Orion Office REIT Inc. (NYSE:ONL) is an internally managed real estate investment trust (REIT) engaged in the ownership, acquisition, and management of a diversified portfolio of office buildings located in high-quality suburban markets across the U.S. The company's portfolio is comprised of traditional office buildings, as well as governmental office, medical office, flex/laboratory and R&D and flex/industrial properties.

Business Overview

As of March 31, 2024, Orion owned and operated 75 office properties with an aggregate of 8.7 million leasable square feet located in 29 states. Including its pro rata share of leasable square feet and annualized base rent from the Arch Street Joint Venture, the company owned an aggregate of 8.9 million leasable square feet with an occupancy rate of 75.8%, or 83.2% adjusted for properties that are currently under agreements to be sold, and a weighted-average remaining lease term of 4.1 years as of March 31, 2024.

Orion was initially formed as a wholly-owned subsidiary of Realty Income Corporation. Following the completion of the merger transaction involving Realty Income and VEREIT, Inc. in November 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, to Orion and its operating partnership, Orion Office REIT LP. On November 12, 2021, Realty Income effected a special distribution to its stockholders of all the outstanding shares of common stock of Orion, and the company became independent and publicly traded.

Financials

Rental Revenue and Leasing Activity

Orion's operating results depend primarily upon generating rental revenue from the properties in its portfolio. For the year ended December 31, 2023, the company reported total revenues of $195,041,000 and a net loss of $57,302,000. During the first quarter of 2024, Orion generated total revenues of $47,197,000, compared to $50,190,000 in the same period of the prior year. The decrease in rental revenue of $3.0 million during the first quarter of 2024 was primarily due to the impact from a decrease in the company's overall occupied square footage due to scheduled vacancies and the impact from property dispositions.

Orion remains highly focused on leasing activity, given the 4.1 year weighted-average remaining lease term and the significant lease maturities which will occur across the portfolio over the next few years. During the first quarter of 2024, the company completed approximately 0.1 million square feet of lease renewals and new leases across four different properties, including a new 15-year lease for 86,000 square feet at its property in Lincoln, Nebraska. Subsequent to the first quarter, Orion entered into a 4-year renewal option for approximately 413,000 square feet at its property in Covington, Kentucky with the United States Government. Additionally, the company signed a 2.3-year lease for 1,000 square feet at one of its properties in The Woodlands, Texas.

Impairments and Asset Dispositions

Orion recorded impairment charges of $19.7 million during the first quarter of 2024, reflecting changes in the company's future cash flow assumptions for agreed-upon or estimated sales proceeds with respect to real estate assets that were expected to be sold as well as changes to assumptions with regard to management's intent to sell or lease the real estate assets. The company has been actively disposing of vacant and identified non-core assets that do not fit its long-term investment objectives. Since the completion of the distribution from Realty Income, Orion has sold 17 properties totaling 1.8 million square feet for gross proceeds of $58.5 million, which has materially reduced carry costs and significantly reduced forward expected capital expenditures.

During the first quarter of 2024, Orion entered into an agreement to sell an approximately 96,000 square foot vacant property in St. Charles, Missouri for $2.1 million, which is expected to close in the second quarter of 2024. The company also has agreements in place to sell 7 additional properties, representing 694,000 square feet for approximately $46 million. These dispositions will allow Orion to both reduce carry costs and avoid the uncertainty and significant capital expenditures associated with re-tenanting.

Liquidity

As of March 31, 2024, Orion had $23.6 million of cash and cash equivalents and $234.0 million of borrowing capacity under its $350.0 million revolving credit facility, after giving effect to a recent amendment that reduced the facility size by $75.0 million. The company's nearest debt maturity is the non-recourse mortgage notes associated with the Arch Street Joint Venture of $136.7 million, which are scheduled to mature in November 2024. The Arch Street Joint Venture has two successive one-year options to extend the maturity until November 2026, subject to satisfaction of certain conditions.

Orion's credit agreement requires the company to comply with various covenants, including maintaining a ratio of total debt to total asset value of not more than 0.60 to 1.00, a ratio of adjusted EBITDA to fixed charges of not less than 1.50 to 1.00, and a minimum unencumbered asset value of $500.0 million. As of March 31, 2024, the company was in compliance with these financial covenants.

Risks and Challenges

Orion's leasing and asset disposition activity continues to be adversely impacted by a variety of market and property specific conditions. The office leasing market has experienced significantly reduced demand for space and changes in space usage as tenants seek to attract employees back to the office, in newer, renovated buildings with more amenities. As of March 31, 2024, 59.3%, 35.0% and 5.7% of Orion's office buildings by square feet were classified as class A, class B and class C, respectively, as determined by the most recent appraisals of the properties. In the current office environment, class B and class C buildings generally have been experiencing reduced demand and lease or sell at discounts to class A buildings.

Outlook

For the full year 2024, Orion is reaffirming its guidance for core FFO in the range of $0.93 to $1.01 per diluted share, G&A in the range of $19.5 million to $20.5 million, and net debt to adjusted EBITDA in the range of 6.2x to 7.0x. The company intends to maintain significant liquidity on its balance sheet for the foreseeable future to provide the financial flexibility required to execute on its business plan over the next several years, including the funding of expected capital commitments to support future leasing efforts.

Conclusion

Orion Office REIT continues to navigate the challenging office market environment through disciplined asset management and a focus on leasing, dispositions of non-core assets, and maintaining a strong capital structure. While the company faces significant lease rollover in the coming years, it has made progress in renewing key tenants and attracting new tenants to its portfolio. Orion's strategy of streamlining its asset base and retaining a core portfolio of well-leased properties in attractive markets positions the company to weather the current market conditions and potentially capitalize on future opportunities. Investors should closely monitor the company's leasing activity, capital allocation decisions, and ability to maintain compliance with its financial covenants as it works to stabilize and reposition its portfolio.