Q3 2023 Office Properties Income Trust Earnings Call

Good morning, everyone and welcome to the office properties income Trust third quarter 2023 earnings Conference call.

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Now I'd like to turn the call over to Kevin Berry Senior director of Investor Relations. Please go ahead Sir.

Thank you and good morning, everyone. Thanks for joining us today.

With me on the call are Opi's, President and Chief Executive Officer, Chris Blotto, and Chief Financial Officer, and Treasurer, Brian Donnelly in just a moment they will provide details about our business and our performance for the third quarter of 2023, followed by a question and answer session with sell side analysts Firstly I would like to note that the recording and retransmission of today's conference call.

Prohibited without the prior written consent of the company also note that todays conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act 1995, and other securities laws.

These forward looking statements are based on Opi's beliefs and expectations as of today Tuesday October 31, 2023, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call.

Additional information concerning factors that could cause those differences is contained in our filings with the securities and exchange Commission or SEC, which can be accessed from our website OPI REIT dot com or the Sec's website investors are cautioned not to place undue reliance upon any forward looking statements. In addition, we will be discussing non-GAAP numbers during this call.

Normalized funds from operations or normalized <unk> cash available for distribution or <unk>.

And cash basis, net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income are available in Opi's earnings release presentation that we issued last night, which can be found on our website and finally, we will be providing guidance on this call, including normalized <unk> and cash basis NOI.

But a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all such as gains and losses or impairment charges related to the disposition of real estate I will now turn the call over to Chris.

Thank you Kevin and good morning, everyone. Thank you for joining us today for OPI is third quarter 2023 earnings call.

Like to start by welcoming Brian Donley joined OPI, as our Chief Financial Officer, and Treasurer on October one and brings more than 25 years of accounting and finance experience in the commercial real estate industry.

On our call today, we will cover various trends within the office sector and our portfolio provide an overview of OPI as initiatives as a standalone company. Following the termination of the proposed merger with D. H D and provide a summary of our third quarter operating and financial results before we open the call to questions.

Turning to highlights normalized <unk> came in at $1 two per share, beating the high end of our guidance range, we executed 586000 square feet of new and renewal leasing primarily with state government tenants and tenants in real estate financial and energy services industries.

Portfolio occupancy was approximately 89, 9% at quarter end, a 70 basis point decrease compared to the prior quarter and largely due to a known downsides of our primary tenant located at 841st Street in the D. C MSA.

We sold one property for $10 $5 million, bringing total asset sales to $23 $6 million for the year.

As we approach the end of the year and look ahead to 2024, we remain focused on opi's upcoming lease expirations and existing vacancies along with our maturing credit facility another debt maturities.

Supporting this we have an active leasing pipeline of close to $2 8 million square feet 650000 square feet or approximately 25% of which is associated with 2024 renewals and close to 735000 square feet of potential absorption in early stages of negotiation.

Collectively pipeline deals include weighted average lease terms ranging from five to 10 years and an overall rent roll up.

More broadly.

Ross this sector remains challenged with elevated vacancy and sublease levels. However, we remain encouraged with effort supporting returned to office mandates across industries and that OPI. We continued to see an improving outlook with estimated utilization close to 70%.

Year to date, we completed more than $177 million of property level mortgage financing with plans to continue evaluating similar financing opportunities, which Brian will expand on in more detail.

Lastly, while the investment sales market has been slow this year following the steep increase in interest rates and more specifically credit on office assets has been especially tight we are evaluating properties as fundamentals that we believe may have a high probability of execution to ramp up on our capital recycling program.

Currently we are under agreement to sell two buildings, reflecting 177000 square feet and proceeds of $21 $3 million. We have a couple of properties, where we are in active conversations with prospective buyers and have plans to bring additional properties to market in the coming months.

Turning now to more detail on our third quarter leasing results.

We completed 29 deals for 586000 square feet of new and renewal leases with an average lease term of seven four years and a rent roll down of two 7%. Our total volume for the quarter came in above our average rate during the preceding four quarters.

New leasing represented 104000 square feet and a roll up of one 9% and a weighted average lease term of nine five years and increasing total activity for the year to more than 390000 square feet.

Concessions and capital commitments declined year over year to $5 89 per square foot per lease year and slightly below our quarterly average over the past year.

