Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust fourth quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing 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 a touch-tone phone. 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 Kevin Berry, Director 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 Pallotto, 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 2021, followed by a question and answer session with sell-side analysts. 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 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, Thursday, February 17th, 2022, 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, adjusted 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 this call, 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. With that, I will now turn the call over to Chris.

Thank you, Kevin, and good morning, everyone. Welcome to the fourth quarter earnings call for Office Properties Income Trusts. On today's call, I will begin with the headlines from our 2021 results, provide a general overview on what we are seeing in the market, and discuss an update to the progress we are making on our core business strategies before turning it over to Matt to review our financial results in more detail. Yesterday, OPI reported fourth quarter results that reflect strong leasing momentum, solid financial performance, and steady execution on our capital recycling strategy. Normalized FFO was $1.20 per share, exceeding the high end of our guidance for the quarter. Leasing volumes exceeded 700,000 square feet and represents the highest quarterly volume since the beginning of 2020, while tenant utilization across our buildings remained consistent with prior quarters at 40%. We expect utilization will continue to improve as we progress into 2022. However, timing remains uncertain as tenants continue to work through their reentry plans and give consideration to their space needs to accommodate various working models. Despite these considerations, lease assigned during 2021 averaged 9.5 years of term, highlighting the willingness of tenants to consider office space as part of a long-term plan. Looking back on the past year, we made excellent progress improving our portfolio through the advancement of our core growth strategies, which we feel is a testament to the quality of our assets, relationships with our tenants, and the work done by our real estate and operations teams to elevate our properties to be a land of the choice. Leasing volume for the year was up 26% over 2020. at 2.5 million square feet with a weighted average lease term of 9.5 years and a roll-up in rent of 6.3%. This included 846,000 square feet of new leasing, which is more than three times the volume experienced in 2020 and more than double the new volume achieved in 2019 prior to the pandemic. We have continued to execute on our capital recycling plan, highlighting our ability to identify and dispose of non-core properties and those where we feel we have maximized value. Since the beginning of 2021, we have sold nine properties for more than $250 million that contained approximately 2.9 million square feet at an average age of 26 years and an average cap rate of 7.4%. We plan to continue these efforts into 2022 and are currently marketing properties with targeted proceeds of $400 to $500 million. Proceeds will primarily be used as part of our deleveraging plan. Complementing these efforts, we redeployed proceeds into the acquisition of two core properties in Atlanta and Chicago, adding Google to our roster of top tenants for a combined $550 million launched two highly accretive development projects in Washington, D.C. and Seattle, Washington, which are collectively 32% pre-leased, and completed the issuance of $1.1 billion of senior notes in 2021, reducing our cost of debt, increasing average debt maturity, and further highlighting investor confidence in OPI's portfolio. Turning now to the fourth quarter in more detail. As noted earlier, we maintained strong leasing momentum with 702,000 square feet of new and renewable leasing. This activity came with a weighted average lease term of six years and a weighted average roll-up and ramp of 4%. From an industry perspective, more than 60% of our Q4 activity was driven by tenants and industries representing technology, communications, and manufacturing and transportation uses. Government tenants accounted for approximately one-quarter of our leasing volume during the quarter. We ended the year with investment-grade rated tenants representing approximately 62% of annualized rental revenue. New leasing activity represented just under 40% of our total Q4 activity, consistent with our trend over the past few quarters, and concessions and capital commitments were $2.95 per square foot per lease year. Same property occupancy increased to 91.2% during the fourth quarter, and we ended the quarter with consolidated occupancy of 89.5%, a 50 basis points increase from last quarter. Turning to our fourth quarter leasing transaction, In Reston, Virginia, the federal government exercised its one-year renewal option for 131,000 square feet at a roll-up in rent of 3%. We are currently engaged in discussions for a longer-term commitment following the expiration of this renewal in 2023. As previously communicated, in Sacramento, California, the State of California dictated 129,000 square feet affected November 2021 and renewed 29,000 square feet, reducing the overall contemplative vacancy. This included a lease term of six years and a roll-up in rent of approximately 17%. In terms of new deals, in Chester, Virginia, we executed a lease for 225,000 square feet with a leading consumer goods manufacturer for a 12-year term and a rent roll-up of 3.9%. Our current leasing pipeline remains robust, with discussions covering more than 3.4 million square feet, of which 1.5 million square feet is attributable to new leasing. This is the sixth consecutive quarter where our leasing pipeline has been in excess of 3 million square feet, further highlighting strong interest from tenants across our portfolio. Based on the characteristics of our pipeline, we currently expect to end in 2022 with occupancy of 89% to 90%. and a roll-up in rents at 5% to 7%. Now looking ahead to OPI's upcoming lease expirations. 8.5% of our total annualized revenue is rolling in 2022, known vacates representing 4.9% of annualized revenue with a breakdown as follows. F5, representing 2.2% of annualized revenue, will vacate our property in Seattle, Washington in February 2022. Plans for redevelopment are underway, and we anticipate delivery of a Class A life science and office campus in early 2023. We have had good activity for the different uses and look forward to providing updates in upcoming quarters. Our tenant located in Centennial, Colorado, representing 168,000 square feet and 90 basis points of annualized revenue, will vacate in September 2022 following its expiration. We currently have a signed turn sheet for 28,000 square feet and are in discussions with a variety of tenants looking to lease portions of the building. In Plantation, Florida, we previously disclosed that GSA will vacate, which is currently estimated for mid-2022. We are pleased to report that, subsequent to quarter end, we signed a lease for the remaining 64,000 square feet, bringing occupancy to 100% for a 14-year term. Despite these vacancies, we have more than 561,000 square feet in advanced stages of negotiation and an additional 446,000 square feet that has been executed since year end. Combined, this reflects over 430,000 square feet of new leasing in advanced stages across the portfolio. Turning to development. In addition to the update provided for our Seattle project, we are on track with our plans to redevelop 20 Mass Ave. in Washington, D.C. and deliver in Q1 2023. Newer Class A properties in the greater D.C. market experience roughly 1.3 million square feet of net occupancy gains for the year, with tenants focused on flight to quality, but with increased concessions across all classes. As we have discussed on prior calls, the development is currently 54% pre-lease, and we continue to field interest from a variety of prospective tenants across a range of industries, including technology, consulting, services, legal, and related uses. Finally, we are dedicated to enhancing OPI's corporate sustainability program and continue to advance initiatives that will position the company to thrive over the long term. In 2021, we continue to make progress on our initiatives and garnered industry honors, including Energy Star Partner of the Year for the fourth consecutive year. We ended the year with more than 6 million square feet of Energy Star certified, 6 million square feet of LEED certified, and 5 million square feet of BOMA certified properties in our portfolio. In the year ahead, we plan to increase coverage for all three recognition programs and expand on our sustainability efforts. In summary, 2021 was an active year for leasing and property management, as we work to reshape OPI's portfolio and drive sustainable growth in our operating performance and financial results. We look forward to updating you on our progress and milestones as we continue to execute on our strategy during the year ahead. I will now turn the call over to Matt Brown to provide details on our financial results. Matt?