Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust Second Quarter 2022 Earnings Conference Call. All participants will be in a 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 a touchtone 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 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 second 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, July 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, OPIREAP.com, or the SEC's website. Investors are cautioned not to place any 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 second quarter earnings call for Office Properties Income Trust. Last night, we reported second quarter results that reflect solid financial growth, strong leasing momentum, and continued progress on our capital recycling plans. Normalized SFO and same property cash basis NOI exceeded our prior year results in the high end of our guidance range. We are pleased with our strong quarterly performance. However, broader office fundamentals remain in a period of transition. Tenants continue to assess their longer-term space needs and the balance of a hybrid work environment. National vacancy remains elevated and office utilization continues at a modest pace. We anticipate market fundamentals will remain in transition over the next several quarters. As part of our ongoing commitment to offering best-in-class options to tenants, we have selectively deployed capital into our properties over the years focused on better operations, market-specific tenant experiences, and sustainability. Through our manager, we have local professionals specifically focused on our real estate in each market and have certified building engineers managing maintenance of our properties with the highest level of care. This has positioned many of our properties to be at first consideration with tenant tours, and we believe our pipeline activity and corresponding new leasing activity over the past several years are a result of this proactive investment, despite the noted market uncertainty. During the second quarter, our leasing activity increased sequentially to 679,000 square feet, and same-property occupancy increased significantly. 50 basis points over the prior quarter to 94.3%, attributable to new leasing activity and advancement of our disposition program for non-core assets. We continue to take a disciplined and thoughtful approach to our capital recycling efforts with the goal of reducing capital expenditures and improving our portfolio geographic footprint and operating fundamentals. Since the beginning of the second quarter, we sold or agreed to sell non-core properties or properties where we believe value has been maximized for aggregate proceeds of $167.9 million that contained over 1.7 million square feet at an average age of 18 years. For assets we continue to market, we have seen some thinning of the buyer pool along with volatility in pricing expectations in light of macroeconomic changes and uncertain real estate market conditions. As a result, we are moderating our expectations for the pace of our 2022 property dispositions. And now anticipate aggregate 2022 sales proceeds and the range of 100 to 200Million dollars. We remain committed to utilizing capital recycling proceeds to manage leverage levels and strengthen our portfolio and anticipate dispositions to continue as we move into 2023. Turning now to the second quarter in more detail. We completed 18 deals for 679,000 square feet of new and renewal leasing with a 4.9% weighted average roll-up in rent and a 9.2-year weighted average lease term. quarter over quarter leasing volume increased in excess of 18% and by 23% over Q2 2021. Government agencies accounted for approximately 30% of our total leasing volume, followed by tenants in the government, contractor, life science and medical industries. Since the first quarter of 2021, new leasing activity contributed to close to 1.2 million square feet, which we believe represents the highlighted initiative with how we manage our buildings and is a good indication of tenants' appetite to commit to space. We ended the quarter with investment grade rated tenants representing approximately 63% of annualized rental revenue. Turning to highlights from second quarter leasing transactions. In Chantilly, Virginia, we executed a lease renewal with a defense contractor for 159,000 square feet. This represents a key strategic win in which OPI secured a renewal for a mission-critical location at a 10% roll-up in rent in a now 17-year term. We renewed 168,000 square feet in Florence, Kentucky, occupied by the GSA at an 11% roll-up in rent in a five-year term. And in Naperville, Illinois, we signed a new lease with a healthcare equipment manufacturer for 86,000 square feet at a modest roll-down in rent in an eight-year term. Looking ahead to OPI's upcoming lease expiration, Approximately 4% of our total annualized revenue is scheduled to expire during the back half of 2022. We are actively managing through a limited number of known vacates, including our previously discussed tenant, located in a vibrant and growing sub market of Denver, Colorado. Resulting in a net impact of 135,000 square feet and 80 basis points of annualized revenue. We continue to build interest from a variety of prospects looking to lease portions of the buildings. Beyond the Colorado lease, our remaining 2022 rent rolls comprise of mostly smaller tenants and properties currently being marketed for sale. Looking ahead to 2023, roughly 13.5% of OPI's annualized revenue is scheduled to expire, with the largest known vacate being a tenant located in Washington, D.C. CBD, representing 2% of annualized revenue and a lease expiration during the back half of the year. Given the timing for this expiration later in 2023, we have ample time to market the building and are well into plans to support lease-ready initiatives for what is currently a LEED Gold Class A property in a prominent submarket of downtown DC. While expirations may be somewhat mitigated by asset sales, renewal conversations with many of our tenants have been positive and we anticipate strong leasing momentum will continue for the remainder of the year. OPI's expiration schedule also presents an opportunity in this high inflationary environment to right-size rents and reset base-year expense agreements to grow the top line. Our current leasing pipeline remains strong with a balance of new and renewal deals, healthy lease term, and mark-to-market growth potential in the high single digits. We have over 3.2 million square feet of active prospects, of which 1.6 million square feet is attributable to new leasing. Today, we are in advanced stages of negotiation with nearly 670,000 square feet, which includes over 250,000 square feet of potential new tenants. We are reaffirming our expectation for the year-end 2022 occupancy of 89% to 90%, along with expectation for roll-ups of 5% to 7%. Turning to development, our redevelopment efforts in Washington, D.C. and Seattle, Washington both remain on track. Despite broad industry challenges associated with rising construction costs and longer lead times for materials, we continue to work towards a favorable stabilized year return on costs of 8 to 10 percent for 20 Mass Ave. and 10 percent to 12 percent in Seattle, and plan to deliver both projects in April of 2023. We believe the rigorous planning and disciplined execution of these projects have positioned us for leasing success, cash flow growth, and long-term value creation. Tenant tours and pre-leasing interests remain active at both locations as each project takes shape. Before turning the call over to Matt, I wanted to comment on the recent publication of the RMR Group's Annual Sustainability Report. The report highlights insights, accomplishments, and data regarding our managers' commitment to long-term ESG goals. For example, earlier this year, OPI was recognized as an Energy Star Partner of the Year for the fifth consecutive year and a Gold Level 2022 Green Lease Leader. We are proud of the progress we continue to make to strengthen OPI's sustainability practices and enhance our ESG transparency and disclosure. You can find links to the report and a tear sheet specific to OPI's highlights on our website at opiread.com. I will now turn the call over to Matt to review our financial results. Thanks, Chris, and good morning, everyone.