Overall, our portfolio remains well diversified by industry and geography with a weighted average lease term of approximately six and a half years and investment grade rated tenants representing 64% of annualized rental income.

Turning to third quarter leasing transactions.

Sacrum and the Sacramento MSA, we executed three lease renewals across three separate properties occupied by the state of California for a combined 260000 square feet with a weighted average lease term of close to eight years.

In Rockville, Maryland, we renewed an upsized the lease with the private sector energy company for a combined 74000 square feet for a lease term of five five years. We also completed a short term extension and downsize with our tenant in Washington D. C. Previously communicated as a known vacate this downsize decrease the tenants annualize.

Revenue contribution from two 1% to 70 basis points, we were actively marketing the space and have several proposals after tenants ranging from 50000 square feet to 250000 square feet all of which are in early stages of discussion.

In July we received notice from Tyson foods that would exercise its lease termination option that 400, South Jefferson Street in Chicago, Illinois. The effective termination date is January 2025, and the tenant will pay a fee of approximately $8 $6 million.

The property underwent a complete redevelopment in 2012 and is within blocks of all major transportation hubs and offers an abundance of amenities, including training and conference centers, a rooftop terrace fitness facility and is LEED certified we are currently evaluating a range of options for the property, including leasing or a potential sale.

Looking ahead to OPI is upcoming lease expirations.

We are actively engaging with our tenants to renew leases and convert prospects in our pipeline to fill a vacancy.

Please gestation periods remain protracted compared to a few years ago. Although we are increasingly seeing tenants with large space requirements come to the table whelm advance of lease explorations to engage in conversations.

During 2023 lease expirations for the remainder of the year represents five 6% of annualized rental income of which three 8% are known vacates. Excluding those considered for sale most of which are with tenants previously communicated within our 2023 retention statistics.

Larger known Vacates for Q4 include a state lease in the Boston MSA, representing 90 basis points of annualized revenue and the GSA vacating three buildings in the Atlanta, MSA, reflecting 130 basis points of annualized revenue.

We are actively marketing each of the properties for lease with varying levels of activity.

In 2024 lease expirations represent approximately 12% of annualized rental income currently we have just over 2% in advanced stages of renewal and are in active conversations with several other expiring tenants. However, we anticipate continued pressure on retention as tenants evaluate their space needs.

Turning to our development projects.

During the quarter, we completed and delivered to us.

Sonesta the hotel portion of our class a mixed use development at 20 Mass Avenue in Washington D. C. This project is 55% leased and we continue to work through varying levels of tour and proposal activity.

Earlier. This month, we were pleased to have been awarded best renovation by the May F. D C, Maryland chapter for this project.

And our life science redevelopment in Seattle, we continued to advance construction and planned for delivery in phases with the final completion anticipated for Q1 2024.

The project is 28% pre leased the Sonoma Biotherapeutics and we plan to deliver the project was for move in ready spec lab suites, serving as a differentiator as tenants evaluate options and timing for move out.

<unk> for the two projects, we have roughly $88 million in remaining capital spend we estimate 25 million to $30 million will be spent by the end of Q1 2024 and the balance will be spent as leases are executed through stabilization over the next few years.

I will now turn the call over to Brian trees, if you our financial results.

Thanks, Chris and good morning, everyone.

We reported normalized <unk> of $49 $4 million or $1 <unk> per share for the quarter exceeding the high end of our guidance by a penny per share.

This compares to normalized <unk> of $53 $7 million or $1 11 per share for the second quarter of 2023.

The decrease on a sequential quarter basis was primarily driven by higher interest expense and lower NOI due primarily to a seasonal increase in utility expense.

Same property cash basis, NOI decreased nine 2% compared to the third quarter of 2022 and was in line with our guidance range of down 2% to 10%.

The decrease was mainly driven by a tenant explorations and downsizes elevated free rent levels on new leases and higher operating costs.

We generated <unk> 30, <unk> 36 per share during the third quarter and $1 54 per share on a rolling four quarter basis.

Earlier this month, we declared a regular quarterly distribution of <unk> 25 per share, which represents a trailing four quarter see a payout ratio of 65% based on our annual dividend rate of one dollar per share.

