Office Properties Income Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 showed continued pressure: rental income fell to $113.6M, GAAP net loss was $45.9M (−$0.66/sh), and Normalized FFO dropped to $4.4M ($0.06/sh), reflecting vacancies, asset sales, and higher interest expense.
• Leasing execution was a bright spot: 223k sq ft signed at a 13.5% roll‑up and 10.3‑year WALT, but same‑property occupancy slid to 85.4% and same‑property cash NOI margin compressed to 54.9%.
• Liquidity remains constrained (cash $63.7M at quarter-end; $73.1M as of Apr 30) and management continues to disclose substantial doubt about going concern; debt maturity risk in 2026 persists.
• Guidance: Q2 Normalized FFO outlook of $0.09–$0.11/sh; FY25 CapEx cut to ~$75M (from $80M); Q2 same‑property cash NOI expected down 10–12% YoY; interest expense run‑rate ~$53M/quarter.
• Potential stock catalysts: progress on 2026 maturities/debt exchanges, asset sale execution (incl. 20 Mass Ave), and any stabilization in leasing for large single‑tenant assets.

What Went Well and What Went Wrong

What Went Well

• Leasing improved pricing and duration: 223k sq ft at a 13.5% roll‑up and 10.3‑year WALT; concessions/capital commitments per sq ft per year declined 22% QoQ.
• Disposition execution: 3 properties sold (249k sq ft) for $26.9M; another 3 vacant properties under agreement (376k sq ft) for $28.9M.
• Forward outlook stabilized sequentially: Q2 Normalized FFO guided to $0.09–$0.11/sh, driven by lower seasonal OpEx and expected stronger hotel performance.

Management quote: “We remain focused on capitalizing on leasing opportunities and tenant retention... completed 223,000 square feet of new and renewal leasing at a 13.5% roll‑up... ending the quarter with same property portfolio occupancy of 85.4%.” — Yael Duffy, President & COO.

What Went Wrong

• Profitability deterioration: Normalized FFO fell to $0.06/sh (vs $0.36 in Q4), missing the prior Q1 guidance by $0.02/sh due to non‑cash interest amortization from debt exchanges.
• Occupancy and margins: same‑property occupancy down to 85.4%; same‑property cash NOI fell to $52.9M (−10.5% YoY), margin declined to 54.9%.
• Balance sheet pressure: interest expense rose to $53.4M (≈+50% YoY) and leverage/covenant headroom remains tight; management again flagged substantial doubt about going concern.

Transcript

Operator (participant)

Good morning and welcome to the Office Properties Income Trust first quarter 2025 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. Please note this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Kevin Barry (Senior Director of Investor Relations)

Good morning and thank you 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 first quarter of 2025. 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, May 1st, 2025, 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, which can be accessed from our website, opire.com. 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 FFO and cash basis net operating income, or cash basis NOI. A reconciliation of these non-GAAP figures to net income is available in OPI's earnings release presentation that we issued last night, which can be found on our website. 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.

Yael Duffy (President and COO)

Thank you, Kevin, and good morning. On today's call, I will provide an overview of our portfolio and review trends we are seeing in the office market before outlining OPI's first quarter leasing and disposition activity. From there, I will turn the call over to Brian to discuss our financial results. As of March 31st, 2025, OPI's portfolio consisted of 125 properties, totaling 17.3 million sq ft, with a weighted average remaining lease term of seven years. We ended the quarter with same property occupancy of 85.4%. Approximately 60% of our revenues come from investment-grade rated tenants or their subsidiaries. The U.S. government is our largest tenant, representing 16.8% of our annualized revenue. 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. In instances where activity exists, leasing demand has been concentrated towards trophy assets as tenants seek amenity-rich buildings that will entice employees back to the office. Given OPI's portfolio is predominantly comprised of older properties and the capital required to reposition assets is often cost prohibitive, new leasing interest has been minimal. Accordingly, we have experienced negative net absorption, declining asking rents, and heightened competition. In Washington, D.C., where OPI has a glorious concentration, the market vacancy rate is over 23%, and conditions have worsened due to federal leasing uncertainty. Despite our leasing efforts, strategies to preserve cash flow, and manage our debt maturity schedule, OPI's financial performance has declined in this difficult operating environment.

Annualized revenue is down $93 million, or 19%, to $405 million compared to a year ago. Interest expense increased $17.9 million to $53.4 million, representing a 50% increase year-over-year. We have little room under our debt covenants, which restricts us from refinancing or issuing new debt. $280 million in debt principal payments are due in 2026, and our liquidity is currently limited to $73 million of cash. In response to these challenges, we are exploring all options to address our financial commitments while simultaneously operating and leasing our properties. Turning to our leasing results, in the first quarter, we executed 11 leases totaling 223,000 sq ft at a weighted average lease term of 10.3 years and a 13.5% roll-up in rent. Concessions and capital commitments of $4.62 per sq ft per year declined 22% quarter-over-quarter.

