Office Properties Income Trust (NASDAQ:OPI) reported its first quarter financial results for 2024, revealing a mix of challenges and achievements amid a difficult lending market and changing tenant behaviors. The company announced a normalized Funds From Operations (FFO) of $38.3 million, or $0.79 per share, which aligns with their guidance range but shows a decrease from the previous quarter's $45.9 million, or $0.95 per share. The decline is attributed to higher interest expenses and lower Net Operating Income (NOI) due to tenant vacates.
Key Takeaways
- Office Properties Income Trust commenced exchange offers for up to $610 million of new senior secured notes.
- The company's portfolio consists of 151 properties totaling 20 million square feet, with a weighted average remaining lease term of nearly seven years.
- OPI's portfolio is diversified, with over 60% of revenue coming from investment-grade tenants or subsidiaries.
- Consolidated occupancy stood at 85.6%, with same property occupancy at 88.2%.
- The company executed 488,000 square feet of new and renewal leasing with an average lease term of 9.3 years and a rent increase of 10.2%.
- OPI is recognized for its commitment to environmental sustainability, earning accolades as an Energy Star Partner of the Year.
- The company faces significant lease rollovers through 2026, with nearly 30% of total annualized rental income expiring.
- OPI's financial outlook for Q2 2024 includes an expected normalized FFO of $0.62 to $0.64 per share and a same property cash basis NOI decline of 15% to 17% year-over-year.
Company Outlook
- OPI anticipates a decrease in normalized FFO for Q2 2024, primarily due to lower rental income.
- The company expects a significant decline in same property cash basis NOI in comparison to the same quarter of the previous year, owing to free rent and tenant vacancies.
Bearish Highlights
- Approximately 2.2 million square feet, representing $65.5 million of annualized rental income, is expected not to renew, impacting future results.
- The non-specialized portion of government revenues is expected to decline as the GSA consolidates office space.
Bullish Highlights
- Renewal leasing activity remains strong, with significant rent roll-ups in recent agreements.
- The company has a stable base of tenants involved in mission-critical government functions.
Misses
- OPI experienced a decrease in normalized FFO on a sequential quarter basis due to increased interest expense and lower NOI.
- Same-property cash basis NOI decreased by 12% compared to the first quarter of 2023.
Q&A highlights
- There were no questions and answers as the call did not include a Q&A session due to the open offering period for the note exchange.
In summary, Office Properties Income Trust is navigating a complex market environment with strategic financial maneuvers and a focus on leasing and sustainability. While facing upcoming lease expirations and tenant retention challenges, OPI is leveraging its diversified portfolio and strong leasing performance to maintain stability. The company's proactive approach to debt management and asset disposition reflects its adaptability in a changing office sector landscape.
InvestingPro Insights
Office Properties Income Trust (OPI) has indeed been through a tumultuous period, as reflected in the recent financial results. To provide further context, InvestingPro data and tips can offer additional insights into the company's performance and valuation.
InvestingPro Data:
- Market Cap (Adjusted): 124.81M USD, which highlights the relatively small size of the company within the real estate investment trust (REIT) sector.
- Price / Book (last twelve months as of Q1 2024): 0.08, suggesting that the company's stock is trading at a low valuation relative to its book value.
- Dividend Yield as of the latest available date in 2024: 2.0%, indicating that OPI has maintained a commitment to returning value to shareholders through dividends.
InvestingPro Tips:
- OPI is trading at a low EBITDA valuation multiple, which could be a signal for value investors that the stock is undervalued relative to its earnings before interest, taxes, depreciation, and amortization.
- The company has not been profitable over the last twelve months, which is an important consideration for investors focusing on bottom-line growth.
For readers looking to delve deeper into these metrics or seeking additional InvestingPro Tips, there are more tips available on the InvestingPro platform. Specifically, Office Properties Income Trust has 12 more tips available to help investors make informed decisions. To access these, visit https://www.investing.com/pro/OPI, and don't forget to use the coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Government Properties Income Trust (OPI) Q1 2024:
Operator: Good morning and welcome to Office Properties Income Trust’s First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Kevin Barry, 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 first quarter of 2024. 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, May 2, 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 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 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.
