Office Properties Income Trust (OPI) Q3 2026 Earnings Call Transcript

Thank you. Hi and welcome to the Office Properties Income Trust 3rd Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to hand the call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today. With me on the call are OPI's president and chief executive officer, Yael Duffy, and chief financial officer and treasurer, Brian Donnelly. In just a moment, they will provide details about OPI's business and performance for the third quarter of 2026. 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, Tuesday, November 10, 2026, 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 OPI's filings with the Securities and Exchange Commission, which can be accessed from the company's website. Investors are cautioned not to place undue reliance on any forward-looking statements. In addition, as a result of OPI's recent restructuring and the application of Fresh Start Accounting, financial statement amounts and operating metrics are not comparable to prior periods. Please refer to our earnings materials and SEC filings for additional information regarding the impact of Fresh Start Accounting on our reported results. We will also be discussing non-GAAP financial measures during this call, including normalized FFO and cash basis net operating income or cash basis NOI. Reconciliations of these non-GAAP figures to net income are available in OPI's earnings presentation that we issued last night, which can be found on our website. I will now turn the call over to Yael.

Thank you, Matt, and good morning. For the third quarter, OPI reported normalized FFO of $20.5 million, or 93 cents per share. Same property cash basis NOI increased 14.8% year-over-year to $51.5 million, which Brian will discuss in further detail later on this call. Turning to our portfolio leasing and disposition activity. As of September 30, 2026, OPI's portfolio consisted of 109 wholly-owned properties across 27 states in the District of Columbia, totaling approximately 15.6 million square feet. The portfolio was 80.7% leased, or 88.8% on the same property basis, with a weighted average remaining lease term of 6.2 years. Over 60% of OPI's annualized revenue comes from investment-grade-rated tenants and government leases. During our earnings call last quarter, we outlined OPI's priorities, which included maximizing cash flow through leasing, occupancy growth, and proactive asset management, executing on asset sales and applying those proceeds towards liquidity and addressing debt maturities, and driving long-term value by maintaining strong tenant relationships and efficient property operations. OPI signed 13 leases totaling 400,000 square feet with a weighted average lease term of 8.7 years, its best leasing quarter since Q2 2025. Renewals made up 97% of that volume, which drove leasing costs and concessions down to just $2.22 per square foot per lease year, more than 40% below our prior four-quarter average. Renewals avoid downtime and lost rent, which reflects continued progress on our third priority, fostering strong tenant relationships. Looking ahead, roughly 1.3 million square feet of leases, representing 11% of annualized revenue, is scheduled to expire between now and the end of 2027. We plan to address these expirations through leasing and asset sales. Of the 1.3 million square feet scheduled to roll, 290,000 square feet is currently scheduled to vacate or downsize. After adjusting for planned property disposition, that figure declined to just 52,000 square feet, representing less than 1% of annualized revenue. Today, our leasing pipeline sits at 1.6 million square feet with 1.1 million square feet, or 70% related to lease renewals. Turning to our second priority, asset sales. In June, we identified 32 properties for sale, totaling approximately 3.7 million square feet, and contributing $43 million of annualized revenue. Since then, OPI has sold 14 properties for approximately $156 million. Additionally, 15 properties are currently under purchase and sale agreements for an aggregate sales price of $134 million. And the remaining three properties are under letter of intent with estimated proceeds of $22.5 million. Pricing has met or exceeded our expectations, and total gross proceeds for the 32 properties should exceed $300 million, up from our initial expectations of $275 million. The buyer profile for these assets has spanned owner-users, value-add investors, and redevelopment buyers. As we continue to evaluate OPI's portfolio, upcoming debt repayments, and liquidity needs, we have identified an additional 26 properties for sale totaling 3.5 million square feet, which contribute annualized revenue of approximately $87 million. Eighteen of these properties are collateral for our senior notes due December, 2029. Six are collateral for our senior notes due June, 2031, and two are collateral for our senior notes due March, 2029. We are in the early stages of bringing these properties to market and expect proceeds of approximately $360 million in 2027. Once we sell the 18 properties securing the senior notes due December 2029, along with the four already held for sale, only four will remain in that collateral pool. In effect, we are selling down these assets to fully repay the December 2029 notes, which now have approximately $307 million of principal outstanding. Once we complete the sale of all 58 properties, OPI will own 64 properties totaling approximately 10 million square feet across 23 states and Washington, D.C. Based on our current projections, the retained portfolio will be 93% occupied with more than 70% of its square footage in Class A buildings compared to approximately 63% before we began selling assets. OPI will also reduce its concentration in Washington, D.C. Proforma for the planned asset sales, the D.C. Metro will represent approximately 17% of annualized revenue across 10 buildings compared to 24% of annualized revenue across 24 buildings prior to the asset sales. As a result, revenues will be more evenly balanced across our three largest markets, Washington, D.C., Atlanta, and Chicago. Government leased tenants will remain an important part of the tenant base at approximately 30% of annualized revenue, but a larger share of that revenue will come from agencies outside the D.C. area. Once complete, OPI will own a smaller, higher-quality portfolio that will be better positioned to maximize cash flow. In summary, we are delivering on the priorities we set last quarter. Renewals made up 97% of our leasing. Asset sales are on track to exceed $300 million, and we are using those proceeds to repay debt and enhance liquidity. I will now turn the call over to Brian to discuss our financial results.

