14,124	15,824	$	(326)	(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 interest.

(2)During the three and nine months ended September 30, 2023 and 2022, the Arch Street Joint Venture did not acquire any properties.

(3)The total carrying value of the Company’s investment in the Arch Street Joint Venture was greater than the underlying equity in net assets by $0.5 million and $0.9 million as of September 30, 2023 and December 31, 2022, respectively. This difference is related to a step up in the fair value of the investment in the Arch Street Joint Venture in connection with the Separation and the Distribution. The step up in fair value was allocated based on the underlying assets and liabilities of the Arch Street Joint Venture and is being amortized over the estimated useful lives of the respective assets and liabilities in accordance with the Company’s accounting policies.

Note 4 – Receivables and Other Assets:

Accounts receivable, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

	September 30, 2023		December 31, 2022
Accounts receivable, net	$	11,961	$	10,461
Straight-line rent receivable, net	14,950		11,180
Total	$	26,911	$	21,641

Other assets, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

	September 30, 2023		December 31, 2022
Restricted cash	$	67,910	$	34,673
Right-of-use assets, net (1)	25,650		26,422
Investment in unconsolidated joint venture	14,124		15,824
Deferred costs, net (2)	8,444		4,619
Prepaid expenses	2,203		1,305
Derivative assets	986		6,308
Other assets, net	1,073		1,063
Total	$	120,390	$	90,214

____________________________________

(1)Amortization expense for below market right-of-use asset was less than $0.1 million and $0.1 million, respectively, for the three and nine months ended September 30, 2023 and 2022. Includes right-of-use finance leases of $9.0 million, right-of-use operating leases of $9.9 million, and a below-market right-of-use asset, net of $6.7 million as of September 30, 2023. Includes right-of-use finance leases of $9.0 million, right-of-use operating leases of $10.6 million, and a below-market right-of-use asset, net of $6.8 million as of December 31, 2022.

(2)Amortization expense for deferred costs related to the Revolving Facility totaled $0.8 million and $1.8 million for the three and nine months ended September 30, 2023, respectively, as compared to $0.5 million and $1.6 million for the three and nine months ended September 30, 2022, respectively. Accumulated amortization for deferred costs related to the Revolving Facility was $4.3 million and $2.5 million as of September 30, 2023 and December 31, 2022, respectively. Additional deferred costs related to the Revolving Facility of $5.6 million were capitalized during the nine months ended September 30, 2023 in connection with the second amendment to the Credit Agreement, as defined below and discussed in Note 6 – Debt, Net. Deferred costs, net also includes outstanding deferred equity offering costs of $0.6 million and $0.5 million, which will be offset against additional paid in capital for future issuances of shares of the Company’s common stock, as of September 30, 2023 and December 31, 2022, respectively.

13

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (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, 2023 and December 31, 2022, 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, 2023
Derivative assets	$	—	$	986	$	—	$	986

	Level 1		Level 2		Level 3		Balance as of December 31, 2022
Derivative assets	$	—	$	6,308	$	—	$	6,308

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 with an aggregate notional amount of $175.0 million (as described 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, 2023 and December 31, 2022, 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, right of use assets and its investment in the Arch Street Joint Venture, 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 and 10 properties were deemed to be impaired during the nine months ended September 30, 2023 and 2022, respectively, resulting in impairment charges of $27.0 million and $54.2 million during the nine months ended September 30, 2023 and 2022, respectively. The impairment charges were incurred primarily with respect to real estate assets expected to be sold and reflect changes in the Company’s future cash flow assumptions for agreed-upon or estimated sale proceeds, as well as changes to assumptions with regard to management’s intent to sell or lease the real estate assets.

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

	Nine Months Ended September 30,
	2023		2022
Number of properties	6		10
Carrying value of impaired properties	$	54,803	$	98,633
Provisions for impairment	(26,976)		(54,161)
Estimated fair value	$	27,827	$	44,472

14

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (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 rates; (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, 2023, the fair value measurement for five properties was determined based on sales prices under definitive agreements and the one remaining property was determined by applying an estimated sales price based on market data. During the nine months ended September 30, 2023, impairment charges of $14.0 million were recorded for held and used properties, $8.4 million impairment charges were recorded for held for sale properties and $4.6 million for disposed properties.

