Q1 2025 Office Properties Income Trust Earnings Call

Good morning, and welcome to the office properties income Trust first quarter 2025 earnings 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. Please note. This.

Speaker Change: Is being recorded I would now like to turn the call over to Kevin Berry Senior director of Investor Relations. Please go ahead.

Kevin Berry: Good morning, and thank you for joining us today with me on the call are Opi's, President and Chief operating Officer Yale Duffy.

Kevin Berry: Financial Officer, and Treasurer, Brian Donnelly in just a moment they will provide details about our business and our performance for the first quarter of 2025, 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 todays conference call contains forward looking statements within the meaning of the private Securities litigation.

Kevin Berry: And Reform Act of 1995 and other securities laws.

Speaker Change: These forward looking statements are based on Opi's beliefs and expectations as of today Thursday May <unk> 2025, and actual results may differ materially from those that we project.

Speaker Change: 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.

Speaker Change: Information concerning factors that could cause those differences is contained in our filings with the securities and exchange Commission, which can be accessed from our website <unk> dot com investors are cautioned not to place undue reliance upon any forward looking statements. In addition, we will be discussing non-GAAP numbers, starting this call, including normalized <unk> and cash basis net off.

Speaker Change: 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.

Speaker Change: 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 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.

Speaker Change: I will now turn the call over to <unk>.

Speaker Change: Thank you Kevin and good morning on today's call I will provide an overview of our portfolio in my view a trend we are seeing in the office market before outlining O P as first quarter leasing and disposition activity.

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

Speaker Change: As of March 31st 2025, Opi's portfolio consisted of 125 properties totaling $17 3 million square feet with a weighted average remaining lease term of seven years.

Speaker Change: We ended the quarter with same property occupancy of 85, 4%.

Speaker Change: Approximately 60% of our revenues come from investment grade rated tenants or their subsidiaries. The U S. Government is our largest tenant representing 16, 8% of our annualized revenue.

Speaker Change: The office sector continues to face headwinds associated with the impacts of work from home as well as macroeconomic and political uncertainty.

Speaker Change: Throughout the country, we faced pressure in our re leasing efforts with minimal tenants in the market to absorb large blocks of vacant space.

Speaker Change: In instances where activity exists leasing demand has been concentrated towards trophy assets as tenants seek amenity rich the tanks that will entice employees back to the office.

Speaker Change: Kevin Opi's portfolio is predominantly comprised of older properties and the capital required to reposition assets, it's often cost prohibitive noon.

Speaker Change: New leasing interest has been minimal.

Speaker Change: Accordingly, we have experienced negative net absorption.

Speaker Change: Grinding asking rents and heightened competition.

Speaker Change: In Washington D. C O P. I haven't there's concentration the market vacancy rate is over 23% and conditions have worsened due to federal leasing uncertainty.

Speaker Change: Despite our leasing efforts strategies to preserve cash flow and manage our debt maturity schedule <unk> financial performance has declined in this difficult operating environment.

Speaker Change: Annualized revenue was down $93 million or 19%.

Speaker Change: So $405 million compared to a year ago.

Speaker Change: Interest expense increased $17 $9 million to $53 $4 million.

Speaker Change: Representing a 50% increase year over year.

Speaker Change: We have little room under our debt covenants, which restricts us from refinancing are issuing new debt.

Speaker Change: $280 million in debt principal payments are due in 2026, and our liquidity is currently limited to $73 million up cash.

Speaker Change: In response to these challenges we are exploring all options to address our financial commitments, while simultaneously operating and leasing our properties.

Speaker Change: Turning to our leasing results in the first quarter, we executed 11 leases totaling 223000 square feet at a weighted average lease term of 10, three years, and a 13 and a half for that rollout and Iraq.

Speaker Change: Sessions in capital commitments.

Speaker Change: $4.62 per square foot per year declined 22% quarter over quarter.

Speaker Change: Notable leasing activity included a new 11 year lease for 45000 square feet in Omaha, Nebraska.

Speaker Change: 12 year lease renewal for 101000 square feet in Fremont, California, and an eight year round them off for 100000 square feet in Irving, Texas.

Speaker Change: We are closely monitoring the department of government efficiencies measures to reduce the government's office square footage.

Speaker Change: Part of it the efforts to optimize its real estate.

Speaker Change: While the ultimate impact on Opi's portfolio remains uncertain, we have not yet received any lease termination notices related to these efficiency measures.

Speaker Change: Today, the GSA represents two 4 million square feet or approximately $68 million of OPI has annualized revenue.

Speaker Change: Of this approximately 432000 square feet or $14.9 million in annualized revenue is within their soft term, which gives the GSA a right to terminate the lease in whole or in part without penalty.

