Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust second quarter 2024 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 second quarter of 2024. followed by a question and answer session with sell-side analysts. 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, August 1st, 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 revisions of 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, 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 Yael.

Thank you, Kevin, and good morning. I will start with an overview of our portfolio, review second quarter leasing results and upcoming lease expiration before providing an update on our property dispositions. Before I begin, I would like to highlight that in the first half of the year, OPI completed $1.3 billion in secured financing. Most recently, in June, we finalized a private debt exchange that reduced OPI's total debt by nearly $300 million, while reducing our upcoming 2025 debt maturities from $650 million to $499 million, which Brian will discuss later on this call. Now turning to the quarter. OPI's portfolio consists of 151 properties totaling 20 million square feet with a weighted average remaining lease term of over six and a half years. Our portfolio generates $483 million of annualized revenue and is diversified by industry and geography with over 60% of our revenues coming from investment grade tenants or subsidiaries. We ended the quarter with same property occupancy of 89.9%. Through our secured financing initiative, 62 properties totaling 10 million square feet within our portfolio are encumbered under our debt agreements. On a consolidated basis, encumbered assets account for $286 million of annualized revenue, our 94% lease, and have a remaining weighted average lease term of nearly eight years. Our unencumbered assets portfolio consists of 89 properties totaling 10 million square feet, provides annualized revenue of approximately $197 million, are 73% leased, and have a weighted average lease term of 4.6 years. As we have shared previously, our known vacates in 2024 and 2025 are heavily concentrated within this portfolio of assets and will negatively impact our results in the coming quarters. In the second quarter, we executed 208,000 square feet of new and renewal leasing, which resulted in a weighted average lease term of four years. Renewals drove almost 90% of our leasing activity, including a short-term extension with an insurance provider in Washington, D.C. for 62,000 square feet at a 3% roll-up in rent and a five-year renewal with the GSA in Phoenix, Arizona for 32,000 square feet at a 6% roll-up in rent. Subsequent to quarter close, We renewed a 554,000 square foot lease with an investment grade single tenant user within our encumbered portfolio that was scheduled to expire in 2026. While we had previously forecasted that this renewal would happen, we are pleased that it has been finalized and the property will be long-term leased into 2037. Looking ahead to OPI's upcoming lease expiration. The office sector continues to face headwinds associated with the impacts of work from home as well as macroeconomic and political uncertainty. Throughout the country, we face pressure in our releasing efforts with minimal tenants in the market to absorb large blocks of vacant space. Most markets are experiencing negative net absorption, declines in asking rents, and heightened competition. Washington, D.C., where OPI has its largest concentration, has a market vacancy rate of over 22%. The upcoming election creates additional volatility as government tenants are hesitant to engage in long-term space planning discussions given the uncertainty surrounding return-to-work mandates. Our 20MASA app development which sits in the Capitol Hill sub-market, has not been immune to these challenges. The office portion has seen limited leasing interest, especially in recent months, and we are evaluating next steps required to maximize value. However, despite an investment to date of nearly $300 million, we believe, based on broker opinions of value, that the property would trade for under $100 million if we are to pursue a sale. In the second half of 2024, 1.8 million square feet is scheduled to expire, with an additional 2 million square feet expiring in 2025, comprised predominantly of properties leased to single tenants. And we have long telegraphed. 1.7 million of the 1.8 million square feet expiring in 2024 will not renew, and we currently expect an additional 1.3 million square feet will also vacate in 2025. In total, known vacates over the next 18 months account for $70 million of annualized revenue, or 14.5% of OPI's total annualized revenue. The U.S. government represents the highest percentage of these known vacates, accounting for 32% of annualized rental income, followed by the financial sector at 26% and the technology sector at 20%. Within the government sector, none of the properties being vacated are specialized building facilities or serve mission-critical needs for government agencies. Over time, we expect the non-specialized portion of our government revenues will continue to decline as the GSA seeks to consolidate office space into government-owned buildings while reducing its reliance on leased properties. Our current leasing pipeline totals 2.2 million square feet, of which approximately 26% could result in positive net absorption. We plan to mitigate the impact to occupancy and associated carry costs through property disposition. While many of our single-tenant properties that have become vacant could be converted to multi-tenant, the cost and downtime would be significant, which would put a further burden on OPI's liquidity. Office dispositions are challenging in this economic environment. where property valuations have been negatively impacted since the pandemic and financing is not readily available to buyers. At OPI, we face additional obstacles given the properties we are marketing for sale are vacant or soon to be vacant, which further reduces the pool of potential buyers. Additionally, as we evaluate any sales, we must consider the impact the potential disposition will have on our operating metrics and debt covenants. Given these hurdles, we are pleased to report that we currently have 12 unencumbered properties totaling 1.4 million square feet under agreement to sell for an aggregate sales price of $93.5 million. This group of disposition assets has a total occupancy of 54% with a remaining lease term less than three years. We hope to close on these transactions by year-end. While we have identified additional properties for disposition, our projection for disposition proceeds in 2024 remains at the $100 million we referenced last quarter due to the challenges in the market I have described. As we look ahead, We remain focused on tenant retention, attracting new tenants to our properties, executing on our property dispositions, and continuing to evaluate strategies to navigate OPI's upcoming debt maturities. With that, I will now hand the call over to Brian to review our financial results.