UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 (St ...

Financial Data and Key Metrics Changes - Core funds from operations for the quarter were $25.3 million or $0.45 per share, down from $29.3 million or $0.52 per share in Q1 2022 [12] - Adjusted EBITDA was $31.2 million compared to $34.7 million in the same quarter of 2022 [12] - Total revenue for the quarter was $50.2 million, down from $53.2 million in the same quarter of the prior year [30] - The net loss attributable to common stockholders was $8.9 million or $0.16 per share, compared to a net loss of $9.9 million or $0.17 per share in 2022 [30] - General and administrative expenses were $4.3 million compared to $3.5 million in Q1 2022 [12] Business Line Data and Key Metrics Changes - The company signed four leases for 83,000 square feet in the first quarter [26] - Renewed a 64,000 square foot lease with the U.S. government for 15 years [26] - Leasing spreads during the first quarter were about 20%, with variability expected [9] Market Data and Key Metrics Changes - As of March 31, 2023, 73.6% of annualized base rent was from investment-grade tenants, up from 67% a year earlier [7] - The largest tenant industries are healthcare and government, representing 13.5% and 12.5% of annualized base rent, respectively [7] - Over 30% of annualized base rent is derived from Sunbelt markets [7] Company Strategy and Development Direction - The company is focused on stabilizing and repositioning its portfolio while avoiding over-leverage [23][24] - Plans to dispose of non-core vacant assets to maximize long-term value [11][27] - The strategy includes maintaining significant liquidity and operating on a low leverage basis [14][40] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the challenging economic backdrop for real estate, particularly for office spaces, but remains confident in the long-term strategy [23] - There is an expectation of sequential reductions in quarterly earnings and core FFO due to scheduled lease vacancies [33] - Management is optimistic about the potential for a sustained return to office work as corporate attitudes shift [25] Other Important Information - The company ended the quarter with $557.3 million of outstanding debt and no borrowings on the revolving credit facility [13] - Total liquidity was $449.5 million, consisting of $425 million available on the revolving credit facility and $24.5 million in cash [40] - A quarterly cash dividend of $0.10 per share was declared for Q2 2023 [41] Q&A Session Summary Question: How has leasing transpired since going public? - Management indicated that leasing has been largely in line with expectations, but attracting new tenants to vacant properties has been slower than anticipated [42] Question: Can you elaborate on the improvement in asset pricing? - Management noted that cap rates are widening for well-leased properties, indicating a shift in the market dynamics [43] Question: Will acquisitions be considered before determining the status of the term loan? - Management stated that they have the capacity to add assets if they choose to, but have not made any acquisitions since going public due to cautious market conditions [45]

PART I - FINANCIAL INFORMATION [Unaudited Financial Statements](index=3&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) Q1 2023 financials show decreased revenue to $50.2 million, a slightly improved net loss of $8.9 million, and reduced operating cash flow [Consolidated Balance Sheets](index=3&type=section&id=Orion%20Office%20REIT%20Inc.%20Consolidated%20Balance%20Sheets) Total assets decreased to $1.55 billion and total equity declined to $960 million as of March 31, 2023 Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$1,546,872** | **$1,571,073** | | Total real estate investments, net | $1,223,463 | $1,233,246 | | Cash and cash equivalents | $23,755 | $20,638 | | **Total Liabilities** | **$586,925** | **$595,215** | | Mortgages payable, net | $352,337 | $352,167 | | Credit facility term loan, net | $174,153 | $173,815 | | **Total Equity** | **$959,947** | **$975,858** | [Consolidated Statements of Operations](index=4&type=section&id=Orion%20Office%20REIT%20Inc.%20Consolidated%20Statements%20of%20Operations) Q1 2023 revenue fell to $50.2 million, while net loss improved to $8.9 million due to lower depreciation expenses Q1 2023 vs Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total revenues | $50,190 | $53,206 | | Total operating expenses | $51,678 | $55,605 | | Depreciation and amortization | $28,166 | $34,353 | | Impairments | $3,754 | $1,602 | | Net loss attributable to common stockholders | $(8,885) | $(9,906) | | Basic and diluted net loss per share | $(0.16) | $(0.17) | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Orion%20Office%20REIT%20Inc.