ORION OFFICE REIT INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.Orion Office REIT Inc. (the "Company", "Orion", "we", or "us") makes statements in this section that are forward-looking statements. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see the section titled "Risk Factors" included in the preliminary information statement included as Exhibit 99.1 to the Company's Registration Statement on Form 10 (File No. 001-40873) filed with theU.S. Securities and Exchange Commission (the "SEC") onOctober 4, 2021 , the final version of which was included as Exhibit 99.1 to the Current Report on Form 8-K filed with theSEC onOctober 25, 2021 (the "Information Statement"). Forward-Looking Statements This Quarterly Report on Form 10-Q includes "forward-looking statements" which reflect our expectations and projections regarding future events and plans, future financial condition, results of operations, liquidity and business, including leasing and occupancy, acquisitions, dispositions, rent receipts, rent relief requests, rent relief granted, the payment of future dividends, the impact of the coronavirus (COVID-19) on our business, the Mergers, the Separation and the Distribution (each, as defined under "Overview - Merger with Realty Income" below). Generally, the words "anticipates," "assumes," "believes," "continues," "could," "estimates," "expects," "goals," "intends," "may," "plans," "projects," "seeks," "should," "targets," "will," and variations of such words and similar expressions identify forward-looking statements. These forward-looking statements are based on information currently available to us and involve a number of known and unknown assumptions and risks, uncertainties and other factors, which may be difficult to predict and beyond the Company's control, that could cause actual events and plans or could cause our business, financial condition, liquidity and results of operations to differ materially from those expressed or implied in the forward-looking statements. These factors include, among other things, those discussed below. Information regarding historical rent collections should not serve as an indication of future rent collection. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or factors, new information, future events or otherwise, except as may be required by law. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements: •Realty Income Corporation's ("Realty Income") inability or failure to perform under the various transaction agreements effecting the Separation and the Distribution; •our lack of operating history as an independent company; •conditions associated with the global market, including an oversupply of office space, client credit risk and general economic conditions; •our ability to comply with the terms of our credit agreements or to meet the debt obligations on certain of our properties; •the availability of refinancing current debt obligations; •existing and potential co-investments with third-parties; •changes in any credit rating we may subsequently obtain; •changes in the real estate industry and in performance of the financial markets and interest rates and our ability to effectively hedge against interest rate changes; •the actual or perceived impact of global and economic conditions; •our ability to enter into new leases or renewal leases on favorable terms; •the potential for termination of existing leases pursuant to client termination rights; •the amount, growth and relative inelasticity of our expenses; •risks associated with the ownership and development of real property; 37 -------------------------------------------------------------------------------- •risks associated with our joint venture with an affiliate ofArch Street Capital Partners and any potential future equity investments; •the outcome of claims and litigation involving or affecting the company; •the ability to satisfy conditions necessary to close pending transactions and the ability to successfully integrate pending transactions; •applicable regulatory changes; •risks associated with acquisitions, including the integration of VEREIT Office Assets and Realty Income Office Assets (each, as defined under "Overview - Merger with Realty Income" below) into Orion; •risks associated with the fact that our historical and pro forma financial information may not be a reliable indicator of our future results; •risks associated with achieving expected synergies or cost savings; •risks associated with the potential volatility of our common stock; and •other risks and uncertainties detailed from time to time in ourSEC filings. All forward-looking statements should be read in light of the risks identified in the section titled "Risk Factors" included in the Information Statement and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings: Under a "net lease," the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require that the tenant pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs). Double net leases typically require that the tenant pay all operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance), but excludes some or all major repairs (e.g., roof, structure and parking lot). Accordingly, the owner receives the rent "net" of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. Overview Merger with Realty Income OnApril 29, 2021 , Realty Income entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement") with VEREIT, Inc. ("VEREIT"), its operating partnership,VEREIT Operating Partnership, L.P. ("VEREIT OP"),Rams MD Subsidiary I, Inc. , a wholly owned subsidiary of Realty Income ("Merger Sub 1"), andRams Acquisition Sub II, LLC , a wholly owned subsidiary of Realty Income ("Merger Sub 2"). OnNovember 1, 2021 , pursuant to the Merger Agreement, Merger Sub 2 merged with and into VEREIT OP, with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the "Mergers", and such effective time of the Mergers, the "Merger Effective Time"). Following the Merger Effective Time, in accordance with the Merger Agreement, Realty Income contributed the portion of the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, "Realty Income Office Assets") and certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, "VEREIT Office Assets") (the "Separation") to the Company and its operating partnership,Orion Office REIT LP ("Orion OP"). OnNovember 12, 2021 , following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement, Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the "Distribution"). Following the Distribution, we became an independent publicly traded company and intend to qualify and elect to be taxed as a REIT, commencing with our initial taxable year endingDecember 31, 2021 . 38 -------------------------------------------------------------------------------- Our common stock, par value$0.001 per share, trades on theNew York Stock Exchange (the "NYSE") under the symbol "ONL". Realty Income and VEREIT are both considered our accounting predecessors. Following the Mergers, the Separation and the Distribution, we own and operate 92 office properties and related assets previously owned by Realty Income and VEREIT, totaling approximately 10.5 million leasable square feet located within 29 states andPuerto Rico . In addition, we own an equity interest in an unconsolidated joint venture with an affiliate ofArch Street Capital Partners , which, as ofSeptember 30, 2021 owned a portfolio consisting of five office properties totaling approximately 0.8 million leasable square feet located within five states. ThroughSeptember 30, 2021 , we had not conducted any business as a separate company other than start-up related activities. Emerging Growth Company Status We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including, but not limited to, compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. If we do take advantage of some or all of these exemptions, some investors may find our common stock less attractive. The result may be a less active trading market for our common stock and our stock price may be more volatile. