Office Properties Income Trust

Good morning, everyone, and welcome to the Office Properties Income Trust third quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then 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 withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior 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 Executive Officer, Chris Bellotto, and Chief Financial Officer and Treasurer, Brian Donnelly. In just a moment, they will provide details about our business and our performance for the third 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 a Private Securities Litigation Reform Act 1995 and other securities laws. These forward-looking statements are based on OPI's beliefs and expectations as of today, Tuesday, October 31st, 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 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. Thank you for joining us today for OPI's third quarter 2023 earnings call. I would like to start by welcoming Brian Donley, who joined OPI as our Chief Financial Officer and Treasurer on October 1st and brings more than 25 years of accounting and finance experience in the commercial real estate industry. On our call today, we will cover various trends within the office sector and our portfolio, provide an overview of OPI's initiatives as a standalone company following the termination of the proposed merger with DHC, and provide a summary of our third quarter operating and financial results before we open the call to questions. Turning to highlights, normalized FFO came in at $1.02 per share, beating the high end of our guidance range. We executed 586,000 square feet of new and renewal leasing, primarily with state government tenants and tenants in real estate, financial, and energy services industries. Portfolio occupancy was approximately 89.9% at quarter end, a 70 basis point decrease compared to the prior quarter, and largely due to a known downsize of our primary tenant located at 841st Street in the DC MSA. We sold one property for $10.5 million bringing total asset sales to $23.6 million for the year. As we approach the end of the year and look ahead to 2024, we remain focused on OPI's upcoming lease expirations and existing vacancies, along with our maturing credit facility and other debt maturities. Supporting this, we have an active leasing pipeline of close to 2.8 million square feet, 650,000 square feet or approximately 25% of which is associated with 2024 renewals and close to 735,000 square feet of potential absorption in early stages of negotiation. Collectively, pipeline deals include weighted average lease terms ranging from 5 to 10 years and an overall rent rollout. More broadly, leasing across the sector remains challenged with elevated vacancy and sublease levels. However, we remain encouraged with efforts supporting return to office mandates across industries. And at OPI, we continue to see an improving outlook with estimated utilization close to 70%. Year to date, we completed more than $177 million of property level mortgage financing with plans to continue evaluating similar financing opportunities, which Brian will expand on in more detail. Lastly, while the investment sales market has been slow this year following this deep increase in interest rates, and more specifically, credit on office assets has been especially tight, we are evaluating properties with fundamentals that we believe may have a high probability of execution to ramp up on our capital recycling program. Currently, we are under agreement to sell two buildings reflecting 177,000 square feet and proceeds of $21.3 million. We have a couple of properties where we are in active conversations with prospective buyers and have plans to bring additional properties to market in the coming months. Turning now to more detail on our third quarter leasing results. We completed 29 deals for 586,000 square feet of new and renewal leasing with an average lease term of 7.4 years and a rent roll down of 2.7%. Our total volume for the quarter came in above our average rate during the preceding four quarters. New leasing represented 104,000 square feet and a roll-up of 1.9% and a weighted average lease term of 9.5 years and increasing total activity for the year to more than 390,000 square feet. Concessions and capital commitments declined year-over-year to $5.89 per square foot per lease year and slightly below our quarterly average over the past year. Overall, our portfolio remains well diversified by industry and geography with a weighted average lease term of approximately six and a half years and investment grade rated tenants representing 64% of annualized rental income. Turning to third quarter leasing transactions. In the Sacramento MSA, we executed three lease renewals across three separate properties occupied by the state of California for a combined 260,000 square feet with a weighted average lease term of close to eight years. In Rockville, Maryland, we renewed and upsized the lease with a private sector energy company for a combined 74,000 square feet for a lease term of 5.5 years. We also completed a short-term extension and downsize with our tenant in Washington, D.C., previously communicated as a known vacate. This downsize decreased the tenant's annualized revenue contribution from 2.1% to 70 basis points. We are actively marketing the space, and have several proposals out to tenants ranging from 50,000 square feet to 250,000 square feet, all of which are in early stages of discussion. In July, we received notice from Tyson's Foods that it exercises lease termination option at 400 South Jefferson Street in Chicago, Illinois. The effective termination date is January 2025, and the tenant will pay a fee of approximately $8.6 million. The property underwent a complete redevelopment in 2012 and is within blocks of all major transportation hubs. It offers an abundance of amenities, including training and conference centers, a rooftop terrace, fitness facility, and is LEED certified. We are currently evaluating a range of options for the property, including leasing or a potential sale. Looking ahead to OPI's upcoming lease expirations. We are actively engaging with our tenants to renew leases and convert prospects in our pipeline to fill vacancy. Lease gestation periods remain protracted compared to a few years ago, although we are increasingly seeing tenants with large space requirements come to the table well in advance of lease expiration to engage in conversations. During 2023, lease expirations for the remainder of the year represent 5.6% of annualized rental income, of which 3.8% are known vacates excluding those considered for sale, most of which are with tenants previously communicated within our 2023 retention statistics. Larger known vacates for Q4 include a state lease in the Boston MSA representing 90 basis points of annualized revenue and the GSA vacating three buildings in the Atlanta MSA reflecting 130 basis points of annualized revenue. We are actively marking each of the properties for lease with varying levels of activity. In 2024, lease expirations represent approximately 12% of annualized rental income. Currently, we have just over 2% in advanced stages of renewal and are in active conversations with several other expiring tenants. However, we anticipate continued pressure on retention as tenants evaluate their space needs. Turning to our development projects. During the quarter, we completed and delivered to Senesta the hotel portion of our Class A mixed-use development at 20 Mass Ave in Washington, D.C., This project is 55% leased, and we continue to work through varying levels of tour and proposal activity. Earlier this month, we were pleased to have been awarded Best Renovation by the NAEF DC Maryland Chapter for this project. At our Life Science Redevelopment in Seattle, we continue to advance construction and plan for delivery in phases with final completion anticipated for Q1 2024. The project is 28% pre-leased to Sonoma Biotherapeutics, and we plan to deliver the project with four movement-ready spec lab suites serving as a differentiator as tenants evaluate options and timing for movement. Collectively, for the two projects, we have roughly $88 million in remaining capital spent. We estimate $25 million to $30 million will be spent by the end of Q1 2024, and the balance will be spent as leases are executed through stabilization over the next few years. I will now turn the call over to Brian to review our financial results.