Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust fourth quarter 2020 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. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Olivia Snyder, Manager of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are OPI's President and Chief Operating Officer, Chris Bellotto, and Chief Financial Officer and Treasurer, Matt Brown. In just a moment, they will provide details about our business and our performance for the fourth quarter of 2020, followed by Matt Brown. In just a moment, they will provide details about our business and our performance for the fourth quarter of 2020, followed by a question and answer session with sell-side analysts, 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. These forward-looking statements are based on OPI's beliefs and expectations as of today, Friday, February 19th, 2021. 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, opireet.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 or normalized FFO, cash available for distribution or CAD, suggested EBITDA, and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income are available in our supplemental operating and financial data package, which also can be found on our website. In addition, we will be providing guidance on them all, including normalized FFO 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. Now I will turn the call over to Chris.

Thank you, Olivia, and good morning. Welcome to the fourth quarter earnings call for Office Properties Income Trust. We entered 2020 with leverage below the low end of our target range after completing our post-merger deleveraging plan, as originally outlined, which included a disposition of close to $1 billion in assets. This outcome positioned the company with a strong balance sheet, and a well-diversified portfolio going into an unprecedented global health crisis that would soon impact our personal and professional lives, communities, and activities from the global economy down to neighborhood businesses. Despite these challenges, we continued executing on our business and capital recycling plan, and I am pleased to report operating and financial results representative of our strong portfolio composition. Yesterday, we reported normalized FFO of $1.28 per share, exceeding our guidance range and consensus estimates for the quarter. Year over year, we generated same property cash basis NOI growth of 5.1%, increased CAD by 6.5%, and completed 2 million square feet of leasing activity for the year, resulting in a 6.9% increase in rent and a weighted average lease term of 7.3 years. Turning to our operating results, At the beginning of 2020, we introduced our capital recycling program with the principal goal of selling $100 to $300 million of properties annually, those older in age, more capital intensive, or with less remaining lease term, and reinvesting the proceeds in newer, more stabilized properties that generate higher cash flows. During 2020, we sold $110.5 million of properties, which had an average age of 22 years, a weighted average lease term of 6.2 years, and an average cash contribution yield of 3.6%. These sales also eliminated approximately $30.2 million of budgeted capital over the next five years. In January 2021, we sold two additional properties for $131 million, including a small warehouse facility in Kansas City, Missouri for $845,000 and an opportunistic sale of a property in Richmond, Virginia for $130 million. While not originally considered for 2021 capital recycling, the Richmond property had a weighted average lease term of 3.4 years, anticipated vacancy with a sub-tenant occupying more than 61% of the property, and estimated five-year capital of $7.9 million. As conversations ensued on leasing efforts for the property, we received an offer to purchase the property at what we believe is reflective of a long-term stabilized value despite the anticipated vacancy. This sale reflects a cash contribution yield of 3.6%, providing for an accretive redeployment of proceeds into newer, stabilized properties consistent with our capital recycling plan. We have also entered into an agreement to sell a property located in Huntsville, Alabama that we have previously discussed as a known vacate for 2021. The tenant provided notice of their lease termination for a move-out effective in August of this year and we have evaluated both the re-leasing and disposition strategy for the property. The sale will eliminate anticipated leasing downtime, significant capital, and a potential drag on occupancy with an industrial property not core to OPI's business strategy. As previously announced, in December, we acquired a corporate headquarters property in Fort Mill, South Carolina for $35.1 million. This 150,000 square foot Class A property sits on 16 acres was recently constructed in 2019 and serves as the tenant's corporate headquarters. The property has a remaining lease term of 10.8 years and is located in a growing market in what is considered suburban Charlotte, North Carolina. This acquisition is indicative of our core investment strategy with an average cash contribution yield of 7.4%. Lastly, we have entered into an agreement to acquire a property adjacent to one we own in the Boston CBD. This acquisition represents the final piece for assemblage of properties within the block and provides us with optionality as part of a longer-term strategy for redevelopment and a high-growth corridor of the North Station neighborhood. In the near term, we will continue operating these properties as their current use and look forward to providing updates as we evaluate opportunities for the site. We have been successful in the disposition end of our capital recycling plan, and believe the low cash contribution yield on these sales today creates ample room for OPI to reinvest in higher yielding properties, resulting in CAD accretion as shown with the Fort Mill acquisition. Our acquisition pipeline remains healthy, and our focus in 2021 continues to be on acquiring properties we believe to be mission critical to tenants, and those where remote work is less likely, including single tenant headquarters, high security government buildings, life science, and medical office buildings. Turning to leasing for the quarter. During the fourth quarter, we completed 139,000 square feet of leasing with a 7% roll-down in rent, a weighted average lease term of 9.7 years, and leasing concessions and capital commitments of $5.73 per square foot per lease year. We ended the quarter with consolidated occupancy of 91.2%, and the quarter's performance is in line with expectations. Timing of leasing can vary quarter to quarter, but we are pleased to have ended the year with strong leasing results reflecting a 6.9% increase in rent and a weighted average lease term of 7.3 years. Subsequent to quarter end, we completed a lease restructure with Taylor Brands located in Houston, Texas, following its approved plan of reorganization, which includes a decrease of roughly 67 basis points of annualized revenue and a reduction to their footprint. Plans are currently underway with releasing efforts, and we look forward to providing feedback on leasing in the upcoming quarters. Our overall leasing pipeline remains active, with discussions covering 3.7 million square feet, an increase of roughly 19% in pipeline activity from the prior quarter. This includes roughly 250,000 square feet of new and renewal leasing signed since year end, 313,000 square feet of current activity that is in advanced stages of negotiation, and more than 690,000 square feet that could absorb vacant space across the portfolio. Given the circumstances with COVID-19 throughout 2020, we remain focused on our leasing activity and relationship with tenants, and we feel confident with how we have been able to navigate the pandemic. Despite broad market uncertainty and discussion around the demand for office space, our portfolio has performed well, leasing activity continues to improve, and we attribute our resilience through the pandemic including quarterly rent collections remaining at 99% to our strong balance sheet, favorable geographic exposure, the quality of our properties, and the makeup of our tenant base with approximately 65% of annualized revenue coming from investment-grade tenants, including 39% coming from government tenants. As we look to 2021, we remain focused on the growth of our business through acquisitions, redevelopment, leasing, and operational programs. In addition to those items we highlighted, we continue to advance several programs to manage operating costs while utilization of our properties increase into 2021, and on our sustainability initiatives, which include current and proposed programs for real-time energy monitoring, LEED, WELL, and FITWELL programs, and others which have previously earned OPI designations for the Energy Star Partner of the Year Award and the Green Lease Leader Award. Before I turn the call over to Matt, I would like to acknowledge RMR's property and engineering teams for the exceptional work in 2020 to ensure the health and safety of our tenants, employees, and the many programs implemented across our portfolio for a safe reentry to the office. I would also like to quickly recognize the RMR group for being named one of the top 2020 places to work in Massachusetts by the Boston Globe. We are proud to be part of an organization that commits to building an inclusive culture, investing in the wellness and development of its employees, and providing an innovative workplace. We believe that the scale and caliber of RMAR's operations, as well as the opportunities for advancement, attract top talent, and OPI is a beneficiary of this success. I will now turn the call over to Matt Brown to provide details on our financial results.