Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please say no 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 can press star then one on your 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 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 2023, 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, July 27, 2023, 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, and cash basis net operating income, or cash basis NOI. A reconciliation of these non-GAAP figures to net income are available in OPI's earnings release presentation that we issued last night, which can be found on our website. And finally, 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. Good morning, everyone, and thank you for joining us today. On our call today, we will provide an update on the merger with Diversified Healthcare Trust, discuss broader office fundamentals, and we'll provide an update on our operational and financial results. Starting with the merger, we remain on track to complete our merger with Diversified Healthcare Trust during the third quarter. We filed our registration statement with the SEC, and we are holding a special meeting of shareholders on August 30th. to vote on proposals to approve the merger and the issuance of OPI common shares. With shareholder approval, we expect to close the transaction shortly thereafter. This merger represents a tremendous opportunity for our shareholders to create a larger, scalable, and more diversified REIT. It combines two institutional quality portfolios and better positions us to navigate office sector headwinds while providing embedded near and long-term growth in value creation. As a reminder, immediate benefits to OPI includes increased scale and diversity, cash flow stability with the addition of attractive MOB and life science properties as a complement to our established office portfolio, access to additional capital sources with a more favorable interest rate outlook, including low-cost GST and agency debt, and access to an institutional quality portfolio of senior living communities. benefiting from growth through favorable healthcare sector tailwind, and the turnaround strategy currently underway. We expect the transaction to be accretive to OPI's normalized FFO, CAT, and leverage during the second half of 2024, and ultimately maximizing long-term value for our shareholders. Based on the compelling benefits of the transaction, we support our board and their recommendation that shareholders vote for the merger. As Matt will discuss, during the second quarter, we commenced our financing strategy to close the merger by completing more than $108 million in mortgage financing since May. Given the challenges related to financing office properties in today's capital markets, we believe our progress on this priority serves as a testament to OPI's highly financeable portfolio of properties. In aggregate, the finances reflect an implied capitalization rate based on the aggregate appraised value of 7.5% and include a mix of buildings fully occupied by government and private tenants. Learning the highlights in the second quarter. Nationally, performance within the office sector remains in a period of transition with some recent bright spots related to increased leasing volume, improving office utilization, and a slowing of new sublease space. Conversely, the financing and transaction environment both remain challenging. Tenants continue to rationalize their space needs, resulting in a mix of renewals, downsizing, and relocations, and national office vacancy is at a high of nearly 20%. We believe there will be continued improvement in some of these areas as return to office mandates continue to unfold, new supply continues to decrease, and monetary policy on interest rates stabilize. OPI's portfolio occupancy for the second quarter was 90.6%, an increase of 120 basis points year over year and up 10 basis points over the third quarter, supported by new leasing activity and the disposition of properties with higher vacancy. The new property cash basis NY came in better than projected, and normalized FFO per share exceeded both the prior quarter and the high end of our guidance range. Tenant utilization across our portfolio is trending above the office national average, a positive sign with the evolving return to office outlook. We also reached an exciting milestone with substantial completion of our 427,000 square foot mixed use redevelopment at 20 Massachusetts Avenue in Washington, D.C., which is currently 54% pre-lease. Turning now to our second quarter leasing results, we completed deals for 713,000 square feet of new and renewal leasing, comprised mostly of long-term leases with an average lease term of 10.3 years and a roll-up in rent of 3.7%. Total leasing volume for the quarter increased sequentially more than 250%. reflecting a meaningful acceleration from the seasonally lighter first quarter and representing OPI's highest volume in over three years. Approximately 80% of this activity was with tenants in the real estate and financial and the technology and communications industries. Concessions and capital commitments declined both on a sequential quarter basis and year-over-year to $5.53 per square foot per lease year. We ended the quarter with investment grade rated tenants representing approximately 63% of annualized rental income. Turning to highlights from the second quarter leasing transactions. In Duluth, Georgia, just northeast of Atlanta, we executed a full building lease renewal for the tenant's headquarters representing 344,000 square feet at a modest roll-open rent and a lease term of approximately 12.5 years. We renewed a full building lease for 93,000 square feet in Austin, Texas, occupied by a global technology solutions company at rates that were largely unchanged and a lease term of approximately 5.6 years. In Santa Clara, California, we renewed a full building lease for 66,000 square feet with a technology networking tenant for an 11-year term and a rental rate increase of over 9%. and we signed a new lease with a healthcare contractor in Lincoln, Nebraska, for over 100,000 square feet at a modest for open rent in a 10.5-year term. Looking ahead to OPI's upcoming lease expirations, we continue to actively manage through leasing efforts to address lease expirations during the second half of 2023 and beyond. Subsequent to quarter end, we completed over 300,000 square feet of leasing activity, including a short-term extension and downsize with our tenant in Washington, D.C., representing 2.1% of annualized revenue, previously communicated as a known vacate in 2023. Our leasing pipeline includes approximately 2.7 million square feet of potential leasing activity, with nearly 1.5 million square feet attributable to new leasing, and 800,000 square feet of potential absorption, providing a year-end occupancy outlook of 87 to 88%. Turning to our development projects, We reached an important milestone with the substantial completion of 20 Mass Out in Washington, D.C. at the end of the quarter. This 427,000-square-foot trophy Class A mixed-use property is 54% leased to Royal Sonesta Hotel, which plans to open to new guests in September. Tour activity has been encouraging with close to 100,000 square feet of active proposals. We have approximately $48 million remaining project costs, a portion of which will be utilized during the back half of 2023 toward construction and the balance in future years to achieve stabilization with leases. Our life science redevelopment in Seattle, known as Unison Bay, remains on track to deliver during the fourth quarter of this year. The project is 28% pre-lease with approximately $64 million remaining for completion of construction and for use towards stabilization with leasing. We continue to field multiple prospects for both lab and office users with close to 45,000 square feet of active proposals and anticipate a ramp-up in activity toward the back half of the year as our spec lab suites are completed. In summary, we had an active quarter for OPI and are pleased with our trending out across the portfolio. Despite office headwinds, we ended the quarter with leasing volume representative of the highest levels in three years, are encouraged with the elevated utilization rates across the portfolio and continue to track on execution of our previously communicated initiatives. I will now turn the call over to Matt to review our financial results.