Q1 2024 Office Properties Income Trust Earnings Call

Okay.

Yeah.

Good morning.

Operator: Good morning. And welcome to Office Properties Income Trust's first quarter 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. At this time, for opening remarks and introductions, I would like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please, go ahead.

Speaker Change: And welcome to office properties income Trust.

Kevin Barry: First quarter 'twenty 'twenty four financial results conference call.

Operator: All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

Kevin Barry: At this time for opening remarks, and introductions I would like to turn the call over to Kevin Berry Senior director of Investor Relations. Please go ahead.

Kevin Barry: Thank you and good morning, everyone. Thanks for joining us today with me on the call are <unk>, President and Chief operating Officer, Jan Duffy, and Chief Financial Officer, and Treasurer, Brian dominance in just a moment they will provide details about our business and our performance for the first quarter of 2024.

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

Kevin Barry: With me on the call are OPI's President and Chief Operating Officer, Yael Duffy, and Chief Financial Officer and Treasurer, Bryan Donley. In just a moment, they will provide details about our business and our performance for the first quarter of 2024. 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 the Private Securities Litigation Reform Act of 1995 and other securities laws.

Kevin Barry: 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.

Kevin Barry: Also note that todays conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and other securities laws.

Kevin Barry: These forward-looking statements are based on OPI's beliefs and expectations as of today, Thursday, May 2, 2024, 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, opireep.com, or the SEC's website.

Kevin Barry: These forward looking statements are based on Opi's beliefs and expectations as of today Thursday May <unk> 2024, and actual results may differ materially who knows 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.

Kevin Barry: 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 dot com or the Sec's website.

Kevin Barry: Investors are cautioned not to place undue reliance upon any forward-looking statement. In addition, we will be discussing non-GAAP 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 NOI. A reconciliation of these non-GAAP figures to net income is available in OPI's earnings release presentation that we issued last night, which can be found on our website.

Kevin Barry: You are cautioned not to place undue reliance upon any forward looking statements.

Kevin Barry: In addition, we will be discussing non-GAAP numbers during this call, including normalized funds from operations or normalized <unk> cash available for distribution or C. A D and cash basis, net operating income or cash basis NOI.

Kevin Barry: 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. We are not providing a reconciliation of these non-GAAP measures as part of our guide.

Kevin Barry: And finally, we will be providing guidance on this call, including normalized FFO and cash basis NOI. However, we are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such a 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 Yael.

Yael: 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 Yale.

Yael Duffy: Thank you, Kevin, and good morning. Last night, OPI announced that it had commenced offers to exchange certain of its outstanding unsecured senior notes for up to $610 million of new senior secured notes subject to the terms and conditions set forth in an offering memorandum. Now that the offering period is open, today's call will focus on OPI's first quarter operating and financial results, and we will not be taking any questions at the end of our prepared remarks.

Yael: Thank you Kevin and good morning.

Yael Duffy: Nine O P. I know that he has commenced the offer to exchange.

Yael Duffy: I'm certain of is the outstanding unsecured.

Yael Duffy: Our senior notes.

Yael Duffy: Up to $610 million of new senior secured notes.

Yael Duffy: Subject to the terms and conditions set forth in an offering memorandum.

Yael Duffy: Now that the offering period is open today's call will focus on O P. I.

Yael Duffy: Our operating and financial results and we will not be taking any questions at the end of our prepared remarks.

Yael Duffy: Before I begin I want to highlight the recent publication of the RMR group's annual sustainability report, which provides a comprehensive overview of our managers commitment to ESG.

Yael Duffy: Before I begin, I want to highlight the recent publication of the RMR Group's Annual Sustainability Report, which provides a comprehensive overview of our managers' commitment to ESG goals. We are deeply committed to enhancing OPI's corporate sustainability practices and continuing to advance initiatives that benefit our tenants and communities. As a testament to our environmental stewardship, OPI was recently recognized as an Energy Star Partner of the Year for the seventh consecutive year and a Sustained Excellence Honoree for the fifth year in a row. You can find links to the report and the tear sheets specific to OPI's highlights on our website at opiread.com.

Yael Duffy: We are deeply committed to enhancing OPI corporate sustainability practices and continuing to advance initiatives that benefit our tenants and communities.

Yael Duffy: As a testament to our environmental stewardship OPI was recently recognized as an energy star partner of the year for the seventh consecutive year and sustained excellence honoree by the state here in a row.

Speaker Change: You can finally selim.

