UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20212022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-34364
OFFICE PROPERTIES INCOME TRUST
(Exact Name of Registrant as Specified in Its Charter)
| | | | | | | | |
Maryland | | 26-4273474 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634
(Address of Principal Executive Offices) (Zip Code)
617-219-1440
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol(s) | | Name Of Each Exchange On Which Registered |
Common Shares of Beneficial Interest | | OPI | | The Nasdaq Stock Market LLC |
6.375% Senior Notes due 2050 | | OPINL | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
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Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | |
Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of OctoberJuly 27, 2021: 48,425,6652022: 48,455,075
OFFICE PROPERTIES INCOME TRUST
FORM 10-Q
SeptemberJune 30, 20212022
INDEX
References in this Quarterly Report on Form 10-Q to “the Company”, “OPI”, “we”, “us” or “our” include Office Properties Income Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.
PART I. Financial Information
Item 1. Financial Statements
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
| | | | | September 30, 2021 | | December 31, 2020 | | | June 30, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Real estate properties: | Real estate properties: | | | | | Real estate properties: | | | | |
Land | Land | | $ | 873,488 | | | $ | 830,884 | | Land | | $ | 827,861 | | | $ | 874,108 | |
Buildings and improvements | Buildings and improvements | | 2,964,277 | | | 2,691,259 | | Buildings and improvements | | 2,995,508 | | | 3,036,978 | |
Total real estate properties, gross | Total real estate properties, gross | | 3,837,765 | | | 3,522,143 | | Total real estate properties, gross | | 3,823,369 | | | 3,911,086 | |
Accumulated depreciation | Accumulated depreciation | | (459,408) | | | (451,914) | | Accumulated depreciation | | (515,619) | | | (495,912) | |
Total real estate properties, net | Total real estate properties, net | | 3,378,357 | | | 3,070,229 | | Total real estate properties, net | | 3,307,750 | | | 3,415,174 | |
Assets of properties held for sale | Assets of properties held for sale | | 71,873 | | | 75,177 | | Assets of properties held for sale | | 100,816 | | | 26,598 | |
Investments in unconsolidated joint ventures | Investments in unconsolidated joint ventures | | 35,828 | | | 37,951 | | Investments in unconsolidated joint ventures | | 35,310 | | | 34,838 | |
Acquired real estate leases, net | Acquired real estate leases, net | | 536,772 | | | 548,943 | | Acquired real estate leases, net | | 424,865 | | | 505,629 | |
Cash and cash equivalents | Cash and cash equivalents | | 54,881 | | | 42,045 | | Cash and cash equivalents | | 26,006 | | | 83,026 | |
Restricted cash | Restricted cash | | 1,139 | | | 14,810 | | Restricted cash | | 1,743 | | | 1,489 | |
Rents receivable | Rents receivable | | 97,507 | | | 101,766 | | Rents receivable | | 103,361 | | | 112,886 | |
Deferred leasing costs, net | Deferred leasing costs, net | | 52,182 | | | 42,626 | | Deferred leasing costs, net | | 59,798 | | | 53,883 | |
Other assets, net | Other assets, net | | 11,339 | | | 12,889 | | Other assets, net | | 3,009 | | | 8,160 | |
Total assets | Total assets | | $ | 4,239,878 | | | $ | 3,946,436 | | Total assets | | $ | 4,062,658 | | | $ | 4,241,683 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Unsecured revolving credit facility | Unsecured revolving credit facility | | $ | — | | | $ | — | | Unsecured revolving credit facility | | $ | 230,000 | | | $ | — | |
Senior unsecured notes, net | Senior unsecured notes, net | | 2,477,730 | | | 2,033,242 | | Senior unsecured notes, net | | 2,184,073 | | | 2,479,772 | |
Mortgage notes payable, net | Mortgage notes payable, net | | 98,460 | | | 169,729 | | Mortgage notes payable, net | | 72,936 | | | 98,178 | |
Liabilities of properties held for sale | Liabilities of properties held for sale | | 1,059 | | | 891 | | Liabilities of properties held for sale | | 3,453 | | | 594 | |
Accounts payable and other liabilities | Accounts payable and other liabilities | | 126,317 | | | 116,480 | | Accounts payable and other liabilities | | 134,510 | | | 142,609 | |
Due to related persons | Due to related persons | | 12,571 | | | 6,114 | | Due to related persons | | 6,668 | | | 6,787 | |
Assumed real estate lease obligations, net | Assumed real estate lease obligations, net | | 17,761 | | | 10,588 | | Assumed real estate lease obligations, net | | 15,568 | | | 17,034 | |
Total liabilities | Total liabilities | | 2,733,898 | | | 2,337,044 | | Total liabilities | | 2,647,208 | | | 2,744,974 | |
| Commitments and contingencies | Commitments and contingencies | | 0 | | 0 | Commitments and contingencies | | 0 | | 0 |
| Shareholders’ equity: | Shareholders’ equity: | | | | | Shareholders’ equity: | | | | |
Common shares of beneficial interest, $0.01 par value: 200,000,000 shares authorized, 48,425,924 and 48,318,366 shares issued and outstanding, respectively | | 484 | | | 483 | | |
Common shares of beneficial interest, $0.01 par value: 200,000,000 shares authorized, 48,455,075 and 48,425,665 shares issued and outstanding, respectively | | Common shares of beneficial interest, $0.01 par value: 200,000,000 shares authorized, 48,455,075 and 48,425,665 shares issued and outstanding, respectively | | 485 | | | 484 | |
Additional paid in capital | Additional paid in capital | | 2,616,751 | | | 2,615,305 | | Additional paid in capital | | 2,618,640 | | | 2,617,169 | |
Cumulative net income | Cumulative net income | | 158,770 | | | 183,895 | | Cumulative net income | | 146,252 | | | 175,715 | |
| Cumulative common distributions | Cumulative common distributions | | (1,270,025) | | | (1,190,291) | | Cumulative common distributions | | (1,349,927) | | | (1,296,659) | |
Total shareholders’ equity | Total shareholders’ equity | | 1,505,980 | | | 1,609,392 | | Total shareholders’ equity | | 1,415,450 | | | 1,496,709 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 4,239,878 | | | $ | 3,946,436 | | Total liabilities and shareholders’ equity | | $ | 4,062,658 | | | $ | 4,241,683 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands, except per share data)
(unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
| Rental income | Rental income | | $ | 147,572 | | | $ | 145,806 | | | $ | 429,195 | | | $ | 441,294 | | Rental income | | $ | 141,316 | | | $ | 137,099 | | | $ | 288,670 | | | $ | 281,623 | |
| Expenses: | Expenses: | | | | | | | | | Expenses: | | | | | | | | |
Real estate taxes | Real estate taxes | | 20,067 | | | 16,113 | | | 52,133 | | | 48,701 | | Real estate taxes | | 16,583 | | | 15,912 | | | 33,228 | | | 32,066 | |
Utility expenses | Utility expenses | | 7,389 | | | 7,564 | | | 19,131 | | | 19,777 | | Utility expenses | | 5,820 | | | 5,310 | | | 12,685 | | | 11,742 | |
Other operating expenses | Other operating expenses | | 26,537 | | | 26,366 | | | 76,874 | | | 78,033 | | Other operating expenses | | 26,497 | | | 24,898 | | | 53,860 | | | 50,337 | |
Depreciation and amortization | Depreciation and amortization | | 59,533 | | | 62,227 | | | 178,991 | | | 189,340 | | Depreciation and amortization | | 57,536 | | | 55,371 | | | 118,005 | | | 119,458 | |
Loss on impairment of real estate | Loss on impairment of real estate | | (3) | | | 2,954 | | | 55,854 | | | 2,954 | | Loss on impairment of real estate | | 4,773 | | | 48,197 | | | 21,820 | | | 55,857 | |
| Acquisition and transaction related costs | | Acquisition and transaction related costs | | 224 | | | — | | | 224 | | | — | |
General and administrative | General and administrative | | 448 | | | 7,059 | | | 24,690 | | | 21,372 | | General and administrative | | 7,083 | | | 12,970 | | | 12,789 | | | 24,242 | |
Total expenses | Total expenses | | 113,971 | | | 122,283 | | | 407,673 | | | 360,177 | | Total expenses | | 118,516 | | | 162,658 | | | 252,611 | | | 293,702 | |
| Gain on sale of real estate | | 36 | | | — | | | 54,154 | | | 10,822 | | |
Gain (loss) on sale of real estate | | Gain (loss) on sale of real estate | | (11,637) | | | 114 | | | (9,488) | | | 54,118 | |
| Interest and other income | Interest and other income | | — | | | 2 | | | 7 | | | 738 | | Interest and other income | | 16 | | | 2 | | | 17 | | | 7 | |
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,442, $2,477, $7,366 and $7,162, respectively) | | (26,929) | | | (27,097) | | | (84,728) | | | (79,461) | | |
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,366, $2,492, $4,770 and $4,924, respectively) | | Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,366, $2,492, $4,770 and $4,924, respectively) | | (26,515) | | | (29,001) | | | (53,954) | | | (57,799) | |
Loss on early extinguishment of debt | Loss on early extinguishment of debt | | (2,274) | | | — | | | (14,068) | | | (3,839) | | Loss on early extinguishment of debt | | (77) | | | (11,794) | | | (77) | | | (11,794) | |
Income (loss) before income tax (expense) benefit and equity in net losses of investees | | 4,434 | | | (3,572) | | | (23,113) | | | 9,377 | | |
Loss before income tax (expense) benefit and equity in net losses of investees | | Loss before income tax (expense) benefit and equity in net losses of investees | | (15,413) | | | (66,238) | | | (27,443) | | | (27,547) | |
Income tax (expense) benefit | Income tax (expense) benefit | | (34) | | | 54 | | | (348) | | | (220) | | Income tax (expense) benefit | | 190 | | | 121 | | | (341) | | | (314) | |
Equity in net losses of investees | Equity in net losses of investees | | (688) | | | (279) | | | (1,664) | | | (815) | | Equity in net losses of investees | | (833) | | | (580) | | | (1,679) | | | (976) | |
| Net income (loss) | | 3,712 | | | (3,797) | | | (25,125) | | | 8,342 | | |
| Other comprehensive income (loss): | | |
Unrealized gain on financial instrument | | — | | | 85 | | | — | | | 200 | | |
| Other comprehensive income | | — | | | 85 | | | — | | | 200 | | |
Comprehensive income (loss) | | $ | 3,712 | | | $ | (3,712) | | | $ | (25,125) | | | $ | 8,542 | | |
Net loss | | Net loss | | $ | (16,056) | | | $ | (66,697) | | | $ | (29,463) | | | $ | (28,837) | |
| | Weighted average common shares outstanding (basic) | | 48,211 | | | 48,132 | | | 48,179 | | | 48,111 | | |
Weighted average common shares outstanding (diluted) | | 48,244 | | | 48,132 | | | 48,179 | | | 48,111 | | |
| | Weighted average common shares outstanding (basic and diluted) | | Weighted average common shares outstanding (basic and diluted) | | 48,249 | | | 48,165 | | | 48,246 | | | 48,163 | |
| | Per common share amounts (basic and diluted): | Per common share amounts (basic and diluted): | | | | | Per common share amounts (basic and diluted): | | | | |
| Net income (loss) | | $ | 0.08 | | | $ | (0.08) | | | $ | (0.52) | | | $ | 0.17 | | |
Net loss | | Net loss | | $ | (0.33) | | | $ | (1.38) | | | $ | (0.61) | | | $ | (0.60) | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
(unaudited)
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| Number of Shares | | Common Shares | | Additional Paid In Capital | | Cumulative Net Income | | | | Cumulative Common Distributions | | Total Shareholders’ Equity |
Balance at December 31, 2020 | 48,318,366 | | $ | 483 | | | $ | 2,615,305 | | | $ | 183,895 | | | | | $ | (1,190,291) | | | $ | 1,609,392 | |
Share grants | — | | | — | | | 321 | | | — | | | | | — | | | 321 | |
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Net income | — | | | — | | | — | | | 37,860 | | | | | — | | | 37,860 | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,575) | | | (26,575) | |
Balance at March 31, 2021 | 48,318,366 | | 483 | | | 2,615,626 | | | 221,755 | | | | | (1,216,866) | | | 1,620,998 | |
Share grants | 28,000 | | | — | | | 1,176 | | | — | | | | | — | | | 1,176 | |
Share repurchases | (12,009) | | | — | | | (352) | | | — | | | | | — | | | (352) | |
Net loss | — | | | — | | | — | | | (66,697) | | | | | — | | | (66,697) | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,575) | | | (26,575) | |
Balance at June 30, 2021 | 48,334,357 | | 483 | | | 2,616,450 | | | 155,058 | | | | | (1,243,441) | | | 1,528,550 | |
Share grants | 117,800 | | | 1 | | | 950 | | | — | | | | | — | | | 951 | |
Share forfeitures and repurchases | (26,233) | | | — | | | (649) | | | — | | | | | — | | | (649) | |
Net income | — | | | — | | | — | | | 3,712 | | | | | — | | | 3,712 | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,584) | | | (26,584) | |
Balance at September 30, 2021 | 48,425,924 | | $ | 484 | | | $ | 2,616,751 | | | $ | 158,770 | | | | | $ | (1,270,025) | | | $ | 1,505,980 | |
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| Number of Shares | | Common Shares | | Additional Paid In Capital | | Cumulative Net Income | | | | Cumulative Common Distributions | | Total Shareholders’ Equity |
Balance at December 31, 2021 | 48,425,665 | | $ | 484 | | | $ | 2,617,169 | | | $ | 175,715 | | | | | $ | (1,296,659) | | | $ | 1,496,709 | |
Share grants | — | | | — | | | 415 | | | — | | | | | — | | | 415 | |
Share forfeitures | (400) | | | — | | | (1) | | | — | | | | | — | | | (1) | |
Net loss | — | | | — | | | — | | | (13,407) | | | | | — | | | (13,407) | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,634) | | | (26,634) | |
Balance at March 31, 2022 | 48,425,265 | | | 484 | | | 2,617,583 | | | 162,308 | | | | | (1,323,293) | | | 1,457,082 | |
Share grants | 31,500 | | | 1 | | | 1,078 | | | — | | | | | — | | | 1,079 | |
Share forfeitures and repurchases | (1,690) | | | — | | | (21) | | | — | | | | | — | | | (21) | |
Net loss | — | | | — | | | — | | | (16,056) | | | | | — | | | (16,056) | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,634) | | | (26,634) | |
Balance at June 30, 2022 | 48,455,075 | | | $ | 485 | | | $ | 2,618,640 | | | $ | 146,252 | | | | | $ | (1,349,927) | | | $ | 1,415,450 | |
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Balance at December 31, 2020 | 48,318,366 | | $ | 483 | | | $ | 2,615,305 | | | $ | 183,895 | | | | | $ | (1,190,291) | | | $ | 1,609,392 | |
Share grants | — | | | — | | | 321 | | | — | | | | | — | | | 321 | |
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Net income | — | | | — | | | — | | | 37,860 | | | | | — | | | 37,860 | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,575) | | | (26,575) | |
Balance at March 31, 2021 | 48,318,366 | | | 483 | | | 2,615,626 | | | 221,755 | | | | | (1,216,866) | | | 1,620,998 | |
Share grants | 28,000 | | | — | | | 1,176 | | | — | | | | | — | | | 1,176 | |
Share repurchases | (12,009) | | | — | | | (352) | | | — | | | | | — | | | (352) | |
Net loss | — | | | — | | | — | | | (66,697) | | | | | — | | | (66,697) | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | | | (26,575) | | | (26,575) | |
Balance at June 30, 2021 | 48,334,357 | | | $ | 483 | | | $ | 2,616,450 | | | $ | 155,058 | | | | | $ | (1,243,441) | | | $ | 1,528,550 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
(unaudited)
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| Number of Shares | | Common Shares | | Additional Paid In Capital | | Cumulative Net Income | | Cumulative Other Comprehensive Loss | | Cumulative Common Distributions | | Total Shareholders’ Equity |
Balance at December 31, 2019 | 48,201,941 | | $ | 482 | | | $ | 2,612,425 | | | $ | 177,217 | | | $ | (200) | | | $ | (1,084,170) | | | $ | 1,705,754 | |
Share grants | — | | — | | | 379 | | | — | | | — | | | — | | | 379 | |
Share repurchases | (1,012) | | | — | | | (27) | | | — | | | — | | | — | | | (27) | |
Net current period other comprehensive loss | — | | | — | | | — | | | — | | | (61) | | | — | | | (61) | |
Net income | — | | | — | | | — | | | 10,840 | | | — | | | — | | | 10,840 | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | — | | | (26,511) | | | (26,511) | |
Balance at March 31, 2020 | 48,200,929 | | 482 | | | 2,612,777 | | | 188,057 | | | (261) | | | (1,110,681) | | | 1,690,374 | |
Share grants | 28,000 | | — | | | 1,121 | | | — | | | — | | | — | | | 1,121 | |
Share repurchases | (1,129) | | — | | | (30) | | | — | | | — | | | — | | | (30) | |
Net current period other comprehensive income | — | | — | | | — | | | — | | | 176 | | | — | | | 176 | |
Net income | — | | — | | | — | | | 1,299 | | | — | | | — | | | 1,299 | |
Distributions to common shareholders | — | | | — | | | — | | | — | | | — | | | (26,510) | | | (26,510) | |
Balance at June 30, 2020 | 48,227,800 | | 482 | | | 2,613,868 | | | 189,356 | | | (85) | | | (1,137,191) | | | 1,666,430 | |
Share grants | 108,600 | | 1 | | | 864 | | | — | | | — | | | — | | | 865 | |
Share forfeitures and repurchases | (18,034) | | — | | | (386) | | | — | | | — | | | — | | | (386) | |
Amounts reclassified from cumulative other comprehensive loss to net loss | — | | — | | | — | | | — | | | 85 | | | — | | | 85 | |
Net loss | — | | — | | | — | | | (3,797) | | | — | | | — | | | (3,797) | |
Distributions to common shareholders | — | | — | | | — | | | — | | | — | | | (26,525) | | | (26,525) | |
Balance at September 30, 2020 | 48,318,366 | | $ | 483 | | | $ | 2,614,346 | | | $ | 185,559 | | | $ | — | | | $ | (1,163,716) | | | $ | 1,636,672 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2021 | | 2020 | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income (loss) | | $ | (25,125) | | | $ | 8,342 | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depreciation | | 67,469 | | | 62,570 | | | |
Net amortization of debt premiums, discounts and issuance costs | | 7,366 | | | 7,162 | | | |
Amortization of acquired real estate leases | | 108,471 | | | 126,409 | | | |
Amortization of deferred leasing costs | | 5,750 | | | 5,208 | | | |
Gain on sale of real estate | | (54,154) | | | (10,822) | | | |
Loss on impairment of real estate | | 55,854 | | | 2,954 | | | |
Loss on early extinguishment of debt | | 9,694 | | | 2,701 | | | |
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Straight line rental income | | (13,128) | | | (12,963) | | | |
Other non-cash expenses, net | | 1,627 | | | 1,542 | | | |
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Equity in net losses of investees | | 1,664 | | | 815 | | | |
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Change in assets and liabilities: | | | | | | |
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Rents receivable | | 10,567 | | | (4,853) | | | |
Deferred leasing costs | | (14,388) | | | (10,722) | | | |
Other assets | | (1,523) | | | (860) | | | |
Accounts payable and other liabilities | | (7,919) | | | (11,593) | | | |
Due to related persons | | 6,457 | | | 208 | | | |
Net cash provided by operating activities | | 158,682 | | | 166,098 | | | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Real estate acquisitions | | (563,447) | | | (11,864) | | | |
Real estate improvements | | (65,186) | | | (55,135) | | | |
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Distributions in excess of earnings from unconsolidated joint ventures | | 459 | | | 408 | | | |
Distributions in excess of earnings from Affiliates Insurance Company | | — | | | 287 | | | |
Proceeds from sale of properties, net | | 192,476 | | | 81,528 | | | |
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Proceeds from repayment of mortgage note receivable | | — | | | 2,880 | | | |
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Net cash (used in) provided by investing activities | | (435,698) | | | 18,104 | | | |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Repayment of mortgage notes payable | | (72,238) | | | (154,734) | | | |
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Repayment of senior unsecured notes | | (610,000) | | | (400,000) | | | |
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Proceeds from issuance of senior unsecured notes, net | | 1,041,809 | | | 408,932 | | | |
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Borrowings on unsecured revolving credit facility | | 755,000 | | | 561,467 | | | |
Repayments on unsecured revolving credit facility | | (755,000) | | | (561,467) | | | |
Payment of debt issuance costs | | (2,655) | | | (1,477) | | | |
Repurchase of common shares | | (1,001) | | | (434) | | | |
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Distributions to common shareholders | | (79,734) | | | (79,546) | | | |
Net cash provided by (used in) financing activities | | 276,181 | | | (227,259) | | | |
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Decrease in cash, cash equivalents and restricted cash | | (835) | | | (43,057) | | | |
Cash, cash equivalents and restricted cash at beginning of period | | 56,855 | | | 100,696 | | | |
Cash, cash equivalents and restricted cash at end of period | | $ | 56,020 | | | $ | 57,639 | | | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net loss | | $ | (29,463) | | | $ | (28,837) | | | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation | | 49,455 | | | 43,313 | | | |
Net amortization of debt premiums, discounts and issuance costs | | 4,770 | | | 4,924 | | | |
Amortization of acquired real estate leases | | 65,691 | | | 74,301 | | | |
Amortization of deferred leasing costs | | 4,096 | | | 3,766 | | | |
(Gain) loss on sale of real estate | | 9,488 | | | (54,118) | | | |
Loss on impairment of real estate | | 21,820 | | | 55,857 | | | |
Loss on early extinguishment of debt | | 77 | | | 9,294 | | | |
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Straight line rental income | | (5,461) | | | (9,204) | | | |
Other non-cash expenses, net | | 943 | | | 952 | | | |
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Equity in net losses of investees | | 1,679 | | | 976 | | | |
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Change in assets and liabilities: | | | | | | |
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Rents receivable | | 6,770 | | | 15,206 | | | |
Deferred leasing costs | | (15,194) | | | (8,764) | | | |
Other assets | | 4,821 | | | 3,986 | | | |
Accounts payable and other liabilities | | (10,460) | | | (6,044) | | | |
Due to related persons | | (119) | | | 11,768 | | | |
Net cash provided by operating activities | | 108,913 | | | 117,376 | | | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Real estate acquisitions | | — | | | (535,902) | | | |
Real estate improvements | | (89,144) | | | (31,303) | | | |
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Distributions in excess of earnings from unconsolidated joint ventures | | 51 | | | 306 | | | |
Contributions to unconsolidated joint ventures | | (2,202) | | | — | | | |
Proceeds from sale of properties, net | | 74,183 | | | 166,432 | | | |
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Net cash used in investing activities | | (17,112) | | | (400,467) | | | |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Repayment of mortgage notes payable | | (25,283) | | | (71,939) | | | |
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Repayment of senior unsecured notes | | (300,000) | | | (310,000) | | | |
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Proceeds from issuance of senior unsecured notes, net | | — | | | 297,699 | | | |
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Borrowings on unsecured revolving credit facility | | 230,000 | | | 420,000 | | | |
Repayments on unsecured revolving credit facility | | — | | | (35,000) | | | |
Payment of debt issuance costs | | — | | | (941) | | | |
Repurchase of common shares | | (16) | | | (352) | | | |
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Distributions to common shareholders | | (53,268) | | | (53,150) | | | |
Net cash (used in) provided by financing activities | | (148,567) | | | 246,317 | | | |
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Decrease in cash, cash equivalents and restricted cash | | (56,766) | | | (36,774) | | | |
Cash, cash equivalents and restricted cash at beginning of period | | 84,515 | | | 56,855 | | | |
Cash, cash equivalents and restricted cash at end of period | | $ | 27,749 | | | $ | 20,081 | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(unaudited)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
SUPPLEMENTAL CASH FLOW INFORMATION: | SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
Interest paid | Interest paid | | $ | 86,917 | | | $ | 83,116 | | Interest paid | | $ | 56,490 | | | $ | 53,722 | |
Income taxes paid | Income taxes paid | | $ | 294 | | | $ | 1,097 | | Income taxes paid | | $ | 283 | | | $ | 287 | |
| NON-CASH INVESTING ACTIVITIES: | NON-CASH INVESTING ACTIVITIES: | | NON-CASH INVESTING ACTIVITIES: | |
Real estate improvements accrued, not paid | Real estate improvements accrued, not paid | | $ | 15,428 | | | $ | 12,640 | | Real estate improvements accrued, not paid | | $ | 25,706 | | | $ | 18,472 | |
Real estate acquisitions | Real estate acquisitions | | $ | (13,031) | | | $ | — | | Real estate acquisitions | | $ | — | | | $ | (13,031) | |
| Capitalized interest | Capitalized interest | | $ | 392 | | | $ | 119 | | Capitalized interest | | $ | 1,600 | | | $ | 150 | |
|
SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:
| | | As of September 30, | | As of June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Cash and cash equivalents | Cash and cash equivalents | | $ | 54,881 | | | $ | 45,035 | | Cash and cash equivalents | | $ | 26,006 | | | $ | 18,667 | |
Restricted cash (1) | Restricted cash (1) | | 1,139 | | | 12,604 | | Restricted cash (1) | | 1,743 | | | 1,414 | |
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | | $ | 56,020 | | | $ | 57,639 | | Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | | $ | 27,749 | | | $ | 20,081 | |
(1)Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our mortgage debts.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Office Properties Income Trust and its subsidiaries, or OPI, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, or our 20202021 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles.
