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

Quarterly report pursuant to Section 13 or 15(d)

Real Estate Investments and Related Intangibles

Real Estate Investments and Related Intangibles

9 Months Ended

Sep. 30, 2024

Real Estate [Abstract]

Real Estate Investments and Related Intangibles

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the nine months ended September 30, 2024, the Company acquired, for no consideration, the fee simple 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, $3.5 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 land in the Company’s consolidated balance sheet as of September 30, 2024.

Additionally, during the nine months ended September 30, 2024, the Company acquired fee simple, controlling financial interest in one real property and the improvements thereon including a 97,000 square foot flex/laboratory and R&D facility located in San Ramon, California for a gross purchase price of $34.6 million and external acquisition-related expenses of $0.1 million that were capitalized. The property is fully leased to a single tenant with a remaining lease term of 15.0 years as of the acquisition date.

The following table presents the allocation of the purchase consideration and capitalized transaction costs to the assets acquired and liabilities assumed based on their relative fair values during the nine months ended September 30, 2024 (in thousands):


Real estate investment, at cost:
Land	$	12,250
Building, fixtures and improvements	25,269
Total real estate investment, at cost	37,519
Acquired intangible assets:
Intangible lease asset	13,847
Assumed intangible liabilities:
Below-market lease liability	(16,632)
Net assets acquired	$	34,734

During the three and nine months ended September 30, 2023, the Company had no acquisitions.

Property Dispositions and Real Estate Assets Held for Sale

The following table summarizes the Company’s property dispositions during the periods indicated below (dollars in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Total dispositions	—		2		1		2
Aggregate gross sales price	$	—	$	14,050	$	2,100	$	14,050

Gain on disposition of real estate assets	$	—	$	18	$	—	$	18
Property count	—		2		—		2

Impairments on disposition of real estate assets	$	—	$	—	$	20	$	—
Property count	—		—		1		—

As of September 30, 2024, the Company had no properties classified as held for sale. In November 2024, the Company closed on the sale of one vacant property for a gross sales price of $3.2 million. See Note 15 – Subsequent Events, below.

Intangible Lease Assets and Liabilities

Intangible lease assets and liabilities consisted of the following as of the periods indicated below (in thousands, except weighted-average useful life):


	Weighted-Average Useful Life (Years)	September 30, 2024		December 31, 2023
Intangible lease assets:
In-place leases, net of accumulated amortization of $173,264 and $193,470, respectively	9.0	$	77,039	$	103,997
Leasing commissions, net of accumulated amortization of $4,253 and $3,033, respectively	12.4	17,705		13,539
Above-market lease assets, net of accumulated amortization of $12,671 and $10,372, respectively	9.1	2,652		5,006
Deferred lease incentives, net of accumulated amortization of $792 and $419, respectively	11.0	4,105		3,822
Total intangible lease assets, net		$	101,501	$	126,364

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $25,083 and $23,176, respectively	14.8	$	21,328	$	8,074

The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was less than $0.1 million and $1.0 million for the three and nine months ended September 30, 2024, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2023, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was $0.1 million and $0.4 million for the three and nine months ended September 30, 2024, respectively, and $0.2 million for the nine months ended September 30, 2023. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $11.7 million and $42.1 million for the three and nine months ended September 30, 2024, respectively, and $18.5 million and $57.4 million for the three and nine months ended September 30, 2023, 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, 2024 (in thousands):


	Remainder of 2024		2025		2026		2027		2028		2029
In-place leases:
Total projected to be included in amortization expense	$	8,859	$	22,537	$	16,157	$	8,262	$	5,517	$	2,797
Leasing commissions:
Total projected to be included in amortization expense	$	486	$	1,943	$	1,939	$	1,912	$	1,692	$	1,403
Above-market lease assets:
Total projected to be deducted from rental revenue	$	609	$	849	$	680	$	237	$	115	$	63
Deferred lease incentives:
Total projected to be deducted from rental revenue	$	136	$	527	$	429	$	405	$	392	$	381
Below-market lease liabilities:
Total projected to be added to rental revenue	$	732	$	2,147	$	1,928	$	1,766	$	1,682	$	1,500

Investment in Unconsolidated Joint Venture

The following is a summary of the Company’s investment in the Arch Street Joint Venture, as of and for the periods indicated below (dollars in thousands):


	Ownership % (1)	Number of Properties	Carrying Value of Investment				Equity in Loss, Net
							Nine Months Ended
Investment	September 30, 2024		September 30, 2024		December 31, 2023		September 30, 2024		September 30, 2023
Arch Street Joint Venture (2)	20%	6	$	12,065	$	13,549	$	(497)	$	(326)

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(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 interest.

(2)The total carrying value of the Company’s investment in the Arch Street Joint Venture was greater than the underlying equity in net assets by less than $0.1 million and $0.4 million as of September 30, 2024 and December 31, 2023, respectively. This difference is related to a step up in the fair value of the investment in the Arch Street Joint Venture in connection with the Separation and the Distribution. The step up in fair value was allocated based on the underlying assets and liabilities of the Arch Street Joint Venture and is being amortized over the estimated useful lives of the respective assets and liabilities in accordance with the Company’s accounting policies.

The non-recourse mortgage notes associated with the Arch Street Joint Venture of $135.7 million as of September 30, 2024 are scheduled to mature on November 27, 2024, and the Arch Street Joint Venture has two successive one-year options to extend the maturity until November 27, 2026. The Company’s pro-rata share of the mortgage notes was $27.1 million as of September 30, 2024. The extension options are subject to satisfaction of certain conditions, including satisfaction of certain financial and operating covenants. In October 2024, the Arch Street Joint Venture and its lenders entered into an amendment to the loan agreement pursuant to which, among other things, the lenders agreed to modify certain conditions for the first loan extension and which amendment provides greater certainty the Arch Street Joint Venture will be able to satisfy all conditions for the first loan extension until November 27, 2025. In connection with the amendment, the Arch Street Joint Venture exercised the first extension option and is working with the lenders to satisfy all extension conditions, including a maximum loan-to-value of 60% which may result in a partial repayment of the mortgage notes that the Company anticipates will require it to fund a member loan to the Arch Street Joint Venture. The Company cannot provide any assurance the Arch Street Joint Venture will be able to satisfy the extension conditions for the first or second loan extension or otherwise extend or refinance this debt obligation prior to maturity. If the Arch Street Joint Venture is unable to extend or refinance the mortgage notes, the Company’s investment in the Arch Street Joint Venture could be materially adversely affected.