Turning to our outlook for normalized <unk> and same property cash basis NOI expectations in the fourth quarter.

We expect normalized <unk> to be between 96 to 98 per share.

The decrease from Q3 is made up of several items, most notably increased interest expense and projected increases in operating expenses.

We expect same property cash basis, NOI to be down 11% to 13% as compared to the fourth quarter of 2022, mainly driven by elevated free rent in the current year period, and certain tenant vacancies and downsizes.

Turning to the balance sheet, our total outstanding debt at quarter end had a weighted average interest rate of four 4% and a weighted average maturity of four five years.

Our upcoming debt maturities, including our $750 million revolving credit facility, which matures at the end of January 2024, and $350 million of unsecured senior notes due in May 2024.

Regarding our revolving credit facility, we ended the quarter with $200 million outstanding. We are currently in active discussions with our banking group regarding entering into a new credit facility. Prior to year end. However, it is too early to comment on any specific terms.

During the third quarter, we closed on two mortgage loans with an aggregate principal balance of $69 $2 million.

The net proceeds from these mortgage loans were used to repay amounts outstanding under Opi's revolving credit facility.

The challenging capital market conditions and limited financing options available for office properties, we have demonstrated our ability to efficiently execute see MBS financing.

Dave we closed more than $177 million in interest only mortgage financings at a weighted average interest rate of seven 8% and a weighted average term of six four years.

These mortgages reflect the implied capitalization rate based on aggregate appraised value below 7% and a loan to value of approximately 51%.

As we look to address the $350 million of senior notes due in May 24, we are exploring additional property level secured financing options, including additional MBS and as Chris mentioned asset sale opportunities to raise cash.

Over 90% of our $4 billion portfolio by gross book value of our unencumbered assets that we can look to for possible strategies to manage our debt maturities.

Turning to our investing activities during the quarter, we sold one property for $10 $5 million and have raised disposition proceeds of $23 $6 million year to date.

About $24 $2 million on recurring capital at $28 $3 million in redevelopment capital during the third quarter.

The fourth quarter, we expect recurring capital of $25 million to $35 million in redevelopment capital of approximately $15 million to $20 million.

That concludes our prepared remarks, operator, we're ready to open up the call for questions.

Yeah.

Thank you we will now begin the question and answer session to ask a question okay sorry.

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Our first question comes from Bryan Maher.

B Riley for Cherokees. Please go ahead.

Thank you and good morning, and I apologize in advance if you already said some of these things had a little bit of technical difficulties here Hum.

On the property taxes, we noticed it was noticeably lower than prior quarter and our estimate I think it was somewhere in the 14. So is there anything particular going on there as it related to asset sales can you give us any color on that for our modeling purposes.

Sure Brian Good morning, Thanks for the question.

Yeah. There was a one time item in Q3 related to 20 mass out there was a multi year tax appeal that that was successful that that was recorded this quarter.

So that really won't recur in Q4. So this is really isolated to Q3.

Okay. That's helpful and then on asset sales.

Are you in the market you know actively.

Marketing with brokers assets to sell you know how many is that is it just a cop or is it a half dozen dozen in and what do you think the prospects are over the next kind of let's say three to nine months.

Yeah, Brian we're not actively in the market. We do have as I mentioned in the prepared remark remarks, a few buildings are that we're in dialogue with but as far as a broader campaign, it's something we're evaluating now.

And so I think that you know, there's a strong likelihood that will be out in the market in Q4 with additional assets and the profile of those assets are being arranged I think we've seen some success with selling assets that have some level of vacancies or our vegan and I can see some of.

Those be candidates of what could transact and then we're going to look at other assets that are more stabilized in nature and kind of test out the market to kind of see where are the opportunities reside and so you know we're working through that and we'll have kind of a more distinct list of assets to consider.

And discussed as we get into Q4.

Okay, and then shifting to your your financing and I know you've done $177 million over the past few months. It seems like when I looked at the assets online that those are kind of down the fairway type of properties of yours, you know nothing high end, nothing low and just kind of down the fairway.

What's the thought process now for the next three 612 months to address the maturity just to kind of chip away at that type of debt similar to what you've just done and how deep do you think you can do on a quarterly basis is at a 100 million 150 million $200 million.

