Orion Office REIT Inc. Announces Third Quarter 2023 Results

– Entered into 10-Year Lease Renewal for a 90,000 Square Foot Property Subsequent to Quarter End –

– Sold Three Properties for $15.4 million and Agreements in Place to Sell Nine Properties for $46.6 million –

– Declares Dividend of $0.10 Per Share for Fourth Quarter –

– Updated 2023 Outlook –

PHOENIX–(BUSINESS WIRE)–Orion Office REIT Inc. (NYSE: ONL) (“Orion” or the “Company”), a fully-integrated real estate investment trust focused on the ownership, acquisition and management of single-tenant net lease office properties located across the U.S., announced today its operating results for the third quarter ended September 30, 2023.

Paul McDowell, Orion’s Chief Executive Officer commented, “Our progress executing on our business strategy continues to evolve. During the quarter ended September 30, 2023 and shortly thereafter, we closed on three non-core property sales and have definitive agreements to dispose of an additional nine properties that will contribute to our ongoing efforts to control carrying costs and reshape the portfolio. Subsequent to quarter end, we executed on an early lease renewal and we continue to have a growing long-term leasing pipeline. With a low levered balance sheet and no expected debt maturities until 2026, we believe we have strong financial flexibility to continue delivering on our plans to transform the portfolio over time to unlock value for shareholders.”

Third Quarter 2023 Financial and Operating Highlights

  • Total Revenues of $49.1 million
  • Net Loss Attributable to Common Stockholders of $(16.5) million, or $(0.29) per share
  • Funds from Operations (“FFO”) of $22.3 million, or $0.39 per share
  • Core FFO of $24.1 million, or $0.43 per share
  • EBITDA of $18.9 million, EBITDAre of $30.3 million and Adjusted EBITDA of $30.0 million
  • Net Debt to Annualized Adjusted EBITDA of 4.09x

Financial Results

During the quarter ended September 30, 2023, the Company generated total revenues of $49.1 million, as compared to $51.8 million in the same quarter of 2022. The Company’s net loss attributable to common stockholders was $(16.5) million, or $(0.29) per share, during the third quarter of 2023, as compared to $(53.0) million, or $(0.94) per share, reported in the same quarter of 2022. Core FFO for the third quarter of 2023 was $24.1 million, or $0.43 per share, as compared to $25.6 million, or $0.45 per share in the same quarter of 2022.

Leasing and Disposition Activity

Although the Company did not enter any new leases or lease renewals during the quarter ended September 30, 2023, during October, the Company entered into a 10.0-year early lease renewal for approximately 90,000 square feet at its property in Memphis, Tennessee, where the Investment-Grade tenant’s lease term will now run until December 31, 2034. Also during October, the Company entered into a new 10.0-year lease for 3,000 square feet of retail space at its property in Covington, Kentucky leased primarily to the United States Government.

During the quarter ended September 30, 2023 and shortly thereafter, the Company closed on three dispositions, representing a total of 452,000 square feet, for an aggregate sales price of approximately $15.4 million. The Company also has agreements currently in place to sell nine additional properties, representing 779,000 square feet, for an aggregate gross sales price of $46.6 million, including the six property former Walgreens campus in Deerfield, IL.

Real Estate Portfolio

As of September 30, 2023, the Company’s real estate portfolio consisted of 79 properties as well as a 20% ownership interest in the Arch Street Joint Venture, the Company’s Unconsolidated Joint Venture with an affiliate of Arch Street Capital Partners, LLC, comprising six properties. As of September 30, 2023, the Company’s Occupancy Rate was 80.5%, with 72.0% of Annualized Base Rent derived from Investment-Grade Tenants, and the portfolio’s Weighted Average Remaining Lease Term was 3.9 years. Adjusted for properties that have been sold following quarter end or are currently under agreement to be sold, the Company’s Occupancy Rate was 88.7% as of September 30, 2023.

As of September 30, 2023, the Unconsolidated Joint Venture owned six real estate assets for total Gross Real Estate Investments of approximately $227.7 million. The Company is continuing to review a number of potential property acquisitions for its real estate portfolio.

Balance Sheet and Liquidity

As of September 30, 2023, the Company has total debt of $557.3 million, comprised of $175.0 million under the Company’s $425.0 million-capacity credit facility revolver, $355.0 million under the Company’s securitized mortgage loan (the “CMBS Loan”) and $27.3 million which represents the Company’s pro rata share of indebtedness of the Unconsolidated Joint Venture.