Note 2. Per Common Share Amounts
The following table provides a reconciliation ofWe calculate basic earnings per common share using the weighted average number of common shares used in the calculation of basic andtwo class method. We calculate diluted earnings per share (in thousands):
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Weighted average common shares for basic earnings per share | | 48,211 | | | 48,132 | | | 48,179 | | | 48,111 | |
Effect of dilutive securities: unvested share awards (1) | | 33 | | | — | | | — | | | — | |
Weighted average common shares for diluted earnings per share | | 48,244 | | | 48,132 | | | 48,179 | | | 48,111 | |
(1)using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, together with the related impact on earnings, are considered when calculating diluted earnings per share. For the three and six months ended SeptemberJune 30, 20202022 and the nine months ended September 30, 2021, and 2020, there were no dilutive common shares and certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive.shares.
Note 3. Real Estate Properties
As of SeptemberJune 30, 2021,2022, our wholly owned properties were comprised of 178172 properties containing a combined approximately 23,274,00022,491,000 rentable square feet. The aggregatefeet, with an undepreciated carrying value of our wholly owned properties as of September 30, 2021 was $3,916,800,$3,918,825, including $79,035$95,456 classified as held for sale, and wesale. We also had noncontrolling ownership interests of 51% and 50% in 2 unconsolidated joint ventures that own 3 properties containing a combined approximately 444,000 rentable square feet. We generally lease space at our properties on a gross lease, modified gross lease or net lease basis pursuant to fixed term contracts expiring between 20212022 and 2053. Some of our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended SeptemberJune 30, 2021,2022, we entered into 2018 leases for approximately 659,000679,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.99.2 years and we made commitments for approximately $46,133$37,369 of leasing related costs. During the ninesix months ended SeptemberJune 30, 2021,2022, we entered into 6539 leases for approximately 1,782,0001,251,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.99.9 years and we made commitments for approximately $129,980$70,117 of leasing related costs. As of SeptemberJune 30, 2021,2022, we hadhave estimated unspent leasing related obligations of $129,369.$130,726.
We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to the consideration of impairment upon the events or changes in circumstances
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.
During the nine months ended September 30, 2021, we acquired 3 properties containing a combined approximately 926,000 rentable square feet for an aggregate purchase price of $576,478, including net purchase price adjustments of $1,761 and acquisition related costs of $1,264. These acquisitions were accounted for as asset acquisitions. We allocated the purchase prices of these acquisitions based on the relative estimated fair values of the acquired assets and assumed liabilities as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition Date | | | | Location | | Number of Properties | | Rentable Square Feet | | Purchase Price | | Land | | Buildings and Improvements | | Acquired Real Estate Leases | | Assumed Real Estate Lease Obligations | | | | |
June 2021 | | | | Chicago, IL (1) | | 1 | | 531,000 | | $ | 368,331 | | | $ | 42,935 | | | $ | 258,348 | | | $ | 76,136 | | | $ | (9,088) | | | | | |
June 2021 | | | | Atlanta, GA | | 1 | | 346,000 | | 180,602 | | | 13,040 | | | 135,459 | | | 32,103 | | | — | | | | | |
August 2021 | | | | Boston, MA | | 1 | | 49,000 | | 27,545 | | | 16,103 | | | 10,217 | | | 1,225 | | — | | | | | |
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| | | | | | 3 | | 926,000 | | $ | 576,478 | | | $ | 72,078 | | | $ | 404,024 | | | $ | 109,464 | | | $ | (9,088) | | | | | |
OFFICE PROPERTIES INCOME TRUST(1)Purchase price includes an adjustment of $13,031 to record an estimated real estate tax liability as of the acquisition date.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Disposition Activities
During the ninesix months ended SeptemberJune 30, 2021,2022, we sold 6 properties and a warehouse facility adjacent to a property we own containing a combined approximately 2,565,000778,000 rentable square feet for an aggregate sales price of $198,415,$77,720, excluding closing costs. The sales of these properties, as presented in the table below, do not represent significant dispositions, individually or in the aggregate, nor do they represent a strategic shift in our business. As a result, the results of operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss).
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Date of Sale | | | | Number of Properties | | Location | | Rentable Square Feet | | Gross Sales Price (1) | | Gain (Loss) on Sale of Real Estate | | Loss on Impairment of Real Estate | | |
January 2021 | | | | — | | Kansas City, MO (2) | | 10,000 | | $ | 845 | | | $ | (63) | | | $ | — | | | |
January 2021 | | | | 1 | | Richmond, VA | | 311,000 | | 130,000 | | | 54,181 | | | — | | | |
April 2021 | | | | 1 | | Huntsville, AL | | 1,371,000 | | 39,000 | | | — | | | 5,383 | | | |
July 2021 | | | | 1 | | Fresno, CA | | 532,000 | | 6,000 | | | — | | | 33,902 | | | |
July 2021 | | | | 1 | | Liverpool, NY | | 38,000 | | 650 | | | 31 | | | — | | | |
August 2021 | | | | 1 | | Memphis, TN | | 205,000 | | 15,270 | | | 287 | | | — | | | |
September 2021 | | | | 1 | | Stoneham, MA | | 98,000 | | 6,650 | | | (282) | | | 5,911 | | | |
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| | | | 6 | | | | 2,565,000 | | $ | 198,415 | | | $ | 54,154 | | | $ | 45,196 | | | |
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Date of Sale | | | | Number of Properties | | Location | | Rentable Square Feet | | Gross Sales Price (1) | | Gain (Loss) on Sale of Real Estate | | |
January 2022 | | | | 1 | | Rockville, MD | | 129,000 | | $ | 6,750 | | | $ | (72) | | | |
February 2022 | | | | 2 | | Chesapeake, VA | | 172,000 | | 18,945 | | | 2,296 | | | |
March 2022 | | | | 1 | | Milwaukee, WI | | 29,000 | | 3,775 | | | (75) | | | |
May 2022 | | | | 1 | | Holtsville, NY | | 264,000 | | 28,500 | | | 1,900 | | | |
June 2022 | | | | 1 | | Fairfax, VA | | 184,000 | | 19,750 | | | (13,537) | | | |
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| | | | 6 | | | | 778,000 | | $ | 77,720 | | | $ | (9,488) | | | |
(1)Gross sales price is the gross contract price, excluding closing costs.
As of June 30, 2022, we had 11 properties containing approximately 1,408,000 rentable square feet classified as held for sale in our condensed consolidated balance sheet, 10 of which have been sold or are under agreement to sell for an aggregate sales price of $119,600 and are summarized below:
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Date of Sale Agreement | | | | Number of Properties | | Location | | Rentable Square Feet | | Gross Sales Price (1) | | Loss on Impairment of Real Estate |
March 2022 | | | | 1 | | Houston, TX (2) | | 206,000 | | $ | 9,800 | | | $ | 15,278 | |
June 2022 | | | | 2 | | Chesapeake, VA | | 214,000 | | 24,000 | | | 649 | |
June 2022 | | | | 3 | | Birmingham, AL | | 448,000 | | 16,050 | | | 3,709 | |
July 2022 | | | | 1 | | Kapolei, HI (3) | | 109,000 | | 4,000 | | | — | |
July 2022 | | | | 2 | | Everett, WA | | 112,000 | | 31,500 | | | — | |
July 2022 | | | | 1 | | Salem, OR | | 233,000 | | 34,250 | | | — | |
| | | | 10 | | | | 1,322,000 | | $ | 119,600 | | | $ | 19,636 | |
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(1)Gross sales price is the gross contract price, excluding closing costs.
(2)ConsistsThe sale of this property was completed in July 2022.
(3)This property is a warehouse facility adjacentleasable land parcel.
During the six months ended June 30, 2022, we also recorded a $2,184 loss on impairment of real estate to aadjust the carrying value of 1 additional property that was classified as held for sale to its estimated fair value less costs to sell. The pending sales in the preceding table are subject to conditions; accordingly, we own located in Kansas City, MO.cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
As of September 30, 2021, we had 5 properties and 2 land parcels classified as held for sale in our condensed consolidated balance sheet. These properties and land parcels have been sold or are under agreement to sell for an aggregate sales price of $84,500, excluding closing costs, and are summarized below:
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Date of Sale Agreement | | | | Number of Properties | | Location | | Rentable Square Feet | | Gross Sales Price (1) | | | | | | |
August 2021 | | | | — | | Sterling, VA (2) | | — | | $ | 28,500 | | | | | | | |
October 2021 | | | | 5 | | Brookhaven, GA | | 378,000 | | 56,000 | | | | | | | |
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(1)Gross sales price is the gross contract price, excluding closing costs.
(2)Consists of two vacant land parcels adjacent to properties we own located in Sterling, VA. The sale of these land parcels was completed in October 2021.
In addition to the properties discussed above, we are currently marketing for sale 17 properties containing approximately 2,161,000 rentable square feet. As of September 30, 2021, 3 of these properties containing approximately 448,000 rentable square feet are classified as held for sale in our condensed consolidated balance sheet. We recorded a $10,658 loss on impairment of real estate to adjust the carrying value of these three properties to their estimated fair values less cost to sell during the nine months ended September 30, 2021. We have determined the remaining 14 properties were not impaired nor did they meet the held for sale criteria as of September 30, 2021.
We cannot be sure we will sell any properties we are marketing for prices in excess of our carrying values or that we will not recognize impairment losses or losses on sale with respect to these properties. In addition, our pending sale is subject to conditions; accordingly, we cannot be sure that we will complete this sale or that this sale will not be delayed or the terms will not change.
Unconsolidated Joint Ventures
We own interests in 2 joint ventures that own 3 properties. We account for these investments under the equity method of accounting. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, our investments in unconsolidated joint ventures consisted of the following:
| | | OPI Carrying Value of Investments at | | | OPI Carrying Value of Investments at | |
Joint Venture | Joint Venture | | OPI Ownership | | September 30, 2021 | | December 31, 2020 | | Number of Properties | | Location | | Rentable Square Feet | Joint Venture | | OPI Ownership | | June 30, 2022 | | December 31, 2021 | | Number of Properties | | Location | | Rentable Square Feet |
Prosperity Metro Plaza | Prosperity Metro Plaza | | 51% | | $ | 21,142 | | | $ | 21,888 | | | 2 | | Fairfax, VA | | 329,000 | | Prosperity Metro Plaza | | 51% | | $ | 20,006 | | | $ | 20,672 | | | 2 | | Fairfax, VA | | 329,000 | |
1750 H Street, NW | 1750 H Street, NW | | 50% | | 14,686 | | | 16,063 | | | 1 | | Washington, D.C. | | 115,000 | | 1750 H Street, NW | | 50% | | 15,304 | | | 14,166 | | | 1 | | Washington, D.C. | | 115,000 | |
Total | Total | | $ | 35,828 | | | $ | 37,951 | | | 3 | | 444,000 | | Total | | $ | 35,310 | | | $ | 34,838 | | | 3 | | 444,000 | |
The following table provides a summary of the mortgage debt of our 2 unconsolidated joint ventures:
| Joint Venture | Joint Venture | | Interest Rate (1) | | Maturity Date | | Principal Balance at September 30, 2021 and December 31, 2020 (2) | Joint Venture | | Interest Rate (1) | | Maturity Date | | Principal Balance at June 30, 2022 and December 31, 2021 (2) |
Prosperity Metro Plaza | Prosperity Metro Plaza | | 4.09% | | 12/1/2029 | | $ | 50,000 | | Prosperity Metro Plaza | | 4.09% | | 12/1/2029 | | $ | 50,000 | |
1750 H Street, NW | 1750 H Street, NW | | 3.69% | | 8/1/2024 | | 32,000 | | 1750 H Street, NW | | 3.69% | | 8/1/2024 | | 32,000 | |
Weighted Average / Total | Weighted Average / Total | | 3.93% | | $ | 82,000 | | Weighted Average / Total | | 3.93% | | $ | 82,000 | |
|
(1)Includes the effect of mark to market purchase accounting.
(2)Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interests in the joint ventures we do not own. None of the debt is recourse to us.
At SeptemberJune 30, 2021,2022, the aggregate unamortized basis difference of our 2 unconsolidated joint ventures of $7,098$6,734 is primarily attributable to the difference between the amount we paid to purchase our interest in these joint ventures, including transaction costs, and the historical carrying value of the net assets of these joint ventures. This difference is being amortized over the remaining useful life of the related properties and the resulting amortization expense is included in equity in net losses of investees in our condensed consolidated statements of comprehensive income (loss).
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Note 4. Leases
Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. In certain circumstances, some leases provide the tenant with the right to terminate if the legislature or other funding authority does not appropriate the funding necessary for the tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the full term of the lease because we believe the occurrence of early terminations to be a remote contingency based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis.
We increased rental income to record revenue on a straight line basis by $3,924$2,775 and $3,912$3,847 for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, and $13,128$5,461 and $12,963$9,204 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. Rents receivable, excluding properties classified as held for sale, include $76,033$86,379 and $68,824$82,978 of straight line rent receivables at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $24,098$22,101 and $60,446$44,637 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, of which tenant reimbursements totaled $23,167$21,009 and $57,609,$42,484, respectively. For the three and ninesix months ended SeptemberJune 30, 2020,2021, such payments totaled $18,606$17,488 and $56,654,$36,348, respectively, of which tenant reimbursements totaled $17,495$16,639 and $53,346,$34,442, respectively.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Note 5. Concentration
Tenant and Credit Concentration
We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. As of SeptemberJune 30, 2022, the U.S. government, 11 state governments and 4 other government tenants combined were responsible for approximately 28.4% of our annualized rental income. As of June 30, 2021, the U.S. government, 11 state governments and 4 other government tenants combined were responsible for approximately 29.8% of our annualized rental income. As of September 30, 2020, the U.S. government, 11 state governments and 2 other government tenants combined were responsible for approximately 35.6%31.9% of our annualized rental income. The U.S. government is our largest tenant by annualized rental income and represented approximately 19.7%18.5% and 25.2%22.0% of our annualized rental income as of SeptemberJune 30, 20212022 and 2020,2021, respectively.
Geographic Concentration
At SeptemberJune 30, 2021,2022, our 178172 wholly owned properties were located in 3332 states and the District of Columbia. Properties located in Virginia, California, Illinois, the District of Columbia Illinois and Georgia were responsible for 12.2%approximately 11.8%, 11.0%11.3%, 9.6%10.5%, 9.1%10.2% and 8.0%8.7% of our annualized rental income as of SeptemberJune 30, 2021,2022, respectively.
Note 6. Indebtedness
Our principal debt obligations at SeptemberJune 30, 20212022 were: (1) $2,512,000$230,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) $2,212,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $98,604(3) $73,018 aggregate outstanding principal amount of mortgage notes.
Our $750,000 revolving credit facility is governed by a credit agreement, or our credit agreement, with a syndicate of institutional lenders that includes a feature under which the maximum aggregate borrowing availability may be increased to up to $1,950,000 in certain circumstances. Our revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by 2 additional six month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at SeptemberJune 30, 2021,2022, on the amount outstanding under our revolving credit facility, if any.facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
basis points per annum at SeptemberJune 30, 2021.2022. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, the annual interest rate payable on borrowings under our revolving credit facility was 2.4% and 1.2%., respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 2.4% for the three and six months ended June 30, 2022 and 1.2% for each of the three and six months ended SeptemberJune 30, 2021 and 2020, and 1.2% and 2.0% for the nine months ended September 30, 2021 and 2020, respectively.2021. As of SeptemberJune 30, 20212022 and OctoberJuly 27, 2021,2022, we had no amounts$230,000 and $200,000, respectively, outstanding under our revolving credit facility, and $750,000$520,000 and $550,000, respectively, available for borrowing.