%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Total comprehensive loss widened to $10.7 million in Q1 2023 from $5.8 million in Q1 2022, driven by derivative losses Q1 2023 vs Q1 2022 Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net loss | $(8,874) | $(9,882) | | Total other comprehensive income (loss) | $(1,768) | $4,057 | | **Total comprehensive loss** | **$(10,653)** | **$(5,849)** | [Consolidated Statements of Cash Flows](index=7&type=section&id=Orion%20Office%20REIT%20Inc.%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities decreased significantly to $11.4 million in Q1 2023 from $28.2 million in the prior year Q1 2023 vs Q1 2022 Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,441 | $28,153 | | Net cash used in investing activities | $(2,467) | $(1,235) | | Net cash used in financing activities | $(5,844) | $(2,168) | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Orion%20Office%20REIT%20Inc.%20Consolidated%20Financial%20Statements) Notes detail the 81-property portfolio, $3.8 million in impairments, $526.5 million in debt, and a $0.10 dividend - As of March 31, 2023, the company owned and operated **81 office properties** totaling approximately **9.5 million leasable square feet**[22](index=22&type=chunk) - The company recorded impairment charges of **$3.8 million** on three properties during Q1 2023, compared to $1.6 million on two properties in Q1 2022[60](index=60&type=chunk)[61](index=61&type=chunk) - Total debt outstanding was **$526.5 million** as of March 31, 2023, with a weighted-average interest rate of 4.38% and a **$175.0 million term loan maturing in November 2023**[70](index=70&type=chunk)[71](index=71&type=chunk) - As of March 31, 2023, the company had outstanding commitments of **$50.0 million for tenant improvement allowances** and $0.3 million for leasing commissions[102](index=102&type=chunk) - The Board of Directors declared a quarterly cash dividend of **$0.10 per share** for Q1 2023[114](index=114&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a challenging environment with declining occupancy, though Core FFO remains sufficient for near-term obligations [Overview and Business Environment](index=24&type=section&id=Overview%20and%20Business%20Environment) The company faces headwinds from rising interest rates and remote work, causing occupancy to fall to 87.5% - The company's efforts to address lease maturities and vacancies are **adversely impacted by rising interest rates, inflation, and remote working trends**, which are expected to continue to slow new leasing[136](index=136&type=chunk) Portfolio Metrics | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Operating properties | 81 | 81 | | Rentable square feet (in thousands) | 9,732 | 9,732 | | Occupancy rate | 87.5% | 89.0% | | Weighted-average remaining lease term (in years) | 4.0 | 4.1 | [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Q1 2023 rental revenue decreased by $3.0 million year-over-year, while operating expenses fell due to lower depreciation Revenue and Operating Expense Changes (Q1 2023 vs Q1 2022, in thousands) | Account | 2023 | 2022 | Increase/(Decrease) | | :--- | :--- | :--- | :--- | | **Total revenues** | **$50,190** | **$53,206** | **$(3,016)** | | Rental | $49,990 | $53,017 | $(3,027) | | **Total operating expenses** | **$51,678** | **$55,605** | **$(3,927)** | | Depreciation and amortization | $28,166 | $34,353 | $(6,187) | | Impairments | $3,754 | $1,602 | $2,152 | [Non-GAAP Measures (FFO & Core FFO)](index=32&type=section&id=Non-GAAP%20Measures) Core FFO per diluted share declined to $0.45 in Q1 2023 from $0.52 in Q1 2022, reflecting operational challenges Reconciliation of Net Loss to FFO and Core FFO (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net loss attributable to common stockholders | $(8,885) | $(9,906) | | **FFO attributable to common stockholders** | **$23,473** | **$26,494** | | **Core FFO attributable to common stockholders** | **$25,283** | **$29,289** | | FFO per diluted share | $0.41 | $0.47 | | Core FFO per diluted share | $0.45 | $0.52 | - Beginning in 2023, the company **revised its definition of Core FFO** to exclude non-cash charges such as amortization of deferred financing costs and equity-based compensation, applying the change retrospectively[188](index=188&type=chunk)[192](index=192&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains sufficient liquidity with $23.8 million in cash and $425.0 million available on its credit facility - Principal liquidity sources include **$23.8 million in cash**, operating cash flows, and **$425.0 million of borrowing capacity** under the Revolving Facility[193](index=193&type=chunk) - The **$175.0 million Term Loan Facility matures on November 12, 2023**, and the company has sufficient capacity under its Revolving Facility to repay it if needed[71](index=71&type=chunk)[138](index=138&type=chunk) - The company was **in compliance with all financial covenants** for its Revolver/Term Loan Facilities as of March 31, 2023[207](index=207&type=chunk) [Cash Flow Analysis](index=39&type=section&id=Cash%20Flow%20Analysis) Net cash from operating activities decreased by $16.7 million year-over-year due to working capital changes and lower income Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $11,441 | $28,153 | $(16,712) | | Net cash used in investing activities | $(2,467) | $(1,235) | $(1,232) | | Net cash used in financing activities | $(5,844) | $(2,168) | $(3,676) | [Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market exposure is interest rate risk, which is actively managed through hedging instruments - The primary market risk is **interest rate risk** related to variable-rate borrowings, which is mitigated through interest rate hedge contracts[233](index=233&type=chunk) - As of March 31, 2023, the company's **$175.0 million of variable-rate debt** on the Term Loan Facility was **effectively fixed** through the use of interest rate swap agreements[197](index=197&type=chunk)[235](index=235&type=chunk) - A **100 basis point increase** in market interest rates would result in a decrease in the fair value of the company's fixed-rate debt of **$11.2 million**[234](index=234&type=chunk) [Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Management, including the CEO and CFO, concluded that **disclosure controls and procedures were effective** as of March 31, 2023[242](index=242&type=chunk) - There were **no changes in internal control over financial reporting** during Q1 2023 that have materially affected, or are reasonably likely to materially affect, internal controls[243](index=243&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=40&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any material pending legal proceedings - The company is **not a party to any material pending legal proceedings**[244](index=244&type=chunk) [Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) No material changes have been identified regarding the risk factors disclosed in the 2022 Annual Report on Form 10-K - **No material changes** to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[245](index=245&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[246](index=246&type=chunk) [Defaults Upon Senior Securities](index=41&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - None[246](index=246&type=chunk) [Mine Safety Disclosures](index=41&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[247](index=247&type=chunk) [Other Information](index=41&type=section&id=Item%205.%20Other%20Information) The company reported no other information for the period - None[248](index=248&type=chunk) [Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including required certifications and XBRL data - The exhibits filed with the report include **CEO and CFO certifications** (31.1, 31.2, 32.1, 32.2) and **Inline XBRL data files** (101 series)[250](index=250&type=chunk)

Financial Data and Key Metrics Changes - For Q4 2022, the company generated total revenues of $50.3 million and reported a net loss attributable to common stockholders of $19 million, or a loss of $0.33 per share [8] - For the full year 2022, total revenues were $208.1 million with a net loss of $97.5 million, or a loss of $1.72 per share; Core Funds from Operations (FFO) was $101.8 million or $1.80 per share, exceeding guidance by $0.02 per share [8][42] - Adjusted EBITDA for Q4 was $30.7 million, while for the full year it was $132.2 million [8] Business Line Data and Key Metrics Changes - The company leased 805,000 square feet of space in 2022 with positive cash rent spreads of over 4% and a weighted average lease term of more than seven years [6] - The portfolio ended the year with 81 properties and six unconsolidated joint venture properties, totaling 9.7 million square feet, with an occupancy rate of 89%, up from 88.2% in the previous quarter [5] Market Data and Key Metrics Changes - The company has a diversified tenant base with 73.3% of annualized base rent from investment-grade tenants and approximately 83.4% of leases being triple or double net [38] - The largest markets by state are Texas and New Jersey, representing 15% and 12% of annualized base rent, respectively, with 33% of annualized base rent derived from Sunbelt markets [38] Company