Orion Office REIT: Risks and Opportunities in 2023.
Mar 8th 2023, 9:21 pm
Performance Analysis: Orion Office REIT Inc. has been operating in a manner so as to qualify and be taxed as a REIT for U.S. federal income tax purposes. As of December 31, 2022, the Company owned and operated 81 office properties with an aggregate of 9.5 million leasable square feet located in 29 states with an occupancy rate of 88.8% and a weighted-average remaining lease term of 4.0 years. However, the occupancy level of the Company has been declining since December 31, 2021, from 91.9% to 89.0% as of December 31, 2022, due to economic conditions and persistent remote working trends as a result of the COVID-19 pandemic. The Company’s efforts to address upcoming lease maturities and vacancies have also been adversely impacted by economic conditions, such as rising interest rates, rising inflation and recession fears, which may reduce future rental revenues. Moreover, the Company has also agreed to provide rent concessions to tenants and may continue to increase tenant improvement allowances and to pay leasing commissions, the amount of which may increase in future periods. Forward Looking Analysis: Orion is expected to face increased General and administrative expenses starting in 2023 and beyond as subsidies provided by Realty Income at the Distribution expire, and as stock-based compensation costs and public company compliance costs increase due to additional Sarbanes-Oxley compliance costs and costs associated with the SEC’s expected climate change rules. Additionally, the Company did not acquire any new properties during 2022 due to the impact of rapidly rising interest rates and disruptions in the financing markets. The Company’s ability to resume asset acquisition activity will be highly dependent upon favorable market conditions, including attractive yields on properties and access to requisite financing, and it cannot provide any assurance as to whether it will be able to acquire assets on favorable terms and in a timely manner. However, one of the Company’s main asset management strategies during 2022 was to sell non-core assets that do not fit its long-term investment objectives. The Company plans to continue this non-core asset disposition strategy in 2023. Orion’s interest expense has also been generally in line with what was budgeted for 2022, as increases in interest rates on its floating rate indebtedness were offset by lower amounts of debt outstanding as the Company utilized cash from operations and proceeds from real estate dispositions to repay debt on the Revolving Facility. Furthermore, the Company’s Executive Summary mentions that the real estate portfolio generally performed as expected during 2022, with no material amount of scheduled rent payments determined to be uncollectible. This suggests that the Company has been successful in maintaining its portfolio during a challenging macroeconomic environment. The CEO of Orion, Thomas R. Villani, stated, “We continue to believe that we are well-positioned for the nascent economic recovery given the credit quality of our tenant roster and the missioncritical nature of many of their business operations.” This indicates that the Company is optimistic about its prospects for the future. Overall, there are risks and uncertainties that may impact the Company’s performance in the future, but the Company’s efforts to manage its portfolio and expenses may help mitigate these risks.