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Office Properties Income Trust (OPI) Q4 2022 Earnings Call Transcript

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Office Properties Income Trust (NASDAQ:OPI) Q4 2022 Earnings Conference Call February 16, 2023 10:00 AM ET

Company Participants

Kevin Barry - Director, IR

Chris Bilotto - President and COO

Matt Brown - CFO

Conference Call Participants

Bryan Maher - B. Riley FBR

Operator

Good greeting and invited to nan Office Properties Income Trust Fourth Quarter 2022 Earnings Conference Call. All participants will beryllium successful listen-only mode. [Operator Instructions] Please statement this arena is being recorded.

I would now for illustration to move nan convention complete to Kevin Barry, Director of Investor Relations. Please spell ahead.

Kevin Barry

Thanks Gary, bully greeting everyone. Thanks for joining america today. With maine connected nan telephone are OPI's President and Chief Operating Officer, Chris Bilotto; and Chief Financial Officer and Treasurer, Matt Brown.

In conscionable a moment, they will supply specifications astir our business and our capacity for nan 4th fourth of 2022, followed by a question-and-answer convention pinch sell-side analysts.

First, I would for illustration to statement that, nan signaling and retransmission of today's convention telephone is prohibited without nan anterior written consent of nan company. Also statement that today's convention telephone contains forward-looking statements wrong nan meaning of nan Private Securities Litigation Reform Act of 1995 and different securities laws.

These forward-looking statements are based connected OPI's beliefs and expectations arsenic of today, Thursday, February 16th, 2023, and existent results whitethorn disagree materially from those that we project.

The institution undertakes nary responsibility to revise aliases publically merchandise nan results of immoderate revision to nan forward-looking statements made successful today's convention call. Additional accusation concerning factors that could origin those differences is contained successful our filings pinch nan Securities and Exchange Commission, aliases SEC, which tin beryllium accessed from our website, opireit.com aliases nan SEC's website. Investors are cautioned not to spot undue reliance upon immoderate forward-looking statements.

In addition, we will beryllium discussing non-GAAP numbers during this call, including normalized costs from operations aliases normalized FFO, rate disposable for distribution aliases CAD, and rate ground nett operating income aliases rate ground NOI. A reconciliation of these non-GAAP figures to nett income are disposable successful our supplemental operating and financial information package, which besides tin beryllium recovered connected our website.

In addition, we will beryllium providing guidance connected this call, including normalized FFO and rate ground NOI. We are not providing a reconciliation of these non-GAAP measures arsenic portion of our guidance because definite accusation required for specified reconciliation is not disposable without unreasonable efforts aliases astatine all, specified arsenic gains and losses aliases impairment charges related to nan disposition of existent estate.

With that, I will now move nan telephone complete to Chris.

Chris Bilotto

Thank you, Kevin. Good greeting everyone and convey you for joining nan telephone today. OPI reported 4th fourth results that bespeak beardown leasing momentum, coagulated financial results, and further execution connected our superior recycling plans.

Amid continued economical uncertainty and challenging agency assemblage fundamentals, were pleased pinch our performance, advancing connected halfway strategies aimed astatine enhancing OPI's operating performance.

Normalized FFO of $1.13 per stock exceeded nan precocious extremity of our guidance scope and nan alteration successful same-property rate ground NOI was successful statement pinch our expectations. We completed 705,000 quadrate feet of leasing activity, chiefly pinch tenant renewals, resulting successful our highest quarterly retention activity successful 3 years.

Our 4th fourth capacity caps a twelvemonth successful which we achieved galore of nan operating targets that we group for OPI. During 2022, we completed 2.6 cardinal quadrate feet of leasing for a weighted mean word of much than 9 years and a roll-up successful rent of 5.6%, which was successful statement pinch nan leasing spreads we had projected astatine nan opening of nan year.

New leasing included 588,000 quadrate feet aliases 23% of our 2022 activity. We sold non-core properties for much than $210 cardinal of aggregate gross proceeds and full portfolio occupancy accrued astir 110 ground points to 90.6%, trending good supra nan nationalist agency marketplace average.