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies until we can no longer avail ourselves of the exemptions applicable to emerging growth companies or until we affirmatively and irrevocably opt out of the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed$1 billion , (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (iii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds$700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than$1 billion in non-convertible debt during the preceding three-year period. Basis of Presentation For periods presented prior to the date of the Distribution, the historical combined financial results for the Realty Income Office Assets and VEREIT Office Assets include the accounts of Realty Income Office Assets and VEREIT Office Assets on a combined basis as the ownership interests have historically been under common control and ownership of Realty Income and VEREIT, respectively. These combined financial results were derived from the books and records of Realty Income and VEREIT and were carved out from Realty Income and VEREIT, respectively. The combined historical financial statements of Realty Income Office Assets and the combined and consolidated financial statements of VEREIT Office Assets reflect charges for certain corporate costs and, we believe such charges are reasonable. Costs of the services that were charged to Realty Income Office Assets and VEREIT Office Assets were based on either actual costs incurred by each business or a proportion of costs estimated to be applicable to each entity, based on Realty Income Office Assets' pro-rata share of total rental revenue and VEREIT Office Assets' pro-rata share of annualized rental income. The historical combined financial information presented does not necessarily include all of the expenses that would have been incurred had Realty Income Office Assets and VEREIT Office Assets been operating as a separate, standalone entity. Such historical combined financial information may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Realty Income Office Assets and VEREIT Office Assets had been an independent, standalone 39 -------------------------------------------------------------------------------- public company during the periods presented or of the future performance of the Company as an independent, standalone company. Election as a REIT We intend to elect to be taxed as a REIT forU.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year endedDecember 31, 2021 . To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. As a REIT, except as discussed below, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if we maintain our qualification for taxation as a REIT, we may become subject to certain state and local taxes on our income and property, federal income taxes on certain income and excise taxes on our undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year endingDecember 31, 2021 . Inflation We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. However, net leases that require the tenant to pay its allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance, may reduce our exposure to increases in costs and operating expenses resulting from inflation. 40 -------------------------------------------------------------------------------- ORION OFFICE REIT INC. Results of Operations For the periods presented prior to the date of the Distribution, our historical consolidated financial results reflect charges for certain legal, accounting and other costs related to the Distribution, which were incurred and paid by Realty Income on our behalf, and are reflected as capital contributions. Liquidity and Capital Resources FromJuly 1, 2021 (inception) toSeptember 30, 2021 , our principal sources of liquidity were cash on hand and contributions from Realty Income. For the next 12 months, our principal liquidity needs are to: (i) fund operating expenses; (ii) meet our debt service requirements; (iii) make distributions to our stockholders, as required for us to qualify as a REIT; (iv) fund capital expenditures at properties we own; and (v) fund acquisitions, investments and commitments, including commitments to fund acquisitions related to the Arch Street Joint Venture, as defined below. We expect that these liquidity needs generally will be satisfied by a combination of cash flows from operations and borrowings under the Revolving Facility (as defined below). Credit Facility In connection with the Separation and the Distribution, onNovember 12, 2021 , we, as parent, andOrion Office REIT LP ("Orion OP"), as borrower, entered into (i) a credit agreement (the "Revolver/Term Loan Credit Agreement") providing for a three-year,$425 million senior revolving credit facility (the "Revolving Facility"), including a$25 million letter of credit sub-facility, and a two-year,$175 million senior term loan facility (the "Term Loan Facility," and together with the Revolving Facility, the "Revolver/Term Loan Facilities") withWells Fargo Bank, National Association , as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the "CMBS Bridge Credit Agreement," and together with the Revolver/Term Loan Credit Agreement, the "Credit Agreements") providing for a 6-month,$355 million senior bridge term loan facility (the "CMBS Bridge Facility," and together with the Revolver/Term Loan Facilities, the "Facilities") withWells Fargo Bank, National Association , as administrative agent, and the lenders party thereto. OnNovember 12, 2021 , Orion OP borrowed$90 million under the Revolving Facility, and each of the Term Loan Facility and the CMBS Bridge Facility was fully drawn. Approximately$595 million of the net proceeds of the Facilities was distributed to Realty Income in accordance with the Separation and Distribution Agreement. Orion OP retained the remaining net proceeds of such borrowings as working capital that will be used for our general corporate purposes, Orion OP and Orion OP's subsidiaries. As of the completion of the Separation and the Distribution, we had$620.0 million in consolidated outstanding indebtedness, approximately$15.6 million in cash and$335.0 million of availability under the Revolving Facility. The CMBS Bridge Facility is subject to one 6-month extension option at the election of Orion OP. The exercise of such extension option requires the payment of an extension fee and the satisfaction of certain other customary conditions. The interest rate applicable to the loans under the Facilities may, at the election of Orion OP, be determined on the basis of LIBOR or a base rate, in either case, plus an applicable margin. Under the Revolver/Term Loan Facilities, the applicable margin is (1) in the case of the Revolving Facility, 2.50% for LIBOR loans and 1.50% for base rate loans and (2) in the case of the Term Loan Facility, 2.50% for LIBOR loans and 1.50% for base rate loans. Under the CMBS Bridge Facility, the applicable margin for LIBOR loans is initially 2.50% with increases over time to a maximum of 3.50% and the applicable margin on base rate loans is initially 1.50% with increases over time to a maximum of 2.50%, in each case, based on the number of days elapsed afterNovember 12, 2021 . Loans under the Credit Agreements may be prepaid, and unused commitments under the Credit Agreements may be reduced, at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs). 