Office Properties Income Trust Announces Fourth Quarter and Year End 2020 Results

Rhea-AI Summary

Office Properties Income Trust (OPI) reported mixed results for the quarter and year ending December 31, 2020. The company recorded a net loss of $1.7 million, or $0.03 per diluted share, compared to a net income of $65 million, or $1.35 per share in Q4 2019. However, Normalized FFO per share was $1.28, slightly lower than $1.38 the previous year. OPI maintained strong rent collections at approximately 99% and achieved a 6.5% year-over-year increase in cash available for distribution (CAD). Leasing activity remained robust, with over two million square feet leased and a rental rate increase of 6.9%.

Positive

• 99% average monthly rent collections throughout Q4 2020
• Same Property Cash Basis NOI increased by 5.1% year-over-year
• Leasing activity for the year reached 2 million square feet with average rents up by 6.9%
• CAD increased by 6.5% year-over-year, reaching $42.3 million in Q4 2020
• Strong liquidity with full availability of $750 million revolving credit facility

Negative

• Net loss of $1.7 million in Q4 2020 compared to a profit of $65 million in Q4 2019
• Decline in rental income from $160.2 million in Q4 2019 to $146.6 million in Q4 2020
• Decrease in utilization, with all properties leased at 91.2%, down from 92.4% year-over-year

Office Properties Income Trust (Nasdaq: OPI) today announced its financial results for the quarter and year ended December 31, 2020.

Christopher Bilotto, President and Chief Operating Officer of OPI, made the following statement:

“We are pleased with OPI’s continued solid performance throughout 2020. Fourth quarter Normalized FFO per share and Same Property Cash Basis NOI growth both exceeded expectations and CAD increased by 6.5% year over year. Monthly rent collections continued to average approximately 99% through the fourth quarter and we have collected nearly 79% of granted rent deferrals. Our leasing activity showed solid performance throughout the year, completing two million square feet of activity with an average lease term of over seven years and a roll-up in rents of 6.9%.

Heading into 2021, our asset and property management teams remain focused on proactive tenant engagement to drive leasing and retention, along with management of property operations as tenants continue to advance their re-entry plans. With strong liquidity, including full availability on our $750 million revolving credit facility, we are well positioned to execute on growth activity through property acquisitions and select development and repositioning opportunities across our portfolio."

Quarterly Results:

			Three Months Ended December 31,
			2020		2019
Financial			(dollars in thousands, except per share data)
Net income (loss)			($1,664)		$65,029
Net income (loss) per share			($0.03)		$1.35
Normalized FFO per share			$1.28		$1.38
CAD per share			$0.88		$0.83
Same Property Cash Basis NOI			$92,515		$88,052

• Net loss for the quarter ended December 31, 2020 was $1.7 million, or $0.03 per diluted share, compared to net income of $65.0 million, or $1.35 per diluted share, for the quarter ended December 31, 2019. Net income for the quarter ended December 31, 2019 includes a $71.6 million, or $1.49 per diluted share, gain on sale of real estate, partially offset by an $8.2 million, or $0.17 per diluted share, loss on impairment of real estate.

• Normalized funds from operations, or Normalized FFO, and cash available for distribution, or CAD, for the quarter ended December 31, 2020 were $61.8 million, or $1.28 per diluted share, and $42.3 million, or $0.88 per diluted share, respectively, compared to Normalized FFO and CAD for the quarter ended December 31, 2019 of $66.4 million, or $1.38 per diluted share, and $39.7 million, or $0.83 per diluted share, respectively.

• Same Property cash basis net operating income, or Cash Basis NOI, increased 5.1% for the quarter ended December 31, 2020 compared to the quarter ended December 31, 2019. The increase in Same Property Cash Basis NOI is due to an increase in cash received from contractual rents of $3.0 million as a result of free rent expiring and roll-ups in rent related to leasing activity in 2020, as well as a $2.2 million decrease in operating expenses, mainly driven by cost savings initiatives in response to the COVID-19 pandemic, offset by a decline in parking revenue of $0.8 million as a result of the COVID-19 pandemic.

