Office Properties Income Trust (OPI) 1 May 202020 Q1 Earnings call transcript

Good morning and welcome to Office Properties Income Trust First Quarter 2020 Financial Results Conference Call.

At this time, for opening remarks and introductions, I would like to turn the call over to Olivia Snyder, Manager of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us today. call Chief President Matt Financial Vice Chris the Officer, Chief Brown; on President, Blackman; David Officer Bilotto. me are and OPI's Executive and With and Treasurer, business will of quarter followed by with details they the session XXXX moment, question-and-answer analysts. a performance for just about In our sell-side and a our first provide

that, that Act Securities contains First, Litigation OPI's I XXXX Private of conference that XXXX, materially laws. of is securities statements without we These expectations those prohibited results note and Company. statements call Reform today, meaning written the on and of consent project. of based call recording actual would and the like May today's Also X, the differ and within note the other are Friday, as forward-looking forward-looking may beliefs to today's retransmission conference prior the of from

obligation The of the revision to results Company or call. undertakes the made conference no publicly release any today's statements to forward-looking revise in

factors statements. Additional accessed from differences and the SEC, upon to be can that place with cautioned is which are Exchange website, forward-looking Commission, undue information opireit.com, Securities Investors filings our could any SEC's our or the concerning not in or contained those website. reliance cause

basis In operating including cash net income our package, in operations cash cash or during available which of or adjusted will available on CAD, be basis these discussing normalized income, are can website. found NOI. to A supplemental for this addition, net figures we financial normalized also operating non-GAAP our non-GAAP and and data reconciliation numbers EBITDA FFO, be call, funds from distribution or

including basis be will providing call, normalized and FFO cash we NOI. addition, guidance on In this

our or related of as certain reconciliation non-GAAP all, figures charges guidance efforts such required real not gains unreasonable such available to providing of for at or the not losses impairment estate. part a are is reconciliation because as and We without information these of disposition

that, location. due to to David, unable to today’s same order, we would are conduct the call the to turning shelter-in-place I the Before Massachusetts note like over from call

may there is a delays As as our David? as result, may some clear question-and-answer there normal. during a be risk audio be not our session and

earnings Thank Welcome Properties you, Office first Trust. Income quarter Olivia, good for to call the morning. and

of unemployment the dramatically the the all of has and of way sizes call, XXXXs throughout COVID-XX and economic the you businesses the has war joined The most price claims conduct nonessential since economy. brought seen Like business. today's has businesses on not the U.S. in changed across pandemic record we global impacted disruption resulted the oil by adversely closing

past I've our the wellbeing the and how have it. my strength worked XX of and family, continuity of businesses, stakeholders of but As survive not OPI to economic this these positioned remotely organization only take comfort likely of shock, in on we the I days, out the to RMR tenants, coming health and focus our thrive

than paid grade XX% likely the highest paid tenant over Five, BaaX all expect annual minus, April a by including Eight, cash is $XXX both to period, has are of paid for rent, and of office of several annualized BBB July, OPI be stable assistance rent in the by million hardest by the grade full the targeted leverage approximately our have annualized XXXX to our our at million below to XX% million until Considering $XXX lease OPI equal X.X% debt tenants for of debt-to-EBITDA have minimal in by equal full rents $XX of only tenants OPI that that tenants. and OPI has our tenants below of have basis month well by also the the with minimal contractual X times, X.X granted a of range with through spending below with portfolio percentages office low There and gateway limited recession. a recently availability be affirmed low top revenue at investment our revolving with our central. OPI expectations, sector quarter to Four, rents industries of payout has which payout deemed rated only debt is almost XX of Six, ratio ratio facility, government investment OPI will CAD with year, well-diversified Seven, to paid eventually basis geographically our for be expirations has will coastal economic XX%. markets rent. of perform XX an properties, tenants of hit liquidity adequate points in exposure was ratings credit what factors has will remainder One, maturing. only been position XX.X% that OPI’s approximately target. OPI's rents. been pandemic our operating one more year minimal maturities of outlooks. first capital our times. on our the X.X Two, unsecured annualized has OPI our below to sector we net payout industry our Three, under XX.X%, of at targeted of ratio the and