Notable leasing activity included a new 11-year lease for 45,000 sq ft in Omaha, Nebraska, a 12-year lease renewal for 101,000 sq ft in Fremont, California, and an 8-year renewal for 100,000 sq ft in Irving, Texas. We are closely monitoring the Department of Government Efficiencies measures to reduce the government's office sq ft as part of its efforts to optimize its real estate. While the ultimate impact on OPI's portfolio remains uncertain, we have not yet received any lease termination notices related to these efficiency measures. Today, the GSA represents 2.4 million sq ft, or approximately $68 million of OPI's annualized revenue. Of this, approximately 432,000 sq ft, or $14.9 million in annualized revenue, is within their soft term, which gives the GSA a right to terminate the lease in whole or in part without penalty. Turning to OPI's upcoming lease expirations.

Lease expirations through 2026 total 1.6 million sq ft, representing $45 million, or 11% of OPI's annualized rental income. As we have discussed on prior calls, single-tenant properties will drive most of our expirations, and we expect 780,000 sq ft, or $19.4 million, of annualized revenue will not renew. Our current leasing pipeline totals nearly 2 million sq ft, of which one-third could result in positive net absorption. Turning to dispositions. During the quarter, we sold three properties consisting of 249,000 sq ft for $26.9 million. Additionally, we are under agreement to sell another three vacant properties consisting of 376,000 sq ft for a total sales price of $28.9 million. We do not have any other properties being marketed for sale. However, we continue to evaluate disposition opportunities that will allow OPI to mitigate occupancy risk and carry costs associated with vacant properties.

As we consider future sales, we must balance the impact of potential dispositions on our liquidity, debt covenants, and operating metrics. Before I turn the call over to Brian, I would like to highlight the recent publication of the RMR Group's annual sustainability report, which offers a comprehensive overview of our managers' commitment and progress in addressing sustainability. As we continue to work through challenges in the office market, we remain committed to enhancing OPI's corporate sustainability practices and advancing initiatives that benefit our tenants and communities. Links to the report and the supplemental reports specific to OPI's highlights are available on our website at opire.com. Brian?

Brian Donley (CFO and Treasurer)

Thank you, Yael, and good morning. For the first quarter, we reported normalized FFO of $4.4 million, or $0.06 per share, which came in $0.02 below our guidance range as a result of non-cash amortization included in interest expense related to our debt exchanges. This compares to normalized FFO of $20.9 million, or $0.36 per share for the fourth quarter of 2024. The decrease on a sequential quarter basis was driven by lower NOI as a result of asset sales, tenant vacancies, and higher interest expense. Turning to our outlook for the second quarter of 2025, we expect normalized FFO to be between $0.09 and $0.11 per share for Q2. The increase sequentially from Q1 is primarily driven by higher NOI as a result of lower seasonal operating expenses and the seasonally stronger performance expected from our hotel in Washington, D.C.

We project recurring G&A expense to be $5 million for Q2. Our current estimated quarterly interest expense run rate is $53 million, consisting of $41 million of cash interest expense and $12 million of non-cash amortization of financing costs. We expect same property cash basis NOI to decrease 10%-12% as compared to the second quarter of 2024, driven by tenant vacancies and an increase of free rent from recent leasing activity. This NOI guidance does not include any potential changes to our same store portfolio. Turning to our investing activities, we spent $13.8 million on capital expenditures during the first quarter. We are reducing our 2025 full-year CapEx guidance from a total projected spend of $80 million to approximately $75 million, comprised of $17 million of building capital and $58 million of leasing capital.

During the first quarter, we sold three properties of 249,000 sq ft for proceeds of $26.9 million. One of the properties sold was encumbered by our 2027 senior notes, and the proceeds of $5 million were used to pay down debt principal. At quarter end, we had three properties with a carrying value of $10.4 million classified as held for sale. As of today, we have three properties under agreement for sale for $29 million. Turning to the balance sheet, in mid-March, we completed the private debt exchange of $21 million of our outstanding senior unsecured notes due 2026, 2027, and 2031, with a weighted average interest rate of 3.1%, for $14 million of new 8% senior priority guaranteed notes due 2030. Our total liquidity today is $73 million of cash.

We are currently projecting cash from operations to be a use of $50 million-$55 million during the balance of 2025, including capital expenditures. OPI's upcoming maturities consist of approximately $120 million due in March 2026 under our senior secured notes due 2027, and $134 million of senior unsecured notes due June 2026. Given our liquidity position, financial covenant constraints under our debt agreements, and debt principal repayments coming due in 2026, we continue to evaluate options to address these maturities with our financial advisor. Operator, that concludes our call.

Operator (participant)

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