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Operator: Good morning and welcome to the Office Properties Income Trust Fourth Quarter 2022 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 conference over to Kevin Barry, Director of Investor Relations. Please go ahead.

Kevin Barry: Thanks Gary, good morning everyone. Thanks for joining us today. With me on the call are OPI’s President and Chief Operating Officer, Chris Bilotto; and Chief Financial Officer and Treasurer, Matt Brown. In just a moment, they will provide details about our business and our performance for the fourth quarter of 2022, followed by a question-and-answer session with sell-side analysts. First, 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, February 16th, 2023, 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, or SEC, which can be accessed from our website, opireit.com or the SEC’s website. 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 funds from operations or normalized FFO, cash available for distribution or CAD, and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income are available in our supplemental operating and financial data package, which also can be found on our website.

In addition, 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. With that, I will now turn the call over to Chris.

Chris Bilotto: Thank you, Kevin. Good morning everyone and thank you for joining the call today. OPI reported fourth quarter results that reflect strong leasing momentum, solid financial results, and further execution on our capital recycling plans. Amid continued economic uncertainty and challenging office sector fundamentals, were pleased with our performance, advancing on core strategies aimed at enhancing OPI’s operating performance. Normalized FFO of $1.13 per share exceeded the high end of our guidance range and the change in same-property cash basis NOI was in line with our expectations. We completed 705,000 square feet of leasing activity, primarily with tenant renewals, resulting in our highest quarterly retention activity in three years.

Our fourth quarter performance caps a year in which we achieved many of the operating targets that we set for OPI. During 2022, we completed 2.6 million square feet of leasing for a weighted average term of more than nine years and a roll-up in rent of 5.6%, which was in line with the leasing spreads we had projected at the beginning of the year. New leasing included 588,000 square feet or 23% of our 2022 activity. We sold non-core properties for more than $210 million of aggregate gross proceeds and total portfolio occupancy increased approximately 110 basis points to 90.6%, trending well above the national office market average. Turning to capital recycling. Since the beginning of 2022, we sold 21 properties containing 2.4 million square feet for $216.4 million.

Although we started the year with a more aggressive disposition outlook, we are pleased with our ability to close on these transactions during a very tumultuous year for capital markets and office real estate. In 2023, capital recycling will remain a principal strategy for OPI and cater toward ongoing portfolio enhancement opportunities, management of capital requirements and reducing leverage. We expect macroeconomic uncertainty in CRE financing to continue to weigh on the pace and magnitude of market activity. However, we are presently under agreement to sell two properties for approximately $7.6 million in gross proceeds, and we are in various stages of identifying and marketing additional properties for sale, most likely to transact in the back half of the year.

We ended the year with 160 properties containing 21 million square feet with a weighted average lease term of 6.6 years. Approximately 63% of our annualized rental income was from investment-grade rated tenants, which we believe is one of the highest such percentages in the office REIT sector. Our balance sheet has nearly $570 million of liquidity with 92% of our debt at fixed rates, and we have no senior notes maturing until mid-2024. Turning to our fourth quarter leasing results. We entered into new and renewal leases for 705,000 square feet, which is a 16% increase from the third quarter and a marginal improvement over the prior year. This activity resulted in a weighted average lease term of 10.1 years, and leasing concessions and capital commitments of $8.46 per square foot per lease year.

Weighted average rent spreads for the quarter declined 6.7%, primarily due to a 337,000 square foot renewal for an 11-year term with the defense contractor located in Northern Virginia. We view this renewal as a strategic win with one of our largest tenant expirations in 2023 and recognition that our campus is part of a longer term real estate plan for the tenant. Additional highlights are primarily attributed to renewals with two GSA tenants inclusive a renewal for a110,000 square foot mission-critical facility in Mississippi for a 20-year term. Generally speaking, we continue to see higher retention with the GSA agencies and mission-critical facilities along with willingness to consider longer lease terms. Mission-critical facilities within our portfolio contribute to roughly 11% of our annualized revenue or just over half of our total US government portfolio.

Looking ahead to OPI’s upcoming lease expirations. While overall leasing activity has been healthy, we believe 2023 will move at a gradual pace while tenants continue to evaluate real estate needs. We continue to actively manage through proactive re-leasing efforts, along with select alternative use strategies to further diversify our portfolio and to capitalize on compelling value creation opportunities. In 2023, lease expirations represent approximately 11% of our annualized rental income, a 280 basis point decrease from where we stood at the end of Q3. Annualized revenue for 2023 expirations is comprised of the following; net known vacates for the year are trending between 5% and 6% of annualized rental income, nearly 80 basis points represents planned dispositions, and the balance of 5% to 6% is expected to renew, of which 2.2% has either signed subsequent to year-end or is in advanced stages of lease discussions.

