Office Properties Income Trust Announces Second Quarter 2020 Results

Office Properties Income Trust (Nasdaq: OPI) today announced its financial results for the quarter and six months ended June 30, 2020.

David Blackman, President and Chief Executive Officer of OPI, made the following statement:

“OPI delivered solid results for the 2020 second quarter, exceeding consensus estimates and our expectations. Highlights include completing 642,000 square feet of leasing with a 3.9% roll-up in rents for a weighted average lease term of more than six years, a year over year increase in same property cash basis NOI of 2.5%, a CAD dividend payout ratio of 57.9% and continued strong collection of cash rents. To date, we have granted only $2.5 million of deferrals to 23 tenants for the months of April through September, which represents only 88 basis points of contractual rents over that period. We also issued an aggregate of $162 million of 30 year senior unsecured notes in June and July and, in July, we entered an agreement to sell a four property business park for $25.4 million and an agreement to purchase an office property for $38.1 million under our capital recycling program. All of this is against the back drop of a strained economy from the COVID-19 pandemic. However, the successful completion of OPI’s $1 billion disposition program in 2019, our relatively low leveraged balance sheet and diverse portfolio of high quality tenants better positions OPI to weather these difficult economic conditions.

As a result, we remain optimistic that our business will continue to perform well throughout the remainder of 2020."

Results for the Quarter Ended June 30, 2020:

Net income for the quarter ended June 30, 2020 was $1.3 million, or $0.03 per diluted share, compared to a net loss of $64.8 million, or $1.35 per diluted share, for the quarter ended June 30, 2019. Net income for the quarter ended June 30, 2020 includes a $0.6 million, or $0.01 per diluted share, loss on early extinguishment of debt. Net loss for the quarter ended June 30, 2019 includes a $66.1 million, or $1.38 per diluted share, unrealized loss on equity securities related to OPI's former investment in The RMR Group Inc., or RMR Inc., which OPI sold on July 1, 2019, and a $2.4 million, or $0.05 per diluted share, loss on impairment of real estate, partially offset by certain net revenue events recorded during the quarter ended June 30, 2019 totaling $8.2 million, or $0.17 per diluted share, including a $7.4 million early termination fee related to a single tenant property located in San Jose, CA. The weighted average number of diluted common shares outstanding was 48.1 million for the quarter ended June 30, 2020 and 48.0 million for the quarter ended June 30, 2019.

Normalized funds from operations, or Normalized FFO, and cash available for distribution, or CAD, for the quarter ended June 30, 2020 were $67.2 million, or $1.40 per diluted share, and $45.5 million, or $0.95 per diluted share, respectively, compared to Normalized FFO and CAD for the quarter ended June 30, 2019 of $79.3 million, or $1.65 per diluted share, and $56.7 million, or $1.18 per diluted share, respectively.

Reconciliations of net income (loss) determined in accordance with U.S. generally accepted accounting principles, or GAAP, to funds from operations, or FFO, Normalized FFO and CAD for the quarters ended June 30, 2020 and 2019 appear later in this press release.

Results for the Six Months Ended June 30, 2020:

Net income for the six months ended June 30, 2020 was $12.1 million, or $0.25 per diluted share, compared to a net loss of $30.8 million, or $0.64 per diluted share, for the six months ended June 30, 2019. Net income for the six months ended June 30, 2020 includes a $10.8 million, or $0.22 per diluted share, gain on sale of real estate, partially offset by a $3.8 million, or $0.08 per diluted share, loss on early extinguishment of debt. Net loss for the six months ended June 30, 2019 includes a $44.0 million, or $0.92 per diluted share, unrealized loss on equity securities related to OPI's former investment in RMR Inc., which OPI sold on July 1, 2019, and a $5.6 million, or $0.12 per diluted share, loss on impairment of real estate, partially offset by a $22.1 million, or $0.46 per diluted share, net gain on sale of real estate and certain net revenue events totaling $8.2 million, or $0.17 per diluted share, including a $7.4 million early termination fee related to a single tenant property located in San Jose, CA. The weighted average number of diluted common shares outstanding was 48.1 million for the six months ended June 30, 2020 and 48.0 million for the six months ended June 30, 2019.

Normalized FFO and CAD for the six months ended June 30, 2020 were $134.7 million, or $2.80 per diluted share, and $92.9 million, or $1.93 per diluted share, respectively, compared to Normalized FFO and CAD for the six months ended June 30, 2019 of $152.5 million, or $3.17 per diluted share, and $110.2 million, or $2.29 per diluted share, respectively.

Reconciliations of net income (loss) determined in accordance with GAAP to FFO, Normalized FFO and CAD for the six months ended June 30, 2020 and 2019 appear later in this press release.