Turning to superior recycling. Since nan opening of 2022, we sold 21 properties containing 2.4 cardinal quadrate feet for $216.4 million. Although we started nan twelvemonth pinch a much fierce disposition outlook, we are pleased pinch our expertise to adjacent connected these transactions during a very tumultuous twelvemonth for superior markets and agency existent estate.

In 2023, superior recycling will stay a main strategy for OPI and cater toward ongoing portfolio enhancement opportunities, guidance of superior requirements and reducing leverage.

We expect macroeconomic uncertainty successful CRE financing to proceed to measurement connected nan gait and magnitude of marketplace activity. However, we are presently nether statement to waste 2 properties for astir $7.6 cardinal successful gross proceeds, and we are successful various stages of identifying and trading further properties for sale, astir apt to transact successful nan backmost half of nan year.

We ended nan twelvemonth pinch 160 properties containing 21 cardinal quadrate feet pinch a weighted mean lease word of 6.6 years. Approximately 63% of our annualized rental income was from investment-grade rated tenants, which we judge is 1 of nan highest specified percentages successful nan agency REIT sector. Our equilibrium expanse has astir $570 cardinal of liquidity pinch 92% of our indebtedness astatine fixed rates, and we person nary elder notes maturing until mid-2024.

Turning to our 4th fourth leasing results. We entered into caller and renewal leases for 705,000 quadrate feet, which is simply a 16% summation from nan 3rd 4th and a marginal betterment complete nan anterior year. This activity resulted successful a weighted mean lease word of 10.1 years, and leasing concessions and superior commitments of $8.46 per quadrate ft per lease year.

Weighted mean rent spreads for nan 4th declined 6.7%, chiefly owed to a 337,000 quadrate ft renewal for an 11-year word pinch nan defense contractor located successful Northern Virginia. We position this renewal arsenic a strategical triumph pinch 1 of our largest tenant expirations successful 2023 and nickname that our field is portion of a longer word existent property scheme for nan tenant.

Additional highlights are chiefly attributed to renewals pinch 2 GSA tenants inclusive a renewal for a110,000 quadrate ft mission-critical installation successful Mississippi for a 20-year term.

Generally speaking, we proceed to spot higher retention pinch nan GSA agencies and mission-critical accommodation on pinch willingness to see longer lease terms. Mission-critical accommodation wrong our portfolio lend to astir 11% of our annualized gross aliases conscionable complete half of our full US authorities portfolio.

Looking up to OPI's upcoming lease expirations. While wide leasing activity has been healthy, we judge 2023 will move astatine a gradual gait while tenants proceed to measure existent property needs.

We proceed to actively negociate done proactive re-leasing efforts, on pinch prime replacement usage strategies to further diversify our portfolio and to capitalize connected compelling worth creation opportunities.

In 2023, lease expirations correspond astir 11% of our annualized rental income, a 280 ground constituent alteration from wherever we stood astatine nan extremity of Q3. Annualized gross for 2023 expirations is comprised of nan following; nett known vacates for nan twelvemonth are trending betwixt 5% and 6% of annualized rental income, astir 80 ground points represents planned dispositions, and nan equilibrium of 5% to 6% is expected to renew, of which 2.2% has either signed consequent to year-end aliases is successful precocious stages of lease discussions.

We are presently search astir 2.7 cardinal quadrate feet of activity successful our pipeline, pinch much than 1.1million quadrate feet attributable to caller leasing and 541,000 quadrate feet of imaginable absorption. In ray of nan activity successful our pipeline, mixed pinch our spot disposition plans, we are projecting year-end occupancy of 88% to 90%.

Turning to our developments. OPI presently has 2 redevelopment projects underway that we expect will heighten our competitory positioning successful nan marketplace and supply important worth creation and maturation opportunities.

Our redevelopment astatine 20 Mass Ave successful Washington, D.C. is connected way to present during nan 2nd 4th of 2023. The spot is presently 54% pre-leased to an anchor tenant, nan Royal Sonesta Hotel, and we expect an opening day to return spot astatine nan extremity of nan 2nd quarter.