Yael Duffy: Pork and Turkey, [laughter], Oh, yeah highlights on our website at <unk> Dot com.

Yael Duffy: Now, turning to the quarter. I will begin with a recap of our recent activities, then provide an overview of our portfolio, leasing performance, and the progress we made on key initiatives. From there, I will turn the call over to Bryan to discuss our financial results.

Yael Duffy: Now turning to the quarter I will begin with a recap of our recent activity then provide an overview of our portfolio leasing performance and the progress we made on key initiatives.

Bryan: From there I will turn the call over to Brian to discuss our financial results.

Bryan: The strength of Opi's portfolio is it mix of credit quality tenants.

Yael Duffy: The strength of OPI's portfolio is its mix of credit quality tenets and its Industry and Geographic Diversification. Since last fall, we have been focused on addressing our debt maturity, identifying assets for disposition, and leasing vacant space. To accomplish our financing objectives in an extremely challenging lending market, especially for the office sector, we have utilized the properties with the strongest attributes to secure our recent deals, including the recast of our revolving credit facility into a new $425 million credit agreement and the refinancing of our 2024 debt maturity through a senior secured no issuance.

Yael Duffy: And it's industry and geographic diversification.

Yael Duffy: Since last fall, we have been focused on addressing our debt maturities identifying assets for disposition and leasing vacant space.

Yael Duffy: To accomplish our financing objectives in an extremely challenging lending market, especially for the office sector.

Yael Duffy: Have utilized the property with the strongest attribute to secure our recent deal <unk>.

Yael Duffy: Including the recast of our revolving credit facility into a new $425 million credit agreement and the refinancing of our 2024 debt maturity.

Yael Duffy: Senior secured note issuance.

Yael Duffy: The characteristics of the collateral pools securing these deals include high occupancy, strong remaining lease terms, and credit quality tenants. The note exchange offer we launched last evening includes additional senior secured notes backed by properties with similar attributes. However, beyond these portfolios, our unencumbered asset pool has its challenges, which I will discuss in further detail in a moment, turning to our portfolio as a quarter end.

Yael Duffy: Characteristics of the collateral pool carrying these deal include high occupancy.

Yael Duffy: Strong remaining lease term and credit quality tenants.

Yael Duffy: The note exchange offer we launched last evening includes additional senior secured notes backed by properties with similar attributes.

Yael Duffy: However, beyond these portfolios our unencumbered asset pool has its challenges, which I will discuss in further detail in a moment.

Yael Duffy: Turning to our portfolio as of quarter end.

Yael Duffy: OPI's portfolio consists of 151 properties totaling 20 million square feet with a weighted average remaining lease term of nearly seven years. Our portfolio is diversified by industry and geography, with more than 60% of our revenues coming from investment-grade tenants or subsidiaries. We ended the quarter with consolidated occupancy of 85.6% and same property occupancy of 88.2%.

Yael Duffy: Yeah. Its portfolio consists of 151 properties totaling 20 million square feet with a weighted average remaining lease term of nearly seven years.

Yael Duffy: Our portfolio is diversified by industry and geography with more than 60% of our revenues coming from investment grade tenants our subsidiary.

Yael Duffy: We ended the quarter with consolidated occupancy of 85, 6% and same property occupancy of 88, 2%.

Yael Duffy: Despite significant operational headwinds that continue to impact the office sector, we executed 488000 square feet of new and renewal leasing.

Yael Duffy: Despite significant operational headwinds that continue to impact the office sector, we executed 488,000 square feet of new and renewal leasing. This activity resulted in an average lease term of 9.3 years and a roll-up in rent of 10.2%, reflecting our highest leasing spread since 2022. Leasing concessions and capital commitments continued to decline this quarter at $2.42 per square foot per lease year, which is less than half of OPI's quarterly average in 2023.

Yael Duffy: This activity resulted in an average lease term of nine three years and a roll up in rent a 10, 2%.

Yael Duffy: Reflecting our highest leasing spreads in 2022.

Yael Duffy: Leasing concessions and capital commitments continued to decline this quarter at $2.42 per square foot per lease year, which is less than half of OPI quarterly average in 2023.

Yael Duffy: Renewals drove over 90% of our leasing activity this quarter, including a 10 year renewal with the GSA of 352000 square feet, and Ellen West, Georgia, and a $24 seven for that roll up in rent and then 10 year renewal with the state of Minnesota for 58000.

