Office Properties Income Trust

Good day and welcome to the Office Properties Income Trust fourth quarter 2023 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, Senior 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, Yael Duffy, and Chief Financial Officer and Treasurer, Brian Donley. In just a moment, they will provide details about our business and our performance for the fourth 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, Friday, February 16, 2024, 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 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, 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 Yael.

Thank you, Kevin, and good morning. Before we begin, I would like to start by discussing the announcement last month regarding OPI's quarterly cash dividend. As market conditions in the office sector remain challenging, we felt it was prudent to reduce the dividend to increase our liquidity and financial flexibility. This will help us address future leasing costs, capital expenditures, and our upcoming debt maturities. We recognize the value of the dividend to our investors and this decision was not made lightly. On today's call, I will review OPI's operating and leasing performance before providing an update on our goals heading into 2024. From there, I will turn the call over to Brian to review our financial results. OPI's portfolio consists of 152 properties totaling approximately 20 million square feet with a weighted average remaining lease term of six and a half years. Our portfolio is well diversified by industry and geography with 64% of our revenues coming from investment grade rated tenants. During the fourth quarter, we executed 196,000 square feet of new and renewal leasing with an average lease term of seven years and a roll-up in rent of 60 basis points. We ended the quarter with same property occupancy of 89.5%. Renewals drove most of our leasing activity this quarter, including an eight-year renewal with an insurance company for 100,000 square feet in San Antonio, Texas, and a six-year renewal with an aerospace government contractor for 80,000 square feet in Chantilly, Virginia. Concessions and capital commitments declined 12% quarter over quarter and were 21% lower than our average for the year. We hope to see these trends continue as we head into 2024. In total, we signed 75 leases in 2023 for nearly 1.7 million square feet at a weighted average lease term of eight and a half years. New leasing accounted for 402,000 square feet, or 24% of the activity. Looking ahead to 2024 and OPI's upcoming lease expirations. While we see evidence of large companies across corporate America urging workers to return to the office, including in-person mandates, the office sector faces subdued demands driven by headwinds associated with macroeconomic uncertainty and the impacts of work from home. Most markets experienced declines in asking rents and occupancy levels in 2023, and we expect this trend to continue into 2024. Additionally, Competition among landlords has put further pressure on net effective rents. In 2024, 3 million square feet, or 15.5% of OPI's annualized rental income, is set to expire. Our leasing and asset management teams are proactively engaging in renewal discussions with our tenants to understand their space needs. Through these conversations, we have learned that approximately 1.9 million square feet representing $53.8 million of annualized rental income will not renew. Accordingly, we have engaged leasing brokers and have launched marketing campaigns to address these vacancies. Our current leasing pipeline totals 2.8 million square feet, of which 40% is attributable to new tenants. Turning to our recent development projects. Our 427,000 square foot mixed-use development at 20 Mass Ave in Washington, D.C. is 55% leased to Sonesta International Hotels, and we are actively marketing the remaining vacancy. To date, we have toured over 20 tenants ranging in size from 15,000 to 150,000 square feet. However, as many of these tenants have requirements in 2025 and beyond, Feedback has been slow. In the first quarter of 2024, we expect to deliver the three-property campus redevelopment located in Seattle, Washington, totaling approximately 300,000 square feet. The project includes the repositioning of two properties from office to life science and maintaining the third property for office use. The project is 28% pre-leased to Sonoma Biotherapeutics, and we are actively marketing the remaining vacancy with good activity. The project will be delivered with four move-in ready spec lab suites, which we believe serves as a differentiator as tenants evaluate options in the market. Turning to financing activities. To begin the year, we have made significant progress addressing our upcoming debt maturities. At the end of last month, we recast our revolving credit facility that was scheduled to mature on January 31st with a new three-year, $425 million credit agreement. Additionally, last week, we completed a five-year, $300 million secured bond offering at a 9% coupon and announced the redemption of our $350 million senior notes maturing in May 2024. OPI has $650 million of unsecured senior notes due in February of 2025, and we are assessing a range of options to address this maturity, including additional secured financings and asset sales. To assist us in evaluating our potential financing strategies, we have engaged Mullis & Company as a financial advisor. Turning to property dispositions. In 2023, we sold eight non-core properties, which generated $45 million in gross proceeds. Additionally, we have a 248,000 square foot property in Chicago, which Tyson Foods is vacating in January, 2025 under agreement for sale. We anticipate this property will transact in the first quarter of 2024. Furthermore, we have identified and are in various stages of bringing additional properties to market. As we evaluate future sales, we will need to consider the impact that potential dispositions will have on our operating metrics and debt covenants. Before I turn it over to Brian, I would like to acknowledge that OPI, despite challenges facing the office sector, accomplished many of its objectives in 2023 and to start the new year. We executed nearly 1.7 million square feet of leasing, substantially completed two major development projects in Washington, D.C. and Seattle, sold non-core assets, and successfully executed new financings in both the CNBS and bond markets. Our progress was greatly supported by the efforts and reach of our manager, the RMR Group, with its deep bench of experienced real estate professionals and its banking relationships. Looking ahead, we hope to continue to build on this momentum and further execute on our operational and financial priorities in 2024. I will now turn the call over to Brian to review our financial results.