Orion Office REIT (ONL) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Unaudited Financial Statements 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 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 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) 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 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 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] - 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][61] - 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][71] - 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] - The Board of Directors declared a quarterly cash dividend of $0.10 per share for Q1 2023[114] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a challenging environment with declining occupancy, though Core FFO remains sufficient for near-term obligations Overview and Business Environment 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] 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 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) 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][192] Liquidity and Capital Resources 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] - 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][138] - The company was in compliance with all financial covenants for its Revolver/Term Loan Facilities as of March 31, 2023[207] Cash Flow Analysis 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 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] - 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][235] - 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] Controls and Procedures 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] - 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] PART II - OTHER INFORMATION Legal Proceedings 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] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[246] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[246] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[247] Other Information The company reported no other information for the period - None[248] Exhibits 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]