Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust first quarter 2022 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 Kevin Barry, 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 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 first quarter of 2022, 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, Friday, April 29, 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, opireach.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. I will now turn the call over to Chris.

Thank you, Kevin, and good morning, everyone. Welcome to the first quarter earnings call for Office Properties Income Trusts. Since the beginning of 2021, we continue to see gradual improvement across office fundamentals, supported by growing utilization, improved leasing volumes, moderation of sublease space, and the general sentiment around tenants starting to reengage on overall office needs. Evolving events around rising inflation and the current interest rate environment are also in focus, and we believe that progress OPI has made over the past few years to reshape our portfolio and strengthen our balance sheet better positions us for stability and growth during transitionary periods. Specific to this are the $1.1 billion of senior notes issued in 2021 extending our overall debt maturity and reducing our interest expense. our purchase of two core properties in both the Chicago CBD Fulton Market and Atlanta, Georgia, the more than 1 million square feet of new leasing activity over the past four quarters, and continued execution on our capital recycling program with a particular focus on reducing capital exposure and improving our portfolio geography footprint and operating fundamentals. Turning to the quarter, yesterday OPI reported first quarter results that reflect continued momentum across many parts of our business. Normalized FFO increased compared to the first quarter of 2021 and came in above the high end of our guidance. We signed 21 deals for 572,000 square feet of new and renewal leasing with a weighted average roll-up in rent of 5.1% and a weighted average lease term of more than 10 years. Currently, at 91%, same property occupancy was essentially flat over the prior quarter and decreased nominally by 50 basis points over the prior year. Our current leasing pipeline remains strong with a healthy mix of new and renewal deals and mark-to-market growth potential of close to 8%. While the pace of tenant reentry plans continues to evolve, we are encouraged by conversations with tenants across our national portfolio that indicate a growing appetite to consider office space as part of a long-term plan. We remain committed to our capital recycling program to enhance the portfolio with a focus on growing markets with sustained NOI growth, newer buildings with less capital requirements, and for the use of proceeds to manage leverage levels and to strengthen our portfolio through our active development projects. During the quarter, we sold or agreed to sell six non-corp properties for aggregated proceeds of $67.8 million that contain over 800,000 square feet at an average age of 20 years and an average cap rate of 6%. For the full year of 2022, we are maintaining our guidance for dispositions to be in the range of approximately $400 million to $500 million in total proceeds. Turning now to the first quarter in more detail. As we highlighted earlier, we completed 572,000 square feet of new and renewal leasing activity during the quarter with a weighted average lease term of 10.7 years and a 5% gap for open rent. This marks the fourth consecutive quarter with new leasing activity in excess of 230,000 square feet bringing total new activity over the prior four quarters to an excess of 1 million square feet, or close to 460 basis points of occupancy. Government agencies accounted for approximately 40% of our total leasing volume, followed by tenants in the manufacturing and transportation industry, as well as real estate and financial sectors. We ended the quarter with investment-grade rated tenants, representing approximately 64% of our annualized rental revenue. Turning to a few highlights from first quarter leasing transactions, we completed four lease renewals with the GSA for approximately 233,000 square feet for a weighted average lease term of 10.7 years and a rent roll-up of 5.5%. As previously communicated in Plantation, Florida, we signed a lease for 64,000 square feet of space that the GSA will vacate in mid-2022. This building is now fully leased to a single tenant for a 14-year term, and the pace at which we were able to fully backfill the property is reflective of the creativity from our manager's real estate team. In San Jose, California, we executed two new full building leases for a combined 126,000 square feet, which included 27% roll-up in rent and a combined 8.9-year term. Now looking ahead to OPI's upcoming lease expirations. In 2022, 5% of our total annualized revenue is scheduled to expire. We are managing through a limited number of known vacates that represent 2% of our annualized revenue. Our tenant, located in Greater Denver, Colorado, remains our largest known vacate for the year, representing 168,000 square feet and 90 basis points of annualized revenue, with an August 2022 expiration. The property is a BOMA 360 award recipient and is well positioned within a heavily amenitized submarket, including its access within walking distance to the public light rail station. We are investing in the property to offer additional on-site amenities, collaborative areas, and move-in-ready space, which is fielding healthy interest from a variety of prospects looking to lease portions of the building. Currently, we have close to 50,000 square feet, or 30% of the property, who have signed letters of intent at rent roll-ups in excess of 10%. We also remain focused on lease expirations in the coming years as approximately 15% of OPI's portfolio is scheduled to roll in each of 2023 and 2024. Our real estate services and asset management teams are proactively engaging with tenants to evaluate early renewals and maintain positive tenant retention trends. With our active asset management discipline, we view OPI's expiration schedule as an attractive opportunity to right-size rents during the current inflationary environment. At the same time, we have broad mechanisms embedded in our leases to protect us from inflation risk. Approximately 90% of OPI's rent contains either annual lease bumps or escalations tied to an inflation index. Looking at our current leasing pipeline, we are tracking more than 3.6 million square feet of activity, of which 1.2 million square feet is attributable to leasing. Nearly 1 million square feet of our pipeline is at advanced stages of negotiation which includes over 300,000 square feet of positive net absorption. Based on the continued strong interest from our tenants, as well as signs across our nationwide portfolio that office fundamentals are improving, we are reaffirming our expectations for year-end 2022 occupancy of 89 to 90%, along with our expectation for rent roll-ups of 5 to 7%. Turning to our developments, We are making steady progress on our redevelopment efforts in Washington, D.C. and Seattle, Washington. Both projects are on schedule to deliver in early 2023, and our previous dialogue with prospective tenants has been positive. As we have discussed on prior calls, our development at 20 Mass Ave in D.C. is currently 54% pre-leased to Senesta International Hotels Corporation, which expects to begin welcoming guests in the spring of 2023. At our Lifeslantery development project in Seattle, construction commenced during Q1 with anticipated delivery in the spring of 2023. The market continues to show strong signs of growth within the lab sector, including a growing pipeline of tenants in the market and year-over-year asking rent increases of close to 29%. This momentum has supported strong activity for our development, and we are in advanced leasing discussions for approximately 30% of the property. Finally, we are extremely proud of the progress we continue to make to strengthen OPI's corporate governance. Earlier this month, we welcomed Mark Talley as the newest member of our Board of Trustees. Mark has more than 25 years of commercial real estate industry experience with an extensive background in office real estate. We look forward to drawing on his perspective as we continue our work to create value for OPI shareholders. We'll now turn the call over to Matt Brown to provide details on our financial results. Matt. Thanks, Chris, and good morning, everyone.