Office Properties Income Trust (OPI) 27 Jul 232023 Q2 Earnings call transcript

Good morning, and welcome to the Office Properties Income Trust Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Kevin Barry, Director of Investors. Please go ahead.

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

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

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

operating found presentation figures In these OPI's in that or including cash of operations net which income during or and cash release will available CAD reconciliation discussing normalized basis net last A website. our non-GAAP for this addition, income we can we night, normalized are non-GAAP basis earnings be numbers cash FFO, be NOI. call, funds from to on distribution issued available or

NOI. cash including we'll be finally, providing And call, on this normalized and FFO basis guidance

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

the call over to now Chris. will turn I

merger and thank our broader today. fundamentals you today, Trust, provide everyone, our call Good operational will Kevin. you, Diversified on we and On an financial the results. and us discuss for morning, update Thank with joining Healthcare on provide update will office an

merger with approve shareholders on Trust of filed and meeting Starting and with the XX, thereafter. a third the Healthcare complete the special during a our shares. remain August We we of We close shortly transaction shareholder vote the Diversified are to OPI issuance quarter. registration to to track with approval, to we the proposals on on With expect statement common merger. the merger SEC, holding

opportunity This and create institutional It our merger a quality X office navigate providing and REIT. to creation. growth sector near embedded and headwinds in while represents tremendous value to long-term for positions shareholders a more better scalable portfolios us combines larger, diversified

cash benefits immediate capital properties stability benefiting a addition OPI from and reminder, our quality to with and additional communities, through health scale tailwind of a with GSE growth more a to complement rate and As outlook, the agency low-cost life favorable access senior currently the including sector science attractive an of underway. turnaround diversity, flow established as and favorable care increased institutional portfolio, includes portfolio strategy access MOB debt living interest office sources to and

for value accretive the the benefits of XXXX be We expect the and on ultimately compelling shareholders Based our vote half the leverage and CAD our support and transaction their normalized for during second recommendation transaction, to merger. of we long-term the to OPI's that shareholders. board FFO, maximizing

million since will we Matt second by May. in financing more discuss, financing completing to merger strategy our the As close commenced $XXX during quarter, the than mortgage

aggregate, of highly today's and a value fully financing progress as on the properties. mix testament our this an priority to financing X.X% to Given office OPI's In reflects challenges capitalization appraised properties include a aggregate tenants. rate markets, based the buildings serves on portfolio private believe by related capital of and occupied in the we implied of financial government

a is space. renewals, Conversely, performance office quarter. resulting rationalize the at bright recent spots high a and slowing and space with period both downsizing sector of in Tenants the national a environment their highlights financing remain office challenging. within increased needs, utilization nearly to vacancy of volume, and transition, Nationally, and the transaction remains Turning new a continue sub-lease related of to in of relocation from XX%. mix leasing office second some to improving

to as We believe continue office there return will be continued mandates some areas of to these unfold. improvement in

policy New supply monitor and decrease to rates stabilize. on interest continues

XX.X%, for occupancy XX points portfolio third with year-over-year prior basis FFO range. in properties and Same-property leasing NOI higher normalized new basis share OPI's of both points the quarter the than basis better vacancy. high by supported XXX exceeded and came the cash per end of an guidance projected our the the over up and was of second quarter, increase activity disposition quarter and

utilization above evolving portfolio our Tenant office the to outlook. positive with a across sign trending national the average, office is return

milestone Massachusetts D.C., completion which currently XX% is reached foot in XXX,XXX mixed-use pre-leased. Avenue also square of redevelopment Washington, We substantial our exciting with an at XX

now XX.X rent Turning renewal for in leasing lease a mostly average long-term years X.X%. an comprised results. of of leases and to term roll-up completed second XXX,XXX and feet We leasing, square of with quarter our deals of new

and sequentially volume the leasing years. highest seasonally tenants X was than this OPI's of the in with volume representing reflecting communications activity meaningful the a from quarter increased for quarter estate industries. financial XX% real Approximately first over more in the Total and and XXX%, lighter technology acceleration and

foot capital approximately year. basis quarter rated investment-grade to year-over-year a and with square and quarter per XX% commitments tenants, We per $X.XX lease Concessions rental annualized representing the sequential income. ended both of on declined

of for technology solutions that a lease global the a rates building occupied leasing XX.X representing at a lease from largely approximately highlights Austin, for a and Atlanta, the and approximately X.X unchanged to We years. renewal company transactions. years. of XX,XXX lease Georgia, Texas, square northeast a In headquarters, of feet we were term Turning by at the full roll executed term modest open just rent in full feet second lease tenant quarter XXX,XXX building renewed Duluth, square

Clara, a with square new Santa term and renewed California, feet rental at rent increase open feet with a in In over term. XX-year X%. care a lease for modest lease in technology XX,XXX XX.X-year XXX,XXX a an of a we tenant a over a rate roll full we contractor for for networking signed square And health Lincoln, Nebraska building

OPI's to ahead lease upcoming Looking expirations.