Leasing, Occupancy and Same Property Results:

During the quarter ended June 30, 2020, OPI entered new and renewal leases for an aggregate of 642,000 rentable square feet at weighted (by rentable square feet) average rents that were 3.9% above prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was approximately 6.1 years and leasing concessions and capital commitments were $16.5 million, or $4.25 per square foot, per lease year.

As of June 30, 2020, 91.7% of OPI’s total rentable square feet was leased, compared to 91.5% as of March 31, 2020 and 91.6% as of June 30, 2019. Occupancy for properties owned continuously since April 1, 2019, or same properties, was 92.8% as of June 30, 2020, compared to 92.6% as of March 31, 2020 and 93.4% as of June 30, 2019. Same property cash basis net operating income, or Cash Basis NOI, increased 2.5% for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019. The increase in same property Cash Basis NOI is due to an increase in cash received from contractual rents of $1.1 million, which is primarily the result of free rent expiring and decreases in operating expenses, including approximately $1.7 million of expense savings as a result of cost savings initiatives in response to the COVID-19 pandemic.

Reconciliations of net income (loss) determined in accordance with GAAP to net operating income, or NOI, and Cash Basis NOI, and a reconciliation of NOI to same property NOI and same property Cash Basis NOI, for the quarters ended June 30, 2020 and 2019, appear later in this press release.

As a result of the COVID-19 pandemic, overall new leasing volume for 2020 has slowed and may continue to slow, but OPI continues to believe that overall tenant retention levels may increase. Also as a result of the COVID-19 pandemic, OPI has granted temporary rent assistance to date totaling $2.5 million to 23 tenants, pursuant to a deferred payment plan whereby these tenants will pay, in most cases one month of rent, over a 12-month period beginning in September 2020. The $2.5 million of granted temporary rent assistance is detailed as follows:

For the quarter ended June 30, 2020, OPI collected approximately 98% of contractual rent obligations and 99% of contractual rent obligations after giving effect to such rent deferrals.

While it is still early to assess the full impact the COVID-19 pandemic will have on OPI's business, OPI believes it will benefit from the approximately 62.8% of annualized rental income paid by investment grade tenants, the majority of which is made up of government tenants, and the diversity of its tenant base, both geographically and by industry, which OPI believes may help mitigate the economic impact caused by the COVID-19 pandemic.

Recent Acquisition Activities:

In July 2020, OPI entered into an agreement to acquire an office property located in Denver, CO containing approximately 68,000 rentable square feet for a purchase price of $38.1 million, excluding acquisition related costs. This property is 100% leased to a single tenant and has a remaining lease term of 11.5 years. This acquisition is expected to occur before the end of the third quarter.

Recent Disposition Activities:

In July 2020, OPI entered into an agreement to sell a four property business park located in Fairfax, VA containing approximately 171,000 rentable square feet for a sales price of $25.4 million, excluding closing costs. This sale is expected to occur before the end of the third quarter.

Recent Financing Activities:

As previously announced, in April 2020, OPI prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $32.7 million, an annual interest rate of 5.7% and a maturity date in July 2020 using cash on hand and borrowings under its revolving credit facility.

In June 2020, OPI issued $150.0 million of 6.375% senior unsecured notes due 2050 in an underwritten public offering, raising net proceeds of $144.8 million, after deducting underwriters’ discounts and estimated offering expenses. In connection with this offering, OPI granted the underwriters a 30 day option to purchase up to an additional $22.5 million aggregate principal amount of these notes. In July 2020, the underwriters partially exercised this option for an additional $12.0 million of these notes. OPI used the aggregate net proceeds of this offering to repay amounts outstanding under OPI's revolving credit facility and for general business purposes.

Conference Call:

At 10:00 a.m. Eastern Time this morning, President and Chief Executive Officer, David Blackman, Chief Financial Officer and Treasurer, Matthew Brown, and Vice President and Chief Operating Officer, Christopher Bilotto, will host a conference call to discuss OPI’s second quarter 2020 financial results.

The conference call telephone number is (877) 328-1172. Participants calling from outside the United States and Canada should dial (412) 317-5418. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through 11:59 p.m. on Thursday, August 6, 2020. To access the replay, dial (412) 317-0088. The replay pass code is 10145302.

A live audio webcast of the conference call will also be available in a listen only mode on OPI’s website, at www.opireit.com. Participants wanting to access the webcast should visit OPI’s website about five minutes before the call. The archived webcast will be available for replay on OPI’s website following the call for about one week. The transcription, recording and retransmission in any way of OPI’s second quarter conference call are strictly prohibited without the prior written consent of OPI.

Supplemental Data:

A copy of OPI’s Second Quarter 2020 Supplemental Operating and Financial Data is available for download at OPI’s website, www.opireit.com. OPI’s website is not incorporated as part of this press release.