We are currently tracking approximately 2.7 million square feet of activity in our pipeline, with more than 1.1million square feet attributable to new leasing and 541,000 square feet of potential absorption. In light of the activity in our pipeline, combined with our property disposition plans, we are projecting year-end occupancy of 88% to 90%. Turning to our developments. OPI currently has two redevelopment projects underway that we expect will enhance our competitive positioning in the market and provide significant value creation and growth opportunities. Our redevelopment at 20 Mass Ave in Washington, D.C. is on track to deliver during the second quarter of 2023. The property is currently 54% pre-leased to an anchor tenant, the Royal Sonesta Hotel, and we anticipate an opening date to take place at the end of the second quarter.

In Seattle, Washington, we continue to advance construction. However, our timing for completion has been moved out to Q4 2023 given supply chain impacts for delivery of certain equipment. The delay mostly defers the timing of a potential lease to start of our spec suites. However, we anticipate our anchor lab tenant leasing 28% of the project will continue to commence in Q4 as originally planned. We’re off to a good start with pre-leasing at both projects and maintain our outlook for lease-up to stabilization of 18 to 24 months following delivery. Our development leasing pipeline includes more than 170,000 square feet of active proposals across the two projects. Total cost of stabilization are $377 million of which $197 million or 52% has been spent through year-end 2022.

We anticipate between $125 million to$135 million or up to 36% will be spent in 2023 with the balance incurred with future year lease-up. Upon stabilization, estimated stabilized yields for Washington, D.C. are 8% to 10% and for Seattle are 10% to 12%. In conclusion, despite these achievements, tenants broader view on office needs and plans for reentry remain in a period of transition. Industry utilization continues to improve at a very gradual pace across most markets currently trending near 50% and consistent with what we are expecting across our national portfolio. While we continue to experience gradual improvements supporting tenant decisions within our portfolio, as highlighted with our leasing results or no vacates, concerns of an economic recession, discount reductions, along with cost-containment measures continue to weigh on office fundamentals.

Heading into 2023, we take comfort in the many initiatives undertaken over the past several years to position OPI as a landlord of choice when managing through transitionary periods. Representative examples include enhancements to our overall portfolio with our capital recycling program and major redevelopments are focused on providing an exceptional experience through our property management and engineering teams. Our many sustainability initiatives, including the company’s recognition as a gold level green lease leader and steps taken to strengthen our balance sheet. We believe these and other factors will benefit OPI as we continue to navigate the headwinds facing the office sector. I will now turn the call over to Matt to review our financial results.

Matt Brown: Thanks Chris and good morning everyone. Normalized FFO for the fourth quarter was $54.5 million or $1.13 per share, $0.03 above the high end of our guidance range. This compares to normalized FFO of $53.8 million or $1.11 per share for the third quarter. The sequential quarter increase was primarily driven by lower G&A and interest expense. I’d like to highlight that OPI’s fourth quarter income statement includes a decrease in expense reimbursements included in rental income and real estate tax expense of approximately $8.1 million and $8.2 million, respectively, related to a favorable real estate tax assessment received during the quarter for a property located in Chicago that OPI acquired in June 2021. G&A expense for the fourth quarter was $5.8 million as compared to $6.6 million for the third quarter and $6.7 million adjusted for the reversal of previously accrued incentive fees in Q4 2021.

This quarter decline was driven by Q3 share rents and a reduction in our business management fee as our share price has declined, illustrating the fee structure alignment between RMR and OPI shareholders. Same-property cash basis NOI decreased 1.4% compared to the fourth quarter of 2021, in line with our guidance range. The decrease was mainly driven by higher levels of free rent related to leasing activity over the past year and higher operating expenses. Turning to our outlook for normalized FFO and same-property cash basis NOI expectations in the first quarter of 2023. We expect normalized FFO to be between $1.10 and $1.12 per share. This guidance includes a range of $5.7 million to $5.8 million of G&A expense. Adjusted for the real estate tax and related impact on tenant reimbursement income in the fourth quarter noted previously, our estimated first quarter run rate for rental income is approximately $133.5 million and real estate tax expense is approximately $16 million.