41 -------------------------------------------------------------------------------- To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25% per annum of the unused portion of the Revolving Facility. The Revolver/Term Loan Facilities are guaranteed pursuant to a Guaranty (the "Revolver/Term Loan Guaranty") and the CMBS Bridge Facility is guaranteed pursuant to a Guaranty (the "CMBS Bridge Guaranty"), in each case, by us and, subject to certain exceptions, substantially all of Orion OP's existing and future subsidiaries (including substantially all of its subsidiaries that directly or indirectly own unencumbered real properties), other than certain joint ventures and subsidiaries that own real properties subject to certain other indebtedness (such subsidiaries of Orion OP, the "Subsidiary Guarantors"). The Facilities are secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors. The Credit Agreements require that Orion OP comply with various covenants, including, without limitation, covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends. In addition, the Credit Agreements require that Orion OP satisfy certain financial covenants, including a: •ratio of total debt to total asset value of not more than 0.60 to 1.00; •ratio of adjusted EBITDA to fixed charges of not less than 1.50 to 1.00; •ratio of secured debt to total asset value of not more than 0.45 to 1.00; •ratio of unsecured debt to unencumbered asset value of not more than 0.60 to 1.00; and •ratio of net operating income from all unencumbered real properties to unsecured interest expense of not less than 2.00 to 1.00. The Credit Agreements include customary representations and warranties of us and Orion OP, which must be true and correct in all material respects as a condition to future extensions of credit under the Revolver/Term Loan Facilities. The Credit Agreements also include customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of Orion OP under the Credit Agreements to be immediately due and payable and foreclose on the collateral securing the Facilities. Equity OnNovember 10, 2021 , we issued 56,525,650 additional shares of our common stock to Realty Income, such that Realty Income owned 56,625,650 shares of our common stock. Also onNovember 10, 2021 , in connection with the filing of our Articles of Amendment, we changed the par value of our common stock from$0.01 per share to$0.001 per share. OnNovember 12, 2021 , Realty Income effected the Distribution. OnNovember 12, 2021 , in connection with the Distribution, Orion OP entered into an Amended and Restated Limited Liability Company Agreement (the "LLCA") ofOAP/VER Venture, LLC (the "Arch Street Joint Venture"), by and betweenOrion OP and OAP Holdings LLC (the "Arch Street Partner"), an affiliate ofArch Street Capital Partners , pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held byVEREIT Real Estate, L.P. to Orion OP. Also onNovember 12, 2021 , in connection with the entry into the LLCA, we granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of our common stock (the "Arch Street Warrants"). The Arch Street Warrants entitle the respective holders to purchase shares of our common stock at a price per share equal to (1) the 30-day volume weighted average per share price of our common stock for the first 30 trading days beginning on the first trading date of our common stock, multiplied by (2) 1.15 (as may be adjusted for any stock splits, dividends, combinations or similar transactions), at any time commencing 31 trading days after the completion of the Distribution. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of our common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) the termination of the Arch Street Joint Venture. 42 -------------------------------------------------------------------------------- The Arch Street Warrants will be exercisable and we will not be obligated to issue shares of our common stock upon exercise of a warrant unless such common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. We have agreed that, prior to six months following our eligibility to use Form S-3 for the registration of our securities, we will file with theSEC a registration statement on Form S-3 (the "Registration Statement") for the registration, under the Securities Act, of the shares of our common stock issuable upon exercise of the Arch Street Warrants. We will use our commercially reasonable efforts to cause the Registration Statement to become effective and to maintain the effectiveness of the Registration Statement, and a current prospectus relating thereto, until the earlier of (a) the expiration of the Arch Street Warrants, or (b) the shares issuable upon such exercise become freely tradable underUnited States federal securities laws by anyone who is not an affiliate (as such term is defined in Rule 144 under the Securities Act (or any successor rule)) of us. The holders of the Arch Street Warrants will also remain subject to the ownership limitations pursuant to our organizational documents. Also in connection with the entry into the LLCA, the Arch Street Joint Venture's lender consented to the transfer of the interests of the Arch Street Joint Venture previously held byVEREIT Real Estate, L.P. to Orion OP, and, in connection therewith, Orion OP agreed to become a guarantor of certain limited customary recourse obligations and provide certain customary environmental indemnities under the Arch Street Joint Venture's existing indebtedness. Right of First Offer Agreement In connection with the entry into the LLCA, we and the Arch Street Joint Venture entered into that certain Right of First Offer Agreement (the "ROFO Agreement"), datedNovember 12, 2021 , pursuant to which, subject to certain limitations, we, on behalf of ourselves and our affiliates, agreed not to acquire or purchase a fee simple or ground leasehold interest in any office real property, including by way of an acquisition of equity interests, within certain investing parameters without first offering the property for purchase to the Arch Street Joint Venture, which will expire upon the earlier of (1) the third anniversary of the execution of the ROFO Agreement, (2) the date on which the Arch Street Joint Venture is terminated or (3) the date on which the Arch Street Joint Venture's gross book value of assets is below$50.0 million . If the Arch Street Joint Venture decides not to acquire any such property, we may seek to acquire the property independently, subject to certain restrictions. We do not anticipate that the ROFO Agreement will have a material impact on our ability to acquire additional office real properties, although it could result in us acquiring future properties through the Arch Street Joint Venture rather than as sole 100% owner. Dividend We are a newly formed company that has recently commenced operations, and as a result, we have not paid any dividends as of the date of this Quarterly Report on Form 10-Q. We