Our credit agreement and senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR, LLC, ceasing to act as our business and property manager. Our credit agreement and senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indentures and their supplements at SeptemberJune 30, 2021.
Senior Unsecured Note Issuances
In May 2021, we issued $300,000 of 2.650% senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of $296,826, after deducting underwriters’ discounts and offering expenses. These notes require semi-annual payments of interest only through maturity on June 15, 2026 and may be repaid at par plus accrued and unpaid interest on or after May 15, 2026.
In August 2021, we issued $350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of $346,630, after deducting underwriters’ discounts and offering expenses. These notes require semi-annual payments of interest only through maturity on February 1, 2027 and may be repaid at par plus accrued and unpaid interest on or after January 1, 2027.
In September 2021, we issued $400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of $395,698, after deducting underwriters’ discounts and offering expenses. These notes require semi-annual payments of interest only through maturity on October 15, 2031 and may be repaid at par plus accrued and unpaid interest on or after July 15, 2031.
Senior Unsecured Note Redemptions
In June 2021, we redeemed, at par plus accrued interest, all $310,000 of our 5.875% senior unsecured notes due 2046. As a result of this redemption, we recognized a loss on early extinguishment of debt of $8,581 during the nine months ended September 30, 2021, from the write off of unamortized debt issuance costs.
In September 2021, we redeemed, at a premium plus accrued interest, all $300,000 of our 4.15% senior unsecured notes due 2022. As a result of this redemption, we recognized a loss on early extinguishment of debt of $2,274 during the nine months ended September 30, 2021, from a prepayment penalty and the write off of unamortized discounts.
Mortgage Note RepaymentPrepayment
In June 2021,April 2022, we prepaid, at a premiumpar plus accrued interest, a mortgage note secured by three propertiesone property with an outstanding principal balance of $71,000,$24,863, an annual interest rate of 3.55%4.22% and a maturity date in May 2023. As a result of the prepayment of this mortgage note, we recognized a loss on early extinguishment of debt of $3,213 during the nine months ended September 30, 2021, from a prepayment penalty and the write off of unamortized discounts.
At September 30, 2021, 3 of our properties with an aggregate net book value of $189,298 were encumbered by mortgage notes with an aggregate principal amount of $98,604. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.July 2022.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Senior Unsecured Note Redemption
In June 2022, we redeemed, at par plus accrued interest, all $300,000 of our 4.00% senior unsecured notes due July 2022. As a result of this redemption, we recognized a loss on early extinguishment of debt of $77 during the six months ended June 30, 2022, from the write off of unamortized discounts and debt issuance costs.
At June 30, 2022, 2 of our properties with an aggregate net book value of $126,295 were encumbered by mortgage notes with an aggregate principal amount of $73,018. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.
Note 7. Fair Value of Assets and Liabilities
The following table presents certain of our assets measured at fair value at SeptemberJune 30, 2021,2022, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:
| | | Fair Value at Reporting Date Using | | Fair Value at Reporting Date Using |
Description | Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Non-recurring Fair Value Measurements Assets | Non-recurring Fair Value Measurements Assets | | | | | | | | | Non-recurring Fair Value Measurements Assets | | | | | | | | |
Assets of properties held for sale (1)(2) | Assets of properties held for sale (1)(2) | | $ | 20,300 | | | $ | — | | | $ | — | | | $ | 20,300 | | Assets of properties held for sale (1)(2) | | $ | 52,350 | | | $ | — | | | $ | 49,850 | | | $ | 2,500 | |
| |
(1)We recorded impairment charges of $10,658totaling $19,636 to reduce the carrying value of 6 properties in our condensed consolidated balance sheet to their estimated fair values, less estimated costs to sell of $819, based on negotiated sales prices with third party buyers (Level 2 inputs as defined in the fair value hierarchy under GAAP). See Note 3 propertiesfor more information.
(2)We recorded an impairment charge of $2,184 to reduce the carrying value of 1 property that areis classified as held for sale in our condensed consolidated balance sheet to theirits estimated fair value, less estimated costs to sell of $425,$138, based on third party offers (Level 3 inputs as defined in the fair value hierarchy under GAAP). See Note 3 for more information.
In addition to the assets described in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, accounts payable, a revolving credit facility, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At SeptemberJune 30, 20212022 and December 31, 2020,2021, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows:
| | | | As of September 30, 2021 | | As of December 31, 2020 | | | As of June 30, 2022 | | As of December 31, 2021 |
Financial Instrument | Financial Instrument | | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value | Financial Instrument | | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
Senior unsecured notes, 4.15% interest rate, due in 2022 (2) | | $ | — | | | $ | — | | | $ | 298,853 | | | $ | 306,192 | | |
| Senior unsecured notes, 4.00% interest rate, due in 2022(2) | Senior unsecured notes, 4.00% interest rate, due in 2022(2) | | 299,270 | | | 306,717 | | | 298,579 | | | 306,756 | | Senior unsecured notes, 4.00% interest rate, due in 2022(2) | | $ | — | | | $ | — | | | $ | 299,500 | | | $ | 304,148 | |
Senior unsecured notes, 4.25% interest rate, due in 2024 | Senior unsecured notes, 4.25% interest rate, due in 2024 | | 344,011 | | | 371,980 | | | 342,299 | | | 365,435 | | Senior unsecured notes, 4.25% interest rate, due in 2024 | | 345,722 | | | 340,008 | | | 344,581 | | | 365,449 | |
Senior unsecured notes, 4.50% interest rate, due in 2025 | Senior unsecured notes, 4.50% interest rate, due in 2025 | | 638,507 | | | 697,460 | | | 635,921 | | | 688,399 | | Senior unsecured notes, 4.50% interest rate, due in 2025 | | 641,094 | | | 623,292 | | | 639,370 | | | 687,749 | |
Senior unsecured notes, 2.650% interest rate, due in 2026 (3) | Senior unsecured notes, 2.650% interest rate, due in 2026 (3) | | 297,057 | | | 302,846 | | | — | | | — | | Senior unsecured notes, 2.650% interest rate, due in 2026 (3) | | 297,526 | | | 255,234 | | | 297,213 | | | 298,502 | |
Senior unsecured notes, 2.400% interest rate, due in 2027 (4) | Senior unsecured notes, 2.400% interest rate, due in 2027 (4) | | 346,713 | | | 346,456 | | | — | | | — | | Senior unsecured notes, 2.400% interest rate, due in 2027 (4) | | 347,156 | | | 287,004 | | | 346,845 | | | 339,764 | |
Senior unsecured notes, 3.450% interest rate, due in 2031 (5) | Senior unsecured notes, 3.450% interest rate, due in 2031 (5) | | 395,701 | | | 393,680 | | | — | | | — | | Senior unsecured notes, 3.450% interest rate, due in 2031 (5) | | 395,961 | | | 300,416 | | | 395,744 | | | 388,458 | |
Senior unsecured notes, 5.875% interest rate, due in 2046 (6) | | — | | | — | | | 301,264 | | | 322,028 | | |
| Senior unsecured notes, 6.375% interest rate, due in 2050 | Senior unsecured notes, 6.375% interest rate, due in 2050 | | 156,471 | | | 180,533 | | | 156,326 | | | 171,590 | | Senior unsecured notes, 6.375% interest rate, due in 2050 | | 156,614 | | | 158,760 | | | 156,519 | | | 177,098 | |
Mortgage notes payable (7)(3) | Mortgage notes payable (7)(3) | | 98,460 | | | 101,351 | | | 169,729 | | | 174,952 | | Mortgage notes payable (7)(3) | | 72,936 | | | 72,313 | | | 98,178 | | | 100,294 | |
Total | Total | | $ | 2,576,190 | | | $ | 2,701,023 | | | $ | 2,202,971 | | | $ | 2,335,352 | | Total | | $ | 2,257,009 | | | $ | 2,037,027 | | | $ | 2,577,950 | | | $ | 2,661,462 | |
(1)Includes unamortized debt premiums, discounts and issuance costs totaling $34,414$28,009 and $39,871$32,351 as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
(2)These senior notes were redeemed in September 2021.June 2022.
(3)These senior notes were issued in May 2021.
(4)These senior notes were issued in August 2021.
(5)These senior notes were issued in September 2021.
(6)These senior notes were redeemed in June 2021.
(7)Balance as of December 31, 20202021 includes onea mortgage note secured by 3 propertiesone property with an outstanding principal balance of $71,000$25,055 that was prepaid in June 2021.April 2022.
We estimated the fair valuevalues of our senior unsecured notes (except for our senior unsecured notes due 2046 and 2050) using an average of the bid and ask price of the notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair value of our senior unsecured notes due 2046 and 2050 based on the closing price on The
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair values of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates (Level 3 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Note 8. Shareholders’ Equity
Share Awards
On June 17, 2021,16, 2022, in accordance with our Trustee compensation arrangements, we awarded to each of our 89 Trustees 3,500 of our common shares, valued at $29.88$18.84 per share, the closing price of our common shares on Nasdaq on that day.
On September 15, 2021, we awarded under our equity compensation plan an aggregate of 117,800 of our common shares, valued at $25.42 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC.
Share Purchases
During the three and ninesix months ended SeptemberJune 30, 2021,2022, we purchased an aggregate of 25,533 and 37,542790 of our common shares respectively, valued at a weighted average share price of $25.24 and $26.55$20.59 per share, respectively, from certain1 of our current and former Trustees and officers and certain other current anda former officers and employeesemployee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions
During the ninesix months ended SeptemberJune 30, 2021,2022, we declared and paid regular quarterly distributions to common shareholders as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Declaration Date | | Record Date | | Paid Date | | Distributions Per Common Share | | Total Distributions |
January 14, 2021 | | January 25, 2021 | | February 18, 2021 | | $ | 0.55 | | | $ | 26,575 | |
April 15, 2021 | | April 26, 2021 | | May 20, 2021 | | 0.55 | | | 26,575 | |
July 15, 2021 | | July 26, 2021 | | August 19, 2021 | | 0.55 | | | 26,584 | |
| | | | | | | | |
| | | | | | $ | 1.65 | | | $ | 79,734 | |
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Declaration Date | | Record Date | | Paid Date | | Distributions Per Common Share | | Total Distributions |
January 13, 2022 | | January 24, 2022 | | February 17, 2022 | | $ | 0.55 | | | $ | 26,634 | |
April 14, 2022 | | April 25, 2022 | | May 19, 2022 | | 0.55 | | | 26,634 | |
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| | | | | | $ | 1.10 | | | $ | 53,268 | |
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On OctoberJuly 14, 2021,2022, we declared a regular quarterly distribution payable to common shareholders of record on OctoberJuly 25, 20212022 in the amount of $0.55 per share, or approximately $26,600.$26,700. We expect to pay this distribution on or about NovemberAugust 18, 2021.2022.
Note 9. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC.RMR. We have 2 agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations.
Pursuant to our business management agreement with RMR, LLC, we recognized net business management fees of $(1,738)$4,492 and $18,287$9,202 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and $4,236$10,551 and $13,237$20,025 for the three and ninesix months ended September 30, 2020, respectively. The net business management fees we recognized for the three months ended September 30, 2021 include a reversal of $6,627 of previously accrued estimated business management incentive fees, which represents the amount by which the 2021 business management incentive fees as of June 30, 2021, exceeded the amount estimated as of September 30, 2021. The net business management fees for the nine months ended September 30, 2021 include $4,484 of estimated business management incentive fees. The estimated business management incentive fees as of September 30, 2021 are basedrespectively. Based on our common share total return, as defined in our business management agreement, for the measurement period ending as of that date. We did not recognize anyJune 30, 2022, no estimated incentive fees are included in the net business management incentive fees we recognized for the three or nineand six months ended SeptemberJune 30, 2020.2022. The actual amount of annual incentive fees for 2021,2022, if any, will be based on our common share total return, as defined in our business management agreement, for the three year period ending December 31, 2021,2022, and will be payable in January 2022.2023. The net business management fees we recognized for the three and six months ended June 30, 2021 included $5,911 and $11,111, respectively, of accrued estimated incentive fees based on our common share total return as of June 30, 2021. We did not incur an incentive fee payable to RMR LLC for the year ended December 31, 2020.2021. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).
We and RMR amended our business management agreement effective August 1, 2021 to provide that (i) for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Office REIT Index will be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR and (ii) for periods prior to August 1, 2021, the SNL U.S. REIT Office Index will continue to be used. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Office Index.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
We and RMR LLC amended our business management agreement effective August 1, 2021 to replace the benchmark index used in the calculation of incentive management fees. Pursuant to the amendment, for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Office REIT Index will replace the discontinued SNL U.S. REIT Office Index and be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR LLC. For periods prior to August 1, 2021, the SNL U.S. REIT Office Index will continue to be used. Accordingly, the calculation of incentive management fees for the next three measurement periods will continue to use the SNL U.S. REIT Office Index in calculating the benchmark returns for periods through July 31, 2021. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Office Index.
Pursuant to our property management agreement with RMR, LLC, we recognized aggregate net property management and construction supervision fees of $5,519$6,394 and $15,045$12,522 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and $5,189$4,914 and $15,381$9,526 for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively. Of these amounts, for the three and ninesix months ended SeptemberJune 30, 2021, $4,2242022, $4,015 and $12,239,$8,241, respectively, were expensed to other operating expenses in our condensed consolidated financial statements of comprehensive income (loss) and $1,295$2,379 and $2,806,$4,281, respectively, were capitalized as building improvements in our condensed consolidated balance sheets.sheet. For the three and ninesix months ended SeptemberJune 30, 2020, $4,3022021, $3,935 and $12,952,$8,015, respectively, were expensed to other operating expenses in our condensed consolidated financial statements of comprehensive income (loss) and $887$979 and $2,429,$1,511, respectively, were capitalized as building improvements in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets.
We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’sRMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC’sRMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC’sRMR’s centralized accounting personnel, our share of RMR LLC’sRMR’s costs for providing our internal audit function and as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC.RMR. We reimbursed RMR LLC $6,131$6,047 and $18,108$12,013 for these expenses and costs for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and $6,437$5,925 and $18,687$11,977 for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss).
Note 10. Related Person Transactions
We have relationships and historical and continuing transactions with RMR, LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director, and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. David Blackman resigned asRMR. Jennifer Clark, our Presidentother Managing Trustee and Chief Executive Officer, effective December 31, 2020, andour Secretary, also serves as a Managing Trustee, effective June 17, 2021. In replacementmanaging director and the executive vice president, general counsel and secretary of Mr. Blackman, Christopher J. Bilotto was appointed as our President and Chief Operating Officer, effective January 1, 2021, and Jennifer Clark was elected as a Managing Trustee on June 17, 2021. Mr. Bilotto isRMR Inc., an officer and employee of RMR LLC, Ms. Clark is a managing director and an executive officer of RMR Inc. and an officer and employee of RMR LLC, and each of ourABP Trust. Our other officers isare also an officerofficers and employeeemployees of RMR LLC.RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. AdamMr. Portnoy serves as chair of the boards of trustees or boards of directors and as a managing director or managing trustee of thosethese public companies. Other officers of RMR, LLC, including Ms. Clark, serve as managing trustees, managing directors or officers of certain of these companies.
See Note 8 for further information relating to our awards of common shares to our officers and certain other employees of RMR LLC in September 2021 and our repurchases of common shares from certain of our current and former Trustees and officers and certain other current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to them. We include amounts recognized as expense for awards of our common shares to our officers and to other RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).
Our Manager, RMR LLC.RMR. We have 2 agreements with RMR LLC to provide management services to us. See Note 9 for more information regarding our management agreements with RMR LLC.RMR.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
Leases with RMR LLC.RMR. We lease office space to RMR LLC in certain of our properties for RMR LLC’sRMR’s property management offices. Pursuant to our lease agreements with RMR, LLC, we recognized rental income from RMR LLC for leased office space of $275$285 and $850$569 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and $282$287 and $836$575 for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively.
Sonesta. In June 2021, we entered into a 30-year lease agreement with a subsidiary of Sonesta International Hotels Corporation, or Sonesta, in connection with the redevelopment of an office property we own in Washington, D.C. as a mixed usemixed-use property. Sonesta’s lease is for the planned full-service hotel component of the property that will include approximately 230,000 rentable square feet, which represents approximately 54% of the total square feet upon completion of the redevelopment. The term of the lease commences upon our delivery of the completed hotel, which we estimate to occur in the firstsecond quarter of 2023. Sonesta has 2 options to extend the term for 10 years each. Pursuant to the lease agreement, Sonesta will pay us annual base rent of approximately $6,436 beginning 18 months after the lease commences. The annual base rent will increase by 10% every five years throughout the term. Sonesta is also obligated to pay its pro rata share of the operating costs for the building. We estimate that the total cost to build the hotel space will be approximately $66,000. Mr. Adam Portnoy is a director and controlling shareholder of Sonesta and Ms. Jennifer Clark is also a director of Sonesta. Another officer and employee of RMR is a director and the president and chief executive officer of Sonesta.
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
(unaudited)
For more information about these and other such relationships and certain other related person transactions, refer to our 20202021 Annual Report.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 20202021 Annual Report.
OVERVIEW (dollars in thousands, except per share and per square foot data)
We are a real estate investment trust, or REIT, organized under Maryland law. As of SeptemberJune 30, 2021,2022, our wholly owned properties were comprised of 178172 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing a combined approximately 444,000 rentable square feet. As of SeptemberJune 30, 2021,2022, our properties are located in 3332 states and the District of Columbia and contain approximately 23,274,00022,491,000 rentable square feet. As of SeptemberJune 30, 2021,2022, our properties were leased to 331287 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.06.2 years. The U.S. government is our largest tenant, representing approximately 19.7%18.5% of our annualized rental income as of SeptemberJune 30, 2021.2022. The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of SeptemberJune 30, 2021,2022, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.
COVID-19 Pandemic
The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including the U.S. economy. Many of the restrictions that had been imposed in the United States during the pandemic have since been lifted and commercial activity in the United States generally has increasingly returned to pre-pandemic practices and operations. However, certain market practices that have resulted from the pandemic, including increased alternative work arrangements such as work from home, are continuing to be experienced. We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. To date, the COVID-19 pandemic has not had a significant adverse impact on our business and we continue to believe that our financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic. However, we have received requests from some
The U.S. Federal Reserve recently raised interest rates in an effort to combat high inflation, which could result in negative consequences in the U.S. economy, and concerns about a potential recession are becoming more pronounced. It is unclear whether the U.S. economy will be able to withstand such challenges and continue sustained growth. A recession could adversely affect our financial condition and that of our tenants, for rent assistance. As of October 26, 2021, we have granted temporary rent assistance totaling $2,483 to 18 tenants who represent approximately 3.3%could adversely impact the ability of our annualized rental income as of September 30, 2021. This assistance generally entails a deferral of, in most cases, one month oftenants to renew our leases or pay rent pursuant to deferred payment plans which requireus, would impair our ability to effectively deploy our capital or realize upon investments on favorable terms and may cause the deferred rent amounts be payable over a 12-month period, all of which have commenced. As of October 26, 2021, we have collected more than 95%values of our granted rent deferrals.properties and of our securities to decline. We could also be affected by any overall weakening of, or disruptions in, the financial markets.
There remains uncertainty as to theThe ultimate duration and severityadverse impact of the COVID-19 pandemic, including risksthe extent to which alternative work arrangements such as work from home will be continued and what impact that may arise from mutations or related strains of the virus, the abilityhave on demand for office space at our properties, and recently rising interest rates, is highly uncertain and subject to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and the impact on the U.S. economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens’ ability to otherwise achieve immunity to the virus.change. As a result, we are unable to determine whatdo not yet know the ultimate impact will befull extent of potential impacts on our business and operations, our tenants’ businesses and other stakeholders’ businesses, operations financial results and financial position.or the global economy as a whole. For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1, “Business—COVID-19 Pandemic” and Part I, Item 1A, “Risk Factors”, of our 20202021 Annual Report.
