Office Properties Income Trust Price & Performance (OPI)

Thank you, Amy. Good morning, everyone. Thanks for joining us today. With me on the call are OPI's President and Chief Operating Officer, Yael Duffy and Chief Financial Officer and Treasurer, Brian Donlin. In just a moment, they will provide details about our business and our performance for the fourth quarter of twenty twenty four. 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. We the meaning of the Private Securities Litigation Reform Act of 1995, other securities laws. These forward looking statements are based on OPI's beliefs and expectations as of today Friday, 02/14/2025, and actual results may differ materially 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, opireit.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, including normalized funds from operations, normalized FFO, 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. We will be providing guidance on this call including normalized FFO and cash basis NOI. We are not providing 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. And finally, last week, OPI announced it has commenced offers to exchange certain of its out outstanding unsecured senior notes. Because the operating period is open, management will not be taking questions on today's conference call. I will now turn the call over to Ile.

Thank you, Kevin, and good morning.

Before we begin, I would like to highlight the steps maturities and liquidity constraints Through a series of transactions, we completed $1,800,000,000 in secured financings including exchanging $488,000,000 of new notes during the fourth quarter Good For $378,000,000 of our outstanding twenty twenty five senior unsecured notes that were coming due in February 2025. Paid the balance of these notes off last month with $113,000,000 of cash using the proceeds from the sale of 24 properties totaling approximately 2,800,000 square feet for nearly $200,000,000 in 2024. As a result of the exchanges and repayment, OPI's 2025 debt maturity was satisfied in its entirety and OPI's total debt principal was reduced by nearly $200,000,000 as compared to the prior year. As we look ahead, our next debt maturity is 140 due in June 2026. Last week, OPI announced that it has commenced additional offers to exchange certain of its outstanding unsecured for up to 175,000,000 of new senior guaranteed unsecured notes, Now turning to the quarter. I will start with an overview of our portfolio and market fundamentals summarize leasing activity for 2024 as well as the fourth quarter and provide an update on OPI's upcoming lease exp I will then turn the call over to Brian to review our financial results As of 12/31/2024, OPI's portfolio consisted of 128 properties totaling 17,800,000 square feet with a weighted average remaining lease term of seven point four years.

The portfolio generates $428,000,000 of annualized revenue down from $513,000,000 a year ago. Our portfolio is diversified by industry and geography with approximately 58% of our revenues coming from investment grade rated tenants or their subsidiaries. Single tenant properties represent 61% of our square footage and nearly 80% of our properties are in suburban locations. Recent research and news publications have begun to highlight green shoots within the office sector. The economy remains strong. Employers in both private sector and the federal government are actively promoting return to office mandates. And there is minimal new supply hitting the market. However, these positive trends have not yet materialized in our portfolio. In Washington DC, our largest MSA, OPI's vacancy is nearly 33% and leasing conditions remain challenging as competition among landlords continues to put further pressure on net effective rents. As the new presidential the impact on OPI's largest tenant, the GSA, may be a headwind for our portfolio. Today, the GSA represents 2,400,000 square feet or approximately seven Of this approximately 413,000 square feet or $10,500,000 in annualized revenue is within their soft which gives the GSA a right to terminate the lease in whole or in part without penalty.

We anticipate and have forecast that at least one agency the Department of Safety and Environmental Enforcement, that leases 110,000 square feet representing $856,000 in annual revenue may terminate its lease in the second quarter of twenty twenty five. The balance of the leases in soft term are lease two what we believe but cannot be certain are mission critical agencies with low risk of vacating. Such as the Secret Service, Veterans Affairs, Social Security and the Department of Justice. The essential nature of the work these agencies do has historically provided OPI with stable cash flows. Although the Department of Government efficiencies efforts are broad based and unpredictable. Turning to our leasing results. Driven by renewal activity. We signed 52 leases for more than 2,000,000 square feet at a weighted average lease term of nearly nine years and a rental rate increase of 6.3%, The impact of this activity is an increase of $2,900,000 in annualized rental revenue of which 59% has not yet been realized and will take effect in 2025 or beyond. However, despite these efforts, OPI's lease square footage decreased 2,800,000 square feet during 2024 and we finished the year with total portfolio occupancy of 85% and same property occupancy of 89.4%.

In the fourth quarter, we executed 13 leases totaling 359,000 square feet at a weighted average lease and a 24.3% roll up in rent, representing the strongest quarterly growth in over four years. Leasing activity included a six year renewal with the AT and T for 191,000 square feet in Plano, Texas at a 25% roll up in rent. A thirteen year expansion in early renewal for 74,000 square feet with a residential services company in Naperville, Illinois at a 36% roll up in rent. And a fourteen year renewal with the GSA for 60,000 square feet in Sacramento, California at a 20% roll up in rent. Concessions and capital commitments of $5.92 per square foot per year declined 10% quarter over quarter. Almost a year ago, we completed the redeveloped Unison Elliott Bay, a 30,000 square foot life science and office The Seattle market has been burdened by oversupply and minimal demand with vacancy rates of 30% for lab space and 22% for office space. Though the property was 28% pre leased prior to its completion, we have seen no tour of proposal activity in recent months. As such, we are not optimistic about the leasing prospects of this project in 2025 or in the first half of twenty twenty six.