Yael Duffy: Renewals drove over 90% of our leasing activity this quarter, including a 10-year renewal with the GSA for 352,000 square feet in Ellenwood, Georgia, at a 24.7% roll-up in rent, and a 10-year renewal with the State of Minnesota for 58,000 square feet in Roseville, Minnesota, at a 30.7% roll-up in rent. The United States government is our largest tenant, representing 20% of annualized revenues across 43 leases We estimate that 12% of our annualized revenues are from leases at specialized building facilities that serve mission-critical needs for government agencies, such as the Federal Bureau of Investigation, Department of Homeland Security, and the Drug Enforcement Agency. The essential nature of the work these agencies are conducting and their need to physically occupy our properties has historically provided OPI with stable, predictable cash flows. These historical trends were further reinforced this quarter.

Yael Duffy: Or square feet in Roseville, Minnesota, and a 37% roll up in Iraq.

Yael Duffy: The United States government is our largest tenant representing representing 20% of annualized revenues across 43 leases for over three and a half million square feet.

Yael Duffy: We estimate the 12% of our annualized revenues are from leases a specialized building facilities that serve mission critical need for government agencies, such as the Federal Bureau of investigation Department of Homeland Security and the drug enforcement agency.

Yael Duffy: Essential nature of the work these agencies are conducting and their need to physically occupy our properties has historically provided OPI was stable predictable cash flows.

Yael Duffy: These historical trends, where further reinforced this quarter.

Yael Duffy: Conversely, the remainder of our U.S. government exposure, or 8% of annualized revenues, is from leases for back-office uses that are subject to the same remote work threat to building utilization as our private sector tenants. Over time, we expect the non-specialized portion of our government revenues to decline as the GSA seeks to consolidate office space into government-owned buildings while reducing its reliance on these properties. We plan to offset this pressure on OPI through releasing efforts and asset disposition.

Yael Duffy: Conversely, the remainder of our U S. Government exposure are 8% of annualized revenues are from leases or back office uses that are subject to the same memo works right to building utilization as a private sector tenants.

Yael Duffy: Overtime, we expect the non specialized portion of our government revenues to decline as the GSA seeks to consolidate office space into government owned building, while reducing its reliance on leased properties.

Yael Duffy: We plan to offset this pressure to OPI through re leasing effort and asset disposition.

Yael Duffy: Turning to OPI upcoming lease expirations.

Yael Duffy: Turning to OPI's upcoming lease expiration, we have and will continue to face significant lease rollover over the next several years, with nearly 30% of total annualized rental income expiring through 2026. Lease expirations over the next 12 months total $2.5 million in square feet, or 15% of OPI's annualized rental income. As we discussed on our call last quarter, single-tenant properties will drive most of our expirations, and we expect approximately 2.2 million square feet, representing $65.5 million of annualized rental income, will not renew, which will negatively impact our results in the coming quarter.

Yael Duffy: We have and well continue to see significant lease roll over the next several years with nearly 30% of total annualized rental income expiring through 2026.

Yael Duffy: Lease expirations over the next 12 months total two and a half million square feet or 15% of OPI is annualized rental income.

Yael Duffy: As we discussed on our call last quarter single tenant properties will drive most of our exploration and we expect approximately 2.2 million square feet, representing 65, and a half million dollars of annualized rental income will not run nail which will negatively impact.

Yael Duffy: Our results in the coming quarters.

Yael Duffy: Furthermore, over 2 million square feet relate to properties not already encumbered in our existing debt agreements or part of the note exchange offer I referenced earlier. While we are proactively engaging in discussions with our tenants to address their safety needs, tenant retention remains a significant challenge as hybrid work in an uncertain macroeconomic climate continues to negatively impact demand. Releasing efforts are further impacted with minimal tenants in the market to absorb large blocks of space. Accordingly, it can take upwards of two years and significant capital to stabilize vacant properties.

Yael Duffy: Furthermore, over 2 million square feet relate to properties not already encumbered and our existing debt agreements are part of the notes exchange offer I referenced earlier.

Yael Duffy: While we are proactively engaging in discussions with our tenants to address their space needs.

Yael Duffy: Retention remains a significant challenge as hybrid work and an uncertain macroeconomic climate.

Yael Duffy: 10 years to negatively impact demand.

Yael Duffy: Re leasing efforts are further impacted with minimal tenants in the market to absorb large blocks of space.

Yael Duffy: Accordingly, it can take upwards of two years and significant capital to stabilize the vacant properties.