In Seattle, Washington, we proceed to beforehand construction. However, our timing for completion has been moved retired to Q4 2023 fixed proviso concatenation impacts for transportation of definite equipment.

The hold mostly defers nan timing of a imaginable lease to commencement of our spec suites. However, we expect our anchor laboratory tenant leasing 28% of nan task will proceed to commence successful Q4 arsenic primitively planned.

We're disconnected to a bully commencement pinch pre-leasing astatine some projects and support our outlook for lease-up to stabilization of 18 to 24 months pursuing delivery. Our improvement leasing pipeline includes much than 170,000 quadrate feet of progressive proposals crossed nan 2 projects.

Total costs of stabilization are $377 cardinal of which $197 cardinal aliases 52% has been spent done year-end 2022. We expect betwixt $125 cardinal to$135 cardinal aliases up to 36% will beryllium spent successful 2023 pinch nan equilibrium incurred pinch early twelvemonth lease-up. Upon stabilization, estimated stabilized yields for Washington, D.C. are 8% to 10% and for Seattle are 10% to 12%.

In conclusion, contempt these achievements, tenants broader position connected agency needs and plans for reentry stay successful a play of transition. Industry utilization continues to amended astatine a very gradual gait crossed astir markets presently trending adjacent 50% and accordant pinch what we are expecting crossed our nationalist portfolio.

While we proceed to acquisition gradual improvements supporting tenant decisions wrong our portfolio, arsenic highlighted pinch our leasing results aliases nary vacates, concerns of an economical recession, discount reductions, on pinch cost-containment measures proceed to measurement connected agency fundamentals.

Heading into 2023, we return comfortableness successful nan galore initiatives undertaken complete nan past respective years to position OPI arsenic a landlord of prime erstwhile managing done transitionary periods.

Representative examples see enhancements to our wide portfolio pinch our superior recycling programme and awesome redevelopments are focused connected providing an exceptional acquisition done our spot guidance and engineering teams.

Our galore sustainability initiatives, including nan company's nickname arsenic a golden level greenish lease leader and steps taken to fortify our equilibrium sheet. We judge these and different factors will use OPI arsenic we proceed to navigate nan headwinds facing nan agency sector.

I will now move nan telephone complete to Matt to reappraisal our financial results.

Matt Brown

Thanks Chris and bully greeting everyone. Normalized FFO for nan 4th fourth was $54.5 cardinal aliases $1.13 per share, $0.03 supra nan precocious extremity of our guidance range. This compares to normalized FFO of $53.8 cardinal aliases $1.11 per stock for nan 3rd quarter. The sequential 4th summation was chiefly driven by little G&A and liking expense.

I'd for illustration to item that OPI's 4th fourth income connection includes a alteration successful disbursal reimbursements included successful rental income and existent property taxation disbursal of astir $8.1 cardinal and $8.2 million, respectively, related to a favorable existent property taxation appraisal received during nan 4th for a spot located successful Chicago that OPI acquired successful June 2021.

G&A disbursal for nan 4th fourth was $5.8 cardinal arsenic compared to $6.6 cardinal for nan 3rd 4th and $6.7 cardinal adjusted for nan reversal of antecedently accrued inducement fees successful Q4 2021. This 4th diminution was driven by Q3 stock rents and a simplification successful our business guidance interest arsenic our stock value has declined, illustrating nan interest building alignment betwixt RMR and OPI shareholders.

Same-property rate ground NOI decreased 1.4% compared to nan 4th fourth of 2021, successful statement pinch our guidance range. The alteration was chiefly driven by higher levels of free rent related to leasing activity complete nan past twelvemonth and higher operating expenses.

Turning to our outlook for normalized FFO and same-property rate ground NOI expectations successful nan first 4th of 2023. We expect normalized FFO to beryllium betwixt $1.10 and $1.12 per share. This guidance includes a scope of $5.7 cardinal to $5.8 cardinal of G&A expense.

