Office Properties Income Trust: Look Towards Debt To Get Income

Andres Victorero

Last week, Office Properties Income Trust (OPI) reported its afloat twelvemonth financial results. The banal rallied 7% connected nan week, but nan bonds remained reasonably akin to levels wherever they were erstwhile I past wrote astir nan institution successful December. Based connected nan latest financial data, I judge nan dividend is successful threat of being reduced, but nan 10.5% yielding 2026 bonds are a bully replacement for income investors.

FINRA

FINRA

For unit investors who wish not to acquisition bonds successful $1,000 increments, location is different solution. Office Properties offers a babe enslaved (NASDAQ:OPINL) which presently trades astatine $20.46. The enslaved trades conscionable for illustration a banal pinch quarterly liking distributions totaling $1.59375 per stock per year. At its existent price, nan babe enslaved is trading astatine 8% output to maturity. While nan output is little than nan accepted bonds, nan coupon output is overmuch higher, adjacent 7.8%. The babe enslaved is besides callable successful June of 2025, which if done then, would output investors a return of 17%.

QuantumOnline

Office Properties’ 2022 results featured nary awesome highs aliases lows. The institution reduced nan number of properties nether ownership by 10%. Total occupancy of nan remaining properties accrued by 110 ground points to 90.6%. From an income and profit standpoint, nan institution saw little revenues twelvemonth complete year, owed to owning less properties. Office Properties’ expenses declined owed to little existent property taxes, but not capable to sphere nett operating income, which fell by $14 million. At $359 million, nan institution is still generating capable income to screen its liking expenses, which fell to $103 cardinal past year.

SEC 10-K

SEC 10-K

Office Properties’ equilibrium expanse shows immoderate changes successful nan company’s superior building during nan year. The institution reduced its indebtedness by astir $100 million, but it required drafting $195 cardinal nether its revolving in installments installation to salary down its unsecured notes and owe debt. The company’s rate equilibrium besides drew down by $70 cardinal to $12 million.

SEC 10-K

Office Properties’ rate travel is adjuvant successful determining its dividend sustainability and nan expertise to trim debt. Over nan past 3 fiscal years, Office Properties’ operating rate travel has declined sequentially twelvemonth complete year, pinch $193 cardinal generated successful 2022. What’s astir alarming is nan company’s free rate travel was somewhat antagonistic aft $204 cardinal successful superior expenditures, much than double nan magnitude of nan past 2 years. Office Properties’ $106 cardinal dividend responsibility and indebtedness simplification were some fueled by $203 cardinal successful proceeds from nan waste of assets. Asset income to money dividends is not a bully position for nan institution to beryllium in.

SEC 10-K

Investors should admit that supporting nan existent dividend came astatine nan costs of liquidity successful 2022. The institution started nan twelvemonth pinch $830 cardinal successful liquidity (cash positive revolver capacity) and ended nan twelvemonth pinch nether $570 cardinal successful liquidity. Two much years of this gait will trim Office Properties liquidity capacity to zero without raising caller capital.

SEC 10-K

The business is further stressed by management’s comments that they are readying $250 cardinal successful caller superior expenditures successful 2023. Furthermore, nan institution expects to money these investments done nan income of assets, termed superior recycling. It's important to statement that dollar for dollar plus income aren’t going to beryllium capable to money dividends successful full arsenic nan institution will besides person to negociate nan simplification of leverage by paying down debt. Reducing nan dividend would assistance successful this endeavor.

Q4 2022 Conference Call Transcript

Q4 2022 Conference Call Transcript

Q4 2022 Conference Call Transcript

In summation to backing its planned superior expenditures, Office Properties besides needs to woody pinch upcoming lease expirations. Over nan adjacent 2 years, much than a 4th of nan company’s quadrate feet will person their leases expire. This includes conscionable nether 1.9 cardinal quadrate feet successful 2023. It’s important to statement that Office Properties seems to beryllium prepared to grip these negotiations pinch complete 2.5 cardinal quadrate feet successful leases negotiated successful 2022.

SEC 10-K

SEC 10-K

Looking further out, Office Properties indebtedness maturities are manageable complete nan adjacent 2 years, but nan institution does look a $650 cardinal maturity successful 2025. A operation of dividend simplification and free rate travel accordant pinch humanities superior expenditure levels would make refinancing this indebtedness overmuch easier. Office Properties should person capable liquidity successful its revolver to get done 2024 should refinancing not beryllium a viable option.

SEC 10-K

Overall, I americium much concerned astir Office Properties’ dividend sustainability than I was a 4th ago. I do judge nan superior recycling scheme is needed to shed underperforming properties, but plus income tin only money dividends for truthful long. Consequently, I do not judge nan institution is headed towards bankruptcy and has capable liquidity to navigate done nan 2026 bonds, yielding those investors complete 10% per twelvemonth successful returns.

CUSIP: 67623CAD1

Price: 78.50

Coupon: 2.65%

Yield to Maturity: 10.496%

Maturity Date: 6/15/2026

Credit Rating (Moody's/S&P): Ba1/BBB-

About My Writing: I americium presently focused connected income investing done either communal shares, preferred shares, aliases bonds.  I will occasionally break distant and constitute astir nan system astatine ample aliases a typical business involving a institution I've been researching in. I target 2 articles per week for publication connected Monday and Tuesday.About My Background: Bachelors successful history/political science, Masters successful Business Administration pinch a specialization successful Finance and Economics. I bask numbers. I person been investing since 2000. Professionally, I americium nan CEO of an independent surviving status organization successful Illinois.