Strategy and Development Direction - The company aims to focus on owning mission-critical suburban office properties in high-quality suburban markets, with a strategy to sell vacant and non-core assets to reduce carry costs [37][39] - The company plans to maintain leasing momentum while addressing the challenges posed by the current economic environment, including rising interest rates and inflation [24][25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term value of their core assets despite current headwinds, emphasizing the importance of tenant retention and proactive lease negotiations [5][24] - For 2023, the company expects occupancy to remain stable but may experience temporary declines due to lease expirations, particularly with the Walgreens leases [18][42] Other Important Information - The company declared a quarterly cash dividend of $0.10 per share for Q1 2023, indicating a strong financial position to achieve near and long-term objectives [9] - The company has reduced debt by approximately $90 million or 15% since its spin-off, with a net debt to gross real estate investments ratio of 31% [7][41] Q&A Session Summary Question: What is the outlook for G&A expenses? - Management indicated that G&A expenses are expected to normalize, with an additional year of stock-based compensation impacting 2023 [51] Question: How is the company handling property sales? - The company is selling properties through various channels, including auctions, which may impact pricing; they expect to sell a significant number of properties in 2023 [12][58] Question: What is the status of the Walgreens campus sale? - The company has entered into a definitive agreement to sell the Walgreens campus, with leases expiring in August 2023 [58]

Property Portfolio - As of December 31, 2022, the company owned 81 office properties with a total of 9.5 million leasable square feet and an occupancy rate of 88.8%[159] - The company completed approximately 0.8 million square feet of lease renewals, expansions, and new leases during the year ended December 31, 2022, with a decline in occupancy from 91.9% to 89.0%[162] - As of December 31, 2022, the company had 81 operating properties with a total of 9,732 thousand rentable square feet and an occupancy rate of 89.0%[182] - The weighted-average remaining lease term was consistent at 4.1 years as of December 31, 2022[162] Financial Performance - Total revenues for the year ended December 31, 2022, were $208.1 million, a significant increase of $128.4 million compared to $79.7 million in 2021[201] - The company reported a net loss of $97.5 million for 2022, compared to a net loss of $47.5 million in 2021[187] - Funds from operations (FFO) attributable to common stockholders for 2022 were $99.7 million, translating to $1.76 per diluted share, up from $46.6 million or $0.82 per diluted share in 2021[187] - Core Funds from Operations (Core FFO) will be redefined starting in 2023, with an expected increase of $6.4 million for 2022 if the new definition had been applied[222] - For the year ended December 31, 2022, the net loss attributable to common stockholders was $97.494 million, compared to a loss of $47.481 million in 2021[225] - Funds from Operations (FFO) attributable to common stockholders for 2022 was $99.657 million, up from $46.572 million in 2021, representing a 113% increase[225] - Core FFO attributable to common stockholders for 2022 was $101.764 million, compared to $58.263 million in 2021, reflecting a 74% increase[225] Expenses and Costs - General and administrative expenses were modestly below budget for 2022 but are expected to increase in 2023 due to expiring subsidies and rising compliance costs[160] - Total operating expenses surged by $157.9 million to $276.8 million in 2022, driven by increases in property operating expenses, general and administrative expenses, and depreciation[205] - Property operating expenses increased by $48.1 million in 2022, mainly due to the expanded portfolio size[206] - General and administrative expenses rose by $12.1 million in 2022, reflecting the costs of operating as a standalone business post-distribution[207] - Depreciation and amortization expenses increased by $87.4 million in 2022, primarily due to the larger portfolio size following the mergers[208] - Impairments recorded were $66.4 million in 2022, up from $49.9 million in 2021, affecting 18 properties[209] Debt and Financing - Interest expense was in line with budget, as increases in interest rates were offset by lower debt outstanding due to cash utilization from operations and real estate dispositions[161] - The company refinanced a $355.0 million Bridge Facility with a CMBS Loan at a