intend to elect and qualify to be taxed as a REIT forU.S. federal income tax purposes beginning with our taxable year commencing on the day prior to the Distribution and ending onDecember 31, 2021 . We intend to make regular distributions to our stockholders to satisfy the requirements to qualify as a REIT. Our dividends may be funded from a variety of sources. In particular, we expect that, initially, our dividends may exceed our net income under GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income. To the extent that our funds available for distribution are less than the amount we must distribute to our stockholders to satisfy the requirements to qualify as a REIT, we may consider various means to cover any such shortfall, including borrowing under our Revolving Facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring taxable share dividends. In addition, our Articles of Amendment and Restatement allow us to issue shares of preferred equity that could have a preference on dividends, and if we do, the dividend preference on the preferred equity could limit our ability to pay dividends to the holders of our common stock. Contractual Obligations As ofSeptember 30, 2021 , we were not subject to any contractual obligations or commitments. 43 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 44 -------------------------------------------------------------------------------- VEREIT OFFICE ASSETS Results of Operations Comparison of the three and nine months endedSeptember 30, 2021 to the three and nine months endedSeptember 30, 2020 (dollars in thousands) The following tables set forth the summary historical combined financial data of certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, "VEREIT Office Assets"), which were carved out from the financial information of VEREIT. The summary historical financial data set forth below for the three and nine months endedSeptember 30, 2021 and 2020 has been derived from VEREIT Office Assets' unaudited combined and consolidated financial statements and the notes related thereto, which are included elsewhere in this Quarterly Report on Form 10-Q. The summary historical combined and consolidated financial data set forth below does not indicate results expected for any future periods. The summary historical combined financial data is qualified in its entirety by, and should be read in conjunction with VEREIT Office Assets' combined and consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and the audited combined and consolidated financial statements of VEREIT Office Assets and related notes thereto as of and for the year endedDecember 31, 2020 , included in the Information Statement. Three Months Ended September 30, Nine Months Ended September 30, Increase / Increase / 2021 2020 (Decrease) 2021 2020 (Decrease) REVENUE Rental revenue$ 40,494 $ 42,370 $ (1,876) $ 121,389 $ 128,583 $ (7,194) Fee income from unconsolidated joint venture 161 102 59 601 462 139 Total revenues 40,655 42,472 (1,817) 121,990 129,045 (7,055) EXPENSES Property operating 9,997 11,991 (1,994) 30,811 34,567 (3,756) General and administrative 1,483 1,635 (152) 5,058 5,271 (213) Depreciation and amortization 14,790 15,122 (332) 44,234 47,375 (3,141) Impairments 6,440 - 6,440 28,064 199 27,865 Total operating expenses 32,710 28,748 3,962 108,167 87,412 20,755 Other (expenses) income: Interest expense (1,706) (2,440) (734) (5,522) (7,412) (1,890) (Loss) gain on disposition of real estate assets, net - (1,653) 1,653 - 9,781
(9,781)
Loss on extinguishment of debt, net (5) - 5 (85) (1,686) (1,601) Equity in income of unconsolidated joint venture 211 182 29 621 381 240 Other income, net 95 11 84 146 28 118 Total other (expenses) income, net (1,405) (3,900) 2,495 (4,840) 1,092 (5,932) Income before taxes 6,540 9,824 (3,284) 8,983 42,725 (33,742) Provision for income taxes (156) (159) (3) (469) (480) (11) Net income$ 6,384 $ 9,665 $ (3,281) $ 8,514 $ 42,245 $ (33,731) 45
-------------------------------------------------------------------------------- Rental Revenue. Rental revenue decreased$1.9 million and$7.2 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 , primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year endedDecember 31, 2020 . Fee Income from Unconsolidated Joint Venture. Fee income from unconsolidated joint venture increased$0.1 million for both the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 , primarily due to three properties having been acquired by the unconsolidated joint venture during the nine months endedSeptember 30, 2020 . Property Operating Expenses. Property operating expenses decreased$2.0 million and$3.8 million , for the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 , primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year endedDecember 31, 2020 . General and Administrative Expenses. General and administrative expenses remained relatively constant at$1.5 million and$1.6 million for the three months endedSeptember 30, 2021 and 2020, respectively. During the nine months endedSeptember 30, 2021 and 2020, general and administrative expenses remained relatively constant at$5.1 million and$5.3 million , respectively. General and administrative expenses for VEREIT Office Assets are an allocation from overall VEREIT general and administrative expenses. Depreciation and Amortization Expense. Depreciation and amortization expense decreased$0.3 million and$3.1 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 , primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year endedDecember 31, 2020 . Impairments. Impairments increased$6.4 million and$27.9 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 . As part of VEREIT Office Assets' impairment review procedures, net real estate assets representing four properties were deemed to be impaired, resulting in impairment charges of$28.1 million during the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2020 , net real estate assets related to one property were deemed to be impaired, resulting in impairment charges of$0.2 million . The 2021 and 2020 impairments related to properties that management identified for potential sale or determined, based on discussions with the current tenants, would not be released by the tenant and management believed that the property would not be leased to another tenant at a rental rate that supports the current book value. Interest Expense. Interest expense decreased$0.7 million and$1.9 million , for the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 , primarily due to the payoff of$74.4 million mortgage notes payable during the nine months endedSeptember 30, 2021 . (Loss) Gain on Disposition of Real Estate Assets, Net. Loss on disposition of real estate assets, net was$1.7 million for the three months endedSeptember 30, 2020 related to the sale of one property to the unconsolidated joint venture. No such losses were recorded during the three months endedSeptember 30, 2021 . Gain on disposition of real estate assets, net was$9.8 million for the nine months endedSeptember 30, 2020 , which was related to the three properties sold to the unconsolidated joint venture during the nine months endedSeptember 30, 2020 for an aggregate net sales price of$135.5 million . No such gain was recorded during the nine months endedSeptember 30, 2021 . Loss on Extinguishment of Debt, Net. Loss on extinguishment of debt, net decreased$1.6 million for nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2020 , VEREIT Office Assets incurred$1.7 million in losses on the early extinguishment of a mortgage note payable. Equity in Income of Unconsolidated Joint Venture. Equity in income of unconsolidated joint venture remained relatively constant at$0.2 million for both the three months endedSeptember 30, 2021 and 2020. During the nine months endedSeptember 30, 2021 , equity in income of unconsolidated joint venture increased$0.2 million compared to the nine months endedSeptember 30, 2020 , primarily due to three properties acquired by the unconsolidated joint venture during the year endedDecember 31, 2020 . Other Income, Net. Other income, net increased$0.1 million for both the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 . 