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Operator: Good morning and welcome to the Office Properties Income Trust Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Kevin Berry, Senior Director of Investor Relations. Please go ahead.

Kevin Barry: Thank you, and good morning, everyone. Thanks 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 third quarter of 2024, followed by a question-and-answer session with sell-side analysts. 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 meeting 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, October 31st, 2024, 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’ll be discussing non-GAAP numbers during this call, including normalized funds from operations or normalized FFO and cash basis net operating income or cash basis NOI. Our reconciliation of these non-GAAP figures to net income are available on OPI’s earnings release presentation that we issued last night, which can be found on our website.

And finally, we’ll 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: Thank you, Kevin, and good morning. Before we begin, I would like to provide an update on the progress we have made to navigate our upcoming debt maturities. In the first half of the year, we completed $1.3 billion in secured financings and reduced OPI’s total debt by nearly $300 million. Since last quarter, we exchanged $42.5 million of our outstanding unsecured senior notes for new secured senior notes and common shares. These strategic actions have allowed us to reduce our 2025 debt maturity by over $192 million from $650 million to approximately $457 million. Additionally, we are focused on enhancing our liquidity. We sold six properties for $46 million in the third quarter and drew the remaining $125 million of capacity under our credit facility earlier this month.

We have been negotiating a potential debt exchange transaction with a group of our 2025 noteholders. However, we cannot say with certainty whether we will be able to execute on a refinancing transaction and satisfy the debt prior to the February 1st, 2025 maturity date. Now turning to the quarter. I will start with an overview of our portfolio, review third quarter leasing results and upcoming lease expirations before providing an update on our property dispositions. From there, I will turn the call over to Brian to review our financial results. OPI’s portfolio consists of 145 properties totaling more than 19 million square feet with a weighted average remaining lease term of approximately seven years. We ended this quarter with total portfolio occupancy of 82.8% and same property occupancy of 89.3%.

Our portfolio generates $453 million of annualized revenue and is diversified by both industry and geography with nearly 60% of our revenues coming from investment grade rated tenants or subsidiaries. As of today, 62 properties totaling 10 million square feet that account for nearly $287 million of annualized revenue or 63% of our total portfolio revenue serve as collateral under our existing debt agreements. OPI continues to face challenges due to shifts in office space utilization, such as increased remote work and tenants consolidating their real estate footprint. Within our portfolio, these challenges have had a disproportionately negative impact on our unencumbered portfolio, where the majority of OPI’s known vacates in 2024 and 2025 are concentrated.

Accordingly, we are focused on retaining tenants at our properties. During the third quarter, we executed 14 leases totaling 987,000 square feet with a weighted average lease term of 10.2 years. Renewals drove the majority or 96% of our leasing, including a 554,000 square foot lease with Bank of America at a 2% roll up in rent and a 235,000 square foot lease with AT&T at an 11% roll up in rent. Both were for single-tenant leased properties that serve as collateral to our $567 million senior secured notes due 2029 and were previously forecasted to occur. As we have long telegraphed 3.1 million square feet is scheduled to expire through December of 2025. Known vacates during this period account for $53.2 million of annualized revenue or 11.7% of OPI’s total annualized revenue.

While our desired outcome would be to re-lease these vacancies, many are large single-tenant properties, which face challenging market conditions as tenants vacate. Additionally, significant downtime, decreasing market rents and increased tenant improvement and concession packages would put further burden on OPI’s liquidity. We plan to mitigate the impact to occupancy and associated carry costs through property dispositions. OPI’s multi-tenant properties, which represent 38% of our portfolio are experiencing greater tenant demand, especially at properties where common area and amenity upgrades have recently been completed. In the third quarter, all seven of the new leases we executed were at multi-tenant properties and 65% of our new leasing pipeline is within multi-tenant properties.

Turning to our disposition activity. We remain focused on selling properties that will increase our liquidity as well as reduce the carrying costs associated with vacant properties. However, sales remain challenging in this market as valuations within the office sector remain depressed and financing is not readily available to buyers. Additionally, the pool of potential buyers for vacant or soon to be vacant properties is generally limited to opportunistic value add buyers or developers. In addition to the fixed properties we sold in the third quarter for $46 million we are under agreement to sell an additional 17 properties totaling 1.6 million square feet for an aggregate sales price of $119 million. However, based on our own experience, we cannot be certain that these properties will sell at the prices currently projected or at all.