Property Operations
Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of SeptemberJune 30, 20212022 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For more
more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 3 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Occupancy data for our properties as of SeptemberJune 30, 20212022 and 20202021 was as follows (square feet in thousands):
| | | | All Properties (1) | | Comparable Properties (2) | | | All Properties (1)(2) | | Comparable Properties (3) |
| | September 30, | | September 30, | | June 30, | | June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
Total properties (3) | Total properties (3) | | 178 | | 184 | | 163 | | | 163 | | Total properties (3) | | 172 | | 181 | | 153 | | | 153 | |
Total rentable square feet (4) | Total rentable square feet (4) | | 23,274 | | | 24,909 | | | 20,729 | | | 20,720 | | Total rentable square feet (4) | | 22,491 | | | 24,091 | | | 19,228 | | | 19,226 | |
Percent leased (5) | Percent leased (5) | | 89.0 | % | | 91.2 | % | | 91.2 | % | | 93.4 | % | Percent leased (5) | | 89.4 | % | | 89.5 | % | | 94.3 | % | | 93.0 | % |
(1)Based on properties we owned on SeptemberJune 30, 20212022 and 2020,2021, respectively.
(2)Includes one leasable land parcel.
(3)Based on properties we owned continuously since January 1, 2020;2021; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.
(3)Includes one leasable land parcel.
(4)Subject to changes when space is remeasured or reconfigured for tenants.
(5)Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.
The average effective rental rate per square foot for our properties for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 are as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
Average effective rental rate per square foot (1): | Average effective rental rate per square foot (1): | | | | | | | | | Average effective rental rate per square foot (1): | | | | | | | | |
All properties (2) | All properties (2) | | $ | 28.86 | | | $ | 25.85 | | | $ | 27.12 | | | $ | 25.89 | | All properties (2) | | $ | 28.80 | | | $ | 26.46 | | | $ | 29.11 | | | $ | 26.20 | |
Comparable properties (3) | Comparable properties (3) | | $ | 27.40 | | | $ | 27.26 | | | $ | 27.37 | | | $ | 27.22 | | Comparable properties (3) | | $ | 27.71 | | | $ | 26.85 | | | $ | 27.57 | | | $ | 27.09 | |
(1)Average effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified.
(2)Based on properties we owned on SeptemberJune 30, 20212022 and 2020,2021, respectively.
(3)Based on properties we owned continuously since JulyApril 1, 20202021 and January 1, 2020, respectively,2021, respectively; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.
During the three and ninesix months ended SeptemberJune 30, 2021,2022, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):
| | | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| | | Leased | | Available for Lease | | Total | | Leased | | Available for Lease | | Total | | | Leased | | Available for Lease | | Total | | Leased | | Available for Lease | | Total |
Beginning of period | Beginning of period | | 21,553 | | | 2,538 | | | 24,091 | | | 22,705 | | | 2,184 | | | 24,889 | | Beginning of period | | 20,373 | | | 2,568 | | | 22,941 | | | 20,817 | | | 2,454 | | | 23,271 | |
Changes resulting from: | Changes resulting from: | | | | | Changes resulting from: | | | | |
Acquisition of properties | | 29 | | | 20 | | | 49 | | | 899 | | | 27 | | | 926 | | |
| Disposition of properties | Disposition of properties | | (799) | | | (74) | | | (873) | | | (2,491) | | | (74) | | | (2,565) | | Disposition of properties | | (359) | | | (89) | | | (448) | | | (522) | | | (256) | | | (778) | |
Lease expirations | Lease expirations | | (738) | | | 738 | | | — | | | (2,206) | | | 2,206 | | | — | | Lease expirations | | (592) | | | 592 | | | — | | | (1,445) | | | 1,445 | | | — | |
Lease renewals (1) | Lease renewals (1) | | 385 | | | (385) | | | — | | | 1,206 | | | (1,206) | | | — | | Lease renewals (1) | | 553 | | | (553) | | | — | | | 889 | | | (889) | | | — | |
New leases (1) | New leases (1) | | 274 | | | (274) | | | — | | | 576 | | | (576) | | | — | | New leases (1) | | 126 | | | (126) | | | — | | | 362 | | | (362) | | | — | |
| Remeasurements (2) | Remeasurements (2) | | 1 | | | 6 | | | 7 | | | 16 | | | 8 | | | 24 | | Remeasurements (2) | | (1) | | | (1) | | | (2) | | | (1) | | | (1) | | | (2) | |
End of period | End of period | | 20,705 | | | 2,569 | | | 23,274 | | | 20,705 | | | 2,569 | | | 23,274 | | End of period | | 20,100 | | | 2,391 | | | 22,491 | | | 20,100 | | | 2,391 | | | 22,491 | |
(1)Based on leases entered during the three and ninesix months ended SeptemberJune 30, 2021.2022.
(2)Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants.
Leases at our properties totaling approximately 738,000592,000 and 2,206,0001,445,000 rentable square feet expired during the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively. During the three and ninesix months ended SeptemberJune 30, 2021,2022, we entered into new and renewal leases as summarized in the following tables (square feet in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | New Leases | | Renewals | | Total |
Rentable square feet leased | | 274 | | | 385 | | | 659 | |
Weighted average rental rate change (by rentable square feet) | | (7.6 | %) | | 5.4 | % | | (0.1 | %) |
Tenant leasing costs and concession commitments (1) | | $ | 27,322 | | | $ | 18,811 | | | $ | 46,133 | |
Tenant leasing costs and concession commitments per rentable square foot (1) | | $ | 99.81 | | | $ | 48.85 | | | $ | 70.02 | |
Weighted (by square feet) average lease term (years) | | 12.9 | | | 9.6 | | | 10.9 | |
Total leasing costs and concession commitments per rentable square foot per year (1) | | $ | 7.74 | | | $ | 5.11 | | | $ | 6.40 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
| | New Leases | | Renewals | | Total |
Rentable square feet leased | | 576 | | | 1,206 | | | 1,782 | |
Weighted average rental rate change (by rentable square feet) | | 9.8 | % | | 5.3 | % | | 7.0 | % |
Tenant leasing costs and concession commitments (1)(2) | | $ | 98,517 | | | $ | 31,463 | | | $ | 129,980 | |
Tenant leasing costs and concession commitments per rentable square foot (1)(2) | | $ | 170.91 | | | $ | 26.10 | | | $ | 72.94 | |
Weighted (by square feet) average lease term (years) | | 18.9 | | | 7.1 | | | 10.9 | |
Total leasing costs and concession commitments per rentable square foot per year (1)(2) | | $ | 9.06 | | | $ | 3.66 | | | $ | 6.68 | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | New Leases | | Renewals | | Total |
Rentable square feet leased | | 126 | | | 553 | | | 679 | |
Weighted average rental rate change (by rentable square feet) | | 8.7 | % | | 4.0 | % | | 4.9 | % |
Tenant leasing costs and concession commitments (1) | | $ | 11,199 | | | $ | 26,170 | | | $ | 37,369 | |
Tenant leasing costs and concession commitments per rentable square foot (1) | | $ | 89.01 | | | $ | 47.36 | | | $ | 55.08 | |
Weighted (by square feet) average lease term (years) | | 8.3 | | | 9.4 | | | 9.2 | |
Total leasing costs and concession commitments per rentable square foot per year (1) | | $ | 10.79 | | | $ | 5.05 | | | $ | 6.00 | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
| | New Leases | | Renewals | | Total |
Rentable square feet leased | | 362 | | | 889 | | | 1,251 | |
Weighted average rental rate change (by rentable square feet) | | 7.3 | % | | 3.9 | % | | 5.0 | % |
Tenant leasing costs and concession commitments (1) | | $ | 38,054 | | | $ | 32,063 | | | $ | 70,117 | |
Tenant leasing costs and concession commitments per rentable square foot (1) | | $ | 105.09 | | | $ | 36.10 | | | $ | 56.08 | |
Weighted (by square feet) average lease term (years) | | 9.6 | | | 10.0 | | | 9.9 | |
Total leasing costs and concession commitments per rentable square foot per year (1) | | $ | 10.90 | | | $ | 3.63 | | | $ | 5.69 | |
(1)Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.
(2)Includes commitments totaling approximately $66,000 in connection with the lease we entered with Sonesta in June 2021 related to the redevelopment of a property in Washington, D.C. These costs represent the estimated costs related to the planned hotel component of the property.
During the three and ninesix months ended SeptemberJune 30, 2021,2022, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands):
| | | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| | | Old Effective Rent Per Square Foot (1) | | New Effective Rent Per Square Foot (1) | | Rentable Square Feet | | Old Effective Rent Per Square Foot (1) | | New Effective Rent Per Square Foot (1) | | Rentable Square Feet | | | Old Effective Rent Per Square Foot (1) | | New Effective Rent Per Square Foot (1) | | Rentable Square Feet | | Old Effective Rent Per Square Foot (1) | | New Effective Rent Per Square Foot (1) | | Rentable Square Feet |
New leases | New leases | | $ | 18.83 | | | $ | 27.43 | | | 8 | | | $ | 20.45 | | | $ | 25.57 | | | 109 | | New leases | | $ | 12.63 | | | $ | 20.58 | | | 8 | | | $ | 8.60 | | | $ | 8.26 | | | 260 | |
Lease renewals | Lease renewals | | $ | 27.99 | | | $ | 30.38 | | | 506 | | | $ | 27.11 | | | $ | 28.62 | | | 1,271 | | Lease renewals | | $ | 27.90 | | | $ | 29.06 | | | 536 | | | $ | 27.68 | | | $ | 29.07 | | | 1,028 | |
Total leasing activity | Total leasing activity | | $ | 27.85 | | | $ | 30.33 | | | 514 | | | $ | 26.58 | | | $ | 28.38 | | | 1,380 | | Total leasing activity | | $ | 27.67 | | | $ | 28.93 | | | 544 | | | $ | 23.82 | | | $ | 24.86 | | | 1,288 | |
(1)Effective rental rate includesrates include contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excludesexclude lease value amortization.
During the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
| Lease related costs (1) | Lease related costs (1) | | $ | 17,074 | | | $ | 7,192 | | | $ | 35,259 | | | $ | 26,226 | | Lease related costs (1) | | $ | 16,131 | | | $ | 11,215 | | | $ | 24,795 | | | $ | 18,185 | |
Building improvements (2) | Building improvements (2) | | 9,267 | | | 10,579 | | | 21,558 | | | 29,814 | | Building improvements (2) | | 4,702 | | | 7,765 | | | 7,485 | | | 12,291 | |
Recurring capital expenditures | Recurring capital expenditures | | 26,341 | | | 17,771 | | | 56,817 | | | 56,040 | | Recurring capital expenditures | | 20,833 | | | 18,980 | | | 32,280 | | | 30,476 | |
Development, redevelopment and other activities (3) | Development, redevelopment and other activities (3) | | 13,272 | | | 5,521 | | | 30,916 | | | 11,260 | | Development, redevelopment and other activities (3) | | 40,302 | | | 12,738 | | | 77,826 | | | 17,644 | |
Total capital expenditures | Total capital expenditures | | $ | 39,613 | | | $ | 23,292 | | | $ | 87,733 | | | $ | 67,300 | | Total capital expenditures | | $ | 61,135 | | | $ | 31,718 | | | $ | 110,106 | | | $ | 48,120 | |
(1)Lease related costs generally include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and other tenant inducements.
(2)Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.
(3)Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue.
AsIn addition to the capital expenditures described above, we contributed $1,132 and $2,202 to one of Septemberour unconsolidated joint ventures during the three and six months ended June 30, 2021,2022, respectively. Also, as of June 30, 2022, we have estimated unspent leasing related obligations of $129,369,$130,726, of which we expect to spend $69,248$82,543 over the next 12 months.
As of SeptemberJune 30, 2021,2022, we had leases at our properties totaling approximately 2,317,0001,913,000 rentable square feet that were scheduled to expire through December 31, 2022.June 30, 2023. As of OctoberJuly 27, 2021,2022, we expect tenants with leases totaling approximately 758,000817,000 rentable square feet that are scheduled to expire through December 31, 2022,June 30, 2023, to not renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration. As a result of the COVID-19 pandemic, and its economic impact and the uncertainty of whether certain market practices and trends in response to the pandemic will be sustained or increased, including the extent to which alternative work arrangements such as work from home practices may be continued, overall leasing activity has been volatile during 2021 and may remain so until office property market conditions meaningfully improve and stabilize for a sustained period. However, we remain focused on proactive dialogues with our existing tenants and overall tenant retention. Prevailing market conditions and government and other tenants’ needs at the time we negotiate and enter leases or lease renewals will generally determine rental rates and demand for leased space at our properties, and market conditions and our tenants’ needs are beyond our control. Whenever we renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. We cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter; also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations.terminations or lower rents upon lease renewal or reletting. Additionally, we may incur significant costs to renew our leases with current tenants or lease our properties to new tenants.
As of SeptemberJune 30, 2021,2022, our lease expirations by year are as follows (square feet in thousands):
| Year (1) | Year (1) | | Number of Leases Expiring | | Leased Square Feet Expiring (2) | | Percent of Total | | Cumulative Percent of Total | | Annualized Rental Income Expiring | | Percent of Total | | Cumulative Percent of Total | Year (1) | | Number of Leases Expiring | | Leased Square Feet Expiring (2) | | Percent of Total | | Cumulative Percent of Total | | Annualized Rental Income Expiring | | Percent of Total | | Cumulative Percent of Total |
2021 | | 25 | | | 487 | | | 2.4 | % | | 2.4 | % | | $ | 16,114 | | | 2.8 | % | | 2.8 | % | |
2022 | 2022 | | 72 | | | 1,830 | | | 8.8 | % | | 11.2 | % | | 51,980 | | | 8.9 | % | | 11.7 | % | 2022 | | 42 | | | 944 | | | 4.7 | % | | 4.7 | % | | $ | 23,716 | | | 4.2 | % | | 4.2 | % |
2023 | 2023 | | 67 | | | 2,430 | | | 11.7 | % | | 22.9 | % | | 78,580 | | | 13.5 | % | | 25.2 | % | 2023 | | 60 | | | 2,305 | | | 11.5 | % | | 16.2 | % | | 76,154 | | | 13.5 | % | | 17.7 | % |
2024 | 2024 | | 58 | | | 3,209 | | | 15.5 | % | | 38.4 | % | | 83,908 | | | 14.4 | % | | 39.6 | % | 2024 | | 51 | | | 3,063 | | | 15.2 | % | | 31.4 | % | | 79,437 | | | 14.1 | % | | 31.8 | % |
2025 | 2025 | | 50 | | | 2,128 | | | 10.3 | % | | 48.7 | % | | 46,006 | | | 7.9 | % | | 47.5 | % | 2025 | | 44 | | | 2,047 | | | 10.2 | % | | 41.6 | % | | 43,419 | | | 7.7 | % | | 39.5 | % |
2026 | 2026 | | 39 | | | 1,853 | | | 8.9 | % | | 57.6 | % | | 48,876 | | | 8.4 | % | | 55.9 | % | 2026 | | 37 | | | 1,670 | | | 8.3 | % | | 49.9 | % | | 43,200 | | | 7.7 | % | | 47.2 | % |
2027 | 2027 | | 33 | | | 1,920 | | | 9.3 | % | | 66.9 | % | | 49,987 | | | 8.6 | % | | 64.5 | % | 2027 | | 37 | | | 2,161 | | | 10.8 | % | | 60.7 | % | | 53,942 | | | 9.6 | % | | 56.8 | % |
2028 | 2028 | | 15 | | | 1,254 | | | 6.1 | % | | 73.0 | % | | 46,543 | | | 8.0 | % | | 72.5 | % | 2028 | | 14 | | | 1,254 | | | 6.2 | % | | 66.9 | % | | 48,954 | | | 8.7 | % | | 65.5 | % |
2029 | 2029 | | 19 | | | 970 | | | 4.7 | % | | 77.7 | % | | 27,403 | | | 4.7 | % | | 77.2 | % | 2029 | | 20 | | | 1,038 | | | 5.2 | % | | 72.1 | % | | 30,277 | | | 5.4 | % | | 70.9 | % |
2030 and thereafter | | 55 | | | 4,624 | | | 22.3 | % | | 100.0 | % | | 133,615 | | | 22.8 | % | | 100.0 | % | |
2030 | | 2030 | | 19 | | | 731 | | | 3.6 | % | | 75.7 | % | | 20,800 | | | 3.7 | % | | 74.6 | % |
2031 and thereafter | | 2031 and thereafter | | 51 | | | 4,887 | | | 24.3 | % | | 100.0 | % | | 142,966 | | | 25.4 | % | | 100.0 | % |
Total | Total | | 433 | | | 20,705 | | | 100.0 | % | | | | $ | 583,012 | | | 100.0 | % | | | Total | | 375 | | | 20,100 | | | 100.0 | % | | | | $ | 562,865 | | | 100.0 | % | | |
| Weighted average remaining lease term (in years) | Weighted average remaining lease term (in years) | | 5.9 | | | | | | 6.0 | | | | | Weighted average remaining lease term (in years) | | 5.9 | | | | | | 6.2 | | | | |
(1)The year of lease expiration is pursuant to current contract terms. Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability. As of SeptemberJune 30, 2021,2022, tenants occupying approximately 5.6%3.9% of our rentable square feet and responsible for approximately 5.5%4.3% of our annualized rental income as of SeptemberJune 30, 20212022 currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2021, 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2035, 2037 and 2040, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.5%0.9%, 1.7%3.4%, 2.8%2.6%, 1.2%4.0%, 3.9%, 1.1%1.3%, 0.8%, 1.2%1.5%, 0.5%, 0.3%0.7%, 0.1%, 0.4%, 0.1% and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 0.6%0.9%, 2.0%4.2%, 3.9%2.9%, 1.7%7.8%, 7.0%1.6%, 1.4%1.2%, 1.3%1.6%, 1.3%1.0%, 0.9%, 0.4%0.1%, 0.5%, 0.2% and 0.3%0.4% of our annualized rental income, respectively, as of SeptemberJune 30, 2021.2022. In addition, as of SeptemberJune 30, 2021,2022, pursuant to leases with 14 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 14 tenants occupy approximately 6.0%6.2% of our rentable square feet and contribute approximately 6.6%6.9% of our annualized rental income as of SeptemberJune 30, 2021.2022.
(2)Leased square feet is pursuant to leases existing as of SeptemberJune 30, 2021,2022, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to changes when space is remeasured or reconfigured for new tenants.
We generally will seek to renew or extend the terms of leases in our single tenantat properties with tenants when they expire. Because of the capital many of theour single tenants in these properties have invested in the properties they lease from us and because many of these properties appear to be of strategic importance to thesuch tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire. However, recent shifts in workplace practices, including as a result of the COVID-19 pandemic, have resulted in a significant increase in alternative work arrangements, including work from home practices. It is uncertain to what extent and how long work from home arrangements may continue, or if other hybrid work arrangements will continue or increase. Despite these shifts in workplace practices, our recent leasing activity and negotiations for vacant or expiring space may suggest that there is an improving demand environment for office space. However, if these
arrangements continue or increase, our tenants may not seek to renew or extend their leases when they expire, or may seek to renew their leases for less space than they currently occupy. If we are unable to extend or renew our leases, or we renew leases for reduced space, it may be time consuming and expensive to relet some of these properties.
We believe that recent government budgetary and spending priorities and enhancements in technology have resulted in a decrease in government office use for employees. Furthermore, over the past several years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties. This activity has reduced the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. However, efforts to manage space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy. Also, our government tenants’ desire to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations are often more prevalent in those circumstances. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals; however, activity prior to the outbreak of the COVID-19 pandemic suggested that the U.S. government had begun to shift its leasing strategy to include longer term leases and was actively exploring 10 to 20 year lease terms at renewal, in some instances. It is also possible that as a result of the COVID-19 pandemic, government tenants may seek to manage space utilization rates in order to provide greater physical distancing for employees, mostly through lease renewals, which may require us to spend significant amounts for tenant improvements. However, the COVID-19 pandemic and its aftermath have had negative impacts on government budgets and resources, althoughresources. Although there arehave been indications that to date, certain of those impacts may not have been as negative as originally expected, and it is unclear what the effect of these impacts will be on government demand for leasing office space. In addition, the new presidential administration may result in a change in the federal government’s policy priorities, which may impact
leasing at our government leased properties. Given the significant uncertainties, including as to the COVID-19 pandemic and its economic impact and its aftermath and the new presidential administration,extent to which certain market trends, such as work from home practices, may continue or increase, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods.
