Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust third 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 a touch-tone phone. To retry your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Kevin Berry, Director of Investor Relations. Please go ahead, sir.

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 third 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, October 28, 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 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 third quarter earnings call for Office Properties Income Trust. Last night we reported a solid third quarter despite an evolving office landscape and a rapidly changing economic environment. Same property cash basis NOI growth came in near the high end of our range and we continue to experience strong leasing momentum. Our balance sheet remains well positioned with $629 million of total liquidity and no senior notes maturing until May 2024, which Matt will expand upon momentarily. We completed 606,000 square feet of new and renewal leasing, including a new lease for 84,000 square feet to anchor our Seattle life science development. Portfolio occupancy continues to outperform the broader market and end of the quarter at 90.7%, a 130 basis point improvement over Q2 and a 170 basis point increase over the prior year. During the quarter, we sold 10 properties containing 1.3 million square feet for $118 million at a weighted average cap rate of approximately 6.2%. Year-to-date, dispositions totaled $196 million at a weighted average cap rate of 6.8% and close to the high end of our 2022 guidance range. Further, we have five properties totaling 338,000 square feet for $20.5 million in advanced stages with a targeted close by year end. We have plans to continue our capital recycling efforts into 2023 and are pleased with our ability to close on the noted transactions to date. However, we remain cautious given the overall economic environment. Investor interest remains mixed with a thinning pool of buyers due to higher inflation, interest rates, and changing portfolio strategies. To date, we have not completed any acquisitions with our primary focus on leasing, operational efficiencies, completion of our existing development projects, and property sales. Turning to an update on leasing results, we reported a solid leasing momentum with 24 signed leases for 606,000 square feet, including a 21.6% weighted average roll-up in rent and a 7.2-year weighted average lease term. New leasing increased sequentially and represented 37% of our total activity for the quarter, including a 59% roll-up in rent, primarily driven by leasing at our Seattle development. At a macro level, overall U.S. leasing activity is trending at just over 70% of pre-pandemic level, with gateway markets trailing the pace of secondary growth markets. Leasing demand is largely attributed to higher quality buildings, those with market-specific amenities and better functionality. Over the past several years, our real estate and asset management teams have been instrumental in capital deployment strategies toward improving the quality of our portfolio, which has positioned our buildings to benefit from the current economic demand drivers. Year to date, we completed over 1.8 million square feet of leasing with an 11% roll-up in rent and a weighted average lease term of nine years. New leasing included 585,000 square feet, or 32% of our activity to date. Turning to leasing and property highlights from the third quarter. At a redevelopment in Seattle, Washington, we signed a new lease with a clinical stage biotech company for 84,000 square feet and a 10-year term. This lease is a strategic win as an anchor for the project and demonstrates the ongoing demand for premium, well-designed R&D space in this market. In Naperville, Illinois, we executed a new 57,000 square foot lease at a 14.5% roll-up in rent and a 12-year lease term. Over the past year, our real estate team has strategically allocated capital to improve common areas and expand the amenity base, which has resulted in an increase in occupancy from 58% in Q4 2021 to 82% as of Q3, and supported by close to 145,000 square feet of new leasing activity. And in Atlanta, Georgia, we renewed a mission-critical GSA tenant for 91,000 square feet in a 15-year term. Looking back at the past few years of GSA activity, on average, lease terms for new and renewal leases are 11 years and 7 years respectively, highlighting the GSA's commitment to properties within our portfolio. Looking ahead to OPI's upcoming lease expiration, We have minimal remaining lease expirations in 2022 with 80 basis points of annualized rental income expiring by year end. Of this, 30 basis points is attributed to properties under contract for sale estimated for a Q4 close. The balance of expirations are mostly expected to renew. In 2023, lease expirations represent approximately 14% of annualized rental income. Nearly 4% of our 2023 expiring rental income has either signed subsequent to quarter end or is in advanced stages of lease negotiations. Approximately 1% represents planned dispositions, including 60 basis points driven by an expected Q4 2022 sale of a property in Englewood, Colorado. We are in active conversations with tenants that make up the remaining 2023 expirations, and net known vacates for the year are trending between 3% and 5% of annualized rental income. It is worth noting that known vacates in 2023 predominantly expire during Q3 and Q4, minimizing the risk to 2023 operating results. I would also point out that, in addition to our active asset management, releasing efforts, and continued capital recycling initiatives, select known vacates are being evaluated for alternative use strategies to further diversify our portfolio and capitalize on compelling value creation opportunities as seen with our DC and Seattle development projects. Looking forward, our leasing pipeline remains strong with a healthy mix of new and renewal deals, lease term, and mark-to-market growth potential. We are currently tracking approximately 3.2 million square feet of active prospects, of which more than 1.3 million square feet is attributable to new leasing and 720,000 square feet of potential absorption. Turning to our developments. We continue to advance our value-enhancing redevelopment projects. Our development leasing pipeline includes over 223,000 square feet of active proposals. In Seattle, Washington, the project is now 28% pre-lease, and we anticipate the delivery of our movement-ready spec space will further accelerate leasing at this project as we near completion. Construction at our 20 Mass Avery development in Washington, D.C. is also on time and on budget. Tour activity continues to progress, and we remain on track to deliver both our Seattle and D.C. projects in Q2 2023. In conclusion, aggressive monetary policy inflation, along with the current interest rate environment, are weighing on market fundamentals and decisions around real estate needs, which we believe will continue to be a factor to 2023. Our capital recycling efforts focused on upgrading and enhancing the overall physical quality and functionality of our buildings, along with refining our geographical footprint, is a further complement to the level of tenant interest and activity across our portfolio. As we progress on core initiatives, we remain focused on leasing, operational efficiencies, development, and capital recycling, and are pleased with our portfolio position. which includes 63% of our rental income coming from investment-grade tenants, a portfolio average lease term of 6.3 years, and a well-positioned balance sheet. I will now turn the call over to Matt to review our financial results.