Yael Duffy: Thank you, Kevin, and good morning. Last night OPI announced that it has commenced offers to exchange certain of its outstanding unsecured senior notes for up to $610 million of new senior secured notes subject to the terms and conditions set forth in an offering memorandum. Now that the offering period is open, today's call will focus on OPI's first quarter operating and financial results and we will not be taking any questions at the end of our prepared remarks. Before I begin I want to highlight the recent publication of the RMR Group's annual sustainability report, which provides a comprehensive overview of our managers' commitment to ESG goals. We are deeply committed to enhancing OPI's corporate sustainability practices and continuing to advance initiatives that benefit our tenants and communities. As a testament to our environmental stewardship, OPI was recently recognized as an Energy Star Partner of the Year for the 7th consecutive year and a sustained excellence honoree for the 5th year in a row. You can find links to the report and the tear sheet specific to OPI's highlights on our website at opireit.com. Now turning to the quarter. I will begin with a recap of our recent activities then provide an overview of our portfolio, leasing performance, and the progress we made on key initiatives. From there I will turn the call over to Brian to discuss our financial results. The strength of OPI's portfolio is its mix of credit quality tenants and its industry and geographic diversification. Since last fall, we have been focused on addressing our debt maturities, identifying assets for disposition, and leasing vacant space. To accomplish our financing objectives in an extremely challenging lending market, especially for the office sector, we have utilized the properties with the strongest attributes to secure our recent deals, including the recast of our revolving credit facility into a new $425 million credit agreement and the refinancing of our 2024 debt maturity through a senior secured note issuance. The characteristics of the collateral pool securing these deals include high occupancy, strong remaining lease terms, and credit quality tenants. The note exchange offer we launched last evening includes additional senior secured notes backed by properties with similar attributes. However, beyond these portfolios, our unencumbered asset pool has its challenges, which I will discuss in further detail in a moment. Turning to our portfolio as of quarter end, OPI's portfolio consists of 151 properties totaling 20 million square feet with a weighted average remaining lease term of nearly seven years. Our portfolio is diversified by industry and geography with more than 60% of our revenues coming from investment-grade tenants or subsidiaries. We ended the quarter with consolidated occupancy of 85.6% and same property occupancy of 88.2%. Despite significant operational headwinds that continue to impact the office sector, we executed 488,000 square feet of new and renewal leasing. This activity resulted in an average lease term of 9.3 years and a roll-up in rent of 10.2%, reflecting our highest leasing spread since 2022. Leasing concessions and capital commitments continue to decline this quarter at $2.42 per square foot per lease year, which is less than half of OPI's quarterly average in 2023. Renewals drove over 90% of our leasing activity this quarter, including a 10-year renewal with the GSA for 352,000 square feet in Ellenwood, Georgia at a 24.7% roll-up in rent and a 10-year renewal with the State of Minnesota for 58,000 square feet in Roseville, Minnesota at a 30.7% roll-up in rent. The United States government is our largest tenant, representing 20% of annualized revenues across 43 leases for over 3.5 million square feet. We estimate that 12% of our annualized revenues are from leases at specialized building facilities that serve mission-critical needs for government agencies, such as the Federal Bureau of Investigation, Department of Homeland Security, and the Drug Enforcement Agency. The essential nature of the work these agencies are conducting and their need to physically occupy our properties has historically provided OPI with stable, predictable cash flows. These historical trends were further reinforced this quarter. Conversely, the remainder of our U.S. government exposure or 8% of annualized revenues, are from leases for back office uses that are subject to the same remote work threat to building utilization as our private sector tenants. Over time, we expect the non-specialized portion of our government revenues to decline as the GSA seeks to consolidate office space into government-owned buildings, while reducing its reliance on lease properties. We plan to offset this pressure to OPI through releasing efforts and asset dispositions. Turning to OPI's upcoming lease expiration, we have and will continue to face significant lease role over the next several years with nearly 30% of total annualized rental income expiring through 2026. Lease expirations over the next 12 months total 2.5 million square feet or 15% of OPIs annualized rental income. As we discussed on our call last quarter, single tenant properties will drive most of our expirations and we expect approximately 2.2 million square feet representing $65.5 million of annualized rental income will not renew, which will negatively impact our results in the coming quarters. Furthermore, over 2 million square feet relate to properties not already encumbered in our existing debt agreements or part of the note exchange offer I referenced earlier. While we are proactively engaging in discussions with our tenants to address their space needs, tenant retention remains a significant challenge as hybrid work in an uncertain macroeconomic climate continues to negatively impact demand. Releasing efforts are further impacted with minimal tenants in the market to absorb large blocks of space. Accordingly, it can take upwards of two years and significant capital to stabilize vacant properties. To that end, we are focused on selling vacant or soon-to-become vacant assets. We are in various stages of marketing more than 2 million square feet of properties for sale across OPI's nationwide footprint, most of which were previously leased to single tenant users. In March, we closed on the sale of 400 South Jefferson in Chicago to an owner-user for a sales price of $38.5 million or $155 per square foot. We also received an additional $10.5 million in lease termination fees from Tyson Foods (NYSE:TSN), our former tenant, as part of the deal. Turning to development activity. We reached an important milestone with the substantial completion of Unison Elliott Bay, our 300,000 square foot life science and office redevelopment in Seattle, Washington. The property is 28% leased and we continue to aggressively market the project, including four move-in ready spec lab suites. No further development projects are underway. I will now turn the call over to Brian to review our financial results.