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, and $1.6 million impairment charges were recorded 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, 2023 and December 31, 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, 2023
Assets of properties held and used	$	—	$	10,000	$	2,762	$	12,762
Assets of properties held for sale	—		1,316		—		1,316
Total	$	—	$	11,316	$	2,762	$	14,078

	Level 1		Level 2 (1)		Level 3 (1)		Balance as of December 31, 2022
Assets of properties held and used	$	—	$	38,900	$	11,957	$	50,857
Assets of properties held for sale	—		2,502		—		2,502
Total	$	—	$	41,402	$	11,957	$	53,359

____________________________________

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

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 long-term financial instruments are reported below (dollars in thousands):

	Level	Carrying Value at September 30, 2023		Fair Value at September 30, 2023		Carrying Value at December 31, 2022		Fair Value at December 31, 2022
Assets:
Derivative assets	2	$	986	$	986	$	6,308	$	6,308
Liabilities (1):
Mortgages payable	2	355,000		332,924		355,000		332,323
Credit facility term loan	2	—		—		175,000		175,000
Credit facility revolver	2	175,000		175,000		—		—
Total		$	530,000	$	507,924	$	530,000	$	507,323

____________________________________

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

15

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

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.

Note 6 – Debt, Net

As of September 30, 2023, the Company had $527.7 million of debt outstanding, including net deferred financing costs, with a weighted-average years to maturity of 3.1 years and a weighted-average interest rate of 4.63%. The following table summarizes the carrying value of debt as of September 30, 2023 and December 31, 2022, and the debt activity for the nine months ended September 30, 2023 (in thousands):

			Nine Months Ended September 30, 2023
	Balance as of December 31, 2022		Debt Issuances		Repayments, Extinguishment and Assumptions		Accretion and Amortization		Balance as of September 30, 2023
Mortgages payable:
Outstanding balance	$	355,000	$	—	$	—	$	—	$	355,000
Deferred costs	(2,833)		—		—		516		(2,317)
Mortgages payable, net	352,167		—		—		516		352,683
Credit facility term loan:
Outstanding balance	175,000		—		(175,000)		—		—
Deferred costs	(1,185)		—		504		681		—
Credit facility term loan, net	173,815		—		(174,496)		681		—
Credit facility revolver	—		175,000		—		—		175,000
Total debt	$	525,982	$	175,000	$	(174,496)	$	1,197	$	527,683

The following table summarizes the scheduled aggregate principal repayments due on the Company’s debt outstanding as of September 30, 2023 (in thousands):

	Total
October 1, 2023 to December 31, 2023	$	—
2024	—
2025	—
2026 (1)	175,000
2027	355,000
Total	$	530,000

____________________________________

(1)As described below, the Company’s Revolving Facility is scheduled to mature on November 12, 2024 and Orion OP has an option to extend the maturity date to May 12, 2026. This table assumes exercise of the extension option.

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 “Credit Agreement”) providing for a three-year, $425.0 million senior revolving credit facility (the “Revolving Facility”), including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million senior term loan facility (the “Term Loan Facility”) 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”) providing for a six-month, $355.0 million senior bridge term loan facility (the “Bridge Facility”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

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. In June 2023, as further described below, the Term Loan Facility was repaid and retired with borrowings under the Revolving Facility and, as of September 30, 2023,

16

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

$175.0 million of principal amount was outstanding under the Revolving Facility with $250.0 million available for future borrowings thereunder, including the $25.0 million letter of credit sub-facility.

The Company and Orion OP have entered into two amendments to the Credit Agreement. The purpose of the first amendment entered into in December 2022 was to change the benchmark rate for borrowings under the Credit Agreement from LIBOR to SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York). The purpose of the second amendment entered into in June 2023 was to repay and retire $175.0 million of outstanding borrowings under the Term Loan Facility with borrowings from the Revolving Facility which was undrawn at the time of the second amendment, provide Orion OP with the option to extend the maturity of the Revolving Facility for an additional 18 months to May 12, 2026 from November 12, 2024 and to effect certain other modifications. The extension option may be exercised beginning on May 16, 2024 and is subject to customary conditions including there being no default or event of default and the payment of an extension fee.

Giving effect to the amendments described above, the interest rate applicable to the loans under the Revolving Facility may be determined, at the election of Orion OP, on the basis of Daily Simple SOFR, Term SOFR or a base rate, in the case of a SOFR loan, plus a SOFR adjustment of 0.10% per annum, and in the case of a SOFR loan or a base rate loan, plus an applicable margin of 3.25% for SOFR loans and 2.25% for base rate loans. Loans under the Revolving Facility may be prepaid and reborrowed, and unused commitments under the Revolving Facility may be reduced, at any time, in whole or in part, by Orion OP, without premium or penalty (except for SOFR breakage costs).