Speaker Change: Turning to O P is upcoming lease expirations.

Speaker Change: Lease expirations through 2026, total one 6 million square feet, representing $45 million or 11% of OPI is annualized rental income.

Speaker Change: And so we have discussed on prior calls single tenant properties will drive most of our aspirations and we expect seven and 780000 square feet or $19 $4 million of annualized revenue will not renew.

Speaker Change: Our current leasing pipeline totaled nearly 2 million square feet of which one third could result in positive net absorption.

Speaker Change: Turning to dispositions.

Speaker Change: During the quarter, we sold three properties, consisting of 249000 square feet for $26 $9 million. Additionally, we are under agreement to sell another three vacant properties consisting of 376000 square feet for a total sales price of $28 9 million.

Speaker Change: Dollars.

Speaker Change: We do not have any other properties being marketed for sale. However, we continue to evaluate disposition opportunities that will allow O P. I can mitigate occupancy risks and carry costs associated with vacant properties.

Speaker Change: We consider our future sales, we must balance the impact of potential dispositions on our liquidity debt covenants and operating metrics.

Speaker Change: Before I turn the call over to Brian I would like to highlight the recent publication of the RMR group's annual sustainability report, which offers a comprehensive overview of our managers commitment and progress in addressing sustainability.

Speaker Change: As we continue to work through challenges in the office market, we remain committed to enhancing OPI corporate sustainability practices and advancing initiatives that benefit our tenants and communities links.

Brian Donnelly: Links to the airport and the supplemental report specific to opioids highlights are available on our website at O P. I read dotcom Brian.

Brian Donnelly: Thank you Alan good morning.

Brian Donnelly: For the first quarter, we reported normalized <unk> $4 4 million or six cents per share which came in below our guidance range. As a result of noncash amortization included in interest expense related to our debt exchanges.

Brian Donnelly: <unk> compares to normalized <unk> of $20 9 million or <unk> 36 per share for the fourth quarter of 2024.

Brian Donnelly: The decrease on a sequential quarter basis was driven by lower NOI as a result of asset sales tenant vacancies and higher interest expense.

Brian Donnelly: Turning to our outlook for the second quarter of 2025, we expect normalized <unk> to be between nine and 11 cents per share for Q2.

The increase sequentially from Q1 is primarily driven by higher NOI as a result of lower seasonal operating expenses in the seasonally stronger performance expected from our hotel in Washington D C.

Brian Donnelly: We project recurring G&A expense to be $5 million for Q2.

Brian Donnelly: Our current estimated quarterly interest expense run rate is $53 million, consisting of $41 million of cash interest expense of $12 million of non cash amortization of financing costs.

Brian Donnelly: We expect same property cash basis, NOI decreased 10% to 12% as compared to the second quarter of 2024, driven by tenant vacancies and an increase of free rent from recent leasing activity.

Brian Donnelly: The NOI guidance does not include any potential changes to our same store portfolio.

Brian Donnelly: Turning to our investing activities, we spent $13 million on capital expenditures during the first quarter.

Brian Donnelly: We are reducing our 2025 full year capex guidance from a total projected spend of $80 million to approximately $75 million comprised of $17 million of building capital and $58 million of leasing capital.

Brian Donnelly: During the first quarter, we sold three properties of 249000 square feet for proceeds of 26 $9 million one of the properties sold was encumbered by our 2027 senior notes and the proceeds of $5 million were used to pay down debt principal.

Brian Donnelly: At quarter end, we had three properties with a carrying value of $10 $4 billion classified as held for sale.

Brian Donnelly: Today, we have three properties under agreement for sale for $29 million.

Brian Donnelly: Turning to the balance sheet in mid March we completed the private debt exchange of $21 million of our outstanding senior unsecured notes due 2026, 2027, and 2031 with a weighted average interest rate of three 1%.

Brian Donnelly: For $14 million of new 8% senior priority guaranteed notes due 2030.

Brian Donnelly: Our total liquidity today is $73 million cash. We're currently projected cash from operations to be a use of $50 million to $55 million during the balance of 2025, including capital expenditures.

Brian Donnelly: Oh, yes, it's all coming maturities consist of approximately $120 million due in March 2026 under our senior secured notes due 2027 and $134 million of senior unsecured notes due June 2026.

Brian Donnelly: Given our liquidity position financial covenant constraints under our debt agreements and debt principal repayments coming due in 2026, we continue to evaluate options to address these maturities with our financial advisor.

Brian Donnelly: Operator that concludes our call.

Brian Donnelly: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Brian Donnelly: [music].