As of SeptemberJune 30, 2021,2022, we derive 21.5%22.1% of our annualized rental income from our properties located in the metropolitan Washington, D.C. market area, which includes Washington, D.C., Northern Virginia and suburban Maryland. A downturn in economic conditions in this area including as a result of the COVID-19 pandemic, could result in reduced demand from tenants for our properties or reduce the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased office space by the U.S. government in the metropolitan Washington, D.C. market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants when our leases expire.
Our manager, RMR, LLC, employs a tenant review process for us. RMR LLC assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR LLC evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. RMR LLC also often uses a third party service to monitor the credit ratings, both actual and implied, of our existing tenants. We consider investment grade tenants to include: (a) investment grade rated tenants; (b) tenants with investment grade rated parent entities that guarantee the tenant’s lease obligations; and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations. As of SeptemberJune 30, 2021,2022, tenants contributing 52.3%52.4% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 10.2%11.0% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).
As of SeptemberJune 30, 2021,2022, tenants representing 1% or more of our total annualized rental income were as follows:follows (square feet in thousands):
| | | Tenant | | Credit Rating | | Sq. Ft. | | % of Leased Sq. Ft. | | Annualized Rental Income | | % of Total Annualized Rental Income | | Tenant | | Credit Rating | | Sq. Ft. | | % of Leased Sq. Ft. | | Annualized Rental Income | | % of Total Annualized Rental Income |
1 | 1 | | U.S. Government | | Investment Grade | | 4,196 | | | 20.3 | % | | $ | 115,035 | | | 19.7 | % | 1 | | U.S. Government | | Investment Grade | | 3,894 | | | 19.4 | % | | $ | 104,402 | | | 18.5 | % |
2 | 2 | | Alphabet Inc (Google) | | Investment Grade | | 386 | | | 1.9 | % | | 20,924 | | | 3.6 | % | 2 | | Alphabet Inc. (Google) | | Investment Grade | | 386 | | | 1.9 | % | | 23,713 | | | 4.2 | % |
3 | 3 | | State of California | | Investment Grade | | 651 | | | 3.1 | % | | 19,381 | | | 3.3 | % | 3 | | Shook, Hardy & Bacon L.L.P. | | Not Rated | | 596 | | | 3.0 | % | | 19,336 | | | 3.4 | % |
4 | 4 | | Shook, Hardy & Bacon L.L.P. | | Not Rated | | 596 | | | 2.9 | % | | 19,187 | | | 3.3 | % | 4 | | IG Investments Holdings LLC | | Not Rated | | 336 | | | 1.7 | % | | 16,594 | | | 2.9 | % |
5 | 5 | | Bank of America Corporation | | Investment Grade | | 577 | | | 2.8 | % | | 15,803 | | | 2.7 | % | 5 | | Bank of America Corporation | | Investment Grade | | 577 | | | 2.9 | % | | 15,766 | | | 2.8 | % |
6 | 6 | | IG Investments Holdings LLC | | Non Investment Grade | | 333 | | | 1.6 | % | | 14,553 | | | 2.5 | % | 6 | | State of California | | Investment Grade | | 523 | | | 2.6 | % | | 15,740 | | | 2.8 | % |
7 | 7 | | F5 Networks, Inc. | | Not Rated | | 299 | | | 1.4 | % | | 13,027 | | | 2.2 | % | 7 | | Commonwealth of Massachusetts | | Investment Grade | | 311 | | | 1.5 | % | | 12,260 | | | 2.2 | % |
8 | 8 | | Commonwealth of Massachusetts | | Investment Grade | | 311 | | | 1.5 | % | | 12,260 | | | 2.1 | % | 8 | | CareFirst Inc. | | Not Rated | | 207 | | | 1.0 | % | | 11,498 | | | 2.0 | % |
9 | 9 | | CareFirst Inc. | | Not Rated | | 207 | | | 1.0 | % | | 11,870 | | | 2.0 | % | 9 | | Northrop Grumman Corporation | | Investment Grade | | 337 | | | 1.7 | % | | 11,465 | | | 2.0 | % |
10 | 10 | | Northrop Grumman Corporation | | Investment Grade | | 337 | | | 1.6 | % | | 11,350 | | | 1.9 | % | 10 | | Tyson Foods, Inc. | | Investment Grade | | 248 | | | 1.2 | % | | 11,042 | | | 2.0 | % |
11 | 11 | | Tyson Foods, Inc. | | Investment Grade | | 248 | | | 1.2 | % | | 11,198 | | | 1.9 | % | 11 | | Sonesta International Hotels Corporation (1) | | Not Rated | | 230 | | | 1.1 | % | | 10,745 | | | 1.9 | % |
12 | 12 | | Sonesta International Hotels Corporation (1) | | Not Rated | | 230 | | | 1.1 | % | | 10,745 | | | 1.8 | % | 12 | | CommScope Holding Company Inc. | | Non Investment Grade | | 228 | | | 1.1 | % | | 9,370 | | | 1.7 | % |
13 | 13 | | CommScope Holding Company Inc | | Non Investment Grade | | 228 | | | 1.1 | % | | 8,921 | | | 1.5 | % | 13 | | State of Georgia | | Investment Grade | | 308 | | | 1.5 | % | | 7,383 | | | 1.3 | % |
14 | 14 | | Micro Focus International plc | | Non Investment Grade | | 242 | | | 1.2 | % | | 7,431 | | | 1.3 | % | 14 | | PNC Bank | | Investment Grade | | 441 | | | 2.2 | % | | 6,924 | | | 1.2 | % |
15 | 15 | | State of Georgia | | Investment Grade | | 308 | | | 1.5 | % | | 7,248 | | | 1.2 | % | 15 | | Micro Focus International plc | | Non Investment Grade | | 215 | | | 1.1 | % | | 6,905 | | | 1.2 | % |
16 | 16 | | PNC Bank | | Investment Grade | | 441 | | | 2.1 | % | | 6,924 | | | 1.2 | % | 16 | | Compass Group plc | | Investment Grade | | 267 | | | 1.3 | % | | 6,703 | | | 1.2 | % |
17 | 17 | | ServiceNow, Inc. | | Investment Grade | | 149 | | | 0.7 | % | | 6,623 | | | 1.1 | % | 17 | | ServiceNow, Inc. | | Investment Grade | | 149 | | | 0.7 | % | | 6,637 | | | 1.2 | % |
18 | 18 | | Compass Group plc | | Investment Grade | | 267 | | | 1.3 | % | | 6,496 | | | 1.1 | % | 18 | | Allstate Insurance Co. | | Investment Grade | | 468 | | | 2.3 | % | | 6,479 | | | 1.2 | % |
19 | 19 | | Allstate Insurance Co. | | Investment Grade | | 468 | | | 2.3 | % | | 6,475 | | | 1.1 | % | 19 | | Leidos Holdings Inc. | | Investment Grade | | 159 | | | 0.8 | % | | 6,117 | | | 1.1 | % |
20 | 20 | | Automatic Data Processing, Inc. | | Investment Grade | | 289 | | | 1.4 | % | | 6,037 | | | 1.0 | % | 20 | | Automatic Data Processing, Inc. | | Investment Grade | | 289 | | | 1.4 | % | | 6,087 | | | 1.1 | % |
21 | 21 | | Church & Dwight Co., Inc. | | Investment Grade | | 250 | | | 1.2 | % | | 6,031 | | | 1.0 | % | 21 | | Church & Dwight Co., Inc. | | Investment Grade | | 250 | | | 1.2 | % | | 6,037 | | | 1.1 | % |
| | Total | | 11,013 | | | 53.2 | % | | $ | 337,519 | | | 57.5 | % | | Total | | 10,419 | | | 51.6 | % | | $ | 321,203 | | | 57.0 | % |
(1)In June 2021, we entered into a 30-year lease with Sonesta. The lease relates to the redevelopment of a property we own in Washington, D.C to a mixed use and Sonesta's lease relates to the planned hotel component of the property. The term of the lease commences upon our delivery of the completed hotel, which is estimated to occur in the firstsecond quarter of 2023. For more information about our lease with Sonesta, see Note 10 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
Acquisition Activities
During the nine months ended September 30, 2021, we acquired three properties containing a combined approximately 926,000 rentable square feet for an aggregate purchase price of $576,975, excluding purchase price adjustments and acquisition related costs.
For more information about our acquisition activities, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Disposition Activities
During the ninesix months ended SeptemberJune 30, 2021,2022, we sold six properties and a warehouse facility adjacent to a property we own containing a combined approximately 2,565,000778,000 rentable square feet for an aggregate sales price of $198,415,$77,720, excluding closing costs.
In October 2021,July 2022, we sold two vacant land parcels adjacent to properties we owna property located in Sterling, VAHouston, TX containing approximately 206,000 rentable square feet for a sales price of $28,500,$9,800, excluding closing costs.
Based on current real estate market conditions, including rising interest rates, we expect the pace of our 2022 dispositions to moderate. However, we continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing certain of our properties for sale. As of OctoberJuly 27, 2021,2022, we have also entered into an agreementagreements to sell fivenine properties located in Brookhaven, GAcontaining approximately 1,116,000 rentable square feet for aan aggregate sales price of $56,000,$109,800, excluding closing costs. Also, weThese sales are currently marketing for sale 17 properties containing approximately 2,161,000 rentable square feet that we expectexpected to generate approximately $200,000occur before the end of gross proceeds. We expect to substantially completethe third quarter of 2022. However, these dispositions by mid-year 2022. We cannot be sure we will sell any properties wesales are marketing for prices in excess of their carrying values or otherwise. In addition, our pending sale is subject to conditions; accordingly, we cannot be sure that we will complete this salethese sales or that this salethese sales will not be delayed or the terms will not change.
For more information about our disposition activities, see Note 3 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Financing Activities
Senior Unsecured Note Issuances
In May 2021,April 2022, we issued $300,000prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of 2.650% senior unsecured notes due 2026$24,863, an annual interest rate of 4.22% and a maturity date in an underwritten public offering, raising net proceeds of $296,826, after deducting underwriters' discounts and offering expenses, which we used to redeem all $310,000 of our 5.875% senior unsecured notes due 2046.
In August 2021, we issued $350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of $346,630, after deducting underwriters' discounts and offering expenses, which we used to redeem all $300,000 of our 4.15% senior unsecured notes due 2022.
In September 2021, we issued $400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of $395,698, after deducting underwriters' discounts and offering expenses, which we used to repay amounts outstanding under our revolving credit facility.
Senior Unsecured Note RedemptionsJuly 2022 using cash on hand.
In June 2021,2022, we redeemed, at par plus accrued interest, all $310,000$300,000 of our 5.875%4.00% senior unsecured notes due 2046 using cash on hand and the net proceeds from the issuance of our 2.650% senior unsecured notes due 2026.
In September 2021, we redeemed, at a premium plus accrued interest, all $300,000 of our 4.15% senior unsecured notes dueJuly 2022 using a portion of the net proceeds from the issuance of our 2.400% senior unsecured notes due 2027.
Mortgage Note Repayment
In June 2021, we prepaid, at a premium plus accrued interest, a mortgage note secured by three properties with an outstanding principal balance of $71,000, an annual interest rate of 3.55% and a maturity date in May 2023 using cash on hand and borrowings under our revolving credit facility.
Segment Information
We operate in one business segment: ownership of real estate properties.
RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)
Three Months Ended SeptemberJune 30, 2021,2022, Compared to Three Months Ended SeptemberJune 30, 20202021
| | | | Comparable Properties (1) Results Three Months Ended September 30, | | Non-Comparable Properties Results Three Months Ended September 30, | | Consolidated Results Three Months Ended September 30, | | | | Comparable Properties (1) Results Three Months Ended June 30, | | Non-Comparable Properties Results Three Months Ended June 30, | | Consolidated Results Three Months Ended June 30, | |
| | | | 2021 | | 2020 | | $ Change | | % Change | | 2021 | | 2020 | | 2021 | | 2020 | | $ Change | | % Change | | | | 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | 2022 | | 2021 | | $ Change | | % Change | |
Rental income | Rental income | | $ | 128,995 | | | $ | 130,319 | | | $ | (1,324) | | | (1.0 | %) | | $ | 18,577 | | | $ | 15,487 | | | $ | 147,572 | | | $ | 145,806 | | | $ | 1,766 | | | 1.2 | % | | Rental income | | $ | 122,722 | | | $ | 119,323 | | | $ | 3,399 | | | 2.8 | % | | $ | 18,594 | | | $ | 17,776 | | | $ | 141,316 | | | $ | 137,099 | | | $ | 4,217 | | | 3.1 | % | |
Operating expenses: | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | |
Real estate taxes | Real estate taxes | | 13,730 | | | 14,273 | | | (543) | | | (3.8 | %) | | 6,337 | | | 1,840 | | | 20,067 | | | 16,113 | | | 3,954 | | | 24.5 | % | | Real estate taxes | | 12,809 | | | 13,218 | | | (409) | | | (3.1 | %) | | 3,774 | | | 2,694 | | | 16,583 | | | 15,912 | | | 671 | | | 4.2 | % | |
Utility expenses | Utility expenses | | 6,547 | | | 6,639 | | | (92) | | | (1.4 | %) | | 842 | | | 925 | | | 7,389 | | | 7,564 | | | (175) | | | (2.3 | %) | | Utility expenses | | 5,156 | | | 4,386 | | | 770 | | | 17.6 | % | | 664 | | | 924 | | | 5,820 | | | 5,310 | | | 510 | | | 9.6 | % | |
Other operating expenses | Other operating expenses | | 23,470 | | | 23,933 | | | (463) | | | (1.9 | %) | | 3,067 | | | 2,433 | | | 26,537 | | | 26,366 | | | 171 | | | 0.6 | % | | Other operating expenses | | 22,166 | | | 20,855 | | | 1,311 | | | 6.3 | % | | 4,331 | | | 4,043 | | | 26,497 | | | 24,898 | | | 1,599 | | | 6.4 | % | |
Total operating expenses | Total operating expenses | | 43,747 | | | 44,845 | | | (1,098) | | | (2.4 | %) | | 10,246 | | | 5,198 | | | 53,993 | | | 50,043 | | | 3,950 | | | 7.9 | % | | Total operating expenses | | 40,131 | | | 38,459 | | | 1,672 | | | 4.3 | % | | 8,769 | | | 7,661 | | | 48,900 | | | 46,120 | | | 2,780 | | | 6.0 | % | |
Net operating income (2) | Net operating income (2) | | $ | 85,248 | | | $ | 85,474 | | | $ | (226) | | | (0.3 | %) | | $ | 8,331 | | | $ | 10,289 | | | 93,579 | | | 95,763 | | | (2,184) | | | (2.3 | %) | | Net operating income (2) | | $ | 82,591 | | | $ | 80,864 | | | $ | 1,727 | | | 2.1 | % | | $ | 9,825 | | | $ | 10,115 | | | 92,416 | | | 90,979 | | | 1,437 | | | 1.6 | % | |
| Other expenses: | Other expenses: | | | | | | | | | | | | | | | | | | | | | | Other expenses: | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | Depreciation and amortization | 59,533 | | | 62,227 | | | (2,694) | | | (4.3 | %) | | Depreciation and amortization | 57,536 | | | 55,371 | | | 2,165 | | | 3.9 | % | |
Loss on impairment of real estate | Loss on impairment of real estate | (3) | | | 2,954 | | | (2,957) | | | (100.1 | %) | | Loss on impairment of real estate | 4,773 | | | 48,197 | | | (43,424) | | | (90.1 | %) | |
| Acquisition and transaction related costs | | Acquisition and transaction related costs | 224 | | | — | | | 224 | | | n/m | |
General and administrative | General and administrative | 448 | | | 7,059 | | | (6,611) | | | (93.7 | %) | | General and administrative | 7,083 | | | 12,970 | | | (5,887) | | | (45.4 | %) | |
Total other expenses | Total other expenses | 59,978 | | | 72,240 | | | (12,262) | | | (17.0 | %) | | Total other expenses | 69,616 | | | 116,538 | | | (46,922) | | | (40.3 | %) | |
| Gain on sale of real restate | 36 | | | — | | | 36 | | | n/m | | |
Gain (loss) on sale of real estate | | Gain (loss) on sale of real estate | (11,637) | | | 114 | | | (11,751) | | | n/m | |
| Interest and other income | Interest and other income | — | | | 2 | | | (2) | | | (100.0 | %) | | Interest and other income | 16 | | | 2 | | | 14 | | | n/m | |
Interest expense | Interest expense | (26,929) | | | (27,097) | | | 168 | | | (0.6 | %) | | Interest expense | (26,515) | | | (29,001) | | | 2,486 | | | (8.6 | %) | |
Loss on early extinguishment of debt | Loss on early extinguishment of debt | (2,274) | | | — | | | (2,274) | | | n/m | | Loss on early extinguishment of debt | (77) | | | (11,794) | | | 11,717 | | | (99.3 | %) | |
| Income (loss) before income tax (expense) benefit and equity in net losses of investees | 4,434 | | | (3,572) | | | 8,006 | | | n/m | | |
Income tax (expense) benefit | (34) | | | 54 | | | (88) | | | (163.0 | %) | | |
Loss before income tax benefit and equity in net losses of investees | | Loss before income tax benefit and equity in net losses of investees | (15,413) | | | (66,238) | | | 50,825 | | | (76.7 | %) | |
Income tax benefit | | Income tax benefit | 190 | | | 121 | | | 69 | | | 57.0 | % | |
Equity in net losses of investees | Equity in net losses of investees | (688) | | | (279) | | | (409) | | | 146.6 | % | | Equity in net losses of investees | (833) | | | (580) | | | (253) | | | 43.6 | % | |
| Net income (loss) | $ | 3,712 | | | $ | (3,797) | | | $ | 7,509 | | | (197.8 | %) | | |
Net loss | | Net loss | $ | (16,056) | | | $ | (66,697) | | | $ | 50,641 | | | (75.9 | %) | |
| | Weighted average common shares outstanding (basic) | 48,211 | | | 48,132 | | | 79 | | | 0.2 | % | | |
Weighted average common shares outstanding (diluted) | 48,244 | | | 48,132 | | | 112 | | | 0.2 | % | | |
Weighted average common shares outstanding (basic and diluted) | | Weighted average common shares outstanding (basic and diluted) | 48,249 | | | 48,165 | | | 84 | | | 0.2 | % | |
| | Per common share amounts (basic and diluted): | Per common share amounts (basic and diluted): | | | | | | | | | Per common share amounts (basic and diluted): | | | | | | | |
Net income (loss) | $ | 0.08 | | | $ | (0.08) | | | $ | 0.16 | | | (200.0 | %) | | |
Net loss | | Net loss | $ | (0.33) | | | $ | (1.38) | | | $ | 1.05 | | | (76.1 | %) | |
|
n/m - not meaningful
(1)Comparable properties consists of 164153 properties we owned on SeptemberJune 30, 20212022 and which we owned continuously since JulyApril 1, 20202021 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.
(2)Our definition of net operating income, or NOI, and our reconciliation of net income (loss)loss to NOI are included below under the heading “Non-GAAP Financial Measures.”
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended SeptemberJune 30, 2021,2022, compared to the three months ended SeptemberJune 30, 2020.2021.
Rental income. The increase in rental income reflects an increase in rental income of $14,477$11,637 related to acquired properties and $3,399 related to comparable properties, offset by decreases in rental income of $7,158$7,125 as a result of property disposition activities $4,229and $3,694 for properties undergoing significant redevelopment and $1,324 related to comparable properties.redevelopment. The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at a property located in Washington, D.C.Seattle, WA that began a redevelopment project during 2021.in February 2022. The decreaseincrease in rental income for comparable properties is primarily due to reductions in occupied space at certain$2,175 of our propertiesearly termination income recorded in the 20212022 period related to a tenant that occupies a property located in Columbia, MD that vacated a portion of its space in May 2022 in conjunction with the early renewal of its remaining space, higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in the 2022 period and operating expenses that were previously paid directly by a tenant that are now paid by us and reimbursed by the tenant pursuant to a lease amendment with that tenant effective in February 2022, as well as higher parking garage revenue as a result of higher parking volumes in the 2022 period. Rental income includes non-cash straight line rent adjustments totaling $3,924$2,775 in the 20212022 period and $3,912$3,847 in the 20202021 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $(447)$(233) in the 20212022 period and $(1,312)$(667) in the 20202021 period.