Looking ahead, 2,000,000 square feet representing $42,000,000 or nearly 10% of OPI's annualized rental income is set to expire in 2025. As we have long telegraphed, 1,500,000 square feet or $29,300,000 of annualized revenue are known vacates. Many of these pending vacancies represent large single tenant properties, which face challenging market conditions and low tenant demand. Additionally, significant downtime declining market rents and increased tenant improvement and concession tax plus the cost to multi tenant these properties are likely to put further pressure on OPI's liquidity. As of 12/31/2024, 522,000 square feet or $18,100,000 of annualized revenue is scheduled to expire in 2026. Down from 1,400,000 square feet or $41,000,000 of annualized revenue compared to a year ago. Additionally, our current leasing pipe line totals 1,300,000 square feet which approximately half could result in a mid single digit roll up in rent. Turning to dispositions. We are under agreement to sell six properties totaling 581 square feet for an aggregate sales price of $55,000,000 These properties are either vacant or soon to become vacant and located in markets with weak leasing fundamentals, five of these assets assets held for sale are unencumbered properties and one is collateral for our senior secured notes due in 2027.

We expect to complete the majority of these sales by the end of the second quarter Last month, we launched a marketing campaign to sell our 427,000 square foot mixed use development at 20 Mas Ave in Washington, D. C. Sonesta International Hotels, operates a two seventy four key hotel on floors 2 Through 6 of the property or 56% of the square footage. We anticipate the likely buyer of this project to be a hotel investor. Effective 01/01/2025, we restructured our agreement with Sonesta to convert the existing lease to a hotel management agreement. Under this agreement, any earnings OPI may receive from the hotel will now be tied to the revenue and expenses of the hotel's operations. We believe the change from a lease to a more customary hotel management agreement enhances the marketability of the property to hotel investors and improves the valuation compared to having the pre previous lease agreement in place. Today, no additional properties are being marketed for sale. But we continue to evaluate additional disposition opportunities that could further mitigate occupancy risk in the associated carry costs of vacant properties. However, as we consider any future sales, we must balance the impact the potential dispositions would have on our liquidity debt covenants and operating metrics.

I will now turn the call over to Brian.

Thank you, Yael, and good morning.

For the fourth quarter, we reported normalized FFO of $20,900,000 or $0.36 per share for the quarter, which came in a $0.01 above our guidance range as a result of the impact and timing of our dispositions. This compares to normalized FFO of $22,100,000 or $0.43 per share for the third quarter of twenty twenty four. Decrease on a sequential quarter basis was driven by higher interest expense partially offset by an increase in NOI. Same property cash basis NOI was $60,900,000 representing an increase of 4.9% compared to the fourth quarter of twenty twenty three beating our expectations for the quarter due to lower operating expenses at our comparable properties, and the sale of certain vacant properties. Turning to our outlook for the first quarter of twenty twenty five. We expect normalized FFO to be between $0.08 and $0.1 per share for Q1. The decrease sequentially from Q4 is primarily driven by lower NOI a result of asset sales tenant vacancies and increased interest expense.

Our current estimated quarterly interest expense run rate is approximately $52,000,000 consisting of $41,000,000 of cash interest expense, and $11,000,000 of non cash amortization of financing costs, discounts and premiums. This guidance does not include any potential impact on the debt exchange offer we launched last week We expect same property cash basis NOI to decrease 8% to 10% as compared to the first quarter of twenty twenty four driven by tenant vacancies and an increase of free rent from recent leasing activity. This NOI guidance does not include any potential changes to our same store Turning to our investing activities. We spent $36,100,000 on capital expenditures during the fourth quarter and our 2025 full year CapEx guidance is expected to be a total spend of approximately $80,000,000 comprised of $18,000,000 of building capital, $62,000,000 of leasing capital. During the fourth quarter, we sold 17 properties with 1,800,000 square feet for proceeds of $114,500,000 At quarter end, we had five properties with a carrying value of $32,000,000 classified as held for sale. We took an $8,000,000 impairment charge during the quarter to write down the carrying value of one of these [indiscernible] As of today, we have six properties under agreement for sale for $55,000,000 including five of the properties classified as held for sale.

Turning to the balance sheet. In mid December, we completed a private debt exchange $340,000,000 of outstanding 4.5% senior unsecured notes due in 2025 for $445,000,000 of new 3.25% senior secured notes due 2027 and 11,500,000.0 common shares. In January, we used proceeds from asset dispositions repay our remaining unsecured notes due in 2025. I would also like to highlight that we've enhanced our disclosures and provided additional visibility into our properties securing our various debt transactions within our earnings presentation posted to our website. Our total liquidity today is $113,000,000 of cash.

We are currently projecting to burn $60,000,000 to $70,000,000 of cash from operations in 2025 including capital expenditures, Given our liquidity position, financial covenant constraints under our debt agreements and debt principal repayments coming due in 2020 we have limited options to address our upcoming debt maturities. We do not believe that those options include cash repayments or debt for equity exchanges. OPI's next maturity consists of approximately $140,000,000 of senior unsecured notes due June 2026 which we are looking to address with the debt exchange offer we announced last week of up to $175,000,000 of new 8% senior priority guaranteed unsecured notes Under the offer priority will be given to holders of 2.65% senior notes due in 2026.

The offer is subject to a number of conditions, including at a minimum of 75% or $105,000,000 of our existing 2026 notes participating in the [indiscernible] Under the debt exchange we completed in the fourth quarter, our new $445,000,000 of 3.25% senior secured notes due in 2027 require quarterly principal amortization of $6,500,000 and a principal payment of $125,000,000 by March 2026, We're currently projecting asset sales including the potential sale of 20 Mass Ave in Washington DC which serves as collateral to the 2027 notes will be our source of liquidity to make this payment. We look forward to providing updates about our progress in the future. As Kevin highlighted earlier, that OPI's debt exchange offer period is open, we will not be taking any questions on our call Thank you for joining us. This concludes our conference call. The conference is now concluded.