Brian Donley: Thanks, Yael and good morning everyone. We reported normalized FFO of $38.3 million or $0.79 per share for the quarter, which was in line with our guidance range. This compares to a normalized FFO of $45.9 million, or $0.95 per share for the fourth quarter of 2023. The decrease on a sequential quarter basis was driven by higher interest expense and lower NOI as a result of tenant vacates. Same-property cash basis NOI decreased 12%, compared to the first quarter of 2023, which came in better than our guidance range of a 14% to 16 decline. The year-over-year decrease is mainly driven by elevated free rent concessions, vacancies, and higher operating expenses. We generated CAD of $0.46 per share during the first quarter and $1.32 per share on a rolling full quarter basis. First quarter CAD includes $10.5 million, or $0.22 per share, of early termination revenue related to the sale of the Tyson's Food property in Chicago. Turning to our outlook of normalized FFO and same property cash basis NOI expectations for the second quarter of 2024. We expect normalized FFO to be between $0.62 and $0.64 per share The decrease sequentially from Q1 is primarily driven by lower rental income. We expect same property cash basis NOI to be down 15% to 17% as compared to the second quarter of 2023, driven by elevated free rent and tenant vacancies. Turning to our investing activities, as Yael mentioned, during the first quarter, we sold one property for $38.5 million and we have one property under agreement for sale for $7.8 million. We spent $21.2 million on recurring capital and $6.9 million on redevelopment capital during the first quarter. In 2024, we continue to expect our total capital spend to be approximately $100 million, comprised of $25 million of building capital and $75 million of leasing capital. Turning to the balance sheet, as we discussed on our last call, we made significant progress to begin the year in addressing our debt maturities. We recast our revolving credit facility with a new three-year $425 million secured credit agreement and issued $300 million or 9% senior secured notes. Using the proceeds from the notes, offering and borrowing under our revolving credit facility, we redeemed all of our $350 million of 4.25% unsecured senior notes scheduled to mature in May 2024. I would also like to highlight that we have enhanced our disclosures and provided additional visibility into the collateral pools securing our various debt transactions within our earnings presentation and in our investor presentation posted to our website. We entered the quarter with $2.6 billion of outstanding debt with a weighted average interest rate of 5.4% and a weighted average maturity of 4.9 years. We had $159 million of total liquidity, including $135 million of availability under our credit facility. We have been focused on evaluating strategies to navigate our upcoming debt maturities, including our $650 million of senior notes due in February 2025. Last night, we commenced debt exchange offers pursuant to which OPI will issue up to $610 million of new 9% senior secured notes in exchange for certain of its outstanding unsecured senior notes with priority given to holders of OPI's 4.5% senior notes due 2025. The offer is subject to a number of conditions, including that a minimum of 15% or $98 million of our 4.5% unsecured notes due 2025 were validly tendered, and at least $488 million of the new senior secured notes would be issued. The exchange offers are only being made as certain eligible holders in accordance with the terms of an offer memorandum as noted in the press release OPI issued last night. We look forward to providing updates about our progress in the future. Thank you for joining us today. This concludes our conference call.
Operator: Thank you very much for attending today's presentation. You may now disconnect. Have a good day.
End of Q&A:
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