Yeah. It's a great question and you know part of our prepared remarks is that we're looking at a couple of different options, including asset sales and additional secured financings.

We're going to solve for the 350, a combination of those items. So it's tough to really pinpoint since we're not really in the market or how much that could be asset sales versus secured financing secured financing property level day really depends on the asset and how much you could Brett Youre right.

Some of the larger nicer stuff, if we were to put financing on could raise bigger swaps and some of the smaller ones. So yeah. We're looking at a couple of different things here.

We're looking to address those maturities and obviously the revolving credit facility.

In the coming months.

And to that comment I suspect you could probably take down a decent slog. If you were to put the inside global headquarters in parameter in Atlanta, or the Googles Midwest headquarters in Chicago, you know out for for lending to the tune of a couple of few hundred million dollars.

Right there is what would that be reasonable to expect.

Yeah, I think those are all candidates and profile of buildings, where we have optionality and I think the benches, you know obviously deeper than that but yes, I mean, I think that kind of just highlight just some of the nicer assets, we have across the portfolio and kind of showcases optionality as we look.

To take down tranches were different.

Okay. Thank you that's all for me.

Again.

If you have a question. Please press star then one to be joined here.

Our next question comes from Ronald Camden.

Please go ahead.

Hey, good morning, guys, just Kimi months' Ronald.

A question on the on the Capex remaining for the two development projects you guys are thinking about $90 million.

A further breakdown there in terms of what percentage of that 90 million relates to Ti is an and dependent on those buildings leased up versus.

What percentage of the 90 million actually relates to building the building up.

Yeah. So a couple of things. So we have through I would say Q1, 'twenty four we're estimating $25 million to $30 million of remaining capital spend across the two projects with the lion's share for Seattle, given the fact that that's.

<unk>.

Still being completed and within that number includes the Ti allowance for the Sonoma Biotherapeutics, so really that $25 million to $30 million is a combination of construction capital N Ti allowance.

And so you know what once you get through that kind of the delta remaining from the 90 that will be spent primarily or all as leasing capital over the next few years as we stabilize the asset.

Yeah.

Got it yeah, so not all not all related to that.

Building the building out some of that.

It's not discretionary but.

No. It's not it's not all it doesn't all have to kind of come in at once is that has that kind of stuff.

It is a $25 million to $30 million as committed capital and then you know through Q Q1, 24 in the balances is kind of variable based on getting leases done.

Got it Okay, and then if congrats Brian on the new position, maybe just one for you.

I appreciate youre not going to go further in Q2.

Plans with the revolver, but just.

You know as you think about modeling from here on out.

If that doesn't become a secured revolver, just where does that put you guys from an unencumbered asset to unsecured debt.

Covenant position and then maybe just talk about you know.

Further room for Encumbering assets as we head into 'twenty four if that does become a secured revolver.

Yeah, It's a great question I mean, our secured revolver.

Definitely something that.

That could be on the table as we as we look forward our unencumbered asset ratios.

Over 200% today, the minimums, 150% under our bond indentures. So yeah. If we do if we do put collateral against the new facility and again, that's one possible outcome, obviously that will.

Put a little pressure on that but we have plenty of cushion to deal with it.

Is there a revolver appropriately.

So again I can't really get into some specifics given where we are in discussions so I'm just going to leave it at that for now.

Yeah.

Got it thank you guys.

Thank you.

Yeah.

We have no further questions. This concludes our question and answer session I would now like to turn the conference back over to Chris.

No closing remarks.

Yes. Thank you for joining the call today, we look forward to seeing many of you at NAREIT in the upcoming weeks.

The conference has now concluded thank you for attending.

And you May all now disconnect.

Operator: Good morning, everyone, and welcome to the Office Properties Income Trust 3rd quarter, 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star 10.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-to-one phone. To withdraw your question, please press star then two. Please note this event is being recorded.

Kevin Barry: I would now like to go on the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead, sir. Thank you, and good morning, everyone. Thanks for joining us today. With me on the call, our OPI's President and Chief Executive Officer, Chris Volado, and Chief Financial Officer, and Treasurer Brian Donley. In just a moment, they will provide details about our business and our performance for the 3rd quarter of 2023, followed by a question-and-answer session with cell-side analysts.