per a results square and in In excellent NOI highlight X.X% detail further XXX was summary, consensus year-over-year. Chris share, basis and XXX,XXX Matt almost feet OPI's normalized that prepared which estimates. $X.XX almost will increased loss FFO the provide their Consolidated cash completed of rent. new same for beat quarter. remarks and more points basis occupancy increased renewal We X.X% first in property year-over-year, leasing for will

program As completed a reduce XXXX. to at year-end OPI's leverage was disposition reminder,

we under and budgeted eliminated the in properties six a than age we of $XX first the closed approximately contribution yield than feet square all five-year fourth quarter XX%, sold completing cash we results, sales six average on quarter program. the more capital had average and when of properties X.X%. of reported sale contained of average million XX years occupancy during addition, years, XXX,XXX more of under of million asset of an at successfully lease years five over recycling weighted agreement The a In our resulted $XX term average capital

Once program. remain we such priced opportunities market, until will as appropriately today's dormant our risk. will see capital reinvigorate that liquidity time are returns economic recycling Likewise, for interesting our the we acquisition to program

the RMR final our in to One our save property of tenants. balanced been detail note are tenants, for open. operational and numerous operating our is prepared of that implemented has XXX% protocols are in our cases give remarks, Chris our to This our managing to will property to lightly available property costs expenses most utilized. keep buildings has and manager greater but but as his buildings health protect order staff in safety management with being

review leasing operating that, turn financial call Matt activity results to Chris over With to by the the balance and and review to followed sheet. I'll Chris?

everyone. Thank you, and David, morning, good

as balance strength the benefit As our manage us, we portfolio and economic of sheet current challenges. should the David highlighted, through

While it pandemic, determine implications largely COVID-XX our quarter. to was during difficult is first the the of business duration unaffected and the

OPI's events economic COVID-XX. believe us us such helps portfolio which we characteristics, from of several had as sustain volatility insulated keeps during largely and times

we tenancy tenants. communications up makes portfolio. lower feet XX.X% tenants, XX,XXX made Other which As of rated which legal, consider technology, touched up less while government square XX.X% risk than our grade investment portfolio, on, by paid of large includes is include risk of industries co-working our and in portfolio our David higher

essential And and to cases in helping in security Further, with needs attribute involved geographically transit tenants retention. tenants our are is services up those annualized our of Our properties infrastructure roughly annualized therefore and industry. many the revenue. and such their make diverse drive goods revenue XX% by considered of enhanced building our low-risk as complement access of XX% employees, or

lease X.X with XX.X%. As of quarter occupancy of term the weighted end, portfolio's years is average

implications to related to COVID-XX. Turning

a to will are to our grant we have position believe XX preserving to-date, hardship reevaluate also approach rental greater Tenants discuss are business tenants is of business, consideration tenant requests our in who reviewed experiencing the on tenants to the rent assurances basis, assistance, In statements in general for case-by-case support month giving we required repay deferrals. with Matt defer through over partnering while As of CARES period participation form retention collection, long-term Act. and the a thus the a assistance more for one are XX-month granted portfolio financial plan to as assistance and and rent this a financial for total deferral for those provides beginning event We to of rent Tenant relationships, managing COVID-XX the fall. their time detail, at needed. to this success stability.

total annualized and are less of generally have amenities. located XX tenants floor who of than been building restaurants, higher on our ground the ground retail X tenants up granted our are risk retail of the X.X% make or These assistance revenue. floor

RMR various we both industry risk, and considering around factors the few. industry review tenant a risk credit Through geography, teams, and Group's financials, while to name routinely

roughly by earlier, grade those of XX% noted are portfolio for the considered low-risk. annualized investment industries as rated. tenants of approximately high-risk, As by XX% identified And industry the revenue is

moved country to remain XXX% orders, properties of communities shelter-in-place have the across As operable. our

in and the common operational include, to restrooms; shutdown protocols such system engineering non-essential third, Example cleaning to as RMR reduction areas COVID-XX reduction providing these of non-emergency conference employees to safety reducing and interaction; and limit management on trash on costs HVAC with lastly, building work in were of amenities given prioritization an protocol the such the points building RMR first, procedures; temporary tenant the of fourth, protocols, fitness established while and implementation usage. centers the on tenant tenants protocols costs removal; sanitizing employees, and high-touch ensure have We focus the of also reduction as precaution of and of energy unnecessary second, our of focus enhanced services mitigating frequency a all facilities. trained employee orders employee and