In December 2022, the Company entered into interest rate swap agreements with an aggregate notional amount of $175.0 million, which has effectively fixed the interest rate on $175.0 million of principal under the Revolving Facility at 3.92% per annum until November 12, 2023. Upon the scheduled expiration of the interest rate swap agreements, the Company’s borrowing cost on the Revolving Facility will no longer be effectively fixed, but rather will float and, therefore, the Company’s borrowing cost on the Revolving Facility will immediately shift to prevailing short-term interest rates based on the benchmark and applicable margin described above, and the Company will be exposed to interest rate fluctuations on these borrowings.

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 Revolving Facility is guaranteed pursuant to a guaranty 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 Revolving Facility is secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors.

The Revolving Facility requires that Orion OP comply with various covenants, including covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends. Pursuant to the second amendment described above, if, on any day, Orion OP has unrestricted cash and cash equivalents in excess of $25.0 million (excluding amounts that are then designated for application or use and are subsequently used for such purposes within 30 days), Orion OP will use (or, under certain circumstances, set aside in an escrow account established by the administrative agent) such excess amount to prepay loans under the Revolving Facility, without premium or penalty and without any reduction in the lenders’ commitment under the Revolving Facility. As of September 30, 2023, the Company had $33.2 million of restricted cash deposited in an escrow account with the administrative agent under the Revolving Facility as additional cash collateral. These funds will, in accordance with Orion OP’s obligations described above, be used to prepay borrowings under the Revolving Facility upon the scheduled expiration in November 2023 (or earlier termination) of the Company’s interest rate swap agreements with respect to $175.0 million of borrowings thereunder.

In addition, the Revolving Facility giving effect to the modifications pursuant to the second amendment described above, requires that Orion OP satisfy the following financial covenants:

•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 0.40 to 1.00;

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

17

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

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

•the unencumbered asset value maintained by Orion OP must be at least $600.0 million.

Pursuant to the second amendment described above, if the ratio of unsecured debt to unencumbered asset value exceeds 0.35 to 1.00 as of the end of two consecutive fiscal quarters, Orion OP will be required, within 90 days and subject to cure rights, to grant the administrative agent a first priority lien on all the properties included in the pool of unencumbered assets (other than properties identified for disposition by the Company so long as such properties are sold within one year of such identification).

As of September 30, 2023, Orion OP was in compliance with the Revolving Facility financial covenants.

The Revolving Facility includes 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 Revolving Facility. The Revolving Facility also includes 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 Revolving Facility to be immediately due and payable and foreclose on the collateral securing the Revolving Facility.

CMBS Loan

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

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

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

The CMBS Loan is generally not freely prepayable by the Mortgage Borrowers without payment of certain prepayment premiums and costs. The CMBS Loan may be prepaid in whole, but not in part, except as provided in the loan agreement governing the CMBS Loan (the “CMBS Loan Agreement”), at any time following the Prepayment Lockout Release Date (as defined in the CMBS Loan Agreement) (generally in March 2024, two years after the CMBS Loan has been fully securitized), subject to the payment of a yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement. Further, releases of individual properties are permitted in connection with an arms’ length third party sale upon repayment of the Release Price (as defined in the CMBS Loan Agreement) for the applicable individual property and subject to payment of the applicable yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan Agreement.

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

In connection with the CMBS Loan Agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the “Guaranty”), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than $355.0 million and liquid assets of no less than $10.0 million, in each case, exclusive of the values of the collateral for the CMBS Loan. As of September 30, 2023, the Company was in compliance with these financial covenants.

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

18

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

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

The Company’s mortgages payable consisted of the following as of September 30, 2023 (dollars in thousands):

	Encumbered Properties	Net Carrying Value of Collateralized Properties (1)		Outstanding Balance		Weighted-Average Interest Rate		Weighted-Average Years to Maturity
Fixed-rate debt	19	$	441,293	$	355,000	4.97	%	3.4

____________________________________

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

The table above does not include mortgage notes associated with the Arch Street Joint Venture of $136.7 million as of September 30, 2023.

Note 7 – Derivatives and Hedging Activities

Cash Flow Hedges of Interest Rate Risk

As of each of September 30, 2023 and December 31, 2022, the Company had interest rate swap agreements with an aggregate notional amount of $175.0 million, which were designated as cash flow hedges under U.S. GAAP. The interest rate swap agreements were entered into in order to hedge interest rate volatility. The initial interest rate swap agreements were effective on December 1, 2021 and were scheduled to terminate on November 12, 2023. During the year ended December 31, 2022, in connection with the transition of the benchmark rate for borrowings under the Credit Agreement from LIBOR to SOFR, the Company terminated the initial interest rate swap agreements and entered into new interest rate swap agreements with an aggregate notional amount of $175.0 million, effective on December 1, 2022 and terminating on November 12, 2023. These interest rate swap agreements remain in effect for the $175.0 million of borrowings under the Revolving Facility as of September 30, 2023 until November 12, 2023.