fixed rate of 4.971%, maturing on February 11, 2027[185] - As of December 31, 2022, the company had $425.0 million available under its Revolving Facility, with no borrowings outstanding[185] - Total consolidated debt outstanding as of December 31, 2022, was approximately $530.0 million, consisting of a $355.0 million CMBS Loan and $175.0 million borrowed under the Term Loan Facility[233] - The Term Loan Facility is scheduled to mature on November 12, 2023, with a current outstanding principal of $175.0 million[229] - The company maintained a total indebtedness to total asset value ratio of 29.0%, well below the required maximum of 60%[240] - The ratio of adjusted EBITDA to fixed charges was 4.94x, exceeding the required minimum of 1.5x[240] Cash Flow - Net cash provided by operating activities increased by $58.1 million to $114.2 million for the year ended December 31, 2022, compared to $56.1 million in 2021, primarily due to an increase in portfolio size from mergers[267] - Net cash provided by investing activities increased by $34.7 million to $22.5 million for the year ended December 31, 2022, compared to $(12.3) million in 2021, mainly due to proceeds from real estate dispositions[268] - Net cash used in financing activities increased by $92.3 million to $(110.7) million for the year ended December 31, 2022, compared to $(18.4) million in 2021, primarily due to net repayments on the Revolving Facility and dividend payments[269] Dividends and Shareholder Returns - The company declared quarterly cash dividends of $0.10 per share for four quarters in 2022, totaling $0.40 per share for the year[260] - A Share Repurchase Program was authorized for up to $50.0 million of the company's outstanding common stock until December 31, 2025, although no shares were repurchased under this program as of March 8, 2023[265][266] Market Conditions and Future Outlook - The company anticipates continued challenges in leasing due to economic conditions, including rising interest rates and inflation[162] - The company did not acquire any new properties during 2022, primarily due to rising interest rates and disruptions in financing markets[161] - The company plans to fund new acquisitions, including those related to the Arch Street Joint Venture, through cash flows from operations and proceeds from real estate dispositions[228] Risk Management - The company entered into interest rate swap agreements with an aggregate notional amount of $175.0 million to hedge interest rate volatility, effective December 1, 2022[257] - The company’s interest rate risk management includes entering into interest rate hedge contracts to mitigate risks associated with variable-rate borrowings[284] - As of December 31, 2022, fixed-rate debt had a fair value of $332.3 million and a carrying value of $355.0 million, with a sensitivity analysis indicating a potential decrease in fair value of $11.6 million with a 100 basis point increase in interest rates[285]

Financial Data and Key Metrics Changes - Orion generated total revenues of $51.8 million for Q3 2022 and reported a net loss attributable to common stockholders of $53 million, equating to a loss of $0.94 per share [26] - Core funds from operations (FFO) were $24 million or $0.42 per share, with adjusted EBITDA at $32.1 million [26] - The company ended the quarter with $588.3 million of outstanding debt, having reduced debt by approximately $69 million or 11% since the spin-off [28] Business Line Data and Key Metrics Changes - At quarter end, Orion owned 87 properties and 6 unconsolidated joint venture properties, totaling 10.1 million square feet, with an occupancy rate of 88.2% [13] - The portfolio had 69.9% investment-grade tenancy, with approximately 80% of leases being triple or double net [13] - The weighted average lease term slightly declined to 3.9 years [17] Market Data and Key Metrics Changes - The largest markets by state for Orion are Texas and New Jersey, representing 14.6% and 11.4% of annualized base rent, respectively [14] - Approximately 31.8% of annualized base rent is derived from Sun Belt markets, a proportion the company intends to grow over time [14] Company Strategy and Development Direction - Orion aims to reposition and align its suburban-focused office portfolio, which requires intensive asset management and capital to address lease maturities and vacancies [8][9] - The company is actively selling vacant and non-core assets to reduce carry costs and avoid significant capital expenditures associated with retenanting [18] - A $50 million share repurchase program has been approved to potentially enhance shareholder value during sustained market weakness [24] Management's Comments on