Office Properties Income Trust Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2025

There are 4 speakers on the call.

Operator

Good morning and welcome to the Office Properties Income Trust First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. 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.

Speaker 1

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 Donnelly. In just a moment, they will provide details about our business and our performance for the first quarter of twenty twenty five. 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.

Speaker 1

These forward looking statements are based on OPI's beliefs and expectations as of today, Thursday, 05/01/2025 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 opireit.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.

Speaker 1

A reconciliation of these non GAAP figures to net income are available in 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 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.

Speaker 2

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 03/31/2025, OPI's portfolio consisted of 125 properties totaling 17,300,000 square feet with a weighted average remaining lease term of seven years. We ended the quarter with same property occupancy of 85.4%.

Speaker 2

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.

Speaker 2

Throughout the country, we face pressure in our re leasing 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.

Speaker 2

C, where OPI has 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 was down $93,000,000 or 19% to $4.00 $5,000,000 compared to a year ago. Interest expense increased $17,900,000 to $53,400,000 representing a 50% increase year over year. We have little room under our debt covenants, which restricts us from refinancing or issuing new debt.

Speaker 2

Dollars $280,000,000 in debt principal payments are due in 2026 and our liquidity is currently limited to $73,000,000 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 square feet at a weighted average lease term of ten point three years and a 13.5% roll up in rent. Concessions and capital commitments of $4.62 per square foot per year declined 22 quarter over quarter.

Speaker 2

Notable leasing activity included a new eleven year lease for 45,000 square feet in Omaha, Nebraska, a twelve year lease renewal for 101,000 square feet in Fremont, California and an eight year renewal for 100,000 square feet in Irving, Texas. We are closely monitoring the Department of Government efficiencies measures to reduce the government's office square footage 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 2,400,000 square feet or approximately $68,000,000 of OPI's annualized revenue. Of this, approximately 432,000 square feet or $14,900,000 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.

Speaker 2

Turning to OPI's upcoming lease expirations. Lease expirations through 2026 total 1,600,000 square feet, representing $45,000,000 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 square feet or $19,400,000 of annualized revenue will not renew. Our current leasing pipeline totaled nearly 2,000,000 square feet, of which one third could result in positive net absorption. Turning to dispositions.

Speaker 2

During the quarter, we sold three properties consisting of 249,000 square feet for $26,900,000 Additionally, we are under agreement to sell another three vacant properties consisting of 376,000 square feet for a total sales price of $28,900,000 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.

Speaker 2

Links to the report and the supplemental report specific to OPI's highlights are available on our website at opireit.com. Brian?

Speaker 3

Thank you, Yael and good morning. For the first quarter, we reported normalized FFO of $4,400,000 or $06 per share, which came in $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 $20,900,000 or $0.36 per share for the fourth quarter of twenty twenty four. 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 twenty twenty five, we expect normalized FFO to be between $09 and $0.11 per share for Q2.

Speaker 3

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 DC. We project recurring G and A expense to be $5,000,000 for Q2. Our current estimated quarterly interest expense run rate is $53,000,000 consisting of $41,000,000 of cash interest expense and $12,000,000 of non cash amortization of financing costs. We expect same property cash basis NOI to decrease 10% to 12% as compared to the second quarter of twenty twenty four 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.

Speaker 3

Turning to our investing activities. We spent $13,800,000 on capital expenditures during the first quarter. We are reducing our twenty twenty five full year CapEx guidance from a total projected spend of $80,000,000 to approximately $75,000,000 comprised of $17,000,000 of building capital and $58,000,000 of leasing capital. During the first quarter, we sold three properties with 249,000 square feet for proceeds of $26,900,000 1 of the properties sold was encumbered by our twenty twenty seven senior notes and the proceeds of $5,000,000 were used to pay down debt principal. At quarter end, we had three properties with a carrying value of 10,400,000 classified as held for sale.

Speaker 3

As of today, have three properties under agreement for sale for $29,000,000 Turning to the balance sheet. In mid March, we completed the private debt exchange of $21,000,000 of our outstanding senior unsecured notes due 2026, '20 '20 '7 and 02/1931 with a weighted average interest rate of 3.1% or $14,000,000 of new 8% senior priority guaranteed notes due 02/1930. Our total liquidity today is $73,000,000 of cash. We are currently projecting cash from operations to be a use of $50,000,000 to $55,000,000 during the balance of 2025 including capital expenditures. OPI's upcoming maturities consist of approximately $120,000,000 due at March 2026 under our senior secured notes due 2027 and $134,000,000 of senior unsecured notes due June 2026.

Speaker 3

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

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

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Key Takeaways

  • As of March 31, 2025, OPI’s 125-property portfolio (17.3 million sqft) was 85.4% occupied, with ~60% of revenue from investment-grade tenants and the U.S. government representing 16.8% of annualized rent.
  • OPI faces headwinds from work-from-home trends, weak demand for older assets and uncertain macro conditions, resulting in negative net absorption, declining asking rents and over 23% vacancy in its D.C. concentration.
  • Q1 annualized revenue fell 19% year-over-year to $405 million, interest expense rose 50% to $53.4 million, liquidity stands at $73 million and $280 million of debt matures in 2026 under tight covenants.
  • In Q1, OPI executed 11 leases totaling 223k sqft (10.3-year WA lease term) with a 13.5% rent roll-up, sold three properties (249k sqft) for $26.9 million and agreed to sell three more vacant assets for $28.9 million.
  • Normalized FFO dropped to $4.4 million ($0.06/share) in Q1 from $20.9 million ($0.36/share) last quarter; Q2 FFO is guided at $0.09–$0.11/share and same-store cash NOI is expected to decline 10–12% year-over-year.
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Earnings Conference Call
Office Properties Income Trust Q1 2025
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