The table below presents the fair value of the Company’s derivative financial instrument designated as a cash flow hedge as well as its classification in the Company’s consolidated balance sheets as of September 30, 2023 and December 31, 2022 (in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	September 30, 2023		December 31, 2022
Interest rate swaps	Other assets, net	$	986	$	6,308

During the three and nine months ended September 30, 2023, the Company recorded unrealized gains of less than $0.1 million and $0.4 million, respectively, for changes in the fair value of its cash flow hedge in accumulated other comprehensive income. During the three and nine months ended September 30, 2022, the Company recorded unrealized gains of $1.9 million and $7.2 million, respectively, for changes in the fair value of its cash flow hedge in accumulated other comprehensive income.

During the three and nine months ended September 30, 2023, the Company reclassified previous gains of $2.1 million and $5.7 million, respectively, from accumulated other comprehensive income into interest expense as a result of the hedged transactions impacting earnings. During the three and nine months ended September 30, 2022, the Company reclassified previous gains of $0.7 million and $0.5 million, respectively, from accumulated other comprehensive income into interest expense as a result of the hedged transactions impacting earnings.

The Company estimates that an additional $1.0 million will be reclassified from other comprehensive income as a decrease to interest expense through November 12, 2023.

Derivatives Not Designated as Hedging Instruments

As of each of September 30, 2023 and December 31, 2022, the Company had no interest rate swaps that were not designated as qualifying hedging relationships.

19

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

Tabular Disclosure of Offsetting Derivatives

The table below details a gross presentation, the effects of offsetting and a net presentation of the Company’s derivatives as of September 30, 2023 and December 31, 2022 (in thousands). The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value.

	Offsetting of Derivative Assets and Liabilities
	Gross Amounts of Recognized Assets		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
September 30, 2023	$	986	$	—	$	—	$	986	$	—	$	—	$	—	$	986
December 31, 2022	$	6,308	$	—	$	—	$	6,308	$	—	$	—	$	—	$	6,308

Note 8 – Supplemental Cash Flow Disclosures

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

	Nine Months Ended September 30,
	2023		2022
Supplemental disclosures:
Cash paid for interest	$	18,727	$	18,729
Cash paid for income taxes	$	453	$	678
Non-cash investing and financing activities:
Accrued capital expenditures and leasing costs	$	4,628	$	1,251
Distributions declared and unpaid	$	5,578	$	5,664
Land acquired upon finance lease termination	$	—	$	4,707

Note 9 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

	September 30, 2023		December 31, 2022
Accrued real estate and other taxes	$	15,497	$	10,191
Accrued operating and other	7,599		10,034
Accrued capital expenditures and leasing costs	4,183		2,333
Accrued interest	1,708		1,810
Accounts payable	1,583		1,793
Total	$	30,570	$	26,161

Note 10 – Commitments and Contingencies

Leasing

As part of its ordinary re-leasing activities, the Company has agreed and anticipates that it will continue to agree to provide rent concessions to tenants and incur leasing costs with respect to its properties, including amounts paid directly to tenants to improve their space and/or building systems, or tenant improvement allowances, landlord agreements to perform and pay for certain improvements, and leasing commissions. These rent concession and leasing cost commitments could be significant and are expected to vary due to factors such as competitive market conditions for leasing of commercial office space and the volume of square footage subject to re-leasing by the Company. As of September 30, 2023, the Company had total commitments of $44.3 million outstanding for tenant improvement allowances and $0.3 million for leasing commissions. The timing of the Company’s cash outlay for tenant improvement allowances is significantly uncertain and will depend upon the applicable tenant’s schedule for the improvements and corresponding use of capital, if any. For assets financed on the CMBS Loan, the Company has funded reserves with the lender for tenant improvement allowances and rent concession commitments.

20

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

The restricted cash included in the reserve totaled $34.7 million as of September 30, 2023, including $23.6 million for tenant improvement allowances and $11.1 million for rent concession commitments, and is included in other assets, net in the Company’s consolidated balance sheets.

Litigation

From time to time, the Company may be party to various legal proceedings which it believes are routine in nature and incidental to the operation of its business. The Company does not believe that any such legal proceedings will have a material adverse effect upon its consolidated position or results of operations.