46 -------------------------------------------------------------------------------- Provision for Income Taxes. Provision for income taxes remained constant at$0.2 million and$0.5 million during each of the three and nine months endedSeptember 30, 2021 and 2020, respectively. Net Income. Net income was$6.4 million and$9.7 million for the three months endedSeptember 30, 2021 and 2020, respectively, a decrease of$3.3 million during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 and 2020, net income was$8.5 million and$42.2 million , respectively, a decrease of$33.7 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . Non-GAAP Measures Funds From Operations ("FFO") Attributable to VEREIT Office Assets VEREIT Office Assets defines FFO, a non-GAAP financial measure, consistent with theNational Association of Real Estate Investment Trusts' ("Nareit") definition, as net income or loss, less gains on disposition of real estate assets, net, plus depreciation and amortization of real estate assets, plus provisions for impairments of depreciable real estate assets, plus VEREIT Office Assets' proportionate share of adjustments for unconsolidated entities. The proportionate share of adjustments for unconsolidated entities is based upon VEREIT Office Assets' legal ownership percentage, which may, at times, not equal its economic interest because of various provisions in certain joint venture agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. VEREIT Office Assets considers FFO to be an appropriate supplemental measure of the operating performance of a real estate company as it is based on a net income analysis of property portfolio performance that adds back items such as gains or losses from disposition of property, depreciation and impairments for FFO. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a real estate company, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the real estate industry as a supplemental performance measure. Adjusted Funds from Operations ("AFFO") Attributable to VEREIT Office Assets VEREIT Office Assets uses adjusted funds from operations ("AFFO") as a non-GAAP supplemental financial performance measure to evaluate the operating performance of VEREIT Office Assets. AFFO, as defined by VEREIT Office Assets, is FFO, excluding certain non-cash items to the extent applicable, such as impairments of goodwill, intangible and right of use assets, straight-line rent, net direct financing lease adjustments, gains or losses on derivatives, reserves for loan loss, gains or losses on the extinguishment or forgiveness of debt, and amortization of intangible assets, deferred financing costs, premiums and discounts on debt, above-market lease assets, deferred lease incentives and below-market lease liabilities. VEREIT Office Assets believes that excluding these costs from FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by VEREIT Office Assets' management, and provides investors a view of the performance of VEREIT Office Assets' portfolio over time. AFFO allows for a comparison of the performance of VEREIT Office Assets' operations with other real estate companies, as AFFO, or an equivalent measure, is routinely reported by publicly-traded REITs, and VEREIT Office Assets believes often used by analysts and investors for comparison purposes. VEREIT Office Assets believes FFO and AFFO, in addition to net income, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which VEREIT Office Assets' management evaluates the performance of VEREIT Office Assets over time. However, not all real estate companies calculate FFO and AFFO the same way, including Realty Income Office Assets, so comparisons with other real estate companies may not be meaningful. FFO and AFFO should not be considered as alternatives to net income and are not intended to be used as a liquidity measure indicative of cash flow available to fund VEREIT Office Assets' cash needs. Neither theSEC , Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate AFFO and its use as a non-GAAP financial performance measure. 47 -------------------------------------------------------------------------------- See the Non-GAAP Measures section below for descriptions of VEREIT Office Assets' non-GAAP measures and reconciliations to the most comparable measure in accordance with generally accepted accounting principles inthe United States (dollars in millions): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income$ 6.4 $ 9.7 $ 8.5 $ 42.2 Loss (gain) on disposition of real estate assets, net - 1.7 - (9.8) Depreciation and amortization of real estate assets 14.8 15.1 44.2 47.4 Impairment of real estate 6.4 - 28.1 0.2 Proportionate share of adjustments for unconsolidated entities 0.4 0.3 1.1 0.7 FFO attributable to VEREIT Office Assets 28.0 26.8 81.9 80.7 Amortization of premiums (discounts) on debt, net - (0.2) (0.1) (0.5) Amortization of above-market lease assets and deferred lease incentives, net of amortization of below-market lease liabilities (0.1) - - - Amortization and write-off of deferred financing costs - - - 0.1 Loss (gain) on extinguishment and forgiveness of debt, net - - 0.1 1.7 Straight-line rent 0.2 0.3 1.6 0.3
AFFO attributable to VEREIT Office Assets
Liquidity and Capital Resources Contractual Obligations VEREIT Office Assets was subject to the following contractual obligations atSeptember 30, 2021 (in thousands). Payments Due by Period Less than 1 More Than 5 Total Year 1 - 3 Years 4 - 5 Years Years Principal payments - mortgage notes payable$ 143,504 $ 178
6,935 1,623 5,312 - -
Operating lease and ground lease
commitments 11,791 82 987 658 10,064
Total contractual obligations
Cash Flows The following table summarizes the changes in cash flows for the nine months endedSeptember 30, 2021 and 2020 (dollars in millions): Nine Months Ended September 30, 9-months 2021 2021 2020 versus 2020 Net cash provided by operating activities $ 79.3$ 80.2 $ (0.9) Net cash (used in) provided by investing activities $ (5.9)$ 106.4 $ (112.3) Net cash used in financing activities $ (73.3)