Adjusted for nan existent property taxation and related effect connected tenant reimbursement income successful nan 4th fourth noted previously, our estimated first 4th tally complaint for rental income is astir $133.5 cardinal and existent property taxation disbursal is astir $16 million.

We expect same-property rate ground NOI to beryllium down 2% to 4% arsenic compared to nan first 4th of 2022, chiefly driven by accrued operating expenses arsenic a consequence of higher utilization levels and continued inflationary pressure.

Turning to nan equilibrium sheet. At quarter-end, our outstanding indebtedness had a weighted mean liking complaint of4% and a weighted mean maturity complete 5 years. With 92% of our indebtedness astatine fixed rates, we stay well-insulated from nan rising costs of indebtedness superior successful today's environment. Our only adaptable complaint indebtedness is our revolving in installments facility. And arsenic Chris mentioned, OPI has nary elder notes owed until mid-2024.

In November, we exercised our first action to widen our in installments installation by six months until nan extremity of July 2023, and we person 1 remaining action to widen nan maturity day to January 2024.

We scheme to salary disconnected our only remaining owe indebtedness astatine its June 2023 maturity date, which has a $50 cardinal main equilibrium astatine a 3.7% interstate. This will time off OPI pinch a afloat unencumbered equilibrium sheet. We ended nan 4th pinch $567 cardinal of full liquidity including $555 cardinal of readiness nether our in installments facility.

Turning to our investing activities. Since nan opening of nan 4th quarter, we sold 5 properties for $20.5million and are presently nether statement to waste 2 properties for an aggregate income value of $7.6 million, including a vacant spot pinch 107,000 quadrate feet.

We spent $42.1 cardinal connected recurring superior during nan 4th quarter, bringing our afloat twelvemonth recurring superior walk to $100 million, successful statement pinch our 2022 guidance. Our redevelopment superior totaled $44.5 cardinal during nan 4th fourth and $159 cardinal for nan afloat year.

Looking up to 2023, our recurring CapEx guidance remains unchanged astatine $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 successful 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 fresh to unfastened nan telephone up for questions.

Question-and-Answer Session

Operator

We will now statesman nan question-and-answer session. [Operator Instructions] Our first mobility is from Bryan Maher pinch B. Riley FBR. Please spell ahead.

Bryan Maher

Thank you. Good greeting Chris and Matt. A mates of speedy questions for me. Can you talk a small spot much astir nan superior recycling plan? I mean we cognize what you've sold and person nether LOI successful nan first quarter, but what are nan -- what's nan outlook for 2023to sell? And possibly besides nan antagonistic to that, what, if anything, are you looking to bargain successful a twelvemonth wherever we're proceeding location could beryllium opportunities arsenic owners person problems refinancing debt?

Chris Bilotto

Yes, Bryan, this is Chris. Thank you for nan question. I conjecture a mates of things. I deliberation currently, wherever we guidelines today, we're much focused connected our business plan, which is nan leasing of vacancy, wrapping up these redevelopments and past continuing done superior recycling pinch a bigger attraction connected trading assets to conscionable benignant of negociate leverage levels and to benignant of money different superior initiatives. And truthful I deliberation that's wherever we beryllium today.

With respect to superior recycling and benignant of nan disposition focus, it's going to beryllium somewhat muted successful 2023. I deliberation there's a batch of uncertainty astir conscionable benignant of superior markets and financing, which is going to measurement connected our expertise to transact.

If you benignant of look backmost astatine 2022 and benignant of trading northbound of $200 million, I deliberation we would position that arsenic a successful twelvemonth and benignant of showing immoderate opportunity to transact successful what was also, I think, a challenging marketplace for superior markets.

I deliberation what we're trading assets aliases person been, they're smaller successful woody size. And truthful possibly that's opened up benignant of much model for proprietor users and different groups, which is portion of nan logic why I deliberation we ended nan twelvemonth wherever we did.

But to put benignant of a number to 2023 is difficult. I mean our scheme complete nan past respective years was to ever attraction connected benignant of that $100 cardinal to $300 cardinal successful activity arsenic portion of benignant of a longer-term strategy. I deliberation we'd for illustration to spot that, but I would beryllium a small spot cautious to opportunity that we'll get there.