Environmental Matters

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

Note 11 – Leases

Lessor

As of September 30, 2023, the Company’s operating leases have non-cancelable lease terms ranging from 0.2 years to 15.6 years. Certain leases with tenants include tenant options to extend or terminate the lease agreements or to purchase the underlying assets. Lease agreements may also contain rent increases that are based on an index or rate (e.g., the consumer price index).

The following table presents future minimum base rent payments due to the Company under the terms of its operating lease agreements, excluding expense reimbursements, over the next five years and thereafter as of September 30, 2023 (in thousands).

	Future Minimum Base Rent Payments
October 1, 2023 - December 31, 2023	$	32,890
2024	112,183
2025	75,683
2026	72,381
2027	51,814
2028	40,104
Thereafter	158,714
Total	$	543,769

Lessee

The Company is the lessee under ground lease arrangements and corporate office leases, which meet the criteria under U.S. GAAP for an operating lease. As of September 30, 2023, the Company’s operating leases had remaining lease terms ranging from 0.2 years to 61.3 years, which includes options to extend. Under the operating leases, the Company pays rent and may also pay variable costs, including property operating expenses and common area maintenance. The weighted-average discount rate used to measure the lease liability for the Company’s operating leases was 3.50% as of September 30, 2023. As the Company’s leases do not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the lease commencement date or the lease guidance adoption date, as applicable, in determining the present value of lease payments.

Operating lease costs were $0.3 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2022, respectively. No cash paid for operating lease liabilities was capitalized for the three and nine months ended September 30, 2023 and 2022.

21

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for ground and corporate office lease obligations as of September 30, 2023 (in thousands).

	Future Minimum Lease Payments
October 1, 2023 - December 31, 2023	$	278
2024	883
2025	892
2026	478
2027	445
2028	447
Thereafter	12,492
Total	15,915
Less: imputed interest	5,799
Total	$	10,116

Note 12 – Stockholders’ Equity

Common Stock

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

On November 10, 2021, the Company issued 56,525,650 additional shares of common stock to Realty Income, such that Realty Income owned 56,625,650 shares of the Company’s common stock. On November 12, 2021, Realty Income effected the Distribution.

Dividends

During the nine months ended September 30, 2023 and 2022, the Company’s Board of Directors declared quarterly cash dividends on shares of the Company’s common stock as follows:

Declaration Date	Record Date	Paid Date	Distributions Per Share
March 7, 2023	March 31, 2023	April 17, 2023	$	0.10
May 8, 2023	June 30, 2023	July 17, 2023	$	0.10
August 8, 2023	September 29, 2023	October 16, 2023	$	0.10

Declaration Date	Record Date	Paid Date	Distributions Per Share
March 22, 2022	March 31, 2022	April 15, 2022	$	0.10
May 3, 2022	June 30, 2022	July 15, 2022	$	0.10
August 2, 2022	September 30, 2022	October 17, 2022	$	0.10

On November 9, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share for the fourth quarter of 2023, payable on January 16, 2024, to stockholders of record as of December 29, 2023.

Arch Street Warrants

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

Also on November 12, 2021, in connection with the entry into the LLCA, the Company granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of the Company’s common stock (the “Arch Street Warrants”).

22

ORION OFFICE REIT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 (Unaudited)

The Arch Street Warrants entitle the respective holders to purchase shares of the Company’s common stock at a price per share equal to $22.42, at any time. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Company common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) if the Arch Street Joint Venture is terminated, the later of the termination of the Arch Street Joint Venture and seven years after issuance.

Share Repurchase Program

On November 1, 2022, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s outstanding common stock until December 31, 2025, as market conditions warrant (the “Share Repurchase Program”). Repurchases may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements. The Share Repurchase Program does not obligate the Company to make any repurchases at a specific time or in a specific situation. Repurchases are subject to prevailing market conditions, the trading price of the Company’s common stock, the Company’s liquidity and anticipated liquidity needs, financial performance and other conditions. Shares of common stock repurchased by the Company under the Share Repurchase Program, if any, will be returned to the status of authorized but unissued shares of common stock. During the three months ended September 30, 2023, the Company repurchased approximately 0.9 million shares of common stock in multiple open market transactions, at a weighted average share price of $5.46 for an aggregate purchase price of $5.0 million as part of the Share Repurchase Program, which are currently deemed to be authorized but unissued shares of common stock.

Note 13 - Equity-Based Compensation

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

During the nine months ended September 30, 2023 and 2022, the Company granted Time-Based RSUs and/or Performance-Based RSUs to non-employee directors and officers and other employees of the Company. The fair value of the Time-Based RSUs is determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis. The fair value of the TSR-Based RSUs is determined using a