RMR location protocols travel properties. And has to guidelines, personal at to protective same equipment suspended. spread our the established teams personnel have the social not implementing required of and operating the working business COVID-XX addition operational all stability plans to still Non-critical been our manage our prevent in Regional work at same In at have employees to allowed been to enhanced properties. ensure and management distancing on is time. leadership continuity

tenants. our than continue our collect with properties, around RMR’s allowed of information has relationships maintain quality realtime to and and to platform of us the management changes evolving more communications offices across country strong XX

our while ensure of our pandemic manage and continuing safety of work we for procedures to also protocols are and tenants, buildings. evaluating reoccupancy Finally, post environment employees to

for leasing Turning to the our quarter. results

a leasing aggregate slowdown of we for While in XXX,XXX new and see discussions we results positive leasing leasing are an renewed completed the and towards delivered begun We a new first feet to quarter. in have tenants renewal square square continuing, per of portfolio foot per roll-up average years, concessions term the rent points X.X%, capital to basis for of average and leasing weighted X.X XXX lease and increased a year-over-year $X.XX Total and has lease. XX.X%. weighted occupancy commitments activity, of

feet anticipate stages current of given proposal across is the square space vacant absorb square in leasing portfolio. current a $X.X or conversion our near-term advanced pipeline Our of a of lease that documentation XXX,XXX million XX% that pipeline, feet XXX,XXX includes square of review. roughly the could activity signed We feet of

Despite an the may active second activity quarter lease pipeline, slow. anticipate new lease for we

as which impact X% During basis, target delay a roughly XX% from to therefore decision points a believe same-store and We our in fourth rent occupancy quarter XX% call, with the our to leasing to of XXX XXX occupancy of tenants’ we space near-term may year-end basis to of speculate roll-up year-end provided target guidance a at-risk. COVID-XX on included X%.

Before OPI Award we management. received efforts the announced I in month a Partner energy financial This highlight Year certified. energy our we Sustained move achieved will the of we its ENERGY of ENERGY last that that earning Year in Excellence STAR STAR a are XXXX year for outstanding our management the that into is year Sustained category. XX third designation portfolio buildings the have the recognition Currently, consecutive first Partner and Excellence in review,

of and the the STAR RMR a Group the a year for manager, in outstanding service product second efforts Award ENERGY a Our also honored its Year XXXX with provider was as Partner row. for

provide and to on this the will over Brown quarter’s details turn financial Matt? now our to I results. call liquidity Matt

good And Chris. everyone. morning, Thanks,

both and Chris David are COVID-XX the carefully and possible liquidity. impacts to As our pandemic highlighted, we monitoring results and our

trends April obligations over with rent of XX% and rent collections with consistent months prior remained the collected. strong

tenants April obligations. rental top Our annualized paid XX their have of our XX.X% rent income representing

these XX each in date $XX,XXX XX of in the deferrals As June of to in deferrals In XX, represent rent contractual rent deferrals is down deferred $X.X to revenue amount payments and one tenants. follows: of July. beginning rent broken XXXX. base temporary million, X.X% as cash for aggregate, we that April; $XXX,XXX include May; of and $XXX,XXX The period. of exchange over of these Generally, April total the fall month granted monthly have in increased in

be this accounting relief our are deferrals to these do rent payment As we rent related deemed plans, recent requests, the impact assistance to with to guidance consistent revenues. not expect

flows. will rent it reduce has no However, temporarily been evaded. To-date, our cash or forgiven

adjusted million which had credit million times, net until XXXX. and our target March of $XXX credit EBITDAre cash consecutive revolving and annualized and for of facility revolving of our We debt currently we availability facility. to of liquidity, XXst, have X.X debt $XXX $XX our only March below was XXst, of million the leverage $XX At cash including remains our maturities second availability million unsecured $XXX million At $XXX on range on equivalents million quarter.