Before I turn the call over to Brian to discuss our financial results, I would like to reiterate that we are equally focused on evaluating strategies to navigate OPI’s upcoming debt maturities, while simultaneously operating and leasing our properties. Brian?

Brian Donley: Thank you, Yael, and good morning. For the third quarter, we reported normalized FFO of $22.1 million or $0.43 per share for the quarter. Below the low end of our guidance range by $0.03 as a result of a $0.02 miss in rental income related to an increase in reserve for uncollectible rents and a $0.01 miss on higher operating expenses. This compared to normalized FFO of $33.2 million or $0.68 per share for the second quarter of 2024. The decrease on a sequential quarter basis was driven by higher interest expense and lower NOI. Same property cash basis NOI was $59.3 million representing a decline of 4% compared to the third quarter of 2023, beating our expectations for the quarter due to certain properties being classified as held for sale as of September 30th.

Turning to our outlook for normalized FFO and same property cash basis NOI expectations for the fourth quarter of 2024. We expect normalized FFO to be between $0.33 and $0.35 per share. The decrease sequentially from Q3 is primarily driven by lower NOI and increased interest expense. Our current estimated quarterly interest expense run rate is approximately $45 million consisting of $43 million of cash interest expense and $2 million of non-cash amortization of financing costs. We expect same property cash basis NOI to be down 2% to 4% as compared to the fourth quarter of 2023 driven by tenant vacancies, elevated free rent, partially offset by lower operating expenses. This NOI guidance does not include any potential changes to our same-store portfolio.

Turning to our investing activities. We spent $34.4 million on recurring capital and our 2024 full year CapEx guidance is expected to be a spend of approximately $110 million comprised of $20 million of building capital and $90 million of leasing capital. At quarter-end, we had 17 properties with a carrying value of $124 million classified as held for sale. We took a $42 million impairment charge during the quarter to write down the carrying value of nine of these properties and one additional property. As of today, we have 17 properties under agreement for sale for $119 million, including 13 of the properties classified as held for sale. We expect these transactions to close by the end of Q1 2025. Turning to the balance sheet. In October, we drew down the remaining $125 million of capacity under our revolving credit facility to preserve our financial flexibility.

Our total liquidity today is $146 million of cash. Since the second quarter, we have exchanged $42.5 million of our outstanding unsecured senior notes due 2025 for $42.6 million of new 9% senior secured notes due 2029 and 5.1 million common shares. The new 9% senior notes exchange represented the remaining capacity that was available for issuance under OPI senior secured notes due September 2029 from our June debt exchange. We ended this quarter with $2.3 billion of outstanding debt with a weighted average interest rate of 7.1% and a weighted average maturity of 4.9 years. We also currently have $100 million of committed leasing-related obligations. As Yael noted, we are focused on addressing the remaining $457 million of notes maturing on February 1st, 2025.

We cannot be sure that we can execute on a refinancing transaction to satisfy this debt maturity. As a result, there is a substantial doubt about our ability to continue as a going concern. At the same time, we continue to work with our third-party adviser, Moelis & Company, on a possible debt exchange with certain of our 2025 note holders and to explore other capital management transactions. Our conversations with these investors are ongoing and we’ll provide updates as circumstances warrant. That concludes our prepared remarks. Operator, we’re ready to open up the call for questions.

Operator: We’ll now begin the question-and-answer session. [Operator Instructions] The first question is from Bryan Maher with B. Riley Securities. Please go ahead.

Bryan Maher: Thank you, and good morning, Yael and Brian. Just a couple from me today. When I look at the 10-Q, specifically Page 11, and I look at the assets that you’ve sold and the assets to be sold and I kind of do a little bit of rough math between what they’re being sold at and the impairment charges, is it safe to say that you’re basically selling these at kind of 56% to 60% of carrying value? Am I thinking about that right?