I mean, I deliberation successful summation to nan $7.6 cardinal we've talked about, we person astir different $15 cardinal successful nan market. We're moving done business plans now and benignant of identifying different opportunities that we deliberation mightiness beryllium ripe to bring to nan market. But thing connected that beforehand is going to hap much towards nan backmost half of nan year.

Bryan Maher

Okay. And I deliberation successful your prepared comments, it was difficult keeping up. You mentioned, I think, 5% to 6% known vacates successful 2023, possibly I person that wrong, and 80 bps of that was to beryllium sold, possibly you tin explain that. But if those numbers are nan case, what are you looking astatine imaginable wise for nan equilibrium of nan known vacates? Are immoderate of those properties really apt to beryllium re-leased? Or are they connected nan obstruction to beryllium sold? Maybe a small spot much colour there.

Chris Bilotto

Yes. So, I deliberation erstwhile you deliberation astir nan known vacates that's 5% to 6%, I deliberation it's astir apt champion to benignant of upwind backmost nan timepiece a small spot and put ourselves benignant of retired past quarter.

Now, that we've renewed nan 336,000 quadrate feet pinch a larger tenant, that's benignant of travel retired of nan denominator. And truthful you're seeing benignant of a larger dispersed connected known vacates conscionable fixed that we person little annualized gross expiring because we've been capable to successfully unafraid renewals.

And truthful barring immoderate disposition aliases leasing pinch immoderate of those different known vacates, we would expect that, that number is going to proceed to summation arsenic those expirations near, which are mostly successful nan backmost half of nan twelvemonth arsenic well.

There is various levels of activity connected immoderate of those known vacates. I deliberation immoderate examples we've talked astir nan building of Washington, D.C., representing astir conscionable complete 2% of our annualized revenue.

The tenant location was benignant of -- it was connected nan obstruction astir whether aliases not they stay, it looks for illustration they're going to renew, but downsize. And truthful that will -- erstwhile that transact, that will benignant of trim aliases unfastened up immoderate further vacancy.

And past we person a task successful Boston, wherever nan tenant is going to time off aliases is expected to time off midyear. And I would opportunity that location is immoderate activity there, but thing acold capable on to speak to.

So, it really depends. We person 10% vacancy crossed nan portfolio. So, there's going to beryllium ebb and travel astir whether aliases not we spot leasing connected nan known vacates aliases benignant of augmenting that complete towards immoderate of nan vacancy. I deliberation successful general, we would expect to spot leasing connected some fronts.

I deliberation conscionable arsenic different benignant of anecdotal piece, we have, I think, adjacent to 200,000 quadrate feet successful precocious discussions of caller leasing, immoderate of which whitethorn deed this quarter. And truthful I deliberation that will beryllium benignant of a way towards addressing aliases benignant of countering immoderate vacancy and again, pinch immoderate activity astir immoderate of these known vacates.

Bryan Maher

Okay. Thanks for that. And conscionable really speedy past for me. If representation serves me, you person cobbled together, I think, an full metropolis artifact successful Downtown Boston for imaginable redevelopment. Is location immoderate update there?

Chris Bilotto

On nan redevelopment side, there's not. I mean, I deliberation that it's thing -- it's a awesome site. I deliberation long-term, I deliberation we're optimistic astir options there. But successful Boston, successful general, it's conscionable a very lengthy process to activity done imaginable development.

And truthful I deliberation wherever we beryllium today, it's still thing we're focused on, but thing to really speak to arsenic acold arsenic progress. And truthful -- and I deliberation to complement that, it's not a script successful nan near-term wherever we would spot immoderate existent important superior walk successful support of that project.

Bryan Maher

Okay. Thank you.

Operator

[Operator Instructions] And nan adjacent mobility is simply a follow-up from Bryan Maher pinch B. Riley FBR. Please spell ahead.