XXX,XXX leasing the short-term activity, representing communicated manage Subsequent XXXX. completed vacate in beyond. a in D.C., Washington, downsize extension XXXX with of including feet We actively through continue our second previously as leasing to to square and to of of half annualized a revenue address end, and we during known over these expirations efforts X.X% tenant quarter

XXX,XXX Our to leasing square and includes new million leasing XX% X.X potential a feet XX%. approximately feet pipeline of absorption million with activity, to square X.X attributable outlook year-end providing nearly of of feet potential square leasing occupancy

Turning of been proposals. leased XXX,XXX of new Hotel, trophy encouraging to guests important D.C. XX% is to feet milestone Mass square active the of property We which our has September. the at This XXX,XXX the an XX Class completion foot with open to square substantial end mixed-use quarter. activity Tour with in Sonesta plans Avenue close to Royal projects. to reached A development in Washington,

which of costs, approximately project the $XX million future leases. during half toward a in back utilized balance will achieve construction of have XXXX and years stabilization be portion We to with remaining the

of year. project life leasing. the Our Bay and towards construction as The fourth remains of million quarter Seattle, completion known with to is deliver science this with redevelopment $XX pre-leased during in Unison approximately use on stabilization for for track remaining XX%

continue a square ramp-up back of multiple users with half in office proposals, the as are dissipate completed. spec prospects We and to lab lab activity for towards field to active of year close XX,XXX suites our feet both the

OPI execution for had encouraged track levels the are the previously outlook summary, rates the an our the headwinds, quarter highest our Despite volume initiatives. portfolio pleased the leasing utilization with and training on In X representative portfolio. across we of across with ended to of in continue and are years active communicated elevated we office with quarter

will results. I turn call financial the our to now Matt review to over

fee first related $XX.X lease in Chris, offset above quarter to and by per lower range. a high This per million increase consensus termination $X.XX XXXX. tenant driven or was of quarter compares morning, guidance the Thanks, our for G&A on of expense. The of a to normalized quarter or partially $X.XX of good share primarily FFO sequential a to was higher downsize due the increased a expense, end by and utilities, coming $X.XX interest everyone. in the above $XX.X usage $X.XX and and renewal share, Normalized for seasonal million FFO basis NOI decrease

expense quarter's to million $X.X fee was termination provided the be quarter for quarter. was the QX should was second the business RMR Group previous FFO $X.X sequential stock mainly last shareholders. The in quarter our noted G&A guidance compared on as due emphasizes management normalized in a It that to manager, the driven included our call. in the which decrease between fees by and price, decline our alignment lower million

share on of during generated rolling Earlier quarter which X-quarter CAD share dividend of per payout per quarterly based regular X-quarter on We this $X we share, CAD basis. represents XX% and of ratio rate annual a trailing share. month, a distribution $X.XX our per declared $X.XX the per $X.XX second of our

X.X% to current in we compared to the OPI by by our year of now structures. being changes previously quarter the and was guidance The down downsizes period, as driven rent continue as levels expenses of mainly decreased Same-property beat paid inflationary and in decrease higher X% second cash tenant operating NOI range pressure result free a X%. face and to basis XXXX paid tenants of elevated certain expenses by

Turning to quarter. NOI basis in our third cash outlook and FFO expectations the same-property for normalized

substantial includes expect of decrease $X.XX guidance of $X.XX range This million be We G&A The of downsizes, XX Mass the expense. FFO of Ave the QX Mass capitalized certain million is to in interest several commencement operating lower Ave. XX partially up by seasonal $X.X items, and made offset per amounts a tenant to normalized from increases lease between project share. and notably, and expenses, the most completion of with $X.X at Sonesta the of vacancies

and rent be cash down certain and period X% compared basis NOI XX% the mainly the of to current tenant XXXX, downsizes. same-property expect quarter to free vacancies as to third year driven by in We

balance the to sheet. Turning

As Chris Healthcare our the commenced with merger mentioned, financing second we our strategy during for Diversified Trust. quarter,

million with of in attractive $XXX reminder, terms connection mortgage ensure the close the than merger, transaction. use secured more by to a commitment for of bridge facility, loan avoid entering secured collateral this the a OPI we are facility. a bridge bridge certain loan loans the To facility on As can properties we loan

average these weighted and a more To date, closed with in loan-to-value financings, over total the $XXX In has sheet, in of balance interest-only the than market combined mortgage with of to This our largely ratio assets. bridge have X.X XX%. challenging million reduced benefit of term million. highlights been years unencumbered loan with commitment we high-quality $XXX financings connection a combined our these conditions execution