Operating Environment and Future Outlook - Management noted an uptick in negative trends impacting the portfolio due to rising interest rates, inflation, and recession fears, which have led to hesitancy among businesses to sign new leases [10][11] - Despite current challenges, management remains optimistic about long-term prospects for owning a suburban net lease office portfolio [12] - The anticipated timeline for stabilizing the portfolio may take longer than initially expected due to the changing economic environment [20] Other Important Information - The company has total liquidity of $418 million, consisting of $394 million available on its revolving credit facility and $24 million in cash [28] - The quarterly dividend declared for Q4 2022 is $0.10 per share, payable on January 17, 2023 [29] Q&A Session Summary Question: Insights on the profile of dispositions and whether they are one-off sales - Management indicated that the dispositions were generally one-off transactions, with buyers being a mix of investors looking to reposition assets and users intending to occupy them [36] Question: Clarification on tenant renewals and lease terms - Management confirmed that the recent lease signed was a straight extension option for 5 years, with efforts to encourage longer-term leases [38][40] Question: Impact of tenant behavior on leasing decisions - Management noted that tenants are taking longer to make decisions and are requesting smaller spaces, which reflects broader market trends [44] Question: Opportunities for shifting towards a multi-tenant approach - While the preference remains for single-tenant assets, management is open to multi-tenant arrangements if it makes sense for filling vacancies [45] Question: Details on the properties sold and their occupancy status - Management clarified that the sold properties included both vacant and tenanted assets, with short lease terms for those with tenants [46][47]

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 87-165642 ...

Financial Data and Key Metrics Changes - Orion generated total revenue of $52.8 million for Q2 2022, with a net loss attributable to common stockholders of $15.6 million, or a loss of $0.27 per share [25] - Core funds from operations (FFO) were reported at $26.8 million, or $0.47 per share, with adjusted EBITDA at $34.7 million [25] - General and administrative expenses (G&A) for Q2 2022 were $3.3 million, while capital expenditures (CapEx) were $2.4 million [26] Business Line Data and Key Metrics Changes - The portfolio consisted of 91 properties and six unconsolidated joint venture properties, totaling 10.5 million square feet, with an occupancy rate of 86.7% [11] - The weighted average lease term for the portfolio was 4.1 years, with 67.3% of tenants being investment-grade [11][15] - Lease extensions and expansions totaled 206,000 square feet in Nebraska and Illinois, with a new weighted average lease term of 7.8 years [13] Market Data and Key Metrics Changes - The largest markets by state for Orion are Texas and New Jersey, representing 14.3% and 11.2% of annualized base rent, respectively [12] - Approximately 31.1% of annualized base rent is derived from Sun Belt markets [12] Company Strategy and Development Direction - The company is focused on asset management and repositioning to address lease maturities and vacancies, with a strategy to sell vacant and non-core assets [16][19] - Orion aims to maintain a disciplined approach to acquisitions, considering the macroeconomic environment and current valuation [20][21] - The company has declared a quarterly dividend of $0.10 per share for Q3 2022, with plans to increase the payout ratio over time [22][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the suburban net lease office market and the company's ability to grow and maximize long-term shareholder value [9][10] - The company anticipates continued pressure on earnings performance due to lease expirations and the need for capital expenditures [19][30] - Updated guidance for core FFO is now expected to range from $1.74 to $1.78 per share, reflecting adjustments based on lease expirations and G&A expenses [33] Other Important Information - The company ended the quarter with $628.3 million of outstanding debt, with over 84% of the debt fixed or swapped to fixed rate [28] - Total liquidity was reported at $374 million, consisting of available capacity on the revolving credit facility and cash [28] Q&A Session Summary Question: Insights on asset dispositions and market conditions - Management noted that the assets targeted for sale are specialized and have received strong interest, with six properties under contract and more under LOI [35][36] Question: Guidance on future revenue and capital expenditures - Management indicated that lease expirations earlier in the year would impact revenues, and capital expenditures are expected to range between $5 and $10 per square foot for new and renewed leases [37][38] Question: Details on vacant properties and carrying costs - Approximately half of the properties under contract for sale are currently vacant, with carrying costs averaging around $7 per square foot per year [42][44] Question: Renewal probabilities for tenants with expirations in 2023 and 2024 - Management expects volatility in renewal rates but believes there will be strong renewal opportunities over time [49]