Net cash provided by operating activities decreased$0.9 million during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year endedDecember 31, 2020 . Net cash used in investing activities was$5.9 million during the nine months endedSeptember 30, 2021 , as compared to net cash provided by investing activities of$106.4 million during the nine months endedSeptember 30, 2020 . The change was 48 -------------------------------------------------------------------------------- primarily due to the three properties sold to the unconsolidated joint venture during nine months endedSeptember 30, 2020 for proceeds of$116.4 million after closing costs. Net cash used in financing activities decreased$112.9 million during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , primarily due to a decrease of$160.2 million in net distributions to parent, offset by an increase of$46.9 million in the repayment of mortgage notes payable. Critical Accounting Policies Real Estate Investments VEREIT management performed quarterly impairment review procedures, 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. Impairment indicators that VEREIT management considered included, but were not limited to, decrease in operating income, bankruptcy or other credit concerns of a property's major tenant or tenants or a significant decrease in a property's revenues due to lease terminations, vacancies or reduced lease rates. When impairment indicators are identified or if a property is considered to have a more likely than not probability of being disposed of within the next 12 to 24 months, VEREIT management assessed the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. GAAP required VEREIT Office Assets to utilize the expected holding period of its properties when assessing recoverability. In the event that such expected undiscounted future cash flows did not exceed the carrying value, the real estate assets have been adjusted to their respective fair values and an impairment loss has been recognized. There are inherent uncertainties in making estimates of expected future cash flows such as market conditions and performance and sustainability of the tenants. Goodwill Impairment VEREIT evaluated goodwill for impairment annually or more frequently when an event occurred or circumstances changed that indicated the carrying value may not be recoverable. To determine whether it was necessary to perform a quantitative goodwill impairment test, VEREIT first assessed qualitative factors, including, but not limited to macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or sustained decrease in VEREIT's stock price on either an absolute basis or relative to peers. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no quantitative testing is required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying amount, the provisions of guidance require that the fair value be compared to the carrying value.Goodwill is considered impaired if the carrying value exceeds the fair value. No impairments of VEREIT's goodwill were recorded during the three and nine months endedSeptember 30, 2021 and 2020. The results of the VEREIT impairment tests carry over to VEREIT Office Assets, therefore no impairments were recorded in the accompanying statements of operations. Recent Accounting Pronouncements New accounting guidance that VEREIT Office Assets has recently adopted, as well as accounting guidance that has been recently issued but not yet adopted, is included in Note 1 - Organization and Summary of Significant Accounting Policies of the annual combined and consolidated financial statements of VEREIT Office Assets, included elsewhere in this Report on Form 10-Q. 49 -------------------------------------------------------------------------------- REALTY INCOME OFFICE ASSETS Critical Accounting Policies The accounting policies and estimates used in the preparation of the Realty Income Office Assets combined financial statements are more fully described in the notes to the combined financial statements included elsewhere in this Form 10-Q. However, certain significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on Realty Income Office Assets' combined financial statements. Realty Income Office Assets' management must make significant assumptions in determining if, and when, impairment losses should be taken on its properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. If estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property, a fair value analysis is performed and, to the extent the estimated fair value is less than the current book value, a provision for impairment is recorded to reduce the book value to estimated fair value. Key inputs that are utilized in this analysis include projected rental rates, estimated holding periods, capital expenditures, and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of real estate is the largest component of Realty Income Office Assets' combined balance sheets. The strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if that strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require reducing the carrying value of the real estate by recording provisions for impairment, they could have a material impact on the results of operations. Recent Accounting Pronouncements InMarch 2020 , the FASB issued ASU 2020-04, establishing Topic 848, Reference Rate Reform. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective betweenMarch 12, 2020 andDecember 31, 2022 . The guidance may be elected over time as reference rate reform activities occur. Realty Income Office Assets is currently evaluating the impact that the expected market transition from LIBOR to alternative references rates will have on the financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04. Results of Operations Comparison of the three and nine months endedSeptember 30, 2021 to the three and nine months endedSeptember 30, 2020 (dollars in millions) The following tables set forth the summary historical combined financial data of certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, "Realty Income Office Assets"), which were carved out from the financial information of Realty Income. The summary historical financial data set forth below for the three and nine months endedSeptember 30, 2021 and 2020 has been derived from Realty Income Office Assets' unaudited combined financial statements and the notes related thereto, which are included elsewhere in this Quarterly Report on Form 10-Q. The summary historical combined financial data set forth below does not indicate results expected for any future periods. The summary historical combined financial data is qualified in its entirety by, and should be read in conjunction with Realty Income Office Assets' combined financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and the audited combined financial statements of Realty Income Office Assets and related notes thereto as of and for the year endedDecember 31, 2020 , included in the Information Statement. 50 --------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
Increase / Increase /
2021 2020 (Decrease) 2021 2020 (Decrease)
REVENUE
Rental revenue (including
reimbursable) $ 13.3 $ 13.2 $ 0.1 $ 38.9 $ 40.2 $ (1.3)
EXPENSES
Depreciation and amortization 5.9 6.5 (0.6) 17.9 19.7 (1.8)
Property (including
reimbursable) 1.7 1.4 0.3 4.6 4.4 0.2
General and administrative 0.5 0.5 - 1.6 1.6 -
Interest 0.3 0.7 (0.4) 1.1 2.3 (1.2)
Provisions for impairments - 18.7 (18.7) - 18.7 (18.7)
Total expenses 8.4 27.8 (19.4) 25.2 46.7 (21.5)
Loss on extinguishment of debt 3.5 - 3.5 3.5 - 3.5
NET INCOME $ 1.4 $ (14.6) $ 16.0 $ 10.2 $ (6.5) $ 16.7
Rental Revenue (Including Reimbursable). Rental revenue (including reimbursable)
increased $0.1 million , or 0.8%, for the three months ended September 30, 2021
compared to the three months ended September 30, 2020 . Rental revenue (including
reimbursable) decreased $1.3 million , or 3.2%, for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . These
decreases were primarily due to vacancies in two office properties that have
remained vacant since December 2020 and a third property that became vacant in
April 2021 .