real ample have estate the weather Our balance current facing liquidity and to sheet we disruptions industry. the remains strong

FFO below financial following which consolidated of forecast; reasons, beat $X.XX in to income was share $X.XX estimate decrease share to vendor Normalized $XXX,XXX due a per per property or million with quarter the share. operating $XX.X coming guidance for removal not to was of in for per of Normalized our a related share, dispute $X.XX of forecasted. the consensus $X.XX quarter. to settlement FFO first mainly exceeded our per that $X.XX Turning expenses snow costs share, the or $X.XX a per results for

in to to A Market credit management estimate within [ph] of on our in as share LIBOR; due price disruptions expense COVID-XX share as in G&A a in per a share impacted of a decline fees revolving decline reduction $X.XX our business interest $X.XX per result in expense follows: due facility March. a reduction

a dividend,, million previous XX.X%. of April, CAD $X.XX payout first in our quarter for the was share or maintaining declared per resulted ratio $XX.X CAD In share, a per we which level. $X.XX

we XXXX. and well remains to of for covered, the well covered dividend it Our remain remainder expect

properties amortization property of the sale since proceeds to January depreciation operating $XXX.X million and of as for to compared expenses Rental income, declined XX and due XXXX all QX XXXX. X, aggregate

the paid expense is G&A increase lower by expense G&A in result business to share million January to XXXX. of X, of compared was The quarter quarter G&A XXXX, partially in average management price. first decline million to dispositions first levels RMR, expense debt the since OPI's mainly an fees lower $X.X for of the from $X.X property for offset due

result compensation XXXX. the to who our QX higher increasing on In and number retired from in of of unvested amounts we addition, incurred acceleration QX in of Board trustees SIR’s share-based a the XXXX, as of CFO shares serves RMR former

is management We a based As built and a our assets strong RMR. or under management interest represents business fee paid currently of reminder, of this on our market management believe shareholders being on lesser into calculation capitalization market total capitalization. with contract is with the alignment paid total

result in term XXXX interest mainly unsecured X, million $XX.X senior the since and $XXX of $XX.X since Interest QX decline note loans expense is of million was million, of first of interest repayments the $XXX for in July first quarter The of XXXX. repaid expense XXXX. quarter expense to the compared million

level expenditures. results property to and Turning capital

compared We property first on increased $X.X of snow basis spent $X.X the first including savings, capital down and For beat flat range in building removal of decreases expense the on by recurring first during the quarter, X%. XXXX, cash by costs million $XX.X capital. offset premiums. increases quarter guidance was partially on NOI The driven in and to improvements insurance utilities, leasing XXXX, notably increase million property million mainly same most which of quarter our X.X%, to

which $XX.X obligations is by million improvement our years. XX% $XX.X and million As designated leasing unspent future allowances tenant leases for represents and approximately leasing-related quarter-end, of tenants capital capital of managed of we had

$XXX current result expect forecast, COVID-XX of from is initial speculative on changes XXXX to to Based which million, expenditures approximately our recurring we the projects of of mainly timing as a our the capital, capital be capital in due down pandemic. million, and leasing $XX forecast

the per We to normalized currently $X.XX not the pandemic. and quarter second COVID-XX for of expect FFO We results between impact be the from share $X.XX expect our XXXX. material to do

potential lease acquisition result, or excludes excludes a loss tenant result and obligations could activities. that any estimate this bankruptcies As on defaults revenue disposition from any or

property We X.X% positive X.X%, as basis and second tax between growth XXXX. the to same to negative our quarter NOI of expect second be compared quarter

our ready prepared for that We're remarks. concludes Operator, call open to up the questions.

Our first from Maher Go question ahead. is Bryan Riley from B. FBR.