of complete our bridge properties discussions debt quarter million is a our credit is with ended our final years. weeks. of X.X% X.X of active to We to in XX% in $XXX facility similar June, facility. are We million maturity XX% Over option under total had our collateral and extend financings average XXXX. coming our outstanding the debt rate of $XXX weighted quarter other of approximately and average we XX, a At unsecured. weighted of availability second OPI and fixed January end, loan rate the interest liquidity, In to credit including exercised

investing are to and $XX.X of Since for activities. sold the sell we feet X have feet X year, currently containing Turning million. containing beginning properties XX,XXX square under square for to $XX.X agreement million XXX,XXX the our property

be during we market investment disposition capital million to until conditions $XX.X spent million redevelopment of improve. capital to and Given the our We the current continue second expect $XX.X sales of muted recurring activity market, somewhat quarter.

million. are $XXX to $XXX continue million to we $XXX million approximately capital expect to of to updating million $XXX redevelopment outlook and capital our be XXXX We recurring

our $XXX Ave and capital development Mass fund remaining prepared of we to Mass remarks. complete, XX have and Unison. million the costs project Ave XX of achieve stabilized substantially approximately concludes With estimated That occupancy to lease-related

ready are the open up for we call Operator, to questions.

Riley [Operator from Our Bryan question with Maher come B. FBR. first Instructions] will

selling just you're the you what for couple to a morning. assets the the debt then? in of that and debt, DHT proceeds roughly loan just the is utilizing with the up to loan the you deal And sale of now can is about, long cost How the Matt, proceeds that million $XX this between delta cost bridge the the be from and And until thus, assuming what and less with me aside you suspect between more tap there? bridge talked Chris versus deal assets? and the that closes loan sticking in -- bridge you Kind need delta are the asset new in the there and any the getting close is closed.

just think asset the with I starting Bryan. sales,

say where that at out range we today, stand end we've $XX number on that, million we million and I accurate where and based to think few are about would as talked other that's high on a land least But getting of might opportunities an what probably the might are. close think the as $XX $XX maybe there. that I includes the million far we we with transaction, as

that's a guide. so be think some good And may I but outliers, there

to the having back was expensive on in that when we properties on the bridge above signed sheets collateral executed the goal We're $XXX today, our part It's DHT with in bridge and draw from are financings. the success lenders the the have impact to And potential in proceeds. loan secured traditional April the OPI I proceeds, totaling more very will we've made loan, than commitment. term various the loan million merger just closed million is say and with total and the progress we pleased $XXX bridge. not which far financing between pool, of

close have we wait are If to the and thereafter. prior close simultaneously in If can to merger. they be we they're OPI assets, position to DHT shortly or a assets, continue to

the very we're we properties pleased financing loan are, challenging with positioned bridge in unencumbered. where very So we've of collateral where with believe And ourselves we environment. some also

which to XX%. going as about leave is would on The covenants, lastly, and in we're closed rate of unencumbered, more our debt bridge the et will loans weighted X And certain on get we properties cost X.X%. the was about help So a still interest proceeds pricing, lot the loan cetera. than we average think bridge north we

got a point the you benefit cost. basis So XXX-plus to premium or

So financing the kind I'm loan the that January extension high credit there's very the all bridge need tell any hearing you facility what period? stuff tap stop -- won't of you're I of with doing, deal? And kind likelihood tap a guess to of towards impacts that us to can is, you hard the the how the of

Yes.

our the bridge, it. goal I like draw on it to not on remains So said,

this have we in stop place We never environment, it as back a you until actually close mortgages in know.

And expect if said, So time. like of it's we do need we're it, positioning short period need very it. be to But need not there to we it it. a if we I for

amended company admin closing bank our 'XX. extend as relates is or nicely term it and on January did we cetera, diligence revolver, recast with of maturity been the revolver. from We've questions sheets lot the As the type OPI We've to group, to of XX the we report tracking we're stand-alone really to A et condition the yes, but merger effort progressing have combined a publicly, that. that agent. on a that executed of have Nothing well. fielded will

Okay. for in that Fundamentally, your occupancy range. comments, you And of last me. think maybe talked in prepared kind about XX%, I XX% year-end

out a year-end your online? like Seattle say, might kind little now, look can maybe with X I fast you mean Assuming Ave to and further? a that of those coming to occupancy ramp approaching expectations, XX mid-XXXX year we're according Mass properties from look bit what

is the Mass square I building Bryan. the or the Ave square of It's in hard footage. kind of to for footage our kind tell, mean XX occupancy new

online. that change the building property. no footage coming square for current There's really occupancy so is in of And Seattle representative

recycling rate I seeing and sit a today date. portfolio, And so the absorption mean to as across be about levels here anticipate today, with XXXX. new run with where will for to and stand just that the what of occupancy kind uncertain talked addition plan in there's environment kind difficult where because the I we what the and leasing to we the has we're more it's to But continue kind positive think some seen peg an a we in transact and those ultimately conclude given We've momentum with we've retention likely approach and just of disposition leasing capital and much year. will also numbers that and activity, development of