Kevin Barry: First, I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of a private security's litigation reform act, 1995, and other securities laws. These forward-looking statements are based on OPI's beliefs and expectations. As of today, Tuesday, October 31, 2023, an actual result made different material from those that we project.

Kevin Barry: The company undertakes no obligation to revise or publicly release the results of any revision to the full of different statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our fileings with the Securities and Exchange Commission, or SEC, which can be accessed from our website, opi-read.com, or the SEC's website. Investors are cautioned not to place undue reliance upon any forwarding statements.

Kevin Barry: In addition, we will be discussing non-gap numbers during this call, including normalized funds from operations, or normalized FFO, cash available for distribution, or CAD, and cash basis net operating income, or cash basis NLI. A reconciliation of these non-gap figures to net income are available in OPI's earnings release presentation that we issued last night, which can be found on our website. And finally, we will be providing guidance on this call, including normalized FFO, or cash basis NLI.

Kevin Barry: We are not providing reconciliation of these non-gap measures as part of our guidance, because certain information required for special reconciliation does not available without unreasonable efforts, or at all, such as games and losses, or impairment charges related to the disposition of real estate.

Christopher Bilotto: I will now turn the call over to Chris. Thank you, Kevin, and good morning, everyone. Thank you for joining us today for OPI's third quarter of 2023 earnings call.

Christopher Bilotto: I would like to start by welcoming Brian Donnelly, who joined OPI as our chief financial officer and treasurer on October 1st, and brings more than 25 years of accounting and finance experience in the commercial real estate industry. On our call today, we will cover various trends within the office sector and our portfolio, provide an overview of OPI's initiatives as a standalone company following the determination of the proposed merger with DHC and provide a summary of our third quarter operating and financial results before we open the call to questions.

Christopher Bilotto: Turning to highlights, normalized FFO came in at a dollar two per share, beating the high end of our guidance range. We executed 586,000 square feet of new and renewal leasing, primarily with state government tenants, and tenants in real estate financial and energy services industries. For a folio occupancy with approximately 89.9% at quarter end, a 70 basis point decrease compared to the prior quarter, and largely due to a known downsize of our primary tenant located at 8.41 in the DCMSA.

Christopher Bilotto: We sold one property for $10.5 million, bringing total assets sales to $23.6 million for the year. As we approach the end of the year and look ahead to 2024, we remain focused on OPI's upcoming lease expirations and existing vacancies along with our maturing credit facility and other debt majorities. Supporting this, we have an active leasing pipeline of close to 2.8 million square feet, 650,000 square feet or approximately 25% of which is associated with 2,024 renewals and close to 735,000 square feet of potential absorption in early stages of negotiation.

Christopher Bilotto: Collectively, pipeline deals include weighted average lease terms ranging from 5 to 10 years in an overall rent roll-up. More broadly, leasing across the sector remains challenged with elevated vacancy and sub-lease levels. However, we remain encouraged with efforts supporting return to office mandates across industries, and at OPI, we continue to see an improving outlook with estimated utilization close to 70%. Year to date, we completed more than $177 million of property-level mortgage financing with plans to continue evaluating similar financing opportunities which Brian will expand on in more detail.

Christopher Bilotto: Lastly, while the investment sales market has been slow this year following the steep increase in interest rates and more specifically credit on office assets has been especially tight, we are evaluating properties as fundamentals that we believe may have a high probability of execution to ramp up on our capital recycling program. Currently, we are under agreement to sell two buildings reflecting 177,000 square feet and proceeds of $21.3 million. We have a couple of properties where we are in active conversations with prospective buyers and have plans to bring additional properties to market in the coming months.

Christopher Bilotto: Turning now to more detail on our third quarter leasing results. We completed 29 deals for $586,000 square feet of new and renewal leasing with an average lease term of 7.4 years and a rent roll-down of 2.7%. Our total volume for the quarter came in above our average rate during the preceding four quarters. New leasing represented 104,000 square feet and a roll-up of 1.9% and a weighted average lease term of 9.5 years and increasing total activity for the year to more than 390,000 square feet.