Depreciation and Amortization. Depreciation and amortization expense decreased
$0.6 million , or 9.2%, for the three months ended September 30, 2021 compared to
the three months ended September 30, 2020 . Depreciation and amortization expense
decreased $1.8 million , or 9.1%, for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . These decreases primarily
relate to two in-place lease intangible assets that were fully amortized during
2020, which reduced amortization expense by $0.4 million and $1.1 million during
the three and nine months ended September 30, 2021 , respectively, and a $0.2
million and $0.5 million reduction in 2021 depreciation expense for the three
and nine months ended September 30, 2021 , respectively, as a result of a
building impairment on one office property reducing the carrying amount of the
asset.
Property (Including Reimbursable). Property (including reimbursable) expenses
increased $0.3 million , or 21.4%, for the three months ended September 30, 2021
compared to the three months ended September 30, 2020 , while property (including
reimbursable) expenses increased $0.2 million , or 4.5%, for nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . These
increases were primarily due to an increase in vacant properties' utilities and
insurance costs which otherwise would have been paid by tenants.
General and Administrative Expenses. General and administrative expenses
remained constant at $0.5 million and $1.6 million during both the three and
nine months ended September 30, 2021 and 2020, respectively. General and
administrative expenses for Realty Income Office Assets are primarily an
allocation from Realty Income general and administrative expenses.
Interest Expense. Interest expense decreased $0.4 million , or 57.1%, for the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020 , while interest expense decreased $1.2 million , or 52.2%, for
the nine months ended September 30, 2021 compared to the nine months ended
September 30, 2020 . These decreases were primarily due to Realty Income repaying
five outstanding mortgages in full, on behalf of Realty Income Office
Properties , with respect to five office properties, two of which occurred in
April 2021 for $14.0 million and September 2021 for $12.5 million , and the other
three which occurred in the second half of 2020 for $31.8 million .
Provisions for Impairment. During the three and nine months ended September 30,
2020 , Realty Income Office Assets recorded a $18.7 million pre-tax non-cash
impairment loss related to one office property in the Other Manufacturing
industry that was triggered by a near term lease expiration, combined with a
mortgage obligation. Realty Income Office Assets did not record any impairment
losses on properties during the three and nine months ended September 30, 2021 .
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Loss on Extinguishment of Debt. During the three and nine months ended September
30, 2021 , Realty Income Office Assets recognized a $3.5 million loss associated
with the early repayment of an outstanding mortgage by Realty Income
Corporation. Realty Income Office Assets did not record any losses on
extinguishment of debt during the three and nine months ended September 30,
2020 .
Net Income (Loss). Realty Income Office Assets had net income of $1.4 million
for the three months ended September 30, 2021 and had net loss of $14.6 million
for the three months ended September 30, 2020 . Realty Income Office Assets had
net income of $10.2 million for the nine months ended September 30, 2021 and had
net loss of $6.5 million for the nine months ended September 30, 2020 .
Liquidity and Capital Resources
Cash Flows
Cash was centrally managed at Realty Income and, therefore, Realty Income Office
Assets maintained no separate cash or cash equivalents balances. Restricted cash
was $0.5 million and $3.9 million at September 30, 2021 and December 31, 2020 ,
respectively. The following tables summarize the changes in cash flows for the
periods presented (in millions):
Nine Months Ended Nine Months Ended Increase
September 30, 2021 September 30, 2020 (Decrease)
Net cash provided by operating activities $ 32.3 $ 33.2 $ (0.9)
Net cash used in investing activities $ (0.2) $ (0.4) $ (0.2)
Net cash used in financing activities $ (35.5) $ (32.3) $ 3.2
Net cash provided by operating activities decreased $0.9 million during the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 primarily due to the decrease in revenues from vacancies in two office
properties that have remained vacant since December 2020 and one property that
become vacant in April 2021 , partially offset by a decrease in interest expense
from the repayment of five outstanding mortgages with respect to five office
properties, two of which occurred in April 2021 and September 2021 , and the
other three which occurred in the second half of 2020.
Net cash used in investing activities decreased $0.2 million during the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 primarily due to less capital expenditures related to property, plant and
equipment during the nine months ended September 30, 2021
Net cash used in financing activities increased $3.2 million during the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 primarily due to an increase of $17.6 million in mortgage notes principal
repayments and $4.0 million of payments upon an early extinguishment of mortgage
debt, partially offset by a decrease of $18.4 million in distributions to Realty
Income Corporation during the same period.