Real estate taxes. The increase in real estate taxes primarily reflects an increase in real estate taxes of $5,844$2,652 related to acquired properties, offset by decreases of $932$829 for properties undergoing significant redevelopment, $743 related to property disposition activities $543and $409 for comparable properties and $415 for properties undergoing significant redevelopment.properties. Real estate taxes for comparable properties decreased primarily due to decreases inlower assessed values and refunds received in the 2021 period at certain of our properties as a result of successful real estate tax appeals.
Utility expenses. The decrease in utility expenses reflects decreases in utility expenses of $155 for properties undergoing significant redevelopment, $151 related to property disposition activities and $92 for comparable properties, offset by an increase in utility expenses of $223 for acquired properties. The decrease in utility expenses for comparable properties is primarily due to a decrease in electricity and water usage as a result of reductions in occupied space at certain of our properties in the 20212022 period, partially offset by an increase related to utility expenses in the 2021 periodreal estate taxes that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in January 2021.February 2022.
Utility expenses. The increase in utility expenses reflects increases in utility expenses of $770 for comparable properties and $281 for acquired properties, offset by decreases in utility expenses of $466 related to property disposition activities and $75 for properties undergoing significant redevelopment. The increase in utility expenses for comparable properties is primarily due to increases in electricity usage as a result of higher building utilization levels in the 2022 period, higher rates at certain of our properties in the 2022 period and an increase related to utility expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.
Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees. The increase in other operating expenses primarily reflects an increaseincreases of $1,910$2,282 for acquired properties and $1,311 for comparable properties, offset by decreases of $841$1,571 related to property disposition activities $463 for comparable properties and $435$423 for properties undergoing significant redevelopment. The decreaseincrease in other operating expenses for comparable properties is primarily due to a decreaseincreases in repairscertain expenses as building utilization levels begin to rise, including parking garage and cleaning expenses, as well as higher landscape maintenance expenses at certain of our properties in the 2021 period.2022 period and an increase related to other operating expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.
Depreciation and amortization. The decreaseincrease in depreciation and amortization primarily reflects an increase of $6,275 for acquired properties, offset by decreases of $4,868 for comparable properties and $4,817$2,508 related to property disposition activities offset by an increase of $6,991and $1,602 for acquiredcomparable properties. Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated after Julysince April 1, 2020.2021, partially offset by depreciation and amortization of improvements made to certain of our properties since April 1, 2021.
Loss on impairment of real estate. We recorded a $2,954$4,773 loss on impairment of real estate in the 20202022 period to reduce the carrying value of foursix properties to their estimated fair value less costs to sell. We recorded a $48,197 loss on impairment of real estate in the 2021 period to reduce the carrying value of five properties to their estimated fair values less costs to sell.
Acquisition and transaction related costs. Acquisition and transaction related costs represent costs related to an acquisition opportunity that did not materialize in the 2022 period.
General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The decrease in general and administrative expenses is primarily the result of the reversal$5,911 of $6,627 of previously accrued estimated business management incentive fees recorded in the 2021 period and the expiration of an office lease in January 2021 for which we were the lessee, partially offset by an increase in base business management fees resulting from an increase in average total market capitalization in the 2021 period compared to the 2020 period.
Gain (loss) on sale of real estate. GainWe recorded an $11,637 net loss on sale of real estate for the 2021 period represents a net gain onresulting from the sale of three properties.two properties in the 2022 period.
Interest and other income. Interest and other income reflects interest earned, if any, on cash balances invested.
Interest expense. The decrease in interest expense is primarily due to lower weighted average interest expense incurred on balances outstanding in the 2021 period as a result ofreflects financing activities since July 1, 2020,May 2021, which included the aggregate redemption or repayment of debt totaling $720,635 with a weighted average interest rate of 4.8% and the aggregate issuance of $1,312,000$910,000 of senior unsecured notes with a weighted average interest rate of 3.2%4.7% and the repayment of two mortgage notes totaling approximately $96,000 with a weighted average interest rate of 3.7%, as well as higher capitalized interest in the 2022 period, partially offset by higherthe issuance of $1,050,000 of senior unsecured notes with a weighted average interest expense incurredrate of 2.9%, as a result ofwell as a higher average balance outstanding balance under our revolving credit facility and higher weighted average interest rates on borrowings during the 20212022 period compared to the 20202021 period.
Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of $2,274$77 in the 2022 period from the write off of unamortized discounts and debt issuance costs associated with the redemption of our senior unsecured notes due July 2022. We recorded a loss on early extinguishment of debt of $11,794 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note and the redemption of our senior unsecured notes due 2022.2046.
Income tax (expense) benefit. Income tax (expense) benefit is primarily the result of operating income or lossesearned in jurisdictions where we are subject to state income taxes.taxes and can fluctuate based on the timing of our income, including as a result of gains or losses on the sale of real estate.
Equity in net losses of investees. Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures. The increase in equity in net losses of investees is primarily due to reductions in occupied space at properties owned by our unconsolidated joint ventures in the 2022 period.
Net income (loss).loss. The change in net income (loss)Net loss and net income (loss)loss per basic and diluted common share from 2020decreased in the 2022 period compared to the 2021 isperiod primarily as a result of the changes noted above.
RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)
NineSix Months Ended SeptemberJune 30, 2021,2022, Compared to NineSix Months Ended SeptemberJune 30, 20202021
| | | | Comparable Properties (1) Results Nine Months Ended September 30, | | Non-Comparable Properties Results Nine Months Ended September 30, | | Consolidated Results Nine Months Ended September 30, | | | Comparable Properties (1) Results Six Months Ended June 30, | | Non-Comparable Properties Results Six Months Ended June 30, | | Consolidated Results Six Months Ended June 30, |
| | | 2021 | | 2020 | | $ Change | | % Change | | 2021 | | 2020 | | 2021 | | 2020 | | $ Change | | % Change | | | 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | 2022 | | 2021 | | $ Change | | % Change |
Rental income | Rental income | | $ | 388,517 | | | $ | 391,233 | | | $ | (2,716) | | | (0.7 | %) | | $ | 40,678 | | | $ | 50,061 | | | $ | 429,195 | | | $ | 441,294 | | | $ | (12,099) | | | (2.7 | %) | Rental income | | $ | 244,413 | | | $ | 241,583 | | | $ | 2,830 | | | 1.2 | % | | $ | 44,257 | | | $ | 40,040 | | | $ | 288,670 | | | $ | 281,623 | | | $ | 7,047 | | | 2.5 | % |
Operating expenses: | Operating expenses: | | | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Real estate taxes | Real estate taxes | | 42,584 | | | 42,616 | | | (32) | | | (0.1 | %) | | 9,549 | | | 6,085 | | | 52,133 | | | 48,701 | | | 3,432 | | | 7.0 | % | Real estate taxes | | 25,816 | | | 26,436 | | | (620) | | | (2.3 | %) | | 7,412 | | | 5,630 | | | 33,228 | | | 32,066 | | | 1,162 | | | 3.6 | % |
Utility expenses | Utility expenses | | 17,182 | | | 17,338 | | | (156) | | | (0.9 | %) | | 1,949 | | | 2,439 | | | 19,131 | | | 19,777 | | | (646) | | | (3.3 | %) | Utility expenses | | 10,866 | | | 9,754 | | | 1,112 | | | 11.4 | % | | 1,819 | | | 1,988 | | | 12,685 | | | 11,742 | | | 943 | | | 8.0 | % |
Other operating expenses | Other operating expenses | | 69,751 | | | 69,551 | | | 200 | | | 0.3 | % | | 7,123 | | | 8,482 | | | 76,874 | | | 78,033 | | | (1,159) | | | (1.5 | %) | Other operating expenses | | 44,585 | | | 41,773 | | | 2,812 | | | 6.7 | % | | 9,275 | | | 8,564 | | | 53,860 | | | 50,337 | | | 3,523 | | | 7.0 | % |
Total operating expenses | Total operating expenses | | 129,517 | | | 129,505 | | | 12 | | | — | % | | 18,621 | | | 17,006 | | | 148,138 | | | 146,511 | | | 1,627 | | | 1.1 | % | Total operating expenses | | 81,267 | | | 77,963 | | | 3,304 | | | 4.2 | % | | 18,506 | | | 16,182 | | | 99,773 | | | 94,145 | | | 5,628 | | | 6.0 | % |
NOI (2) | NOI (2) | | $ | 259,000 | | | $ | 261,728 | | | $ | (2,728) | | | (1.0 | %) | | $ | 22,057 | | | $ | 33,055 | | | 281,057 | | | 294,783 | | | (13,726) | | | (4.7 | %) | NOI (2) | | $ | 163,146 | | | $ | 163,620 | | | $ | (474) | | | (0.3 | %) | | $ | 25,751 | | | $ | 23,858 | | | 188,897 | | | 187,478 | | | 1,419 | | | 0.8 | % |
| Other expenses: | Other expenses: | | | | | | | | | | | | | | | | | | | | | Other expenses: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | Depreciation and amortization | 178,991 | | | 189,340 | | | (10,349) | | | (5.5 | %) | Depreciation and amortization | 118,005 | | | 119,458 | | | (1,453) | | | (1.2 | %) |
Loss on impairment of real estate | Loss on impairment of real estate | 55,854 | | | 2,954 | | | 52,900 | | | n/m | Loss on impairment of real estate | 21,820 | | | 55,857 | | | (34,037) | | | (60.9 | %) |
| Acquisition and transaction related costs | | Acquisition and transaction related costs | 224 | | | — | | | 224 | | | n/m |
General and administrative | General and administrative | 24,690 | | | 21,372 | | | 3,318 | | | 15.5 | % | General and administrative | 12,789 | | | 24,242 | | | (11,453) | | | (47.2 | %) |
Total other expenses | Total other expenses | 259,535 | | | 213,666 | | | 45,869 | | | 21.5 | % | Total other expenses | 152,838 | | | 199,557 | | | (46,719) | | | (23.4 | %) |
| | Gain on sale of real estate | 54,154 | | | 10,822 | | | 43,332 | | | n/m | |
Gain (loss) on sale of real estate | | Gain (loss) on sale of real estate | (9,488) | | | 54,118 | | | (63,606) | | | (117.5 | %) |
| Interest and other income | Interest and other income | 7 | | | 738 | | | (731) | | | (99.1 | %) | Interest and other income | 17 | | | 7 | | | 10 | | | 142.9 | % |
Interest expense | Interest expense | (84,728) | | | (79,461) | | | (5,267) | | | 6.6 | % | Interest expense | (53,954) | | | (57,799) | | | 3,845 | | | (6.7 | %) |
Loss on early extinguishment of debt | Loss on early extinguishment of debt | (14,068) | | | (3,839) | | | (10,229) | | | n/m | Loss on early extinguishment of debt | (77) | | | (11,794) | | | 11,717 | | | (99.3 | %) |
Income (loss) before income tax expense and equity in net losses of investees | (23,113) | | | 9,377 | | | (32,490) | | | n/m | |
Loss before income tax expense and equity in net losses of investees | | Loss before income tax expense and equity in net losses of investees | (27,443) | | | (27,547) | | | 104 | | | (0.4 | %) |
Income tax expense | Income tax expense | (348) | | | (220) | | | (128) | | | 58.2 | % | Income tax expense | (341) | | | (314) | | | (27) | | | 8.6 | % |
Equity in net losses of investees | Equity in net losses of investees | (1,664) | | | (815) | | | (849) | | | 104.2 | % | Equity in net losses of investees | (1,679) | | | (976) | | | (703) | | | 72.0 | % |
| Net income (loss) | $ | (25,125) | | | $ | 8,342 | | | $ | (33,467) | | | n/m | |
Net loss | | Net loss | $ | (29,463) | | | $ | (28,837) | | | $ | (626) | | | 2.2 | % |
| Weighted average common shares outstanding (basic and diluted) | Weighted average common shares outstanding (basic and diluted) | 48,179 | | | 48,111 | | | 68 | | | 0.1 | % | Weighted average common shares outstanding (basic and diluted) | 48,246 | | | 48,163 | | | 83 | | | 0.2 | % |
| | Per common share amounts (basic and diluted): | Per common share amounts (basic and diluted): | | | | | | | | Per common share amounts (basic and diluted): | | | | | | | |
| Net income (loss) | $ | (0.52) | | | $ | 0.17 | | | $ | (0.69) | | | n/m | |
Net loss | | Net loss | $ | (0.61) | | | $ | (0.60) | | | $ | (0.01) | | | 1.7 | % |
|
n/m - not meaningful
(1)Comparable properties consists of 163153 properties we owned on SeptemberJune 30, 20212022 and which we owned continuously since January 1, 20202021 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.
(2)Our definition of NOI and our reconciliation of net income (loss)loss to NOI are included below under the heading “Non-GAAP Financial Measures.”
References to changes in the income and expense categories below relate to the comparison of consolidated results for the ninesix months ended SeptemberJune 30, 2021,2022, compared to the ninesix months ended SeptemberJune 30, 2020.2021.
Rental income. The decreaseincrease in rental income reflects decreasesincreases in rental income of $17,798$23,479 for acquired properties and $2,830 for comparable properties, offset by decreases of $14,174 related to property disposition activities $8,472and $5,088 for properties undergoing significant redevelopment and $2,716 for comparable properties, offset by an
redevelopment. The increase in rental income for comparable properties is primarily due to termination fee revenue received, higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in the 2022 period and operating expenses that were previously paid directly by a tenant that are now paid by us and reimbursed by the tenant pursuant to a lease amendment with that tenant effective in February 2022, as well as higher parking garage revenue as a result of $16,887 for acquiredhigher parking volumes in the 2022 period, partially offset by reductions in occupied space at certain of our properties. The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at a property located in Washington, D.C. that began a redevelopment project during the 2021 period. The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certainproperties located in Washington, D.C. and Seattle, WA that began
redevelopment projects during 2021 and 2022, respectively, partially offset by termination fee revenue at the Seattle, WA property related to the termination of the former tenant’s lease in February 2022 prior to the 2021 period.commencement of the redevelopment. Rental income includes non-cash straight line rent adjustments totaling $13,128$5,461 in the 20212022 period and $12,963$9,204 in the 20202021 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $(1,836)$(576) in the 20212022 period and $(4,149)$(1,389) in the 20202021 period.
Real estate taxes. The increase in real estate taxes primarily reflects an increase in real estate taxes of $5,992$4,841 for acquired properties, offset by decreases in real estate taxes of $1,478$1,737 for properties undergoing significant redevelopment, $1,322 related to property disposition activities $1,050 for properties undergoing significant redevelopment and $32$620 for comparable properties.
Utility expenses. The decrease in utility expenses reflects decreases in utility expenses of $439 related to property disposition activities, $290 for properties undergoing significant redevelopment and $156 Real estate taxes for comparable properties offset by an increase in utility expenses of $239 for acquired properties. Utility expenses for comparable properties declineddecreased primarily due to a decrease in electricity and water usage resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic and reductions in occupied spacelower assessed values at certain of our properties in the 20212022 period, partially offset by an increase related to utility expenses in the 2021 periodreal estate taxes that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in January 2021.February 2022.
Utility expenses. The increase in utility expenses reflects increases in utility expenses of $1,112 for comparable properties and $602 for acquired properties, offset by decreases of $567 related to property disposition activities and $204 for properties undergoing significant redevelopment. The increase in utility expenses for comparable properties is primarily due to increases in electricity and water usage as a result of higher building utilization levels in the 2022 period, higher rates at certain of our properties in the 2022 period and an increase related to utility expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.
Other operating expenses. The decreaseincrease in other operating expenses primarily reflects decreasesincreases in other operating expenses of $2,557$4,310 for acquired properties and $2,812 for comparable properties, offset by decreases of $3,013 related to property disposition activities and $885$586 for properties undergoing significant redevelopment, offset by increasesredevelopment. The increase in other operating expenses of $2,083 for acquired properties and $200 for comparable properties.properties is primarily due to increases in certain expenses as building utilization levels begin to rise, including parking garage and cleaning expenses, higher landscape maintenance expenses at certain of our properties in the 2022 period and an increase related to other operating expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.
Depreciation and amortization. The decrease in depreciation and amortization primarily reflects decreases of $11,359 for comparable properties and $7,187$12,103 related to property disposition activities, offset by increases of $8,158$2,428 for acquiredcomparable properties and $39$53 for properties undergoing significant redevelopment.redevelopment, offset by an increase of $13,131 for acquired properties. Depreciation and amortization for comparable properties decreased due to certain leasing related assets becoming fully depreciated aftersince January 1, 2020.2021, partially offset by depreciation and amortization of improvements made to certain of our properties since January 1, 2021.
Loss on impairment of real estate. We recorded a $55,854$21,820 loss on impairment of real estate to reduce the carrying value of seven properties to their estimated fair values less costs to sell in the 2022 period. We recorded a $55,857 loss on impairment of real estate in the 2021 period to reduce the carrying value of six properties to their estimated fair values less costs to sell, which includes $45,196sell.
Acquisition and transaction related costs. Acquisition and transaction related costs represent costs related to three properties containing approximately 2,001 rentable square feetan acquisition opportunity that were sold during the nine months ended September 30, 2021, as well as $10,658 related to three properties containing approximately 448 rentable square feet that were classified as held for sale as of September 30, 2021. We recorded a $2,954 loss on impairment of real estatedid not materialize in the 2020 period to reduce the carrying value of four properties to their estimated fair values less costs to sell.2022 period.
General and administrative. The increasedecrease in general and administrative expenses is primarily the result of $4,484$11,111 of estimated business management incentive fees recorded in the 2021 period, a state franchise tax refund received in the 2022 period and the expiration of an office lease in January 2021 for which we were the lessee, partially offset by an increase in base business management fees resulting from an increase in average total market capitalization in the 20212022 period compared to the 2020 period, partially offset by the expiration of an office lease in January 2021 for which we were the lessee and lower accounting and legal costs.period.
Gain (loss) on sale of real estate. We recorded a $54,154$9,488 net loss on sale of real estate resulting from the sale of six properties in the 2022 period. We recorded a $54,118 net gain on sale of real estate resulting from the sale of fourtwo properties and a warehouse facility adjacent to a property we own duringin the 2021 period. We recorded a $10,822 net gain on sale of real estate resulting from the sale of six properties during the 2020 period.
Interest and other income. The decrease in interestInterest and other income is primarily due to a settlement payment we received in the 2020 period resulting from a dispute with a vendor, the June 2020 payoff of a mortgage note receivable in connection with a property we sold in 2016 and the effect of lower returnsreflects interest earned, if any, on cash invested in the 2021 period compared to the 2020 period.balances invested.
Interest expense. The increasedecrease in interest expense is primarily due to higher average outstanding debt balances inreflects financing activities since May 2021, which included the 2021 period resulting from the aggregate issuanceredemption of $1,462,000$910,000 of senior unsecured notes with a weighted average interest rate of 3.5% since January 1, 2020, partially offset by4.7% and the aggregate redemption or repayment of debttwo mortgage notes totaling $833,187approximately $96,000 with a weighted average interest rate of 4.8% since January 1, 2020 and lower3.7%, as well as higher capitalized interest expense incurredin the 2022 period, partially offset by the issuance of $1,050,000 of senior unsecured notes with a weighted average interest rate of 2.9%, as well as a result of having a lowerhigher average balance outstanding under our revolving credit facility and higher weighted average interest rates on borrowings during the 20212022 period compared to the 2020 period and lower average interest rates on amounts outstanding.2021 period.
Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of $14,068$77 in the 2022 period from the write off of unamortized discounts and debt issuance costs associated with the redemption of our senior unsecured notes due July 2022. We recorded a loss on early extinguishment of debt of $11,794 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note and the redemption of our senior unsecured notes due 2022 and 2046. In the 2020 period, we
recorded a loss on early extinguishment of debt of $3,839 from prepayment fees incurred, the write off of unamortized discounts, premiums and debt issuance costs associated with the prepayment of three mortgage notes and a loss on the settlement of a mortgage note receivable related to a property sold in 2016.
Income tax expense. Income tax expense is primarily reflectsthe result of operating income earned in jurisdictions where we are subject to state income taxes.taxes and can fluctuate based on the timing of our income, including as a result of gains or losses on the sale of real estate.
Equity in net losses of investees. Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures. The increase in equity in net losses of investees is primarily due to reductions in occupied space at properties owned by our unconsolidated joint ventures in the 2022 period.
Net income (loss).loss. Our net income (loss)Net loss and net income (loss)loss per basic and diluted common share decreasedincreased in the 20212022 period compared to the 20202021 period primarily as a result of the changes noted above.
Non-GAAP Financial Measures
We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or SEC, including the calculations below of NOI, funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss)loss as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss)loss as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss).loss. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.