Christopher Bilotto: Concession and capital commitments declined year over year to $5.89 per square foot per lease year and slightly below our quarterly average over the past year. Overall, our portfolio remains well diversified by industry and geography with a weighted average lease term of approximately six and a half years and investment grade-rated tenants representing 54% of annualized rental income.

Christopher Bilotto: Turning to third quarter leasing transactions. In the Sacramento MSA, we executed three lease renewals across three separate properties occupied by the state of California for a combined 260,000 square feet with a weighted average lease term of close to eight years and Rockville, Maryland. We renewed and outside the lease with a private sector energy company for a combined 74,000 square feet for a lease term of 5.5 years. We also completed a short-term extension and downsize with our tenant in Washington, D.C, previously communicated as a known vacate.

Christopher Bilotto: This downsize decreased the tenant's annualized revenue contribution from 2.1% to 70 basis points. We are actively marketing the space and have several proposals out to tenants ranging from 50,000 square feet to 250,000 square feet, all of which are in early stages of discussion.

Christopher Bilotto: In July, we received notice from Tyson Spood that it exercised a police termination option at 400 South Jefferson Street in Chicago, Illinois. The effective termination date is January 2025, and the tenant will pay a fee of approximately $8.6 million. The property underwent a complete redevelopment in 2012, and as within blocks of all major transportation hubs, it offers an abundance of amenities including training and conference centers, a rooftop terrace, fitness facility, and as leads certified, we are currently evaluating a range of options for the property, including leasing or a potential sale.

Christopher Bilotto: Looking ahead to OPI's upcoming lease explorations, we are actively engaging with our tenants to renew leases and convert prospects in our pipeline to fill vacancy. Police gestation periods remain protracted compared to a few years ago, although we are increasingly seeing tenants with large space requirements come to the table well in advance of lease explorations to engage in conversations. During 2023, lease explorations for the remainder of the year represents 5.6% of annualized rental income, of which 3.8% are known vacates, including those considered for sale, most of which are with tenants previously communicated within our 2023 retention statistics.

Christopher Bilotto: Larger known vacates for Q4 include a state lease and the Boston MSA representing 90 basis points of annualized revenue, and the GSA vacating three buildings in the Atlanta MSA reflecting 130 basis points of annualized revenue. We are actively marking each of the properties for lease with varying levels of activity.

Christopher Bilotto: In 2024, lease explorations represent approximately 12% of annualized rental income. Currently, we have just over 2% in advance stages of renewal in our active conversations with several other expiring tenants. However, we anticipate continued pressure on retention as tenants evaluate their space needs.

Christopher Bilotto: Turning to our development projects. During the quarter, we completed and delivered to Sinesta, the hotel portion of our class A mixed use development at 20 Mass Ave in Washington, DC. This project is 55% lease, and we continue to work through varying levels of tour and proposal activity.

Christopher Bilotto: Earlier this month, we were pleased to have been awarded best renovation by the May FDC Maryland chapter for this project. At our life science redevelopment in Seattle, we continue to advance construction and plan for delivery and phases of final completion anticipated for Q1 2024. The project is 28% pre-leased with Sonoma bio therapeutics, and we plan to deliver the project with four moving ready spec lab suites serving as a differentiator as tenants evaluate options and timing for moving.

Christopher Bilotto: Collectively, for the two projects, we have roughly $88 million in remaining capital spend. We estimate $25 million to $30 million will be spent by the end of Q1 2024, and the balance will be spent as leaflets are executed through stabilization over the next few years.

Brian Donley: I will now turn the call for the bride entries and view our financial results. Thanks, Chris.

Brian Donley: Good morning, everyone. We reported normalized FFO $49.4 million, or $1.2 per share for the quarter, exceeding the high end of our guidance by a penny per share. This compares to normalized FFO $53.7 million, or $1.11 per share for the second quarter of 2023. The decrease on a sequential quarter basis was primarily driven by higher interest expense and lower N.Y, due primarily to a seasonal increase in utility expense Same property cash basis N.Y, decreased 9.2% compared to the third quarter of 2022 and was in line with our guidance range of down 8 to 10%.

Brian Donley: C.A.D, at 36 cents per share during the third quarter and $1.54 per share in a row in four quarter basis. Earlier this month, we declared our regular quarterly distribution of 25 cents per share, which represents a trailing four quarter C.A.B, pale ratio of 65% based on our annual dividend rate of $1 per share.

