Orion Office REIT Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

VEREIT Office Assets, Real Estate Investments and Related Intangibles

VEREIT Office Assets, Real Estate Investments and Related Intangibles

9 Months Ended

Sep. 30, 2021

VEREIT Office Assets

Entity Information [Line Items]

Real Estate Investments and Related Intangibles

Note 2 – Real Estate Investments and Related Intangibles

Property Dispositions

During the nine months ended September 30, 2020, VEREIT Office Assets disposed of three properties, selling them to the unconsolidated joint venture for an aggregate net sales price of $135.5 million. The dispositions resulted in proceeds of $116.4 million after closing costs and VEREIT Office Assets recorded a net gain of $9.8 million related to the dispositions, which is included in gain on disposition of real estate assets, net in the accompanying combined and consolidated statements of operations.

Intangible Lease Assets

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


	Weighted-Average Useful Life (Years)	September 30, 2021		December 31, 2020
Intangible lease assets:
In-place leases, net of accumulated amortization of $118,576 and $118,093, respectively	10.4	$	30,120	$	40,622
Leasing commissions, net of accumulated amortization of $5,519 and $4,211, respectively	9.0	8,904		7,974
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $14,605 and $12,974, respectively	11.5	6,836		8,417
Total intangible lease assets, net		$	45,860	$	57,013

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $18,335 and $17,553, respectively	10.3	$	5,477	$	7,188

The aggregate amount of amortization of above-market and below-market leases and deferred lease incentives included as a net increase to rental revenue was $70,000 for the three months ended September 30, 2021. The aggregate amount included as a net decrease to rental revenue was $31,000 for the three months ended September 30, 2020 and $12,000 and $35,000 for the nine months ended September 30, 2021 and 2020, respectively. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $4.1 million and $4.0 million for the three months ended September 30, 2021 and 2020, respectively, and $11.8 million and $13.7 million for the nine months ended September 30, 2021 and 2020, 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, 2021 (amounts in thousands):


	Remainder of 2021		2022		2023		2024		2025
In-place leases:
Total projected to be included in amortization expense	$	3,286	$	10,475	$	9,142	$	5,512	$	1,156
Leasing commissions:
Total projected to be included in amortization expense	$	433	$	1,692	$	1,290	$	1,201	$	1,020
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue	$	559	$	2,223	$	2,186	$	1,104	$	354
Below-market lease liabilities:
Total projected to be included in rental revenue	$	518	$	2,003	$	1,878	$	854	$	208

Consolidated Joint Venture

VEREIT Office Assets had an interest in one consolidated joint venture that owned one property as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, the consolidated joint venture had total assets of $30.7 million and $33.0 million, respectively, of which $27.8 million and $29.1 million, respectively, were real estate investments, net of accumulated depreciation and amortization at each of the respective dates. The property was secured by a mortgage note payable, which was non-recourse to VEREIT Office Assets and had a net balance of $14.8 million as of December 31, 2020. During the nine months ended September 30, 2021, VEREIT, on behalf of VEREIT Office Assets, repaid the balance in full and there were no amounts outstanding as of September 30, 2021. VEREIT Office Assets had the ability to control operating and financing policies of the consolidated joint venture. There were restrictions on the use of these assets as VEREIT Office Assets was generally required to obtain the approval of the joint venture partner in accordance with the joint venture agreement for any major transactions. VEREIT Office Assets and the joint venture partner were subject to the provisions of the joint venture agreement, which included provisions for when additional contributions may be required to fund certain cash shortfalls.

Impairments

VEREIT management performed quarterly impairment review procedures for real estate investments, leasehold improvements and property and equipment and right of use assets, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable.

As part of VEREIT management’s quarterly impairment review procedures, net real estate assets representing three and four properties of VEREIT Office Assets were deemed to be impaired resulting in impairment charges of $6.4 million and $28.1 million during the three and nine months ended September 30, 2021, respectively. During each of the three and nine months ended September 30, 2020, net real estate assets related to one property, were deemed to be impaired resulting in impairment charges of $0.2 million. The impairment charges related to properties that VEREIT management identified for potential sale or were determined, based on discussions with the current tenants, would not be re-leased by the tenant and VEREIT management believed the property would not be leased to another tenant at a rental rate that supports the current book value.

VEREIT estimated fair values using Level 3 inputs and used a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment required VEREIT’s management to exercise significant judgment and make certain key assumptions, including, but not limited to, the following: (1) capitalization rate; (2) discount rates; (3) number of years 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 VEREIT Office Assets’ tenants. For VEREIT’s impairment tests for the real estate assets during the three months ended September 30, 2021, VEREIT used a weighted-average discount rate of 9.7% and a weighted-average capitalization rate of 9.2%. For VEREIT’s impairment tests for the real estate assets during the nine months ended September 30, 2021, VEREIT used a weighted-average discount rate of 9.0% and a weighted-average capitalization rate of 8.5%. For VEREIT’s impairment tests for the real estate assets during the three and nine months ended September 30, 2020, discount rates and capitalization rates were not applicable as VEREIT determined the fair value of the real estate assets of VEREIT Office Assets based on sale scenarios and the properties had leases expiring within 12 months of the impairment analysis.