The following summarizes Realty Income Office Assets' mortgages payable as of
September 30, 2021 and December 31, 2020 , respectively (in millions):
September 30, December 31,
Office Properties Fixed Rate Maturity Date 2021 2020
East Windsor, NJ (1) 4.9 % 6/1/2022 $ 9.6 $ 9.6
Columbus, OH (2) 5.6 % 6/1/2032 - 12.8
Tucson, AZ 5.4 % 7/1/2021 - 14.0
Remaining principal balance 9.6 36.4
Unamortized premium, net - 0.6
Total mortgages payable, net $ 9.6 $ 37.0
(1) The mortgage related to the East Windsor, NJ property was paid in full on
October 1, 2021 . As a result of the early repayment, Realty Income Office Assets
incurred a $0.3 million prepayment penalty.
(2) In April 2021 , Realty Income Office Assets repaid the mortgage related to
its property in Tucson, AZ in full for $14.0 million and, in September 2021 ,
repaid the mortgage related to its property in Columbus, OH for $12.5 million .
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Contractual Obligations and Commitments
Realty Income Office Assets was subject to the following contractual obligations
and commitments at September 30, 2021 (in millions):
Less than 1 Greater than
Total Year (1) 1 to 3 Years 3 to 5 Years 5 Years
Contractual Obligations
Debt:
Mortgage notes payable $ 9.6 $ - $ 9.6 $ - $ -
Interest payments - mortgage notes 0.3 0.1 0.2 - -
Operating Leases 3.8 - 0.2 0.2 3.4
Other 1.2 1.2 - - -
Total contractual obligations $ 14.9 $ 1.3 $ 10.0 $ 0.2 $ 3.4
(1) Obligations due in the remainder of calendar year 2021. Other includes
commitments of $0.8 million for building improvements as well as $0.4 million
for leasing commissions.
Non-GAAP Financial Measures
Funds from Operations (FFO) Attributable to Realty Income Office Assets
Realty Income Office Assets defines FFO, a non-GAAP financial measure,
consistent with the National Association of Real Estate Investment Trusts'
("Nareit") definition, as net income or loss, plus depreciation and amortization
of real estate assets, plus provisions for impairments of depreciable real
estate assets.
Realty Income Office Assets considers FFO to be an appropriate supplemental
measure of the operating performance of a real estate company as it is based on
a net income analysis of property portfolio performance that adds back items
such as depreciation and impairments for FFO. The historical accounting
convention used for real estate assets requires straight-line depreciation of
buildings and improvements, which implies that the value of real estate assets
diminishes predictably over time. Since real estate values historically rise and
fall with market conditions, presentations of operating results for a real
estate company, using historical accounting for depreciation, could be less
informative. The use of FFO is recommended by the real estate industry as a
supplemental performance measure.
Adjusted Funds From Operations (AFFO) Attributable to Realty Income Office
Assets
Realty Income Office Assets defines AFFO, a non-GAAP financial measure, as FFO,
excluding (i) Loss on extinguishment of debt, (ii) Amortization of premiums and
discounts on debt, net, (iii) Leasing costs and commissions, (iv) Straight-line
rent, and (v) Amortization of above-market lease assets and deferred lease
incentives.
Realty Income Office Assets believes the non-GAAP financial measure AFFO
provides useful information to investors because it is a widely accepted
industry measure of the operating performance of real estate companies that is
used by industry analysts and investors who look at and compare those companies.
In particular, AFFO provides an additional measure to compare the operating
performance of different real estate companies without having to account for
differing depreciation assumptions and other unique revenue and expense items
which are not pertinent to measuring a particular company's ongoing operating
performance. Therefore, Realty Income Office Assets believes that AFFO is an
appropriate supplemental performance metric, and that the most appropriate GAAP
performance metric to which AFFO should be reconciled is net income (loss).
Other companies in Realty Income's industry use a similar measurement, but they
may use the term "CAD" (for Cash Available for Distribution), "FAD" (for Funds
Available for Distribution) or other terms. Realty Income Office Assets' AFFO
calculations may not be comparable to AFFO, CAD or FAD reported by other
companies, and other companies may interpret or define such terms differently,
including VEREIT Office Assets.
Presentation of the information regarding FFO and AFFO is intended to assist the
reader in comparing the operating performance of different real estate
companies, although it should be noted that not all real estate companies
calculate FFO and AFFO in the same way, so comparisons with other real estate
companies may not be meaningful. Furthermore, FFO and AFFO
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are not necessarily indicative of cash flow available to fund cash needs and
should not be considered as alternatives to net (loss) income as an indication
of Realty Income Office Assets' performance. FFO and AFFO should not be
considered as alternatives to reviewing Realty Income Office Assets' cash flows
from operating, investing, and financing activities. In addition, FFO and AFFO
should not be considered as measures of liquidity or of the ability to pay
interest payments.
The table below presents a reconciliation from net income (loss) attributable to
Realty Income Office Assets to FFO and AFFO for the three and nine months ended
September 30, 2021 and 2020 (in millions):
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
Net income (loss) attributable to Realty Income
Office Assets $ 1.4 $ (14.6) $ 10.2 $ (6.5)
Depreciation and amortization of real estate assets 5.9 6.5 17.9 19.7
Impairment of real estate - 18.7 - 18.7
FFO attributable to Realty Income Office Assets 7.3 10.6 28.1 31.9
Loss on extinguishment of debt 3.5 - 3.5 -
Amortization of premiums and discounts on debt, net - (0.1) (0.1) (0.3)
Leasing costs and commissions (0.1) - (0.1) -
Straight-line rent 0.2 0.1 0.2 0.2
Amortization of above-market lease assets and
deferred lease incentives (0.3) (0.2) (0.8) (0.7)
AFFO attributable to Realty Income Office Assets
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