As of September 30, 2023, the Company had $316.2 million of liquidity, comprised of $33.0 million cash and cash equivalents, including the Company’s pro rata share of cash from the Unconsolidated Joint Venture, as well as $33.2 million of restricted cash deposited with the credit facility lenders and $250.0 million of available capacity on the Company’s $425.0 million-capacity revolving credit facility.

Dividend

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.

Share Repurchase Activity

During the quarter ended September 30, 2023, the Company repurchased $5.0 million or 0.9 million shares of common stock at a weighted average price of $5.46 per share as part of the Company’s previously announced $50.0 million share repurchase program.

2023 Outlook

The Company is updating its 2023 Core FFO and Net Debt to Adjusted EBITDA guidance ranges to reflect solid performance for the first nine months of 2023 and greater certainty in its estimates for the remainder of the year. The Company’s Core FFO is now expected to range from $1.65 to $1.68 per share, up from $1.59 to $1.63 per share last quarter. The Company’s Net Debt to Adjusted EBITDA is now expected to range from 4.0x to 4.7x, down from 4.3x to 5.0x. The Company’s 2023 General and Administrative Expenses guidance range of $18.25 million to $18.75 million is unchanged from last quarter.

Webcast and Conference Call Information

Orion will host a webcast and conference call to review its financial results at 10:00 a.m. ET on Friday, November 10, 2023. The webcast and call will be hosted by Paul McDowell, Chief Executive Officer and President, and Gavin Brandon, Chief Financial Officer, Executive Vice President and Treasurer. To participate, the webcast may be accessed live by visiting the “Investors” section of Orion’s website at onlreit.com/investors. To join the conference call, callers from the United States and Canada should dial 1-877-407-3982, and international callers should dial 1-201-493-6780, ten minutes prior to the scheduled call time.

Replay Information

A replay of the webcast may be accessed by visiting the “Investors” section of Orion’s website at onlreit.com/investors. The conference call replay will be available after 1:00 p.m. ET on Friday, November 10, 2023 through 11:59 a.m. ET on Friday, November 24, 2023. To access the replay, callers may dial 1-844-512-2921 (domestic) or 1-412-317-6671 (international) and use passcode, 13738939.

Non-GAAP Financial Measures

To supplement the presentation of the Company’s financial results prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), this press release and the accompanying quarterly supplemental information as of and for the quarter ended September 30, 2023 contain certain financial measures that are not prepared in accordance with GAAP, including Funds from Operations (“FFO”), Core Funds from Operations (“Core FFO”), Funds Available for Distribution (“FAD”), Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”), and Adjusted EBITDA. Please see the attachments to this press release for how Orion defines these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measure.

About Orion Office REIT Inc.

Orion Office REIT Inc. is an internally-managed real estate investment trust engaged in the ownership, acquisition and management of a diversified portfolio of mission-critical and 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 founded on July 1, 2021, spun-off from Realty Income (NYSE: O) on November 12, 2021 and began trading on the New York Stock Exchange on November 15, 2021. The Company is headquartered in Phoenix, Arizona and has an office in New York, New York. For additional information on the Company and its properties, please visit onlreit.com.

About the Data

This data and other information described herein are as of and for the three and nine months ended September 30, 2023, unless otherwise indicated. Future performance may not be consistent with past performance and is subject to change and inherent risks and uncertainties. This information should be read in conjunction with the consolidated and combined financial statements and the Management’s Discussion and Analysis of Financial Condition and Results of Operations sections contained in Orion Office REIT Inc.’s (the “Company,” “Orion,” “us,” “our” and “we”) Quarterly Reports on Form 10-Q for the periods ended September 30, 2023, June 30, 2023 and March 31, 2023 and Annual Report on Form 10-K for the year ended December 31, 2022.

Definitions

Annualized Base Rent is the monthly aggregate cash amount charged to tenants under our leases (including monthly base rent receivables and certain fixed contractually obligated reimbursements by our tenants), as of the final date of the applicable period, multiplied by 12, including the Company’s pro rata share of such amounts related to the Unconsolidated Joint Venture. Annualized Base Rent is not indicative of future performance.

CPI refers to a lease in which base rent is adjusted based on changes in a consumer price index.

Credit Rating of a tenant refers to the Standard & Poor’s or Moody’s credit rating and such rating also may reflect the rating assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company as applicable.

Double Net Lease (“NN”) is a lease under which the tenant agrees to pay all operating expenses associated with the property (e.g., real estate taxes, insurance, maintenance), but excludes some or all major repairs (e.g., roof, structure, parking lot, in each case, as further defined in the applicable lease).

Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”) and Adjusted EBITDA

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“Nareit”), an industry trade group, has promulgated a supplemental performance measure known as Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate. Nareit defines EBITDAre as net income or loss computed in accordance with GAAP, adjusted for interest expense, income tax expense (benefit), depreciation and amortization, impairment write-downs on real estate, gains or losses from disposition of property and our pro rata share of EBITDAre adjustments related to the Unconsolidated Joint Venture. We calculated EBITDAre in accordance with Nareit’s definition described above.

In addition to EBITDAre, we use Adjusted EBITDA as a non-GAAP supplemental performance measure to evaluate the operating performance of the Company. Adjusted EBITDA, as defined by the Company, represents EBITDAre, modified to exclude non-routine items such as transaction related expenses and spin related expenses. We also exclude certain non-cash items such as impairments of intangible and right of use assets, gains or losses on derivatives, gains or losses on the extinguishment or forgiveness of debt, amortization of intangibles, above-market lease assets and deferred lease incentives, net of amortization of below-market lease liabilities and our pro rata share of Adjusted EBITDA adjustments related to the Unconsolidated Joint Venture. Management believes that excluding these costs from EBITDAre provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time. Therefore, EBITDAre and Adjusted EBITDA should not be considered as an alternative to net income, as computed in accordance with GAAP. The Company uses Adjusted EBITDA as one measure of its operating performance when formulating corporate goals and evaluating the effectiveness of the Company’s strategies. EBITDAre and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Enterprise Value equals the sum of the Implied Equity Market Capitalization and Net Debt, in each case, as of an applicable date.

Fixed Charge Coverage Ratio is (a) Adjusted EBITDA divided by (b) the sum of (i) Interest Expense, excluding non-cash amortization and (ii) secured debt principal amortization on Adjusted Principal Outstanding. Management believes that Fixed Charge Coverage Ratio is a useful supplemental measure of our ability to satisfy fixed financing obligations.

Fixed Dollar or Percent Increase refers to a lease that requires contractual rent increases during the term of the lease agreement. A Fixed Dollar or Percent Increase lease may include a period of free rent at the beginning or end of the lease.

Flat refers to a lease that requires equal rent payments, with no contractual increases, throughout the term of the lease agreement. A Flat lease may include a period of free rent at the beginning or end of the lease.

Funds Available for Distribution (“FAD”)

Funds available for distribution, as defined by the Company, represents Core FFO, as defined below, modified to exclude capital expenditures and leasing costs, as well as certain non-cash items such as amortization of above market leases, net of amortization of below market lease liabilities, straight-line rental revenue, amortization of the Unconsolidated Joint Venture basis difference and our pro rata share of FAD adjustments related to the Unconsolidated Joint Venture. Management believes that adjusting these items from Core FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management and provides useful information regarding the Company’s ability to fund its dividend.

However, not all REITs calculate FAD and those that do may not calculate FAD the same way, so comparisons with other REITs may not be meaningful. FAD should not be considered as an alternative to net income (loss) or cash flow provided by (used in) operating activities as determined under GAAP.

Nareit Funds from Operations (“Nareit FFO” or “FFO”) and Core Funds from Operations (“Core FFO”)

Due to certain unique operating characteristics of real estate companies, as discussed below, Nareit has promulgated a supplemental performance measure known as FFO, which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined under GAAP.

Nareit defines FFO as net income or loss computed in accordance with GAAP adjusted for gains or losses from disposition of real estate assets, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to the Unconsolidated Joint Venture. We calculate FFO in accordance with Nareit’s definition described above.

In addition to FFO, we use Core FFO as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. Core FFO, as defined by the Company, excludes from FFO items that we believe do not reflect the ongoing operating performance of our business such as transaction related expenses, spin related expenses, amortization of deferred lease incentives, amortization of deferred financing costs, equity-based compensation, amortization of premiums and discounts on debt, net and gains or losses on extinguishment of swaps and/or debt, and our pro rata share of Core FFO adjustments related to the Unconsolidated Joint Venture.

We believe that FFO and Core FFO allow for a comparison of the performance of our operations with other publicly-traded REITs, as FFO and Core FFO, or an equivalent measure, are routinely reported by publicly-traded REITs, each adjust for items that we believe do not reflect the ongoing operating performance of our business and we believe are often used by analysts and investors for comparison purposes.

For all of these reasons, we believe FFO and Core FFO, in addition to net income (loss), as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and Core FFO the same way, so comparisons with other REITs may not be meaningful. FFO and Core FFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither the SEC, Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate Core FFO and its use as a non-GAAP financial performance measure.