We expect same-property cash basis NOI to be down 2% to 4% as compared to the first quarter of 2022, mainly driven by increased operating expenses as a result of higher utilization levels and continued inflationary pressure. Turning to the balance sheet. At quarter-end, our outstanding debt had a weighted average interest rate of4% and a weighted average maturity over five years. With 92% of our debt at fixed rates, we remain well-insulated from the rising cost of debt capital in today’s environment. Our only variable rate debt is our revolving credit facility. And as Chris mentioned, OPI has no senior notes due until mid-2024. In November, we exercised our first option to extend our credit facility by six months until the end of July 2023, and we have one remaining option to extend the maturity date to January 2024.

We plan to pay off our only remaining mortgage debt at its June 2023 maturity date, which has a $50 million principal balance at a 3.7% interstate. This will leave OPI with a fully unencumbered balance sheet. We ended the quarter with $567 million of total liquidity including $555 million of availability under our credit facility. Turning to our investing activities. Since the beginning of the fourth quarter, we sold five properties for $20.5million and are currently under agreement to sell two properties for an aggregate sales price of $7.6 million, including a vacant property with 107,000 square feet. We spent $42.1 million on recurring capital during the fourth quarter, bringing our full year recurring capital spend to $100 million, in line with our 2022 guidance.

Our redevelopment capital totaled $44.5 million during the fourth quarter and $159 million for the full year. Looking ahead to 2023, our recurring CapEx guidance remains unchanged at $100 million. Our redevelopment CapEx guidance is expected to approximate $150 million. In January, we declared our regular quarterly dividend of $0.55 per share, resulting in a normalized FFO payout ratio of 49% and a rolling four-quarter CAD payout ratio of 84%. Operator, that concludes our prepared remarks. We’re ready to open the call up for questions.

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Operator: We will now begin the question-and-answer session. Our first question is from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher: Thank you. Good morning Chris and Matt. A couple of quick questions for me. Can you talk a little bit more about the capital recycling plan? I mean we know what you’ve sold and have under LOI in the first quarter, but what are the — what’s the outlook for 2023to sell? And maybe also the counter to that, what, if anything, are you looking to buy in a year where we’re hearing there could be opportunities as owners have problems refinancing debt?

Chris Bilotto: Yes, Bryan, this is Chris. Thank you for the question. I guess a couple of things. I think currently, where we stand today, we’re more focused on our business plan, which is the leasing of vacancy, wrapping up these redevelopments and then continuing through capital recycling with a bigger focus on selling assets to just kind of manage leverage levels and to kind of fund other capital initiatives. And so I think that’s where we sit today. With regard to capital recycling and kind of the disposition focus, it’s going to be somewhat muted in 2023. I think there’s a lot of uncertainty around just kind of capital markets and financing, which is going to weigh on our ability to transact. If you kind of look back at 2022 and kind of selling north of $200 million, I think we would view that as a successful year and kind of showing some opportunity to transact in what was also, I think, a challenging market for capital markets.

I think what we’re selling assets or have been, they’re smaller in deal size. And so perhaps that’s opened up kind of more window for owner users and other groups, which is part of the reason why I think we ended the year where we did. But to put kind of a number to 2023 is difficult. I mean our plan over the last several years was to always focus on kind of that $100 million to $300 million in activity as part of kind of a longer-term strategy. I think we’d like to see that, but I would be a little bit cautious to say that we’ll get there. I mean, I think in addition to the $7.6 million we’ve talked about, we have about another $15 million in the market. We’re working through business plans now and kind of identifying other opportunities that we think might be ripe to bring to the market.

But anything on that front is going to happen more towards the back half of the year.

Bryan Maher: Okay. And I think in your prepared comments, it was hard keeping up. You mentioned, I think, 5% to 6% known vacates in 2023, maybe I have that wrong, and 80 bps of that was to be sold, maybe you can clarify that. But if those numbers are the case, what are you looking at prospect wise for the balance of the known vacates? Are any of those properties really likely to be re-leased? Or are they on the fence to be sold? Maybe a little bit more color there.

Chris Bilotto: Yes. So, I think when you think about the known vacates that’s 5% to 6%, I think it’s probably best to kind of wind back the clock a little bit and put ourselves kind of out last quarter. Now, that we’ve renewed the 336,000 square feet with a larger tenant, that’s kind of come out of the denominator. And so you’re seeing kind of a larger spread on known vacates just given that we have less annualized revenue expiring because we’ve been able to successfully secure renewals. And so barring any disposition or leasing with some of those other known vacates, we would expect that, that number is going to continue to increase as those expirations near, which are mostly in the back half of the year as well. There is various levels of activity on some of those known vacates.

