Quarterly report pursuant to Section 13 or 15(d)

Orion Office REIT, Real Estate Investments and Related Intangibles

v3.22.2.2
Orion Office REIT, Real Estate Investments and Related Intangibles
 9 Months Ended
Sep. 30, 2022
Real Estate [Abstract]  
Real Estate Investments and Related Intangibles
Note 3 – Real Estate Investments and Related Intangibles
Property Acquisitions
During the three months ended September 30, 2022, the Company had no acquisitions. During the nine months ended September 30, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of the tax advantaged bond and ground lease structure. As a result of the transaction, $4.7 million that was previously classified as a finance lease right-of-use asset with respect to such land parcel previously subject to the ground lease was reclassified from other assets, net to real estate investments in the Company’s consolidated balance sheet as of September 30, 2022. During the three and nine months ended September 30, 2021, the Company had no acquisitions.
Property Dispositions and Real Estate Assets Held for Sale
During the nine months ended September 30, 2022, the Company disposed of five properties for an aggregate gross sales price of $23.1 million. The Company recorded a loss of $1.1 million related to two dispositions, which is included in impairments in the accompanying consolidated and combined statements of operations. Additionally, the Company recorded a gain of $1.1 million related to the remaining three dispositions, which is included in gain on disposition of real estate assets in the accompanying consolidated and combined statements of operations. During the nine months ended September 30, 2021, the Company had no dispositions.
As of September 30, 2022, there were three properties classified as held for sale with a carrying value of $6.4 million, included in real estate assets held for sale, net, primarily comprised of land of $1.2 million and building, fixtures and improvements, net of $5.2 million, in the accompanying consolidated balance sheets, and which are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. During the nine months ended September 30, 2022, the Company recorded a loss of $6.0 million related to held for sale properties, which is included in impairments in the accompanying consolidated and combined 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, 2022 December 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $129,123 and $65,247, respectively
 5.2 $ 199,336  $ 272,743 
Leasing commissions, net of accumulated amortization of $1,244 and $456, respectively
 12.7 11,776  10,349 
Above-market lease assets, net of accumulated amortization of $10,127 and $6,239, respectively
 5.4 11,127  15,015 
Deferred lease incentives, net of accumulated amortization of $36
 4.5 1,289  — 
Total intangible lease assets, net $ 223,528  $ 298,107 
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $15,706 and $14,459, respectively
 8.1 $ 15,611  $ 20,609 
The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $0.3 million and $0.9 million for the three and nine months ended September 30, 2022, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2021, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was less than $0.1 million for the three and nine months ended September 30, 2022, as compared to no impact to rental revenue for the three and nine months ended September 30, 2021. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $23.7 million and $73.5 million for the three and nine months ended September 30, 2022, respectively, and $1.6 million and $4.8 million for the three and nine months ended September 30, 2021, 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, 2022 (amounts in thousands):
Remainder of 2022 2023 2024 2025 2026 2027
In-place leases:
Total projected to be included in amortization expense $ 21,496  $ 73,615  $ 49,213  $ 21,652  $ 15,499  $ 7,441 
Leasing commissions:
Total projected to be included in amortization expense $ 288  $ 1,153  $ 1,110  $ 1,042  $ 1,042  $ 1,039 
Above-market lease assets:
Total projected to be deducted from rental revenue $ 1,282  $ 4,791  $ 2,998  $ 860  $ 682  $ 237 
Deferred lease incentives:
Total projected to be deducted from rental revenue $ 76  $ 306  $ 306  $ 289  $ 191  $ 119 
Below-market lease liabilities:
Total projected to be added to rental revenue $ 1,543  $ 5,994  $ 3,786  $ 1,036  $ 817  $ 655 
Investment in Unconsolidated Joint Venture
The following is a summary of the Company’s investment in one unconsolidated entity, the Arch Street Joint Venture, as of September 30, 2022 and December 31, 2021 and for the nine months ended September 30, 2022 and 2021 (dollar amounts in thousands):
Ownership % (1)
Number of Properties Carrying Amount of
Investment		 Equity in Loss
Nine Months Ended (2)
Investment September 30, 2022 September 30, 2022 December 31, 2021 September 30, 2022 September 30, 2021
Arch Street Joint Venture (3) (4)
20% 6 $ 16,544  18,631  $ (252) — 
____________________________________
(1)The Company’s ownership interest reflects its legal ownership interest. The Company’s legal ownership interest may, at times, not equal the Company’s economic interest because of various provisions in the joint venture agreement regarding capital contributions, distributions of cash flow based on capital account balances and allocations of profits and losses. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.
(2)The interest in the Arch Street Joint Venture was acquired by Realty Income as part of the Mergers, and was transferred to the Company upon the consummation of the Distribution. Therefore, the Company’s equity in loss reflects operations following the Merger Effective Time.
(3)During the nine months ended September 30, 2022, the Arch Street Joint Venture did not acquire any properties.
(4)The total carrying amount of the Company’s investment in the unconsolidated joint venture was greater than the underlying equity in net assets by $1.2 million as of September 30, 2022. This difference is related to a step up in the fair value of the investment in the unconsolidated joint venture in connection with the Mergers. The step up in fair value was allocated to the Company’s investment in the unconsolidated joint venture and is being amortized in accordance with the Company’s depreciation policy.