Net Operating Income
The calculation of NOI excludes certain components of net income (loss)loss in order to provide results that are more closely related to our property level results of operations. We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do.
The following table presents the reconciliation of net income (loss)loss to NOI for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020.2021:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) | | $ | 3,712 | | | $ | (3,797) | | | $ | (25,125) | | | $ | 8,342 | | |
Net loss | | Net loss | | $ | (16,056) | | | $ | (66,697) | | | $ | (29,463) | | | $ | (28,837) | |
| Equity in net losses of investees | Equity in net losses of investees | | 688 | | | 279 | | | 1,664 | | | 815 | | Equity in net losses of investees | | 833 | | | 580 | | | 1,679 | | | 976 | |
Income tax expense (benefit) | Income tax expense (benefit) | | 34 | | | (54) | | | 348 | | | 220 | | Income tax expense (benefit) | | (190) | | | (121) | | | 341 | | | 314 | |
Income (loss) before income tax expense (benefit) and equity in net losses of investees | | 4,434 | | | (3,572) | | | (23,113) | | | 9,377 | | |
Loss before income tax expense (benefit) and equity in net losses of investees | | Loss before income tax expense (benefit) and equity in net losses of investees | | (15,413) | | | (66,238) | | | (27,443) | | | (27,547) | |
Loss on early extinguishment of debt | Loss on early extinguishment of debt | | 2,274 | | | — | | | 14,068 | | | 3,839 | | Loss on early extinguishment of debt | | 77 | | | 11,794 | | | 77 | | | 11,794 | |
Interest expense | Interest expense | | 26,929 | | | 27,097 | | | 84,728 | | | 79,461 | | Interest expense | | 26,515 | | | 29,001 | | | 53,954 | | | 57,799 | |
Interest and other income | Interest and other income | | — | | | (2) | | | (7) | | | (738) | | Interest and other income | | (16) | | | (2) | | | (17) | | | (7) | |
| Gain on sale of real estate | | (36) | | | — | | | (54,154) | | | (10,822) | | |
(Gain) loss on sale of real estate | | (Gain) loss on sale of real estate | | 11,637 | | | (114) | | | 9,488 | | | (54,118) | |
| General and administrative | General and administrative | | 448 | | | 7,059 | | | 24,690 | | | 21,372 | | General and administrative | | 7,083 | | | 12,970 | | | 12,789 | | | 24,242 | |
| Acquisition and transaction related costs | | Acquisition and transaction related costs | | 224 | | | — | | | 224 | | | — | |
Loss on impairment of real estate | Loss on impairment of real estate | | (3) | | | 2,954 | | | 55,854 | | | 2,954 | | Loss on impairment of real estate | | 4,773 | | | 48,197 | | | 21,820 | | | 55,857 | |
Depreciation and amortization | Depreciation and amortization | | 59,533 | | | 62,227 | | | 178,991 | | | 189,340 | | Depreciation and amortization | | 57,536 | | | 55,371 | | | 118,005 | | | 119,458 | |
NOI | NOI | | $ | 93,579 | | | $ | 95,763 | | | $ | 281,057 | | | $ | 294,783 | | NOI | | $ | 92,416 | | | $ | 90,979 | | | $ | 188,897 | | | $ | 187,478 | |
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.
The following table presents the reconciliation of net income (loss)loss to FFO and Normalized FFO for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020.2021:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | $ | 3,712 | | | $ | (3,797) | | | $ | (25,125) | | | $ | 8,342 | | |
Net loss | | Net loss | | $ | (16,056) | | | $ | (66,697) | | | $ | (29,463) | | | $ | (28,837) | |
Add (less): Depreciation and amortization: | Add (less): Depreciation and amortization: | | Add (less): Depreciation and amortization: | |
Consolidated properties | Consolidated properties | | 59,533 | | | 62,227 | | | 178,991 | | | 189,340 | | Consolidated properties | | 57,536 | | | 55,371 | | | 118,005 | | | 119,458 | |
Unconsolidated joint venture properties | Unconsolidated joint venture properties | | 745 | | | 1,244 | | | 2,674 | | | 3,722 | | Unconsolidated joint venture properties | | 732 | | | 923 | | | 1,494 | | | 1,929 | |
| Loss on impairment of real estate | Loss on impairment of real estate | | (3) | | | 2,954 | | | 55,854 | | | 2,954 | | Loss on impairment of real estate | | 4,773 | | | 48,197 | | | 21,820 | | | 55,857 | |
| Gain on sale of real estate | | (36) | | | — | | | (54,154) | | | (10,822) | | |
(Gain) loss on sale of real estate | | (Gain) loss on sale of real estate | | 11,637 | | | (114) | | | 9,488 | | | (54,118) | |
| FFO | FFO | | 63,951 | | | 62,628 | | | 158,240 | | | 193,536 | | FFO | | 58,622 | | | 37,680 | | | 121,344 | | | 94,289 | |
Add (less): Acquisition and transaction related costs | | Add (less): Acquisition and transaction related costs | | 224 | | | — | | | 224 | | | — | |
| Add (less): Loss on early extinguishment of debt | | 2,274 | | | — | | | 14,068 | | | 3,839 | | |
Loss on early extinguishment of debt | | Loss on early extinguishment of debt | | 77 | | | 11,794 | | | 77 | | | 11,794 | |
| Estimated business management incentive fees | Estimated business management incentive fees | | (6,627) | | | — | | | 4,484 | | | — | | Estimated business management incentive fees | | — | | | 5,911 | | | — | | | 11,111 | |
| Normalized FFO | Normalized FFO | | $ | 59,598 | | | $ | 62,628 | | | $ | 176,792 | | | $ | 197,375 | | Normalized FFO | | $ | 58,923 | | | $ | 55,385 | | | $ | 121,645 | | | $ | 117,194 | |
| Weighted average common shares outstanding (basic) | | 48,211 | | | 48,132 | | | 48,179 | | | 48,111 | | |
Weighted average common shares outstanding (diluted) | | 48,244 | | | 48,132 | | | 48,179 | | | 48,111 | | |
Weighted average common shares outstanding (basic and diluted) | | Weighted average common shares outstanding (basic and diluted) | | 48,249 | | | 48,165 | | | 48,246 | | | 48,163 | |
| | FFO per common share (basic and diluted) | FFO per common share (basic and diluted) | | $ | 1.33 | | | $ | 1.30 | | | $ | 3.28 | | | $ | 4.02 | | FFO per common share (basic and diluted) | | $ | 1.21 | | | $ | 0.78 | | | $ | 2.52 | | | $ | 1.96 | |
| Normalized FFO per common share (basic and diluted) | Normalized FFO per common share (basic and diluted) | | $ | 1.24 | | | $ | 1.30 | | | $ | 3.67 | | | $ | 4.10 | | Normalized FFO per common share (basic and diluted) | | $ | 1.22 | | | $ | 1.15 | | | $ | 2.52 | | | $ | 2.43 | |
|
LIQUIDITY AND CAPITAL RESOURCES
Our Operating Liquidity and Resources (dollar amounts in thousands, except per share amounts)
Our principal sources of funds to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate from our properties, net proceeds from property sales and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:
•our ability to collect rent from our tenants;
•our ability to maintain or increase the occupancy of, and the rental rates at, our properties;
•our ability to control operating and capital expenses at our properties;
•our ability to successfully sell properties that we market for sale;
•our ability to develop, redevelop or redevelopreposition properties to produce cash flows in excess of our cost of capital;capital and property operating and capital expenses; and
•our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating and capital expenses.
On OctoberJuly 14, 2021,2022, we announced a regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year). We determine our distribution payout ratio with consideration for our expected capital expenditures as well as cash flows from operations and payment of debt obligations.
We expect to accretively grow our property portfolio through our capital recycling program, pursuant to which we plan to selectively sell certain properties from time to time to fund future acquisitions and to maintainmanage leverage consistent with our current investment grade ratingsat levels we believe appropriate with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution. During the ninesix months ended SeptemberJune 30, 2021, we acquired three properties for an aggregate purchase price of $576,975, excluding purchase price adjustments and acquisition related costs, and2022, we sold six properties and a warehouse facility adjacent to a property we own for an aggregate sales price of $198,415,$77,720, excluding closing costs. In October 2021,July 2022, we sold two vacant land parcels adjacent to properties we own located in Sterling, VAone property for a sales price of $28,500,$9,800, excluding closing costs.Based on current real estate market conditions, including rising interest rates, we expect the pace of our 2022 dispositions to moderate. However, we continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing certain of our properties for sale. As of OctoberJuly 27, 2021,2022, we have also entered into an agreementagreements to sell fivenine properties located in Brookhaven, GA for aan aggregate sales price of $56,000,$109,800, excluding closing costs. In addition, we are currently marketing for sale 17 properties containing approximately 2,161,000 rentable square feet that we expect to generate approximately $200,000 of gross proceeds. We expect to substantially complete these dispositions by mid-year 2022.W Given the current economic conditions, wee continue to carefully consider our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.
Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.
The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows:
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | $ | 56,855 | | | $ | 100,696 | | | Cash, cash equivalents and restricted cash at beginning of period | $ | 84,515 | | | $ | 56,855 | | |
Net cash provided by (used in): | Net cash provided by (used in): | | | Net cash provided by (used in): | | |
Operating activities | Operating activities | 158,682 | | | 166,098 | | | Operating activities | 108,913 | | | 117,376 | | |
Investing activities | Investing activities | (435,698) | | | 18,104 | | | Investing activities | (17,112) | | | (400,467) | | |
Financing activities | Financing activities | 276,181 | | | (227,259) | | | Financing activities | (148,567) | | | 246,317 | | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 56,020 | | | $ | 57,639 | | | Cash, cash equivalents and restricted cash at end of period | $ | 27,749 | | | $ | 20,081 | | |
The decrease in cash provided by operating activities for the 20212022 period compared to the 20202021 period was primarily a result of a declineunfavorable changes in working capital in the 2022 period, partially offset by an increase in NOI as a result of property sales in the 2021 period compared to the 2020 period.acquisitions. The increasedecrease in cash used in investing activities in the 20212022 period compared to the 20202021 period is primarily due to higher acquisition activity in the 2021 period, compared to the 2020 period, partially offset by higherlower cash proceeds received from ourthe sales of properties.properties and increased capital expenditures in the 2022 period related to our two redevelopment projects in Washington D.C. and Seattle, WA. The increase in cash provided byused in financing activities in the 20212022 period compared to the 20202021 period is primarily due to the aggregate issuancea result of $1,050,000 of senior unsecured notes in the 2021 period compared to $412,000 of such issuances in the 2020 period, partially offset by highernet debt repayment activity in the 20212022 period whichthat included the aggregate redemption of $610,000all $300,000 of our 4.00% senior unsecured notes due July 2022 and the repayment of $71,000a mortgage note with a principal balance of approximately $25,000, which was partially offset by borrowing activity under our revolving credit facility to facilitate these payments, compared to the issuance of $300,000 of 2.650% senior unsecured notes due 2026 and net borrowing activity under our revolving credit facility to fund acquisition activity in the 2021 period, partially offset by the redemption of all $310,000 of our 5.875% senior unsecured notes due 2046 and the repayment of a mortgage debt.note with a principal balance of $71,000.
Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share amounts)
In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 revolving credit facility. The maturity date of our revolving credit facility is January 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by two additional six month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at SeptemberJune 30, 2021,2022, on the amount outstanding under our revolving credit facility, if any.facility. We also pay a facility fee on the total amount of lending
commitments under our revolving credit facility, which was 25 basis points per annum at SeptemberJune 30,
2021. 2022. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of SeptemberJune 30, 2021,2022, the annual interest rate payable on borrowings under our revolving credit facility was 1.2%2.4%. As of SeptemberJune 30, 20212022 and OctoberJuly 27, 2021,2022, we had no amounts$230,000 and $200,000, respectively, outstanding under our revolving credit facility, and $750,000$520,000 and $550,000, respectively, available for borrowing.
Our credit agreement includes a feature under which the maximum borrowing availability may be increased to up to $1,950,000 in certain circumstances.
Our credit agreement provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under our $750,000 revolving credit facility only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.
Senior UnsecuredDuring the six months ended June 30, 2022, we repaid the following mortgage note and senior unsecured notes:
Mortgage Note IssuancesPrepayment
In May 2021,April 2022, we issued $300,000 of 2.650% senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of $296,826, after deducting underwriters’ discounts and offering expenses. We used the net proceeds from this offering to redeem all $310,000 of our 5.875% senior unsecured notes due 2046. These notes require semi-annual payments of interest only through maturity on June 15, 2026 and may be repaidprepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $24,863, an annual interest rate of 4.22% and unpaid interesta maturity date in July 2022 using cash on or after May 15, 2026.
In August 2021, we issued $350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of $346,630, after deducting underwriters’ discounts and offering expenses. We used the net proceeds from this offering to redeem all $300,000 of our 4.15% senior unsecured notes due 2022, repay amounts outstanding under our revolving credit facility and for general business purposes. These notes require semi-annual payments of interest only through maturity on February 1, 2027 and may be repaid at par plus accrued and unpaid interest on or after January 1, 2027.
In September 2021, we issued $400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of $395,698, after deducting underwriters’ discounts and offering expenses. We used the net proceeds of this offering to repay amounts outstanding under our revolving credit facility and for general business purposes. These notes require semi-annual payments of interest only through maturity on October 15, 2031 and may be repaid at par plus accrued and unpaid interest on or after July 15, 2031.hand.
Senior Unsecured Note RedemptionsRedemption
In June 2021,2022, we redeemed, at par plus accrued interest, all $310,000$300,000 of our 5.875%4.00% senior unsecured notes due 2046 using cash on hand and the net proceeds from the issuance of our 2.650% senior unsecured notes due 2026.
In September 2021, we redeemed, at a premium plus accrued interest, all $300,000 of our 4.15% senior unsecured notes dueJuly 2022 using a portion of the net proceeds from the issuance of our 2.400% senior unsecured notes due 2027.
Mortgage Note Repayment
In June 2021, we prepaid, at a premium plus accrued interest, a mortgage note secured by three properties with an outstanding principal balance of $71,000, an annual interest rate of 3.55% and a maturity date in May 2023 using cash on hand and borrowings under our revolving credit facility.
As of SeptemberJune 30, 2021,2022, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows:
| Year | Year | | Debt Maturities | | Year | | Debt Maturities | |
2021 | | $ | 302 | | | |
2022 | 2022 | | 325,518 | | | 2022 | | $ | 234 | | |
2023 | 2023 | | 72,784 | | | 2023 | | 72,784 | | |
2024 | 2024 | | 350,000 | | | 2024 | | 350,000 | | |
2025 | 2025 | | 650,000 | | | 2025 | | 650,000 | | |
Thereafter | | 1,212,000 | | | |
2026 | | 2026 | | 300,000 | | |
2027 and thereafter | | 2027 and thereafter | | 912,000 | | |
Total | Total | | $ | 2,610,604 | | | Total | | $ | 2,285,018 | | |
None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our $98,604$73,018 in mortgage debts generally require monthly payments of principal and interest through maturity.
In addition to our debt obligations, as of SeptemberJune 30, 2021,2022, we have estimated unspent leasing related obligations of $129,369,$130,726, of which we expect to spend $69,248$82,543 over the next 12 months.
We are currently in the process of redeveloping a property located in Washington, D.C. We currently estimate the total project costs associated with this redevelopment will be approximately $200,000$215,000 and completion of the redevelopment in the firstsecond quarter of 2023. As of SeptemberJune 30, 2021,2022, we have incurred approximately $25,800$103,198 related to this project. In June 2021, we entered into a 30-year lease for approximately 230,000 rentable square feet at this property that is approximately 25.1% higher than the prior rental rate for the same space, making the redevelopment project 54% pre-leased. See Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this lease and related redevelopment costs.
We are also in the process of redeveloping a three-property campus located in Seattle, WA containing approximately 300,000 rentable square feet. This project includes the repositioning of two properties from office to life science and maintaining the third building for office use. We currently estimate the total project costs associated with this redevelopment will be approximately $144,000 and completion of the redevelopment in the second quarter of 2023. As of June 30, 2022, we have incurred approximately $16,707 related to this project.
We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from property sales, incurrences or assumptions of mortgage debt and net proceeds from offerings of debt or equity securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives. Such alternatives may include incurring term debt, issuing debt or equity securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.
Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention. For instance, it is uncertain what the duration and severity of the COVID-19 pandemic, increasing interest rates, inflation and itsa possible recession, and their ultimate economic impact will be. A protracted and extensive economic downturn may cause a decline in financing availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.
During the ninesix months ended SeptemberJune 30, 2021,2022, we paid quarterly distributions to our shareholders totaling $79,734$53,268 using cash on hand. On OctoberJuly 14, 2021,2022, we declared a regular quarterly distribution payable to shareholders of record on OctoberJuly 25, 20212022 of $0.55 per share, or approximately $26,600.$26,700. We expect to pay this distribution on or about NovemberAugust 18, 20212022 using cash on hand.hand and borrowings under our revolving credit facility. For more information regarding the distributions we paid and declared during 2021,2022, see Note 8 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We own 51% and 50% interests in two unconsolidated joint ventures which own three properties. The properties owned by these joint ventures are encumbered by an aggregate $82,000 principal amount of mortgage indebtedness, none of which is recourse to us. We do not control the activities that are most significant to these joint ventures and, as a result, we account for
our investments in these joint ventures under the equity method of accounting. For more information on the financial condition and results of operations of these joint ventures, see Note 3 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Other than these joint ventures, as of SeptemberJune 30, 2021,2022, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
The U.S. government recently increased its debt ceiling, which the U.S. Department of the Treasury has stated will provide the U.S. Government with sufficient funding to pay its obligations through December 3, 2021. It is uncertain whether the U.S. government will further increase its debt ceiling. If it does not, and does not find other means to sufficiently fund its obligations, the U.S. government could default on its debts or other obligations, which could potentially include its rent owed to us.
Debt Covenants (dollars in thousands)
Our principal debt obligations at SeptemberJune 30, 20212022 consisted of $230,000 of borrowings outstanding under our revolving credit facility, an aggregate outstanding principal balance of $2,512,000$2,212,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $98,604,$73,018, that were assumed in connection with certain of our acquisitions. Also, the three properties owned by two joint ventures in which we own 51% and 50% interests secure two additional mortgage notes. Our publicly issued senior unsecured notes are governed by indentures and their supplements. Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances. As of SeptemberJune 30, 2021,2022, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants.
Neither our credit agreement nor our senior unsecured notes indentures and their supplements contain provisions for acceleration which could be triggered by our credit ratings. However, under our credit agreement our highest senior credit rating is used to determine the fees and interest rates we pay. Accordingly, if that credit rating is downgraded, our interest expense and related costs under our credit agreement would increase.
Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances).
Related Person Transactions
We have relationships and historical and continuing transactions with RMR, LLC, RMR Inc. and others related to them. For more information about these and other such relationships and related person transactions, see Notes 9 and 10 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 20202021 Annual Report, our definitive Proxy Statement for our 20212022 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 20202021 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Critical Accounting Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the Condensed Consolidated Financial Statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles.