Non-GAAP Financial Measures:

OPI presents certain “non-GAAP financial measures” within the meaning of applicable rules of the Securities and Exchange Commission, or SEC, including FFO, Normalized FFO, CAD, Property NOI, Property Cash Basis NOI, Same Property NOI and Same Property Cash Basis NOI. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of OPI’s operating performance or as measures of OPI’s liquidity. These measures should be considered in conjunction with net income (loss) as presented in OPI's condensed consolidated statements of income (loss). OPI considers these non-GAAP measures to be appropriate supplemental measures of operating performance for a real estate investment trust, or REIT, along with net income (loss). OPI believes these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of OPI’s operating performance between periods and with other REITs and, in the case of Property NOI, Property Cash Basis NOI, Same Property NOI and Same Property Cash Basis NOI reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of OPI's properties.

Please see the pages attached hereto for a more detailed statement of OPI’s operating results and financial condition and for an explanation of OPI’s calculation of FFO, Normalized FFO, CAD, Property NOI, Property Cash Basis NOI, Same Property NOI and Same Property Cash Basis NOI and a reconciliation of those amounts to amounts determined in accordance with GAAP.

OPI is a REIT focused on owning, operating and leasing properties primarily leased to single tenants and those with high credit quality characteristics such as government entities. OPI is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.

See Notes on pages 6 and 7.

See Notes on page 9.

Warning Concerning Forward-Looking Statements

This press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever OPI uses words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, OPI is making forward-looking statements. These forward-looking statements are based upon OPI’s present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Actual results may differ materially from those contained in or implied by OPI’s forward-looking statements as a result of various factors. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond OPI's control. For example:

• Mr. Blackman's statements about leasing activity and roll-ups in rents may imply that OPI will continue to have positive leasing activity in future periods. However, OPI's ability to realize positive leasing activity depends on various factors, including market conditions, tenants' demand for OPI's properties, the timing of lease expirations and OPI's ability to successfully compete for tenants, among other factors. As a result, OPI may not realize positive leasing activity in future periods,
• Mr. Blackman's statements about the limited amount of rent deferrals that OPI granted to its tenants and statements elsewhere in this press release about the extent of OPI's rent collections in the second quarter despite the COVID-19 pandemic may imply that OPI will continue to have strong rent collections in the future. However, if the COVID-19 pandemic and the current economic conditions continue for an extended period of time or worsen, OPI’s tenants may be significantly adversely impacted, which may result in those tenants seeking relief from their rent obligations, their inability to pay rent, the termination of their leases or OPI's tenants not renewing their leases or renewing their leases for less space. Further, some of OPI’s government leases provide the tenant with certain rights to terminate their lease early. Budgetary and other fiscal pressures may result in some governmental tenants terminating their leases early or not renewing their leases. In addition, the COVID-19 pandemic has caused changes in workplace practices, including increased remote work arrangements. To the extent those practices become permanent or increased, leasing demand for office space may decline. Therefore, the impact OPI experiences in the near term may be worse than it expects and its tenant retention levels may not increase and they could decline,
• Mr. Blackman states that the successful completion of OPI's $1 billion asset disposition program in 2019, OPI's relatively low leveraged balance sheet and its diverse portfolio of high quality tenants better positions OPI to weather difficult economic conditions. In addition, this press release includes additional statements regarding OPI's belief that the characteristics of its tenant base will help mitigate the economic impact from the COVID-19 pandemic. However, if the COVID-19 pandemic and the current economic conditions continue for an extended period or worsen, OPI may not be able to maintain its current leverage levels and its portfolio may not prove as stable as currently expected. Further, OPI’s ability to borrow under its revolving credit facility is subject to OPI satisfying certain covenants and conditions. If OPI’s operating results and financial condition are significantly negatively impacted by current economic conditions or otherwise, OPI may fail to satisfy those covenants and conditions,
• Mr. Blackman states that OPI remains optimistic that its business will continue to perform well throughout the remainder of 2020. However, as noted elsewhere in this press release, the economic conditions caused by the COVID-19 pandemic could increasingly negatively impact OPI and its business. In addition, OPI's business is subject to risks, some of which are beyond OPI's control. As a result, OPI's business may not perform well throughout the remainder of 2020 and thereafter and it could experience declines,
• OPI has entered into an agreement to acquire an office property located in Denver, CO for $38.1 million, excluding acquisition related costs. This acquisition is subject to conditions. Those conditions may not be satisfied and this acquisition may not occur, may be delayed or the terms may change, and
• OPI has entered into an agreement to sell a four property business park for a sales price of $25.4 million, excluding closing costs. This sale is subject to conditions. Those conditions may not be satisfied and this sale may not occur, may be delayed or the terms may change.

The information contained in OPI’s filings with the SEC, including under “Risk Factors” in OPI’s periodic reports, or incorporated therein, identifies other important factors that could cause OPI’s actual results to differ materially from those stated in or implied by OPI’s forward-looking statements. OPI’s filings with the SEC are available on the SEC's website at www.sec.gov.

You should not place undue reliance upon forward-looking statements.

Except as required by law, OPI does not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

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