Good morning, everyone. put pretty And up. guys a that decent quarter you was

now can effectively David, disposition with environment. year? difficult this you process in done are the us, the far sold congrats So, tell assets so with this you

disposition would at came the now, of recycling yes, million. process the the Right capital. of We we selling Bryan, of million expectation $XXX into substantially deleveraging that with completed program, a because year. the XXXX frozen the and market end capital between is of somewhere we availability the lack property do sales $XXX that debt

So, we've until program that elected recommence year. as market half recycling not can the see don't come back is, with My But, is to to sometime we start have the we the anything second to hope the such bring market. sell time, the to to liquidity we of anything. during capital

So, and can until bring there's to decent really we reason we no market transact anything pricing. efficiently at to believe

on then, are any [Technical flip of getting early And the Difficulty]. that, you side Okay.

lost I Bryan, sorry. you. I’m

Malhotra question Morgan is from next with Vikram Our Stanley.

questions. of couple Just

expenses over So, quantifying a of the in trend give some your or forward. bit Wondering lower term? you of peers near OpEx, OpEx terms color lower talked more have how about if can going could

take do question. good that’s that. Vikram, to Sure. you want Matt, a

Sure.

a not as overly numbers. in has don't lesser expect as exact It the With of operating decline though. our have see is a expenses I do material we the initiatives that our buildings, result result to team of property that. people place in management in put a

whole to just permanently as your into work-from-home thoughts debate for there's tenant had base? question, concentration certainly a this government any And early the of space the office. have And then, lot whether from demand the you or your needs discussions just future I'm Okay. on change the experience, a thinking broader curious about side, could given may

Yes. Vikram, question. another good

D.C., could their number a couple a how with Washington the GSA had operating because employees when Dan conversation that that lot see of remotely. just years redid face the a employees buildings going of space, building check fact, increase remotely. work lot as Mathews, of In of with paper. how have they we result of of of was to that in Commissioner There they pandemic. who’s luxury, a in ago and so of a of our were us has that hoteling And lot GSA, created kind a agencies to they work federal number they that a are public, deal with they don't everything

to don't change the more tenants. material so, a working And there's I think as relates going it be with to remote government

to having think of increase apart. than do they sit have they on certainly lot are collaborative much X a years, spaces. I have rethink of the couple They closer last utilization lot that over people in that that feet a have of rates they taken because

think I they're so, over that. time, And to going to have rethink

I sector, to They being being They to the get miss successful the and office. office. want grow. think, back but miss interaction by large, private productive an have the opportunity mentored think very most people working and in I the employees remotely, think, being social on of been I to

find permanent a I I people work. think may while going more remote it's remotely don't so, think working And you forward,

I probably or one think two days a maybe it's week.

an a space all to continue want In to they'll need have So, see bit actually to tenants better able you're some going distancing. create be to little to more office. space physical likelihood, in

too But, actually could result it's know. a expect, you still this. to increase see as way early office we would as So, usage of

for the enough. Fair Thanks color.

and rent question. quarters. numbers moving quick amortization around one line The Just rent the straight just been over the few last

we of wondering, sort we in? run rate of there Just a is modeling expect or be can sort should

off some cash NOI rent free What the straight to of is about we rent I'll was end that favorable that $X at this burned say had of on which XXXX, quarter line million.

in another QX. $X.X terms we forward QX, free to expect cash move million we in rent do As starting about of burn of to off

you. good. Okay, Thank

lease On a that a amortization, QX. was below contraction during had position. in tenant And market we tenant lease

a So, of we write-off that. had

currently for a in is the that So, that's run-rate good QX number number.

Bryan question next Maher Riley B. from from Our is FBR. by

seeing there XXXX? up following on innings, my Post to Kind be assets it's able owners of run of are make really of that out hearing any or a you at I the know thought. disposition, stressed but over of might you early balance

I pricing Bryan, hasn't to are early. tad that capitulation Definitely, been distressed There some though. a still really owners a looking sell are think, in assets. there it's

So, still that are seen to we've properties being proposed cap the relatively low market come at rates.

period to for sellers kind they're think do of really think time have buyers expectations so, that down we're And right now in to I where that. and come willing that to capitulated prices haven't

things half continue they the could that the -- are. That in of change But second as year.

that And acquisitions, any of type of you asset to do I extent fear ownership from make realistic? Is the suspect of course wouldn't that normal tenant. your you and that type

don't have realistic our from plan. business varying is We Bryan. That expectation, any intention the to

lastly looks going some pretty lowering And both guys you have debt. a in expense and interest the on, what's like then, job done markets retiring with me. good It your at for

side, pieces particular. retire still at you look an couple levels So, on in are at those out when as interest are fairly opportunity stack of the with there too, capital lingering well, we Is there lofty debt or stuck there early a your to expense this?