• Leasing activity for the quarter ended December 31, 2020 was as follows:

		Three Months Ended December 31, 2020
Leasing activity for new and renewal leases (rentable square feet)		139,000
Weighted average rental rate change (by rentable square feet)		(7.0%)
Weighted average lease term (by rentable square feet)		9.7 years
Leasing concessions and capital commitments (per square foot per lease year)		$5.73

			As of
Percent Leased			December 31, 2020		September 30, 2020		December 31, 2019
All properties			91.2%		91.2%		92.4%
Same properties			92.1%		92.3%		93.3%

Reconciliations of net income (loss) determined in accordance with U.S. generally accepted accounting principles, or GAAP, to funds from operations, or FFO, Normalized FFO, CAD, net operating income, or NOI, and Cash Basis NOI, and a reconciliation of NOI to Same Property NOI and Same Property Cash Basis NOI, for the quarters ended December 31, 2020 and 2019 appear later in this press release.

Acquisition Activities:

• In November 2020, OPI terminated a previously announced agreement to acquire three properties in Brookhaven, GA for a purchase price of $15.3 million.

• In November 2020, OPI entered into an agreement to acquire a property adjacent to a property it owns in Boston, MA containing approximately 49,000 rentable square feet for a purchase price of $27.0 million, excluding acquisition related costs. This property is 59% leased with a weighted average lease term of 2.5 years. This acquisition is expected to occur before the end of the first quarter.

• In December 2020, OPI acquired a property in Fort Mill, SC containing approximately 150,000 rentable square feet for a purchase price of $35.1 million, excluding acquisition related costs. This property is 100% leased to a single tenant with a remaining lease term of 10.8 years.

Disposition Activities:

• As previously reported, in October 2020, OPI sold a four property business park located in Fairfax, VA containing approximately 171,000 rentable square feet for a sales price of $25.1 million, excluding closing costs.

• In January 2021, OPI sold a warehouse facility adjacent to a property it owns in Kansas City, MO containing approximately 10,000 rentable square feet for a sales price of $0.8 million, excluding closing costs.

• Also in January 2021, OPI sold a property located in Richmond, VA containing approximately 311,000 rentable square feet for a sales price of $130.0 million, excluding closing costs.

• In February 2021, OPI entered into an agreement to sell a property located in Huntsville, AL containing approximately 1,371,000 rentable square feet for a sales price of $39.0 million, excluding closing costs. This sale is expected to occur before the end of the second quarter.

Liquidity:

• As of December 31, 2020, OPI had $42.0 million of cash and cash equivalents and $750.0 million available to borrow under its unsecured revolving credit facility.

COVID-19 Update:

• OPI has granted temporary rent assistance to date totaling $2.5 million to 19 tenants, pursuant to deferred payment plans. These tenants are required to pay, in most cases, one month of rent over a 12-month period, all of which have commenced. The $2.5 million of granted temporary rent assistance is detailed as follows:

		Granted Rent Deferrals				Percentage of Total Granted Rent Deferrals		Percentage of Quarterly Contractual Rents
Quarter ended June 30, 2020		$	2,047,100			80.5%		1.5%
Quarter ended September 30, 2020		497,057				19.5%		0.3%
Quarter ended December 31, 2020		500				—%		—%
Future deferrals		1,028				—%		—%
Total granted deferrals		$	2,545,685			100.0%		0.9%
Less: Amounts repaid (1)		(1,998,752)				78.5%
Outstanding granted rent deferral balance		$	546,933			21.5%

(1)

Represents rent deferrals repaid as of February 16, 2021.

• For the quarter ended December 31, 2020, OPI collected approximately 99% of contractual rent obligations before and after giving effect to such rent deferrals.

Conference Call:

On February 19, 2021 at 10:00 a.m. Eastern Time, President and Chief Operating Officer, Christopher Bilotto, and Chief Financial Officer and Treasurer, Matthew Brown, will host a conference call to discuss OPI’s fourth quarter 2020 financial results.

The conference call telephone number is (877) 328-1172. Participants calling from outside the United States and Canada should dial (412) 317-5418. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through 11:59 p.m. on Friday, February 26, 2021. To access the replay, dial (412) 317-0088. The replay pass code is 10150782.

A live audio webcast of the conference call will also be available in a listen only mode on OPI’s website, at www.opireit.com. Participants wanting to access the webcast should visit OPI’s website about five minutes before the call. The archived webcast will be available for replay on OPI’s website following the call for about one week. The transcription, recording and retransmission in any way of OPI’s fourth quarter conference call are strictly prohibited without the prior written consent of OPI.