Brian Donley: Turning to our outlook for normalized FFO in same property cash basis N.Y, expectations in the fourth quarter. The expect normalized FFO to be between 96 cents and 98 cents per share. The decrease from Q3 is made up for several items most notably increased interest expense and projected increases in operating expenses. We expect same property cash basis N.Y, to be down 11 to 13% as compared to the fourth quarter of 2022 mainly driven by elevated free rent in the current year period and certain tenant vacancies and down sizes.

Brian Donley: Turning to the balance sheet, our total outstanding data quarter end had a weighted average interest rate of 4.4% in a weighted average maturity of 4.5 years. Our upcoming debt maturities include our $750 million revolving credit facility, which matures at the end of January 2024 and $350 million upon secure senior notes due in May 2024. Regarding the revolving credit facility, we ended the quarter with $200 million outstanding and we have currently enacted discussions with our banking group regarding entering into a new credit facility prior to year end.

Brian Donley: However, it is too early to comment on any specific terms. Turning to the third quarter, we closed on two mortgage loans with an aggregate principal balance of $69.2 million. The net proceeds from these mortgage loans were used to repay amounts of standing under OPI's revolving credit facility.

Brian Donley: They challenged capital market conditions and limited financing options available for office properties. We have demonstrated our ability to efficiently execute CNBS financing. Today, we have closed more than $177 million in interest only in mortgage financing at a weighted average interest rate of 7.8% in a weighted average term of 6.4 years. These mortgages reflect an implied capitalization rate based on aggregate of praise value below 7% in a loan to value of approximately 51%.

Brian Donley: As we look to address the $350 million of senior notes due in May 2024, we are exploring additional property level secured financing options, including additional CNBS, and as Chris mentioned, assets sale opportunities to raise cash. Over 90% of our $4 billion portfolio by grossable value are unencumbered assets that we can look to for possible strategies to manage our debt maturities.

Brian Donley: Turning to our investing activities. During the quarter, we sold one property for $10.5 million and have raised disposition proceeds of $23.6 million a year today. You've spent $24.2 million on recurring capital in $28.3 million on redevelopment capital during the third quarter.

Brian Donley: The fourth quarter we've spent recurring capital of $25 to $35 million on redevelopment capital of approximately $15 to $20 million.

Operator: That concludes our prepared remarks, operator, we're ready to open up the call for questions. Thank you.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using the speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At the start, we will pause momentarily to assemble our roster.

Brian Maher: Our first question comes from Brian Maher, but be ready, security, please go ahead. Thank you and good morning and I apologize in advance if you already said some of these things. I had a little bit of technical difficulties here. On the property taxes, we noticed it was noticeably lower than prior quarter and our estimate. I think it was somewhere in the 14th. Is there anything particular going on there? Is it related to asset sales?

Brian Maher: Can you give us any color on that for our modeling purposes? Sure, Brian. Good morning. Thanks for the question. Yeah, there was a one time item in Q3 related to 20 masks out. There was a multi-year tax appeal that was successful that was recorded this quarter.

Brian Maher: So that really won't occur in Q4, so it was just really isolated to Q3. Okay, that's helpful. And then on asset sales, are you in the market actively marketing with brokers? As it's the sale, you know, how many is that? Is it just a couple? Is it a half dozen dozen? And what do you think the prospects are over the next kind of, let's say, three to nine months? Yeah, Brian. We're not actively in the market.

Brian Maher: We do have, as I mentioned, the prepared mark remarks a few buildings that we're in dialogue with, but as far as a broader campaign is something we're evaluating now. And so I think that, you know, there's a strong likelihood that we'll be out in the market in Q4 with additional assets. And the profile of those assets are going to range. I think we've seen some success with selling assets that have some level of vacancies or are vacant.

Brian Maher: And I can see some of those being candidates of what could transact. And then we're going to look at other assets that are more stabilized in nature and kind of test out the market to kind of see where the opportunities reside.

Brian Maher: And so, you know, we're working through that and we'll have kind of a more distinct list of assets to consider and discuss as we get into Q4. Okay.

