Office Properties Income Trust

Good morning and welcome to the Office Properties Income Trust third quarter 2024 earnings conference call. All participants will be listed on remote. 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 like to turn the conference call 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 third 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, October 31st, 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, opireap.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 on 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 provide an update on the progress we have made to navigate our upcoming debt maturities. In the first half of the year, we completed $1.3 billion in secured financings and reduced OPI's total debt by nearly $300 million. Since last quarter, we exchanged $42.5 million over our outstanding unsecured senior notes for new secured senior notes and common shares. These strategic actions have allowed us to reduce our 2025 debt maturity by over $192 million from $650 million to approximately $457 million. Additionally, we are focused on enhancing our liquidity. We sold six properties for $46 million in the third quarter and drew the remaining $125 million of capacity under our credit facility earlier this month. We have been negotiating a potential debt exchange transaction with a group of our 2025 node holders. However, we cannot say with certainty whether we will be able to execute on a refinancing transaction and satisfy the debt prior to the February 1st, 2025 maturity date. Now turning to the quarter. I will start with an overview of our portfolio, review third quarter leasing results and upcoming lease expirations before providing an update on our property dispositions. From there, I will turn the call over to Brian to review our financial results. OPI's portfolio consists of 145 properties totaling more than 19 million square feet with a weighted average remaining lease term of approximately seven years. We ended this quarter with total portfolio occupancy of 82.8% and same property occupancy of 89.3%. Our portfolio generates $453 million of annualized revenue and is diversified by both industry and geography with nearly 60% of our revenues coming from investment-grade rated tenants or subsidiaries. As of today, 62 properties totaling 10 million square feet that account for nearly $287 million of annualized revenue or 63% of our total portfolio revenue serve as collateral under our existing debt agreements. OPI continues to face challenges due to shifts in office space utilization, such as increased remote work and tenants consolidating their real estate footprint. Within our portfolio, these challenges have had a disproportionately negative impact on our unencumbered portfolio, where the majority of OPI's known vacates in 2024 and 2025 are concentrated. Accordingly, we are focused on retaining tenants at our property. During the third quarter, we executed 14 leases totaling 987,000 square feet, with a weighted average lease term of 10.2 years. Renewals drove the majority or 96% of our leasing, including a 554,000 square foot lease with Bank of America at a 2% roll up in rent and then 235,000 square foot lease with AT&T at an 11% roll up in rent. Both were for single-tenant lease properties that serve as collateral to our $567 million senior secured notes due 2029 and were previously forecasted to occur. As we have long telegraphed, 3.1 million square feet is scheduled to expire through December of 2025. Known vacates during this period account for $53.2 million of annualized revenue or 11.7% of OPI's total annualized revenue. While our desired outcome would be to release these vacancies, many are large single-tenant properties which face challenging market conditions as tenants vacate. Additionally, significant downtime, decreasing market rents, and increased tenant improvement and concession packages would put further burden on OPI's liquidity. We plan to mitigate the impact to occupancy and associated carry costs through property dispositions. OPI's multi-tenant properties, which represent 38% of our portfolio, are experiencing greater tenant demand, especially of properties where common area and amenity upgrades have recently been completed. In the third quarter, all seven of the new leases we executed were multi-tenant properties, and 65% of our new leasing pipeline is within multi-tenant properties. Turning to our disposition activity, we remain focused on selling properties that will increase our liquidity as well as reduce the carrying costs associated with vacant properties. However, sales remain challenging in this market as valuations within the office sector remain depressed and financing is not readily available to buyers. Additionally, the pool of potential buyers for vacant or soon-to-be vacant properties is generally limited to opportunistic value-add buyers or developers. In addition to the six properties we sold in the third quarter for $46 million, we are under agreement to sell an additional 17 properties totaling 1.6 million square feet for an aggregate sales price of $119 million. However, based on our own experience, we cannot be certain that these properties will sell at the prices currently projected or at all. Before I turn the call over to Brian to discuss our financial results, I would like to reiterate that we are equally focused on evaluating strategies to navigate OPI's upcoming debt maturities while simultaneously operating and leasing our properties. Brian?