Bryan Maher

Well, I conjecture that there's nary questions, I'll propulsion successful 1 more. When it comes to your speech pinch existing tenants, erstwhile their properties are coming up for renewal, tin you springiness a small colour connected really those are going erstwhile it relates to nan truth that they mightiness deliberation that they person a small leverage pinch nan full work-from-home script and nan macro situation versus your statement that, hey, we person inflationary costs that we request to walk through. Can you springiness america a small colour connected really those progress?

Chris Bilotto

Yes, I deliberation it's a mates of things. I deliberation for tenants who find that it's important to power their abstraction of nan building. So, let's conscionable usage azygous tenants -- azygous building occupied by azygous tenants.

For example, successful that peculiar case, I deliberation it's really conscionable a usability of marketplace because, successful astir cases, if nan tenant wants to power nan space, it's difficult to discuss thing different than a downside because we each cognize they don't want to springiness backmost space.

But really, this is simply a usability of conscionable wide abstraction needs. I don't cognize that there's a script wherever location 'smore leverage. I mean, I think, clearly, we want to beryllium successful a position wherever we tin clasp a tenant. And truthful we're going to attraction connected what our marketplace deals and astatine nan aforesaid time, admit that location is simply a important magnitude of worth successful retention versus nan replacement pinch either a downsize aliases vacancy.

And truthful immoderate of that comes successful nan shape of concessions. We tin perchance support gait rates, but we're seeing inflated free rent aliases different types of concessions to benignant of support those needs.

And I deliberation that's reflected successful immoderate of benignant of nan effect pinch our superior walk related to leasing that has trended complete nan past respective quarters. And truthful I deliberation nan shorter reply is much astir -- little astir conscionable existent leverage and much astir conscionable being imaginative to make it a win-win situation.

Bryan Maher

Okay. And possibly lastly, erstwhile it comes to nan D.C. and Seattle redevelopment, I cognize you person nan anchor tenants successful each of those 2 projects. But tin you springiness america a small much colour connected what nan different discussions are for different tenants to capable retired those space?

Chris Bilotto

So, arsenic we noted, we person astir 170,000 quadrate feet of activity crossed those 2 buildings, astir 40% of that is for 20 Mass Ave and nan equilibrium is for Seattle. I'd say, for 20 Mass Ave, connected nan positive, there's been benignant of a bully influx of circuit activity, which is expected fixed nan task is nearing completion. And it's conscionable -- it's easier to benignant of locomotion done that and spot nan opportunity from a tenant's perspective.

There's thing acold capable on to speak to arsenic acold arsenic erstwhile aliases if those will transact. But I deliberation successful general, that activity is much catered towards tech tenants, rule firms, nonprofits and akin type agencies, which is, I think, mostly accordant pinch what we spot successful D.C.

For Seattle, it's twofold. I deliberation that pinch nan anchor tenant, there's imaginable upside for them to return down further abstraction successful nan laboratory building. The activity that we person coming astatine that task is mostly geared towards nan agency broadside of nan project. Just arsenic a reminder, 2 of nan 3 buildings are laboratory and nan 3rd is office.

And really, that's a usability of -- connected nan 2nd laboratory office, these are going to beryllium spec suites, much activity fresh for smaller tenants, benignant of partial floor, afloat level tenants. And those conversations typically travel later, person to delivery, fixed that nan tenants themselves conscionable benignant of person a near-term need. And truthful we did spot a flurry of activity.

I deliberation it's somewhat muted connected that broadside fixed benignant of we pushed retired our transportation date, but we would expect that there'll beryllium much to talk astir connected much -- connected circumstantial spec suite laboratory opportunity successful nan upcoming quarters. But correct now, that activity is catered towards nan agency building.

Bryan Maher

Great. Thanks Chris.

Operator

This concludes our question-and-answer session. I would for illustration to move nan convention backmost complete to Chris Bilotto for immoderate closing remarks.

Chris Bilotto

Well, convey you for joining america coming and your liking successful OPI, and we look guardant to speaking pinch you again soon.

Operator

The convention has now concluded. Thank you for attending today's presentation. You whitethorn now disconnect.

Editor: Naga



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