Yael Duffy: Good morning, Brian. These properties that we’re selling are generally vacant or soon to be vacant. So the carrying value is really irrelevant considering that there’s no leases in place. So again it’s — I would say probably even less than the carrying value, a third of the carrying value.

Bryan Maher: Okay. And okay — what percentage would you say are currently vacant? Or how soon are these properties to be vacant? I get it that you’re kind of selling them by the pound. But what I’m trying to get at is when I look at your gross book value of your remaining available assets, unencumbered assets, whatever they are, 80 something assets, north of $2 billion. I’m just trying to kind of get to what they’re really worth. I don’t know if you really want to share that or if you’re using that unencumbered pool, I’m sure, to discuss the debt exchange. Any color there, I think, would be helpful to investors in the common.

Yael Duffy: Yes. So of the 17 properties under agreement, 12 of them are vacant or soon to be — or will be vacant by the end of the year. And then there’s another one that will be vacant in early Q2 of ’25. And so the remaining have — are low occupancy. I mean, I would say, 50% or less and a short WALT. So those are — I guess I would say those are not the performing assets within our portfolio.

Bryan Maher: Right. I’m just trying to draw some correlation between the more challenged assets of the portfolio and their value versus the not challenged assets in the portfolio and their value, which the vast bulk, I think we would all agree, make up the collateral pools for the tranches of debt that you’ve discussed. Kind of moving on to the Sonesta in DC at 20 Mass Ave. When does that property stop being in a free rent period? Isn’t that coming up fairly soon?

Yael Duffy: In January of ’25.

Bryan Maher: Okay. And then can you give a little bit of color on who the buyers are? You talked about it in your prepared comments I know a little bit. But when the buyers are coming to table to buy your assets that are out there, the unencumbered, are they teardowns, redevelopments? What are they thinking? And what is their ability to close and close how fast?

Yael Duffy: So it really is a mix depending on the property. We have some properties under agreement that really are based just on a land value and will likely be torn down and redevelopment — redeveloped. And then we have other properties that the buyers are owner users, and those are garnering a premium. So really the sales prices can range anywhere from $20 a square foot to $170 a square foot.

Bryan Maher: Okay. And maybe last for me. We were impressed and I know that you had some outlook on this, the leasing activity in the third quarter, nearly 1 million square feet. Can you give us a little bit more color on what the leasing pipeline looks like and your optimism on the ability to close on that leasing pipeline?

Yael Duffy: So our pipeline is just under 2 million square feet about just over 60 deals. We don’t have — most of it is in early stages proposals or tour activity. I would say less than 20% is in advanced stages. And as I said in my prepared remarks, we really aren’t seeing the activity at the single-tenant buildings where the tenants — the existing tenants are leaving and we have seen, at least, increased activity at the multi-tenant properties.

Bryan Maher: Okay. Well, just maybe one last one for me. In negotiating with these 2025 noteholders. Do you feel like and I saw your deck that went out, whatever it was, a week or two ago and the commentary along with that, that I guess, one of the noteholders had pulled out and so you guys moved to disclose that information. But do you get the sense that the remaining noteholder negotiations are going along in good faith that they want to make something happen for 2025?

Yael Duffy: Yes. The conversations have been very constructive. So that’s all I can really say.

Bryan Maher: Okay. Thank you. That’s all for me.

Operator: [Operator Instructions] The next question is from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem: Hey, guys, thanks for the time this morning. Just a quick one for me. Could you sort of just quickly walk me through just the thinking behind the debt exchange done in the quarter with both notes due in 2029 and equity?

Brian Donley: Sure. We’ve been trying to utilize the tools in our toolbox to chip away at the maturities. At the same time, we’re talking with, as we mentioned, the certain of the 2025 investors. So we had some capacity left from the exchange we did in June to issue further notes under that deal, which we utilized and closed on in October. We’ve also been doing some small one-off debt for equity exchanges, not overly material amount, but every bit is helping chip away at the size of the maturity that we have left, which is now down to $457 million.

Ronald Kamdem: Thanks.

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

Yael Duffy: Thank you for joining us. Have a good day.