I think some examples we’ve talked about the building of Washington, D.C., representing about just over 2% of our annualized revenue. The tenant there was kind of — it was on the fence about whether or not they stay, it looks like they’re going to renew, but downsize. And so that will — once that transact, that will kind of reduce or open up some additional vacancy. And then we have a project in Boston, where the tenant is going to leave or is expected to leave midyear. And I would say that there is some activity there, but nothing far enough along to speak to. So, it really depends. We have 10% vacancy across the portfolio. So, there’s going to be ebb and flow about whether or not we see leasing on the known vacates or kind of augmenting that over towards some of the vacancy.

I think in general, we would expect to see leasing on both fronts. I think just as another kind of anecdotal piece, we have, I think, close to 200,000 square feet in advanced discussions of new leasing, some of which may hit this quarter. And so I think that will be kind of a path towards addressing or kind of countering some vacancy and again, with some activity around some of these known vacates.

Bryan Maher: Okay. Thanks for that. And just really quick last for me. If memory serves me, you have cobbled together, I think, an entire city block in Downtown Boston for possible redevelopment. Is there any update there?

Chris Bilotto: On the redevelopment side, there’s not. I mean, I think that it’s something — it’s a great site. I think long-term, I think we’re optimistic about options there. But in Boston, in general, it’s just a very lengthy process to work through potential development. And so I think where we sit today, it’s still something we’re focused on, but nothing to really speak to as far as progress. And so — and I think to complement that, it’s not a scenario in the near-term where we would see any real significant capital spend in support of that project.

Bryan Maher: Okay. Thank you.

Operator: And the next question is a follow-up from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher: Well, I guess that there’s no questions, I’ll throw in one more. When it comes to your dialogue with existing tenants, when their properties are coming up for renewal, can you give a little color on how those are going when it relates to the fact that they might think that they have a little leverage with the whole work-from-home scenario and the macro environment versus your argument that, hey, we have inflationary costs that we need to pass through. Can you give us a little color on how those progress?

Chris Bilotto: Yes, I think it’s a couple of things. I think for tenants who find that it’s important to control their space of the building. So, let’s just use single tenants — single building occupied by single tenants. For example, in that particular case, I think it’s really just a function of market because, in most cases, if the tenant wants to control the space, it’s hard to negotiate something other than a downside because we all know they don’t want to give back space. But really, this is a function of just overall space needs. I don’t know that there’s a scenario where there ‘smore leverage. I mean, I think, clearly, we want to be in a position where we can retain a tenant. And so we’re going to focus on what our market deals and at the same time, recognize that there is a significant amount of value in retention versus the alternative with either a downsize or vacancy.

And so some of that comes in the form of concessions. We can potentially maintain pace rates, but we’re seeing inflated free rent or other types of concessions to kind of support those needs. And I think that’s reflected in some of kind of the impact with our capital spend related to leasing that has trended over the last several quarters. And so I think the shorter answer is more about — less about just true leverage and more about just being creative to make it a win-win situation.

Bryan Maher: Okay. And maybe lastly, when it comes to the D.C. and Seattle redevelopment, I know you have the anchor tenants in each of those two projects. But can you give us a little more color on what the other discussions are for other tenants to fill out those space?

Chris Bilotto: So, as we noted, we have about 170,000 square feet of activity across those two buildings, about 40% of that is for 20 Mass Ave and the balance is for Seattle. I’d say, for 20 Mass Ave, on the positive, there’s been kind of a good influx of tour activity, which is expected given the project is nearing completion. And it’s just — it’s easier to kind of walk through that and see the opportunity from a tenant’s perspective. There’s nothing far enough along to speak to as far as when or if those will transact. But I think in general, that activity is more catered towards tech tenants, law firms, nonprofits and similar type agencies, which is, I think, generally consistent with what we see in D.C. For Seattle, it’s twofold.

I think that with the anchor tenant, there’s potential upside for them to take down additional space in the lab building. The activity that we have today at that project is mostly geared towards the office side of the project. Just as a reminder, two of the three buildings are lab and the third is office. And really, that’s a function of — on the second lab office, these are going to be spec suites, more movement ready for smaller tenants, kind of partial floor, full floor tenants. And those conversations typically come later, closer to delivery, given that the tenants themselves just kind of have a near-term need. And so we did see a flurry of activity. I think it’s somewhat muted on that side given kind of we pushed out our delivery date, but we would expect that there’ll be more to talk about on more — on specific spec suite lab opportunity in the upcoming quarters.

But right now, that activity is catered towards the office building.

Bryan Maher: Great. Thanks Chris.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks.

Chris Bilotto: Well, thank you for joining us today and your interest in OPI, and we look forward to speaking with you again soon.

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