It's question. a good

kind with is penalties. And of XX have you Our a days without window, debt comes generally pay-off then, about can you where generally penalty. prepayment which

haven't kind those now to if run due of the math have sense only penalty makes We do. of and $XX million between the debt So, XXXX. prepayment coming we on

our at debt with comfortable the moment. we levels So, are very

is Go Tayo Mizuho. from Okusanya [Operator ahead. question next Instructions] Our from

Our Capital Carroll from ahead. Michael from is RBC next Go question Markets.

Mike. Jason is on This Hey. for

expense question to follow-up Vikram's a on operating trends. the Just

this that I quarter. mentioned removal the snow you you savings So, had know

values? to it So, with as we far forward, the in as run be line expect quarter-over-quarter relatively the rate should moving

to be QX. slightly for big expenses QX, a higher would question. It's I than expect

kind R&M are QX. up activities QX seasonal then utilities have will in generally higher over of and picking We

Thanks. great. Okay,

Tayo is question next Our from Mizuho. Go from ahead. Okusanya

Yes.

comments Just listed tenant you list? about about Tailor your a top give with Again, tenants. top a kind made had quick question around given name, XX it’s some of overall on exposure. particular you happening retail your that sense that But, what's in could Brands. your I it's know of

them we received request a Matt, from to rent. defer Sure. Correct?

That is correct.

we And you that rent. many agreed defer to Can how did Matt? for, we months remind me

Two months, April May. and

Okay.

Okay.

with So, again, the you did does as Again, defer because then, of specifically? I helpful. front, you them debt two lack disposition capital, for That's acquisition Okay. the months mentioned, delayed comment necessarily you’re appreciate liquidity selling And recycling. is if though on it”? you to getting attractive kind made the even side mean do do about of also that capital up, you side or transactions, match go assets on the to could delaying feel the enough you other not may acquisition you still that that comfortable ahead of be today necessarily side your and “match

were of sell did X.X%. a of more than question, capital during the basis, quarter after about On recycling part We an million $XX capital the that was yield assets good Tayo. our little first a It's program.

have make that a now. could capacity acquisitions we So, basis, leverage-neutral we on right some some

leverage seen haven't that range. below also We're acquisitions attractive. our We are any targeted

make dramatic go acquisitions, do don't unless with capital recycling although we comfortable continuing and leverage don't to take of out think I we have So, program. that new will -- room number some we're higher, I our

reenter disposition don't to be it you're I but going we think market. got until see some we've the capacity, dramatic So,

you. Got

about giving kind of lease tenants out possibly lastly, you else maturities, there upcoming to in And believe talked know there? nonrenewals. regards FDI, then, but is out indications XXXX I of Okay. building, we’ve kind about I any with anything the there,

few about this are of we tenants basis points have vacate. of rest rent the year, XX Tayo, our to that represent Through a know Yes. that we annualized going

upon We we points have at like they’re where about based feel risk, current negotiation. another XX basis

nothing So, material. all at

that to thinking decline happen irrespective just in is the X% rest X% leasing? of year, the of slowdown of given kind you’re could of And the over course the the occupancy of

Tayo. of part it, that's think,, I

of part Okay. it? That’s

Yes, now, because brokers inability this lifted. what users sure and out to the space that's of quickly office are the the to the shelter-in-place we are going at orders back given we right various point states -- pick not from get use is, showings lack and reopen, and of up, once how

question-and-answer closing the our concludes conference now to session. remarks. This back David over for to would I like turn Blackman

Thank you, operator.

deleveraging like evolution OPI the over efforts base NAREIT look in signing the years you positioned of our to strength with two Thank past the well meeting off, us. Before for combined updating you economic this our forward weather that have June. continued shock. to our virtual I'd to at tenant We reiterate on current joining

Operator, that concludes the call.

concluded. now attending is conference The for Thank you today's presentation.

now may You disconnect.