Property Portfolio - As of June 30, 2022, the company owns 91 office properties with a total of 10.4 million leasable square feet and an occupancy rate of 86.4%[203] - The weighted-average remaining lease term for the properties is 4.0 years, and including the company's joint venture, the total leasable square feet increases to 10.5 million with an occupancy rate of 86.7%[203] - The occupancy rate as of June 30, 2022, was 86.7%, down from 94.4% when including VEREIT Office Assets[232] - As of June 30, 2022, the company had a total of 91 operating properties with an aggregate of 10.5 million rentable square feet[223] - As of June 30, 2022, the company had 91 office properties with an aggregate of 10.4 million leasable square feet, compared to 40 properties with approximately 3.0 million leasable square feet at June 30, 2021[287] Financial Performance - Total revenues for the three months ended June 30, 2022, were $52.8 million, an increase of $40.3 million compared to the same period in 2021[231] - Net loss for the three months ended June 30, 2022, was $(15.6) million, resulting in a basic and diluted net loss per share of $(0.27)[227] - Funds from operations (FFO) attributable to common stockholders for the three months ended June 30, 2022, were $26.5 million, or $0.47 per diluted share[227] - The company reported a net loss attributable to common stockholders of $15.6 million for the three months ended June 30, 2022, compared to a net income of $4.3 million in 2021[252] - Funds from Operations (FFO) attributable to common stockholders was $26.5 million for the three months ended June 30, 2022, compared to $10.3 million in 2021[252] - Core Funds from Operations (Core FFO) attributable to common stockholders was $26.8 million for the three months ended June 30, 2022, compared to $10.3 million in 2021[252] Debt and Financing - Total consolidated debt outstanding was approximately $601.0 million as of June 30, 2022, consisting of a $355.0 million CMBS Loan, a $175.0 million Term Loan Facility, and $71.0 million under a $425.0 million Revolving Facility[258] - The company refinanced a $355.0 million Bridge Facility with a CMBS Loan at a fixed rate of 4.971%, maturing on February 11, 2027[222] - The company refinanced the Bridge Facility in full with a $355.0 million CMBS Loan in February 2022[257] - The ratio of total indebtedness to total asset value was 32.5%, well below the required maximum of 60%[264] - The ratio of adjusted EBITDA to fixed charges was 4.89x, exceeding the required minimum of 1.5x[264] - The company obtained a $355.0 million fixed rate CMBS Loan with an interest rate of 4.971% per annum, maturing on February 11, 2027[266] - Monthly payments for the CMBS Loan are interest-only, with all principal due at maturity[267] - The company has $175.0 million of variable rate debt on the Credit Facility Term Loan, effectively fixed through interest rate swap agreements[285] - The company intends to maintain a net worth of no less than $355.0 million and liquid assets of no less than $10.0 million as part of the CMBS Loan Agreement[271] Operational Risks - The company faces risks from rising interest rates, inflation, and potential tenant defaults, which could materially affect its financial condition and results[197] - The company is exposed to risks associated with the management of its joint ventures and the integration of acquired assets[204] - Credit risk is concentrated among tenants engaged in similar business activities or geographic regions, which could materially affect cash flows[298] Dividends and Shareholder Returns - The company declared quarterly dividends of $0.10 per share for the first and second quarters of 2022[221] - The company declared a quarterly dividend of $0.10 per share for the first quarter of 2022, paid on April 15, 2022[281] Cash Flow and Expenses - Net cash provided by operating activities increased by $30.4 million to $51,794 million for the six months ended June 30, 2022, compared to $21,348 million in