ORION OFFICE REIT INC. Management’s analysis of the financial position and operating results. (form 10-Q)

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 the U.S. Securities and Exchange
Commission (the "SEC") on October 4, 2021, the final version of which was
included as Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on
October 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;
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•risks associated with our joint venture with an affiliate of Arch 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 our SEC 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
On April 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"),
and Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income
("Merger Sub 2"). On November 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").
On November 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 ending December 31, 2021.
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Our common stock, par value $0.001 per share, trades on the New 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 and Puerto Rico. In addition, we own an equity interest in an
unconsolidated joint venture with an affiliate of Arch Street Capital Partners,
which, as of September 30, 2021 owned a portfolio consisting of five office
properties totaling approximately 0.8 million leasable square feet located
within five states.
Through September 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
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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 for U.S. federal income tax purposes
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ended December 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 ending December 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.
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                             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
From July 1, 2021 (inception) to September 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, on November 12, 2021,
we, as parent, and Orion 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") with
Wells 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") with Wells Fargo Bank, National
Association, as administrative agent, and the lenders party thereto.
On November 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 after November 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).
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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
On November 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 on November 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. On November 12, 2021, Realty Income effected the
Distribution.
On November 12, 2021, in connection with the Distribution, Orion OP entered into
an Amended and Restated Limited Liability Company Agreement (the "LLCA") of
OAP/VER Venture, LLC (the "Arch Street Joint Venture"), by and between Orion OP
and OAP Holdings LLC (the "Arch Street Partner"), an affiliate of Arch 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 by VEREIT Real Estate, L.P. to Orion OP.
Also on November 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.
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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 the SEC 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 under United 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 by VEREIT 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"),
dated November 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 for U.S.
federal income tax purposes beginning with our taxable year commencing on the
day prior to the Distribution and ending on December 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 of September 30, 2021, we were not subject to any contractual obligations or
commitments.
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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.


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                              VEREIT OFFICE ASSETS
Results of Operations
Comparison of the three and nine months ended September 30, 2021 to the three
and nine months ended September 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 ended September 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 ended December 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)



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Rental Revenue. Rental revenue decreased $1.9 million and $7.2 million for the
three and nine months ended September 30, 2021, respectively, compared to the
three and nine months ended September 30, 2020, primarily due to the disposition
of three properties that were sold to the unconsolidated joint venture during
the year ended December 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 ended
September 30, 2021 compared to the three and nine months ended September 30,
2020, primarily due to three properties having been acquired by the
unconsolidated joint venture during the nine months ended September 30, 2020.

Property Operating Expenses. Property operating expenses decreased $2.0 million
and $3.8 million, for the three and nine months ended September 30, 2021,
respectively, compared to the three and nine months ended September 30, 2020,
primarily due to the disposition of three properties that were sold to the
unconsolidated joint venture during the year ended December 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 ended September 30, 2021 and 2020, respectively. During the nine months
ended September 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 ended
September 30, 2021, respectively, compared to the three and nine months ended
September 30, 2020, primarily due to the disposition of three properties that
were sold to the unconsolidated joint venture during the year ended December 31,
2020.
Impairments. Impairments increased $6.4 million and $27.9 million for the three
and nine months ended September 30, 2021, respectively, compared to the three
and nine months ended September 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 ended September 30, 2021. During the 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 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 ended September 30, 2021, respectively, compared to
the three and nine months ended September 30, 2020, primarily due to the payoff
of $74.4 million mortgage notes payable during the nine months ended September
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 ended September
30, 2020 related to the sale of one property to the unconsolidated joint
venture. No such losses were recorded during the three months ended September
30, 2021. Gain on disposition of real estate assets, net was $9.8 million for
the nine months ended September 30, 2020, which was related to the three
properties sold to the unconsolidated joint venture during the nine months ended
September 30, 2020 for an aggregate net sales price of $135.5 million. No such
gain was recorded during the nine months ended September 30, 2021.
Loss on Extinguishment of Debt, Net. Loss on extinguishment of debt, net
decreased $1.6 million for nine months ended September 30, 2021 compared to the
nine months ended September 30, 2020. During the nine months ended September 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 ended September 30, 2021 and 2020. During the nine months
ended September 30, 2021, equity in income of unconsolidated joint venture
increased $0.2 million compared to the nine months ended September 30, 2020,
primarily due to three properties acquired by the unconsolidated joint venture
during the year ended December 31, 2020.
Other Income, Net. Other income, net increased $0.1 million for both the three
and nine months ended September 30, 2021 compared to the three and nine months
ended September 30, 2020.
                                       46
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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 ended
September 30, 2021 and 2020, respectively.
Net Income. Net income was $6.4 million and $9.7 million for the three months
ended September 30, 2021 and 2020, respectively, a decrease of $3.3 million
during the three months ended September 30, 2021 as compared to the three months
ended September 30, 2020. During the nine months ended September 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 ended September 30, 2021 as compared to the
nine months ended September 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
the National 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 the SEC, 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
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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 in the 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 office assets of VEREIT $ 28.1 $ 26.9

$ 83.5 $ 82.3


Liquidity and Capital Resources
Contractual Obligations
VEREIT Office Assets was subject to the following contractual obligations at
September 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          

$ 143,326 $ – $ – Interest payments – mortgage notes payable

                                 6,935               1,623                 5,312                     -                   -
Operating lease and ground lease
commitments                            11,791                  82                   987                   658              10,064

Total contractual obligations $ 162,230 $ 1,883 $ 149,625 $ 658 $ 10,064


Cash Flows
The following table summarizes the changes in cash flows for the nine months
ended September 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)  

$ (186.2) $ 112.9


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 disposition of three properties that were sold to the
unconsolidated joint venture during the year ended December 31, 2020.
Net cash used in investing activities was $5.9 million during the nine months
ended September 30, 2021, as compared to net cash provided by investing
activities of $106.4 million during the nine months ended September 30, 2020.
The change was
                                       48
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primarily due to the three properties sold to the unconsolidated joint venture
during nine months ended September 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 ended September 30, 2021, compared to the nine months ended September 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 ended September 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
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                          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
In March 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 between March 12, 2020 and December
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 ended September 30, 2021 to the three
and nine months ended September 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
ended September 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 ended December 31, 2020, included
in the Information Statement.
                                       50
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                                                    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 the assets of the real estate revenue office $ 10.6 $ 10.4 $ 30.8 $ 31.1

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