Thank you, Yael. Good morning. For the third quarter, we reported a normalized FFO of $20.5 million, or $0.93 per share, and adjusted EBITDA of $59 million. Same property cash basis NOI increased 14.8% over the prior year to $51.5 million. This performance was driven by an increase in cash rents as a result of the company's leasing activity and the rate of payment periods ending for certain leases. OPI's annualized rental income as of September 30th was $390 million, which includes straight-line rent adjustments as well as estimated expense reimbursements under OPI's leases. The components of annualized rental income as of September 30th are broken down as follows. Cash rents of $291 million, straight-line rent adjustments of $20 million, and recurring expense reimbursements It's due under OPI's leases of $79 million. Property operating expenses for the quarter were $50.7 million, a decline of 2.7% compared to the prior year, largely due to our dispositions. G&A expenses were $4.9 million for the quarter. For the full year, 2026, G&A is projected to be $19 to $21 million. Our current estimated quarterly interest expense run rate, before any further debt repayments, is approximately $38 million, consisting of $36 million of cash interest expense and $2 million of non-cash amortization of financing costs and discounts. During the quarter, recurring capital expenditures total $10.4 million, comprised of $8.2 million in lease-related costs and $2.2 million in building improvements. For the full year, 2026, we expect CapEx to be approximately $50 million, comprised of $10 million of building capital and $40 million of leasing capital. Turning to the balance sheet, we ended the third quarter with approximately $61 million in unrestricted cash and $25 million in restricted cash, which represents operating reserves under our loan agreements. In September, we successfully raised $425 million of senior secured notes and used the proceeds to fully repay and terminate our $325 million credit facility and $100 million term loan due in January, 2027. The new notes are secured by the same 19 property collateral pool that previously secured the credit facility. This transaction addressed our near-term refinancing priorities and extended our weighted average maturities. As a result, we currently have no meaningful debt maturities until 2029. Additionally, since the end of the quarter, we repaid approximately $78 million of our 83-8 senior notes due 2029, which included $58 million in connection with collateral asset sales and $20 million of mandatory principal payments. The next scheduled principal payment is due on February 1st, 2027 for $30 million. We expect to make this payment using cash on hand and proceeds from asset sales. As Yalla discussed, we are moving forward with the sale of 18 of the 22 properties serving as collateral for these notes and intend to fully redeem the outstanding principal upon completion of these sales. Earlier this month, we also redeemed $32 million of our 10% senior secured notes due to June 2031, using a portion of proceeds from collateral asset sales. We look forward to providing updates about our progress on future calls. Operator, that concludes our call.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.