Yael Duffy: To that end, we are focused on selling vacant or soon-to-become vacant assets. We are in various stages of marketing more than 2 million square feet of properties for sale across OPI's nationwide footprint, most of which were previously leased to single-tenant users. In March, we closed on the sale of 400 South Jefferson in Chicago to an owner-user for a sales price of $38.5 million, or $155 per square foot. We also received an additional $10.5 million in lease termination fees from Tyson Foods, our former tenant, as part of the deal.

Yael Duffy: To that end, we are focused on selling vacant or soon to become vacant assets.

Yael Duffy: We are in various stages of marketing more than 2 million square feet of properties for sale or profit OPI nationwide footprint, most of which were previously leased to single tenant users.

Yael Duffy: In March we closed on the sale of 400 and South Jefferson in Chicago to an owner user for a sales price of 38, and a half million dollars or $155 per square foot.

Yael Duffy: We also received an additional 10 and a half million dollars in lease termination fees from Tyson foods, our former tenant as part of the deal.

Yael Duffy: Turning to development activity, we reached an important milestone with the substantial completion of unison Elliott Bay are 300000 square foot life Science and office redevelopment in Seattle, Washington.

Yael Duffy: Turning to development activity, we reached an important milestone with the substantial completion of Unison Elliott Bay, our 300,000 square foot life science and office redevelopment in Seattle, Washington. The property is 28% leased, and we continue to aggressively market the project, including four move-in ready spec labs. No further development projects are underway. I will now turn the call over to Bryan to review our financial results. Thanks, Yael.

Bryan: The property is 28% leased and we continue to aggressively market the project, including for move in ready back last week.

Bryan: No further development projects are underway I will now turn the call over to Brian to review our financial results.

Bryan Donley: Thank you, Yael, and good morning, everyone. We reported normalized FFO of $38.3 million, or 79 cents per share, for the quarter, which was in line with our guidance range. This compares to normalized FFO of $45.9 million or $0.95 per share for the fourth quarter of 2023. The decrease on a sequential quarter basis was driven by higher interest expense and lower NOI as a result of tenant vacates. Same property cash basis NOI increased 12% compared to the first quarter of 2023, which came in better than our guidance range of a 14 to 16% decline. The EOBF decrease is mainly driven by elevated free rent concessions, vacancies, and higher operating expenses.

Bryan: Thanks, Joe and good morning, everyone.

Bryan Donley: We reported normalized <unk> of $38 $3 million or 79 cents per share for the quarter, which was in line with our guidance range.

Bryan Donley: This compares to normalized <unk> of $45 million or 95 cents per share for the fourth quarter of 2023.

Bryan Donley: The decrease on a sequential quarter basis was driven by higher interest expense and lower NOI as a result of tenant vacates.

Bryan Donley: Same property cash basis, NOI decreased 12% compared to the first quarter of 2023, which came in better than our guidance range of a 14% to 16% decline.

Bryan Donley: The year over year decrease was mainly driven by elevated free rent concessions vacancies and higher operating expenses.

Bryan Donley: We generated <unk> 46 cents per share during the first quarter and $1 32 per share on a rolling four quarter basis.

Bryan Donley: We've generated CAD of 46 cents per share during the first quarter and $1.32 per share on a row and full quarter basis. First quarter CAV includes $10.5 million or $0.22 per share of early termination revenue related to the sale of the Tyson's food property in Chicago. Turning to our outlook for normalized FFO and same property cash basis NOI expectations for the second quarter of 2024, we expect normalized FFO to be between $0.62 and $0.64 per share. The decrease sequentially from Q1 is primarily driven by lower rental income.

Bryan Donley: First quarter <unk> includes $10 $5 million or 22 cents per share of early termination revenue related to the sale of the <unk> property in Chicago.

Bryan Donley: Turning to our outlook of normalized <unk> and same property cash basis NOI expectations for the second quarter of 2024, we expect normalized <unk> to be between 60 to 60.

Bryan Donley: 64 cents per share.

Bryan Donley: The decrease sequentially from Q1 is primarily driven by lower rental income.

Bryan Donley: Yes.

Bryan Donley: We expect the same property cash basis at a lot to be down 15 to 17% as compared to the second quarter of 2023, driven by elevated free rent and tenant vacancies. Turning to our investing activities, as Yael mentioned, during the first quarter, we sold one property for $38.5 million, and we have one property under agreement for sale for $7.8 million. We spent $21.2 million on recurring capital and $6.9 million on redevelopment capital during the first quarter.