the same period of 2021[287] - Net cash provided by investing activities increased by $1.4 million to $1,284 million for the six months ended June 30, 2022, primarily due to proceeds from real estate dispositions[288] - Net cash used in financing activities increased by $3.2 million to $27,831 million for the six months ended June 30, 2022, primarily due to net repayments of the revolving credit facility and dividends to stockholders[289] - Property operating expenses increased by $13.7 million during the three months ended June 30, 2022, primarily due to the increase in portfolio size[235] Asset Management - Impairments recorded during the three months ended June 30, 2022, amounted to $7.8 million, reflecting management's identification of non-core assets for potential sale[238] - The company closed on the sale of one non-core office property for net proceeds of approximately $3.5 million during the three months ended June 30, 2022[222] Market Conditions - A 100 basis point increase in market interest rates would decrease the fair value of fixed-rate debt by $13.6 million[292] - A 100 basis point increase in variable interest rates would decrease the fair value of the variable-rate debt swapped-to-fixed by $0.2 million[293] - The company’s interest rate swaps had a fair value resulting in net assets of $5.9 million as of June 30, 2022[295]

Financial Data and Key Metrics Changes - Orion generated total revenue of $53.2 million for Q1 2022, with a net loss attributable to common stockholders of $9.9 million or $0.17 per share [21] - Core funds from operations (FFO) were reported at $28 million or $0.49 per share, and adjusted EBITDA was $34.9 million [21] - General and administrative expenses (G&A) for Q1 2022 were $3.5 million, with capital expenditures (CapEx) at $1.4 million [22] Business Line Data and Key Metrics Changes - The portfolio consists of 92 properties and 6 unconsolidated joint venture properties, totaling 10.6 million square feet with an occupancy rate of 88.3% [10] - 67% of the annualized base rent comes from investment-grade tenants, and over 80% of leases are either triple or double net [10] - The weighted average lease term remained steady at 4.1 years at quarter-end [13] Market Data and Key Metrics Changes - The largest markets by state are Texas and New Jersey, representing 14.1% and 12% of annualized base rent, respectively [11] - Over 25% of annualized base rent is derived from Sun Belt markets, indicating a strategic focus on high-quality suburban office properties [11] Company Strategy and Development Direction - The company aims to retain tenants, lease vacant space, and grow its joint venture with Arch Street Capital while selling non-core assets to maximize long-term value [8][10] - Orion is positioned as a specialized opportunity in suburban net lease office properties, focusing on demographic and economic tailwinds [11] - The strategy includes active asset management and targeted capital recycling to unlock and maximize value [18][20] Management's Comments on Operating Environment and Future Outlook - Management acknowledges significant challenges ahead but expresses confidence in the team's ability to execute the business plan [16] - The current economic outlook presents challenges, but there are opportunities for value creation through active management [17] - The company intends to position the portfolio for upward pressure on the payout ratio over time, although this will take time [19] Other Important Information - The company ended the quarter with 10 vacant properties, which are considered a drag on earnings, and plans to dispose of non-core assets [15] - Orion's Board of Directors declared a quarterly dividend of $0.10 per share for Q2 2022 [24] Q&A Session Summary Question: Regarding net debt and guidance - Management indicated that the net debt of 4.5x is a combination of expected spending on the portfolio and potential acquisition activity [31] Question: Non-core properties for potential recycling - Management estimates that 10 to 15 properties are considered non-core, which may be sold to recycle capital into better long-term yield assets [32] Question: Tenant decision-making process - Management noted that while tenant renewals are still occurring, the decision-making process has lengthened due to various factors, including the pandemic [33] Question: Timing of tenant decisions - Management confirmed that the decision-making timelines for tenants remain fluid and have not significantly changed [37] Question: Property sales expectations - Management expects to have property sales flowing through in the next couple of quarters, with ongoing discussions on several properties [38]