Office Properties Income Trust

Good morning, and welcome to the Office Properties Income Trust fourth 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.

Thanks, Gary, and good morning, everyone. Thank you 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 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, Thursday, February 16, 2023, and actual results may differ materially from those that we object to. 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, 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 analyte. 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. Good morning, everyone, and thank you for joining the call today. OPI reported fourth quarter results that reflect strong leasing momentum, solid financial results, and further execution on our capital recycling plans. Amid continued economic uncertainty and challenging office sector fundamentals, we are pleased with our performance advancing on core strategies aimed at enhancing OPI's operating performance. Normalized FFO of $1.13 per share exceeded the high end of our guidance range and the change in same property cash basis NOI was in line with our expectations. We completed 705,000 square feet of leasing activity, primarily with tenant renewals, resulting in our highest quarterly retention activity in three years. Our fourth quarter performance caps a year in which we achieved many of the operating targets that we set for OPI. During 2022, we completed 2.6 million square feet of leasing for a weighted average term of more than nine years, and a roll-up in rent of 5.6 percent, which was in line with the leasing spreads we had projected at the beginning of the year. New leasing included 588,000 square feet, or 23 percent of our 2022 activity. We sold non-core properties for more than $210 million of aggregate gross proceeds, and total portfolio occupancy increased approximately 110 basis points to 90.6 percent, trending well above the national office market average. Turning to capital recycling, since the beginning of 2022, we sold 21 properties containing 2.4 million square feet for $216.4 million. Although we started the year with a more aggressive disposition outlook, we are pleased with our ability to close on these transactions during a very tumultuous year for capital markets and office real estate. In 2023, capital recycling will remain a principal strategy for OPI, and cater toward ongoing portfolio enhancement opportunities, management of capital requirements, and reducing leverage. We expect macroeconomic uncertainty in CRE financing to continue to weigh on the pace and magnitude of market activity. However, we are presently under agreement to sell two properties for approximately $7.6 million in gross proceeds, and we are in various stages of identifying and marketing additional properties for sale, most likely to transact in the back half of the year. We ended the year with 160 properties containing 21 million square feet with a weighted average lease term of 6.6 years. Approximately 63% of our annualized rental income was from investment-grade rated tenants, which we believe is one of the highest such percentages in the office REIT sector. Our balance sheet has nearly $570 million of liquidity with 92% of our debt at fixed rates, and we have no senior notes maturing until mid-2024. Turning to our fourth quarter leasing results, we entered into new and renewal leases for 705,000 square feet, which is a 16% increase from the third quarter and a marginal improvement of the prior year. This activity resulted in a weighted average lease term of 10.1 years and leasing concessions and capital commitments of $8.46 per square foot per lease year. Weighted average rent spreads for the quarter declined 6.7%. primarily due to a 337,000 square foot renewal for an 11-year term with a defense contractor located in Northern Virginia. We view this renewal as a strategic win with one of our largest tenant explorations in 2023 and recognition that our campus is part of a longer-term real estate plan for the tenant. Additional highlights are primarily attributed to renewals with two GSA tenants, inclusive of a renewal for 110,000-square-foot mission-critical facility in Mississippi for a 20-year term. Generally speaking, we continue to see higher retention with the GSA agencies and mission-critical facilities, along with willingness to consider longer lease terms. Mission-critical facilities within our portfolio contribute to roughly 11% of our annualized revenue, or just over half of our total U.S. government portfolio. Looking ahead to OPI's upcoming lease expirations, While overall leasing activity has been healthy, we believe 2023 will move at a gradual pace while tenants continue to evaluate real estate needs. We continue to actively manage through proactive re-leasing efforts, along with select alternative use strategies to further diversify our portfolio and to capitalize on compelling value creation opportunities. In 2023, lease expirations represent approximately 11% of our annualized rental income. a 280 basis point decrease from where we stood at the end of Q3. Annualized revenue for 2023 expirations is comprised of the following. Net known vacates for the year are trending between 5 and 6 percent of annualized rental income. Nearly 80 basis points represents planned dispositions, and the balance of 5 to 6 percent is expected to renew, of which 2.2 percent has either signed subsequent to year end or is in advanced stages of lease discussions. We are currently tracking approximately 2.7 million square feet of activity in our pipeline, with more than 1.1 million square feet attributable to new leasing and 541,000 square feet of potential absorption. In light of the activity in our pipeline, combined with our property disposition plans, we are projecting year-end occupancy of 88 to 90 percent. Turning to our developments, OPI currently has two redevelopment projects underway that we expect will enhance our competitive Positioning in the market provides significant value creation and growth opportunities. A redevelopment at 20 Mass Ave in Washington, D.C. is on track to deliver during the second quarter of 2023. The property is currently 54% pre-leased to an anchor tenant, the Royal Sonesta Hotel, and we anticipate an opening date to take place at the end of the second quarter. In Seattle, Washington, we continue to advance construction. However, our timing for completion has been moved out to Q4 2023 given supply chain impacts for delivery of certain equipment. The delay mostly defers the timing of a potential lease to start of our spec suites. However, we anticipate our anchor lab tenant leasing 28% of the projects will continue to commence in Q4 as originally planned. We're off to a good start with pre-leasing at both projects and maintain our outlook for lease up to stabilization of 18 to 24 months following delivery. Our development leasing pipeline includes more than 170,000 square feet of active proposals across the two projects. Total cost of stabilization are $377 million, of which $197 million, or 52%, has been spent through year-end 2022. We anticipate between $125 to $135 million, where up to 36% will be spent in 2023, with the balance incurred with future year lease-ups. Upon stabilization, estimated stabilized yields for Washington, D.C. are 8 to 10 percent, and for Seattle are 10 to 12 percent. In conclusion, despite these achievements, tenants' broader view on office needs and plans for reentry remain in a period of transition. Industry utilization continues to improve at a very gradual pace across most markets, currently trending near 50 percent and consistent with what we are expecting across our national portfolios. While we continue to experience gradual improvements supporting tenant decisions within our portfolio, as highlighted with our leasing results or known vacates, concerns of an economic recession and discount reductions, along with cost containment measures, continue to weigh on office fundamentals. Heading into 2023, we take comfort in the many initiatives undertaken over the past several years to position OPI as a landlord of choice when managing through transitionary periods. Representative examples include enhancements to our overall portfolio with our capital recycling program and major redevelopments, our focus on providing an exceptional experience through our property management and engineering teams, our many sustainability initiatives, including the company's recognition as a gold-level green lease leader, and steps taken to strengthen our balance sheet. We believe these and other factors will benefit OPI as we continue to navigate the headwinds facing the office sector. I will now turn the call over to Matt to review our financial results.