GAAP is an abbreviation for generally accepted accounting principles in the United States.

Gross Lease is a lease under which the landlord is responsible for all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs).

Gross Real Estate Investments represent total gross real estate and related assets of Operating Properties and the Company’s pro rata share of such amounts related to properties owned by the Unconsolidated Joint Venture, net of gross intangible lease liabilities. Gross Real Estate Investments should not be considered as an alternative to the Company’s real estate investments balance as determined in accordance with GAAP or any other GAAP financial measures and should only be considered together with, and as a supplement to, the Company’s financial information prepared in accordance with GAAP.

GSA CPI refers to a General Services Administration (“GSA”) lease that includes a contractually obligated operating cost component of rent which is adjusted annually based on changes in a consumer price index.

Implied Equity Market Capitalization equals shares of common stock outstanding as of an applicable date, multiplied by the closing sale price of the Company’s stock as reported on the New York Stock Exchange on such date.

Industry is derived from the Global Industry Classification Standard (“GICS”) Methodology that was developed by Morgan Stanley Capital International (“MSCI”) in collaboration with S&P Dow Jones Indices to establish a global, accurate, complete and widely accepted approach to defining industries and classifying securities by industry.

Interest Coverage Ratio equals Adjusted EBITDA divided by Interest Expense, excluding non-cash amortization. Management believes that Interest Coverage Ratio is a useful supplemental measure of our ability to service our debt obligations.

Interest Expense, excluding non-cash amortization is a non-GAAP measure that represents interest expense incurred on the outstanding principal balance of our debt and the Company’s pro rata share of the Unconsolidated Joint Venture’s interest expense incurred on its outstanding principal balance. This measure excludes the amortization of deferred financing costs, premiums and discounts, which is included in interest expense in accordance with GAAP. Interest Expense, excluding non-cash amortization should not be considered as an alternative to the Company’s interest expense as determined in accordance with GAAP or any other GAAP financial measures and should only be considered together with and as a supplement to the Company’s financial information prepared in accordance with GAAP.

Investment-Grade Tenants are those with a Credit Rating of BBB- or higher from Standard & Poor’s or a Credit Rating of Baa3 or higher from Moody’s. The ratings may reflect those assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company, as applicable.

Leased Square Feet is Rentable Square Feet leased and includes such amounts related to the Unconsolidated Joint Venture.

Modified Gross Lease is a lease under which the landlord is responsible for most expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs), but passes through some operating expenses to the tenant.

Month-to-Month refers to a lease that is outside of the contractual lease expiration, but the tenant has not vacated and continues to pay rent which may also include holdover rent if applicable.

Net Debt, Principal Outstanding and Adjusted Principal Outstanding

Principal Outstanding is a non-GAAP measure that represents the Company’s outstanding principal debt balance, excluding certain GAAP adjustments, such as premiums and discounts, financing and issuance costs, and related accumulated amortization. Adjusted Principal Outstanding includes the Company’s pro rata share of the Unconsolidated Joint Venture’s outstanding principal debt balance. We believe that the presentation of Principal Outstanding and Adjusted Principal Outstanding, which show our contractual debt obligations, provides useful information to investors to assess our overall financial flexibility, capital structure and leverage. Principal Outstanding and Adjusted Principal Outstanding should not be considered as alternatives to the Company’s consolidated debt balance as determined in accordance with GAAP or any other GAAP financial measures and should only be considered together with, and as a supplement to, the Company’s financial information prepared in accordance with GAAP.

Net Debt is a non-GAAP measure used to show the Company’s Adjusted Principal Outstanding, less all cash and cash equivalents and the Company’s pro rata share of the Unconsolidated Joint Venture’s cash and cash equivalents, and less cash deposited with the credit facility lenders that will, in accordance with the terms of the credit facility revolver, be used to prepay borrowings upon expiration or termination of the Company’s interest rate swap agreements. We believe that the presentation of Net Debt provides useful information to investors because our management reviews Net Debt as part of its management of our overall liquidity, financial flexibility, capital structure and leverage.

Net Debt Leverage Ratio equals Net Debt divided by Gross Real Estate Investments.

Net Operating Income (“NOI”) and Cash NOI

NOI is a non-GAAP performance measure used to evaluate the operating performance of a real estate company. NOI represents total revenues less property operating expenses and excludes fee revenue earned for services to the Unconsolidated Joint Venture, impairment, depreciation and amortization, general and administrative expenses, transaction related expenses and spin related expenses.

Contacts

Investor Relations:
Email: [email protected]
Phone: 602-675-0338

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