So I mean best the to is I XX%. that think stage, we at this guidance have XX%

Morgan Our from Stanley. next will Ronald question Kamdem with come

occupancy, little just to than is where for year-end, XX% This Yes, Tamim the to I Ronald. was XX%, sticking a lower for think, on the previously. bit it is again, guidance

in looks XQ like higher trending the little XQ. than it's occupancy a just So one, bit

So is look for by is guys the lower pipeline? like development reduction, primarily occupancy driven just same-store year-end would what us just give just portfolio. a leasing you that for the can guidance sense for your expectations And

So...

Yes, a couple of things.

some QX in I vacates think that had tenants known we that carryover. were

couple again, a buildings of And so depending some QX be to is contemplated signed disposition that circumstances. And we activity. any impact occupancy drivers. come the anticipate that have upon why respect would contingent them vacating QX, with there's going to of being being on to higher on occupancy, because lease then the And vacancy. I the or of would say is in year-end reason One absent the

occupancy. on been GSA, provide who XXXX, in have have year-end. on first in so And that the at a tenant, that was slight somewhat a part XXXX. negative have had something would for But impact of would that -- in occupancy so impact impacted been least of we vacated a a on itself And notice early did expiration favorable an have early would a then impact of the it

guys estate the making XX% Got activity tenants, and quarter. the up leasing it. during real And about then financial talked you

as for of overall go exposure Or basis, we for about just portfolio should stand-alone government how forward, less as the trends? think OPI see do that? current leasing Just a you because we

a I and XX good overall gone outside strategy I is the where a mission-critical with development facilities. Ave variety Class no of mixed-use with from government older was that's piece, the a private B just And think Mass sector sector some Yes. mean, kind a property we've just of in Class pullback development. speaking, new different than we've rationalizing circumstances circumstances. an private where seen a their mean of in space generally GSA, trophy a I kind through example the into needs GSA -- slight been what those the strategy of then is A

I -- generally think drive generally kind of not -- that a lot just deals tracking seeing we're of absorption. the GSA there kind there's to out of

see And is come the to that likely private the focus so is to space GSA leasing. back that there to on we extent us, lease, path sector

So exposure. that our have on GSA negative a would overall effect

So but that. changes kind some there be be an of continue I time, don't term, will impact. over it the in it that in material near to have will know will

'XX you And the Got about with it. then the talked merger. had second accretion half

as includes Just -- you if that that the guys included will the a guidance? noncash DHT's from and -- like? included you covenants can all whatnot? that's debt mark-to-market within contemplating about if look And number wanted give what sense us that if And confirm for you to think can be assuming might if we at just guys

Yes.

is 'XX. in for combined forecast of it half basis the So on included company second guidance the

carrying as QX. March a value DHT's best is to million to probably it's their it delta shows look compared about the the fair In XX-Q $XXX value. of the I at XX. think value fair as I from footnote, believe proxy

use. that's So proxy good to a

that's covenants, going it our to As covenants the negatively. to not impact relates

will Markets. Aditi Our RBC Capital next come with [Operator from Instructions] question Balachandran

out the when termination Can recognized? that just this And and about more that guys for million the get you on month. came earlier $X What's details will fee plan building? some termination spoke Tyson the we be the

public on the about don't been I So notice, think was it termination Tysons unexpected. had consolidation.

fact, us, for exercised. so been in assuming a termination that be planning, have we And would,

mind And this XXXX. -- look, redeveloped that completely I mean, so in building with in was

landscape a the we it's short It of has kind boxes think walking I where distance footprint is building the LEED It's it I West look step submarket, one submarkets and today. It's the Greater building. as awards of strongest the the to extremely it. which and mean within is back numerous checks And the another or to just and certified behind is Loop, own all Chicago of modes focused got well. it's the the back a which where -- area, of other of rail with different getting X quality the to stronger that we're at respect we tied Fulton kind transportation. shows in tenants so property, the are

order. I so re-lease user optimistic And have And generally that's that to in we're an market. teed we be able a think building up office team to we'll in the this short

the that's termination of going term And XXXX. the over then amortized January to XX, on fee, remaining be

to concludes to President our any closing I question-and-answer Chris and Chief Bilotto, session. like turn conference the This remarks. would over for Officer, back Operating

and Thank your interest joining today OPI. for in for you us

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

may You now disconnect.