A discussion of our critical accounting estimates is included in our 2021 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands, except per share data)
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2020.2021. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
Fixed Rate Debt
At SeptemberJune 30, 2021,2022, our outstanding fixed rate debt consisted of the following:
| Debt | Debt | | Principal Balance (1) | | Annual Interest Rate (1) | | Annual Interest Expense (1) | | Maturity | | Interest Payments Due | Debt | | Principal Balance (1) | | Annual Interest Rate (1) | | Annual Interest Expense (1) | | Maturity | | Interest Payments Due |
| | Senior unsecured notes | Senior unsecured notes | | $ | 300,000 | | | 4.000% | | $ | 12,000 | | | 2022 | | Semi-annually | Senior unsecured notes | | $ | 350,000 | | | 4.250% | | $ | 14,875 | | | 2024 | | Semi-annually |
Senior unsecured notes | Senior unsecured notes | | 350,000 | | | 4.250% | | 14,875 | | | 2024 | | Semi-annually | Senior unsecured notes | | 650,000 | | | 4.500% | | 29,250 | | | 2025 | | Semi-annually |
Senior unsecured notes | Senior unsecured notes | | 650,000 | | | 4.500% | | 29,250 | | | 2025 | | Semi-annually | Senior unsecured notes | | 300,000 | | | 2.650% | | 7,950 | | | 2026 | | Semi-annually |
Senior unsecured notes | Senior unsecured notes | | 300,000 | | | 2.650% | | 7,950 | | | 2026 | | Semi-annually | Senior unsecured notes | | 350,000 | | | 2.400% | | 8,400 | | | 2027 | | Semi-annually |
Senior unsecured notes | Senior unsecured notes | | 350,000 | | | 2.400% | | 8,400 | | | 2027 | | Semi-annually | Senior unsecured notes | | 400,000 | | | 3.450% | | 13,800 | | | 2031 | | Semi-annually |
Senior unsecured notes | Senior unsecured notes | | 400,000 | | | 3.450% | | 13,800 | | | 2031 | | Semi-annually | Senior unsecured notes | | 162,000 | | | 6.375% | | 10,328 | | | 2050 | | Quarterly |
Senior unsecured notes | | 162,000 | | | 6.375% | | 10,328 | | | 2050 | | Quarterly | |
| Mortgage note (one property in Washington, D.C.) | | 25,245 | | | 4.220% | | 1,065 | | | 2022 | | Monthly | |
| | Mortgage note (one property in Chicago, IL) | Mortgage note (one property in Chicago, IL) | | 50,000 | | | 3.700% | | 1,850 | | | 2023 | | Monthly | Mortgage note (one property in Chicago, IL) | | 50,000 | | | 3.700% | | 1,850 | | | 2023 | | Monthly |
Mortgage note (one property in Washington, D.C.) | Mortgage note (one property in Washington, D.C.) | | 23,359 | | | 4.800% | | 1,121 | | | 2023 | | Monthly | Mortgage note (one property in Washington, D.C.) | | 23,018 | | | 4.800% | | 1,105 | | | 2023 | | Monthly |
| Total | Total | | $ | 2,610,604 | | | | | $ | 100,639 | | | | | | Total | | $ | 2,285,018 | | | | | $ | 87,558 | | | | | |
(1)The principal balances and annual interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. For more information, see Notes 6 and 7 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our senior unsecured notes require semi-annual or quarterly interest payments through maturity. Our mortgages generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $26,106.$22,850.
Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. The U.S. Federal Reserve recently raised interest rates in an effort to combat high inflation and may continue to do so. Based on the balances outstanding at SeptemberJune 30, 2021,2022, and discounted cash flow analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate one percentage point increase in interest rates would change the fair value of those obligations by approximately $119,658.$97,584.
Some of our fixed rate secured debt arrangements allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.
At SeptemberJune 30, 2021,2022, we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties that are secured by fixed rate debt consisting of the following mortgage notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt | | Our JV Ownership Interest | | Principal Balance (1)(2) | | Annual Interest Rate (1) | | Annual Interest Expense (1) | | Maturity | | Interest Payments Due |
Mortgage note (two properties in Fairfax, VA) | | 51% | | $ | 50,000 | | | 4.090% | | $ | 2,045 | | | 2029 | | Monthly |
Mortgage note (one property in Washington, D.C.) | | 50% | | 32,000 | | | 3.690% | | 1,181 | | | 2024 | | Monthly |
Total | | | | $ | 82,000 | | | | | $ | 3,226 | | | | | |
(1)The principal balances and annual interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, the joint ventures’ recorded interest expense may differ from these amounts because of market conditions at the time they incurred the debt.
(2)Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interests in the joint ventures we do not own. None of the debt is recourse to us.
Floating Rate Debt
At SeptemberJune 30, 2021,2022, we had no$230,000 of outstanding floating rate debt under our revolving credit facility. Our revolving credit facility matures on January 31, 2023 and, subject to the payment of an extension fee and meeting certain other conditions,
we have the option to extend the stated maturity by two six month periods. No principal repayments are required under our revolving credit facility prior to maturity, and we can borrow, repay and reborrow funds available under our revolving credit facility, subject to conditions, at any time without penalty.
Borrowings under our revolving credit facility are in U.S. dollars and require interest to be paid at a rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR, and to changes in our credit ratings. In addition, upon renewal or refinancing of our revolving credit facility, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.
The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of SeptemberJune 30, 20212022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Impact of an Increase in Interest Rates |
| | Annual Interest Rate (1) | | Outstanding Debt | | Total Interest Expense Per Year | | Annual Earnings Per Share Impact (2) |
At June 30, 2022 | | 2.4 | % | | $ | 230,000 | | | $ | 5,520 | | | $ | 0.11 | |
One percentage point increase | | 3.4 | % | | $ | 230,000 | | | $ | 7,820 | | | $ | 0.16 | |
(1)Based on LIBOR plus a premium, which was 110 basis points per annum, as of June 30, 2022.
(2)Based on the weighted average shares outstanding (diluted) for the six months ended June 30, 2022.
The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2022 if we were fully drawn on our revolving credit facility:
| | | | Impact of an Increase in Interest Rates | | | Impact of an Increase in Interest Rates |
| | | Annual Interest Rate (1) | | Outstanding Debt | | Total Interest Expense Per Year | | Annual Earnings Per Share Impact (2) | | | Annual Interest Rate (1) | | Outstanding Debt | | Total Interest Expense Per Year | | Annual Earnings Per Share Impact (2) |
At September 30, 2021 | | 1.2 | % | | $ | 750,000 | | | $ | 9,000 | | | $ | 0.19 | | |
At June 30, 2022 | | At June 30, 2022 | | 2.4 | % | | $ | 750,000 | | | $ | 18,000 | | | $ | 0.37 | |
One percentage point increase | One percentage point increase | | 2.2 | % | | $ | 750,000 | | | $ | 16,500 | | | $ | 0.34 | | One percentage point increase | | 3.4 | % | | $ | 750,000 | | | $ | 25,500 | | | $ | 0.53 | |
(1)Based on LIBOR plus a premium, which was 110 basis points per annum, as of SeptemberJune 30, 2021.2022.
(2)Based on the weighted average shares outstanding (diluted) for the ninesix months ended SeptemberJune 30, 2021.2022.
The foregoing table showstables show the impact of an immediate increase in floating interest rates as of SeptemberJune 30, 2021.2022. If interest rates were to increase gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility or our other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.
LIBOR Phase Out
LIBOR has been phased out for new contracts and is currently expected to be phased out for new contracts by December 31, 2021 and for pre-existing contracts by June 30, 2023. We are required to pay interest on borrowings under our revolving credit facility at a floating raterates based on LIBOR. InterestLIBOR, and interest we may pay on any future debt that we may incurborrowings under our revolving credit facility may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our revolving credit facility wouldwill be revised as provided under our credit agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that if LIBOR is phased out or transitioned, theany changes to the determination of interest under our agreementsrevolving credit facility would approximate the current calculation in accordance with LIBOR. We do not knowcannot be certain what standard, if any, will replace LIBOR, if it is phased out or transitioned.and any alternative interest rate index that may replace LIBOR may result in our paying increased interest.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our
President and Chief Operating Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Warning Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
•The duration and severity of the COVID-19 pandemic and its impact on us and our tenants and our tenants’ ability and willingness to pay us rent,
•The extent to which certain alternative work arrangements such as work from home will continue and the impact that may have on demand for office space at our properties,
•Our expectations about the financial strength of our tenants,
•The likelihood that our rents will increase when we renew or extend our leases or enter new leases,
•Our belief that we are in a position to opportunistically recycle and deploy capital,
•Our expectations that the diversity and other characteristics of our property portfolio and our financial resources will result in our ability to successfully withstand the current economic conditions,COVID-19 pandemic,
•The likelihood that our tenants will renew or extend their leases and not exercise early termination options pursuant to their leases or that we will obtain replacement tenants, on terms as favorable to us as our prior leases,
•The likelihood that our tenants will be negatively affected by cyclical economic conditions or government budget constraints and, if so, the impact that may have on their ability and willingness to lease our properties and pay us rent,
•Our ability to successfully execute our capital recycling program,
•The expectation that, as a result of the COVID-19 pandemic and alternative work arrangements such as work from home, leasing activity may remain volatile until office property market conditions meaningfully improve and stabilize,
•Our ability to pay distributions to our shareholders and to maintain or increase the amount of such distributions,
•Our expectations regarding occupancy at our properties,
•Our expectations regarding our future financial performance including FFO, Normalized FFO or NOI,
•Our expectations regarding demand for leased space,
•Our expectations regarding capital expenditures,
•Our expectation that there will be opportunities for us to acquire, and that we will acquire, additional properties primarily leased to single or majority tenants and tenants with high credit quality characteristics, such as government entities,
•Our expectations regarding the costs and timing of our development, redevelopment projects,and repositioning activities,
•Our ability to compete for acquisitions and tenancies effectively,
•Our sales and acquisitions of properties,
•Our policies and plans regarding investments, financings and dispositions,
•Our ability to appropriately balance our use of debt and equity capital,
•The future availability of borrowings under our revolving credit facility,
•Our ability to raise debt or equity capital,
•Our ability to pay interest on and principal of our debt,
•Our ability to maintain sufficient liquidity during the duration of the COVID-19 pandemic and any resulting economic downturn
•The U.S. government’s debt ceiling limit and related impact on its ability that may result in response to fund its obligations, including pay rent owed to us,current inflationary conditions or otherwise,
•Our credit ratings,
•Our expectation that we benefit from our relationships with RMR, LLC,
•The credit qualities of our tenants,
•Our qualification for taxation as a REIT,
•Changes in federal or state tax laws, and
•Other matters.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO, Normalized FFO, NOI, cash flows, liquidity and prospects include, but are not limited to:
•The impact of conditions in the economy, including the COVID-19 pandemic and its aftermath, increasing interest rates, inflation and a possible recession, and the capital markets on us and our tenants,
•Competition within the real estate industry, particularly in those markets in which our properties are located,
•The impact of changes in the real estate needs and financial conditions of our tenants,
•Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,
•The impact of any U.S. government shutdown on our ability to collect rents or pay our operating expenses, debt obligations and distributions to shareholders on a timely basis,
•Actual and potential conflicts of interest with our related parties, including our Managing Trustees, RMR, LLC, Sonesta and others affiliated with them,
•Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes, and
•Acts of terrorism, war or other hostilities, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control.
For example:
•Our ability to make futureor sustain distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our receipt of rent from our tenants, our future earnings, the capital costs we incur to lease our properties and our working capital requirements. We may be unable to pay our debt obligations or to maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,
•Our ability to grow our business and increase our distributions depends in large part upon our ability to buy properties and lease them for rents, less their property operating costs, that exceed our capital costs. We may be unable to identify properties that we want to acquire, and we may fail to reach agreement with the sellers and complete the purchases of any properties we want to acquire. In addition, any properties we may acquire may not provide us with rents less property operating costs that exceed our capital costs or achieve our expected returns,
•We may fail to maintain, or we may elect to change our distribution rate. Our Board of Trustees considers many factors when setting distribution rates, including our historical and projected income, Normalized FFO, CAD,cash available for distribution, the then current and expected needs and availability of cash to pay our obligations and fund our investments, distributions which may be required to be paid to maintain our qualification for taxation as a REIT and other factors deemed
relevant by our Board of Trustees. Accordingly, future distribution rates may be increased or decreased and there is no assurance as to the rate at which future distributions will be paid,
•We expect to selectively sell properties from time to time when we determine our continued ownership or ongoing required capital expenditures will not achieve desired returns or when we believe we can successfully pursue more desirable opportunities than retaining those properties. We cannot be sure we will sell any of these properties or what the terms of any sales may be or that we will acquire replacement properties that improve our asset quality or our ability to increase our distributions to shareholders,
•We may not receive the amounts we expect for properties we seek to sell,
•We may not succeed in maintaining ourmanaging leverage consistent with our current investment grade ratings orat levels that the market or credit rating agencieswe believe are appropriate,
•Some of our tenants may not renew expiring leases or they may exercise their rights, if any, to vacate their space before the stated expirations of their leases, and we may be unable to obtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties,
•Rents that we can charge at our properties may decline upon renewals or expirations because of changing market conditions or otherwise,
•Leasing for some of our properties depends on a private sector single or majority tenant and we may be adversely affected by the bankruptcy, insolvency, a downturn of business or a lease termination of such single or majority tenant at these properties,
•Our belief that there is a likelihood that tenants may renew or extend our leases prior to their expirations whenever they have made significant investments in the leased properties, or because those properties may be of strategic importance to them, may not be realized,
•Our belief that our recent leasing activity and negotiations for vacant or expiring space may suggest that there is an improving demand environment for office space may be incorrect or the demand for office space may decrease,
•Overall new leasing volume may decrease more than we currently expect.remain volatile. In addition, if the COVID-19 pandemic, a significant level of alternative work arrangements, including work from home, and any resulting economic downturncurrent inflationary conditions continue for an extended period or worsen or if a recession occurs, our tenants may become unable to pay rent or they may elect to not renew their leases with us. Further, some of our government leases provide the tenant with certain rights to terminate their lease early. Budgetary and other fiscal pressures may result in some governmental tenants terminating their leases early or not renewing their leases. In addition, the COVID-19 pandemic has caused changes in workplace practices, including increased remote work arrangements. To the extent those practices become permanent or increased,further increase, leasing demand for office space may decline. As a result of these factors, our tenant retention levels could decline and we may experience reduced rent or incur increased costs under future new or renewal leases,
•Our belief that we are well positioned to opportunistically recycle and deploy capital may not be realized. We may fail to identify and execute on opportunities to deploy capital and any deployment of capital we may make may not result in the returns that we expect,
•Our perception that as a result of the COVID-19 pandemic, government tenants may seek to manage space utilization rates in order to provide greater physical distancing for employees, may prove incorrect,
•Our perception that activity prior to the outbreak of the COVID-19 pandemic suggested that the government had begun to shift its leasing strategy to include longer term leases and that the government was actively exploring 10 to 20 year lease terms at renewal, in some instances, may mistakenly imply that these activities are indicative of a trend or broader change in government leasing strategy or practices, that will recommence after the COVID-19 pandemic ends. Further, even if such a trend or change were to recommence, that trend or change may not be sustained by the government,
•Contingencies in our acquisition and sale agreements, if any, may not be satisfied and any expected acquisitions and sales and any related lease arrangements we expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change,
•We expect to pursue accretively growing our property portfolio. However, we may not succeed in making acquisitions that are accretive and future acquisitions could be dilutive,
•The competitive advantages we believe we have may not in fact exist or provide us with the advantages we expect. We may fail to maintain any of these advantages or our competition may obtain or increase their competitive advantages relative to us,
•We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital,
•Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions that we may be unable to satisfy,
•Actual costs under our revolving credit facility will be higher than LIBORthe stated rate plus a premium because of fees and expenses associated with such debt,
•The interest rates payable under our floating rate debt obligations depend upon our credit ratings. If our credit ratings are downgraded, our borrowing costs will increase,
•Our ability to access debt capital and the cost of our debt capital will depend in part on our credit ratings. If our credit ratings are downgraded, we may not be able to access debt capital or the debt capital we can access may be expensive,
•We may be unable to repay our debt obligations when they become due,
•The maximum borrowing availability under our revolving credit facility may be increased to up to $1.95 billion in certain circumstances; however, increasing the maximum borrowing availability under our revolving credit facility is subject to our obtaining additional commitments from lenders, which may not occur,
•We have the option to extend the maturity date of our revolving credit facility upon payment of a fee and meeting other conditions; however, the applicable conditions may not be met,
•We may incur significant costs to prepare a property for tenancy, particularly for single or majority tenant properties,
•We may spend more for capital expenditures than we currently expect or than we had planned when the project was commenced, including as a result of inflation, supply chain challenges or otherwise, and we plan to spend more for capital expenditures than we have in the past,
•We may fail to obtain development rights or entitlements that we may seek for development and other projects we may wish to conduct at our properties,
•Our existing joint venture arrangementsventures and any otheradditional joint venture arrangements thatventures we may enter into in the future may not be successful,
•Any development, redevelopment or repositioning projects we undertake may be unsuccessful, may require greater capital expenditures or other costs than we project or may take significant time to complete, including as a result of inflation, supply chain challenges or otherwise,
•We believe that we are well positioned to weather the present disruptions of the COVID-19 pandemic facingconditions in the economy and the real estate industry. However, the full extent of the future impact of the COVID-19 pandemic to us is unknown and we may not realize similar or better operating results in the future,
•We believe that the near term impact of the COVID-19 pandemic to us will not be material due to the strength of our tenant base. However, if the COVID-19 pandemic and any resulting economic downturn continue for an extended period of time or worsen, our tenants may be significantly adversely impacted, which may result in those tenants seeking relief from their rent obligations, their inability to pay rent, the termination of their leases or our tenants not renewing their leases or renewing their leases for less space. Therefore, the impact we experience in the near term may be worse than we currently expect and our results of operations and financial position may be negatively affected,
•We have granted requests to some of our tenants to defer payments over, in most cases, a 12-month period, all of which have commenced. However, current market and economic conditions may deteriorate further and the rent assistance granted by us may not be sufficient to ensure that tenants will be able to meet their rent payment obligations under their leases with us, which may result in an increase in tenant defaults and terminations,
•The business and property management agreements between us and RMR LLC have continuing 20 year terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms,
•We expect that we will benefit from RMR’s Environmental, Social and Governance, or ESG, program and initiatives. However, we may not realize the benefits we expect from such program and initiatives and we or RMR may not succeed in meeting existing or future standards regarding ESG,
•We believe that our relationships with our related parties, including RMR, LLC, Sonesta and others affiliated with them, may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and
•It is difficult to accurately estimate leasing related obligations and costs of property repositioning, development, redevelopment or repositioning and tenant improvement costs. Our unspent leasing related obligations and development, redevelopment
or redevelopmentrepositioning costs may cost more and may take longer to complete than we currently expect or than we planned when the project was commenced, and we may incur increased amounts for these and similar purposes in the future.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as the COVID-19 pandemic and its aftermath, economic conditions, including increasing interest rates, high inflation and a possible recession, other changes in the capital markets or the economy generally, changes in our tenants’ needs for leased space, the ability of the U.S. and state governments to approve spending bills to fund their obligations, acts of terrorism, war or other hostilities, natural disasters or climate change or changes in capital markets or the economy generally.and climate related events.
The information contained elsewhere in this Quarterly Report on Form 10-Q and our 20202021 Annual Report, or in our other filings with the SEC, including under the caption “Risk Factors”, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.
You should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
Statement Concerning Limited Liability
The amended and restated declaration of trust establishing Office Properties Income Trust, dated June 8, 2009, as amended, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Office Properties Income Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Office Properties Income Trust. All persons dealing with Office Properties Income Trust in any way shall look only to the assets of Office Properties Income Trust for the payment of any sum or the performance of any obligation.
Part II. Other Information
Item 1A. Risk Factors
There have been no material changes to the risk factors from those previously disclosed in our 20202021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended SeptemberJune 30, 2021:2022:
| Calendar Month | Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
September 2021 | | 25,533 | | | $ | 25.24 | | | — | | — | |
April 2022 | | April 2022 | | 265 | | | $ | 24.07 | | | — | | $ | — | |
June 2022 | | June 2022 | | 525 | | | 18.84 | | | — | | — | |
| Total | | Total | | 790 | | | $ | 20.59 | | | — | | $ | — | |
(1)These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of one of our Trustees our officers and certain other employeesa former employee of RMR LLC in connection with awards of our common shares and the vesting of those and prior awards of common shares to them. We withheld and purchased these shares at their fair market values based upon the trading prices of our common shares at the close of trading on Nasdaq on the purchase dates.
Item 6. Exhibits
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Exhibit Number | Description |
3.1 | |
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3.2 | |
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4.1 | |
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4.2 | |
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4.3 | |
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4.4 | |
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4.54.4 | |
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4.64.5 | |
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4.74.6 | |
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4.84.7 | |
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4.94.8 | |
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4.104.9 | |
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4.114.10 | |
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4.124.11 | |
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4.134.12 | |
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10.1 | |
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31.1 | |
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31.2 | |
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31.3 | |
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31.4 | |
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32.1 | |
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101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document. (Filed herewith.) |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
104 | Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| OFFICE PROPERTIES INCOME TRUST |
| | |
| | |
| By: | /s/ Christopher J. Bilotto |
| | Christopher J. Bilotto |
| | President and Chief Operating Officer |
| | Dated: OctoberJuly 28, 20212022 |
| | |
| By: | /s/ Matthew C. Brown |
| | Matthew C. Brown |
| | Chief Financial Officer and Treasurer |
| | (principal financial officer and principal accounting officer) |
| | Dated: OctoberJuly 28, 20212022 |