Brian Maher: And then shifting to your financing. I know you've done 177 million over the past few months. It seemed like when I looked at the assets online that those were kind of down the fairway type of properties of yours, you know, nothing high end, nothing low end, just kind of down the fairway.

Brian Maher: It's on a quarterly basis, the 100 million, 150 million, 200 million. That's a great question. And you know, part of our preferred remarks is that we're looking at a couple of different options, including assets sales and additional security financials, you know, we're going to solve for the 350 combination of those items. So it's tough to really pinpoint since we're not really in the market how much that could be assets sales versus secured financing, you know, secured financing property level day, really depends on the asset and how much you could raise, you know, some of the larger, nicer stuff that we would have put financing on could raise bigger swaths than, you know, some of the smaller ones.

Brian Maher: So, you know, we're looking at a couple of different things here and, you know, we're looking to address those may maturities and obviously we're all in credit facility all in the coming months. And to that comment, I suspect you could probably take down a decent slug if you were to put the inside global headquarters perimeter in Atlanta or the Google's Midwest headquarters in Chicago, you know, out for for lending to the tune of, you know, a couple few hundred million dollars right there.

Brian Maher: Would that be reasonable to expect? Yeah, I think those are all candidates and profile of buildings where we have optionality, and I think the bench is, you know, obviously deeper than that. But yes, I mean, I think that kind of just highlights, you know, just some of the nicer assets we have across the portfolio and kind of showcases optionality as we look to take down branches for different roles.

Brian Maher: Okay, thank you.

Brian Maher: That's all for me.

Operator: Again, as a reminder, if you have a question, please press star, then one to be joined into the queue.

Ronald Kamdem: Our next question comes from Ronald Camden with Morgan Stanley. Please go ahead. Hey, good morning, guys. Just coming on for Ronald. Just a question on the capex remaining for the two long projects you guys have. I think it's that 90 million. We just have a further breakdown there in terms of what percentage of that 90 million relates to TI's and, you know, dependent on, you know, again, those buildings, we stop versus, you know, what percentage of the 90 million actually relates to building the building out?

Ronald Kamdem: Yeah, so a couple of things. So we have through, I would say, Q124 or estimating 25 to 30 million every meeting capital spend across the two projects with, you know, the lion chair for Seattle, given the fact that that's, you know, still being completed. And within that number includes the TI allowance for the Sonoma biotherapeutic. So really, that's 25 to 30 million is a combination of construction capital and TI allowance. And so, you know, once you get through that, you know, kind of the delta remaining from the 90, that will be spent primarily for all of us leasing capital over the next few years as we stabilize the asset.

Ronald Kamdem: Yeah, so not all related to building up some of it's not discretionary, but, you know, it's not, it's not all, it doesn't all have to kind of come in at once. Is that kind of. Yeah, it is a 25 to 30 million is committed capital and then, you know, through Q, Q 124 and the balances is, you know, kind of variable based on getting leases done.

Ronald Kamdem: Got it, okay, and then you can just run on the new position, maybe just one for you, you know, appreciate, you're not going to go further into plans with the revolver, but just, you know, as you think about modeling from here on out. If that does become a secure revolver, just where does that put you from an unencumbered asset to unsecured that covenant position and then maybe just talk about, you know, further room for encumbering assets as we had in 24 if that doesn't become a secure revolver.

Ronald Kamdem: Yeah, that's a great question. I mean, the secured revolver is definitely something, you know, that that could be on the table as we as we look forward are unencumbered asset ratios. You know, over 200% today in the minimums 150% under our bonded dentures. So, you know, if we do, if we do put collateral against the new facility, again, that's one possible outcome. Obviously, that will put a little bit pressure on that, but we have plenty of cushion to deal that inside the revolver appropriately. So, again, I can't really get into specifics given where we are in discussion. So, I'm just going to leave it at that for now.

Ronald Kamdem: Thank you, guys. Thank you.

Operator: As we have no further questions, this concludes the question and answer session.

Christopher Bilotto: I would now like to turn the conference back over to Chris Palato for any closing remarks. Yeah. Thank you for joining the call today. We look forward to seeing many of you at the Navy in the upcoming weeks.

Operator: The conference will now conclude. Thank you for attending today's presentation. You may all not.