Bryan Donley: We expect same property cash basis, NOI to be down 15% to 17% as compared to the second quarter of 2023, driven by elevated free rent and tenant vacancies.

Bryan Donley: Turning to our investing activities as you all mentioned during the first quarter, we sold one property for $38 $5 million, we have one property under agreement for sale for $7 million.

Bryan Donley: Spend 21 $42 million on recurring capital and $649 billion under redevelopment capital during the first quarter.

Bryan Donley: In 2024, we continue to expect our total capital spend to be approximately $100 million comprised of $25 million of building capital $75 million of leisure capital.

Bryan Donley: In 2024, we continue to expect our total capital spend to be approximately $100 million, comprised of $25 million of building capital and $75 million of leasing capital. Turning to the balance sheet, as we discussed on the last call, we made significant progress at the beginning of the year in addressing our debt maturity. We recast our revolving credit facility with a new three-year $425 million secured credit agreement and issued $300 million of 9% senior secured notes.

Bryan Donley: Turning to the balance sheet as we discussed on our last call. We made significant progress at the beginning of the year and addressing our debt maturities, we recast our revolving credit facility with a new three year $425 million secured credit agreement and issued $300 million of 9% senior secured notes.

Bryan Donley: Using the proceeds from the notes offering and borrowings under our revolving credit facility, we redeemed all of our $350 million afford a quarter percent unsecured senior notes scheduled to mature in May 2024.

Bryan Donley: Using the proceeds from the notes offering and borrowings under our Revolving Credit Facility, we redeem all of our $350 million of 4.25% unsecured senior notes scheduled to mature in May 2024. I would also like to highlight that we have enhanced our disclosures to provide additional visibility into the collateral pools securing our various debt transactions within our earnings presentation and in our investor presentation posted to our website. We ended the quarter with $2.6 billion of outstanding debt and a weighted average interest rate of 5.4% and a weighted average maturity of 4.9 years.

Bryan Donley: I would also like to highlight that we have.

Bryan Donley: Hence our disclosures to provide additional visibility into the collateral securing our various debt transactions within our earnings presentation and in our investor presentation posted to our website.

Bryan Donley: We ended the quarter with $2 $6 billion of outstanding debt with a weighted average interest rate of 544% and a weighted average maturity of 449 years.

Bryan Donley: We add $159 million of total liquidity, including $135 million of availability under our credit facility. Additionally, we have been focused on evaluating strategies to navigate our upcoming debt maturities, including our $650 million of senior notes due in February 2025. Last night, we commenced debt exchange offers pursuant to which OPI will issue up to $610 million of new 9% senior secured notes in exchange for certain of its outstanding unsecured senior notes with priority given to holders of OPI's 4.5% senior notes through 2025.

Bryan Donley: We had $159 million of total liquidity, including $135 million of availability under our credit facility.

Bryan Donley: We have been focused on evaluating strategies to navigate our upcoming debt maturities, including our $650 million of senior notes due in February 2025.

Bryan Donley: Last night, we commenced debt exchange offers pursuant to which OPI wish you up to $610 million of new 9% senior secured notes in exchange for certain of its outstanding unsecured senior notes with priority given to holders of OPI is four 5% senior notes due 2025.

Bryan Donley: The offer is subject to a number of conditions, including that a minimum of 15% or $98 million of our 45% unsecured notes due 2025 are validly tendered and at least $488 million of the new senior secured notes would be issued.

Bryan Donley: The offer is subject to a number of conditions, including that a minimum of 15% or $98 million of our 4.5% unsecured notes due 2025 are validly tendered, and at least $488 million of the new senior secured notes would be issued. The exchange offers are only being made to certain eligible holders in accordance with the terms of an offering memorandum, as noted in the press release OPI issued last night.

Bryan Donley: The exchange offers are only being made a certain eligible holders in accordance with the terms of an offering memorandum as noted in the press release issued last night.

Bryan Donley: We look forward to providing updates about our progress in the future. Thank you for joining us today. This concludes our conference call.

Bryan Donley: We look forward to providing updates about our progress in the future.

Bryan Donley: Thank you for joining US today. This concludes our conference call.

Bryan Donley: Yeah.

Speaker Change: Thank you very much for attending today's presentation. You may now disconnect have a good day.

Operator: Thank you very much for attending today's presentation. You may now disconnect. Have a good day.