Supplemental Data:

A copy of OPI’s Fourth Quarter 2020 Supplemental Operating and Financial Data is available for download at OPI’s website, www.opireit.com. OPI’s website is not incorporated as part of this press release.

Non-GAAP Financial Measures:

OPI presents certain “non-GAAP financial measures” within the meaning of applicable rules of the Securities and Exchange Commission, or SEC, including FFO, Normalized FFO, CAD, NOI, Cash Basis NOI, Same Property NOI and Same Property Cash Basis NOI. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of OPI’s operating performance or as measures of OPI’s liquidity. These measures should be considered in conjunction with net income (loss) as presented in OPI's consolidated statements of income (loss). OPI considers these non-GAAP measures to be appropriate supplemental measures of operating performance for a real estate investment trust, or REIT, along with net income (loss). OPI believes 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 OPI’s operating performance between periods and with other REITs and, in the case of NOI, Cash Basis NOI, Same Property NOI and Same Property Cash Basis 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 OPI's properties.

Please see the pages attached hereto for a more detailed statement of OPI’s operating results and financial condition and for an explanation of OPI’s calculation of FFO, Normalized FFO, CAD, NOI, Cash Basis NOI, Same Property NOI and Same Property Cash Basis NOI and a reconciliation of those amounts to amounts determined in accordance with GAAP.

OPI is a REIT focused on owning, operating and leasing properties primarily leased to single tenants and those with high credit quality characteristics such as government entities. OPI is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.

Office Properties Income Trust
Consolidated Statements of Income (Loss)
(amounts in thousands, except per share data)
(unaudited)
		Three Months Ended December 31,								Year Ended December 31,
		2020				2019				2020				2019
Rental income		$	146,625			$	160,184			$	587,919			$	678,404
Expenses:
Real estate taxes		16,418				18,354				65,119				73,717
Utility expenses		5,607				7,933				25,384				34,302
Other operating expenses		27,432				30,739				105,465				120,943
Depreciation and amortization		62,226				63,512				251,566				289,885
Loss on impairment of real estate (1)		—				8,150				2,954				22,255
Acquisition and transaction related costs (2)		232				—				232				682
General and administrative		7,071				7,271				28,443				32,728
Total expenses		118,986				135,959				479,163				574,512
Gain on sale of real estate (3)		33				71,593				10,855				105,131
Dividend income		—				—				—				1,960
Loss on equity securities, net (4)		—				—				—				(44,007)
Interest and other income		41				198				779				1,045
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,431, $2,476, $9,593 and $10,740, respectively)		(28,842)				(30,032)				(108,303)				(134,880)
Loss on early extinguishment of debt (5)		—				—				(3,839)				(769)
Income (loss) before income tax expense and equity in net losses of investees		(1,129)				65,984				8,248				32,372
Income tax expense		(157)				(269)				(377)				(778)
Equity in net losses of investees		(378)				(686)				(1,193)				(1,259)
Net income (loss)		$	(1,664)			$	65,029			$	6,678			$	30,335
Weighted average common shares outstanding (basic and diluted)		48,161				48,094				48,124				48,062
Per common share amounts (basic and diluted):
Net income (loss)		$	(0.03)			$	1.35			$	0.14			$	0.63

See Notes on pages 6 and 7.

Office Properties Income Trust
Funds from Operations, Normalized Funds from Operations and Cash Available for Distribution
(amounts in thousands, except per share data)
(unaudited)
		Three Months Ended December 31,								Year Ended December 31,
		2020				2019				2020				2019
Calculation of FFO, Normalized FFO and CAD (6)(7):
Net income (loss)		$	(1,664)			$	65,029			$	6,678			$	30,335
Add (less): Depreciation and amortization:
Consolidated properties		62,226				63,512				251,566				289,885
Unconsolidated joint venture properties		1,081				1,345				4,803				5,903
Loss on impairment of real estate (1)		—				8,150				2,954				22,255
Gain on sale of real estate (3)		(33)				(71,593)				(10,855)				(105,131)
Loss on equity securities, net (4)		—				—				—				44,007
FFO		61,610				66,443				255,146				287,254
Add (less): Acquisition and transaction related costs (2)		232				—				232				682
Loss on early extinguishment of debt (5)		—				—				3,839				769
Normalized FFO		61,842				66,443				259,217				288,705
Add (less): Non-cash expenses (8)		607				76				2,027				1,974
Distributions from unconsolidated joint ventures		204				397				612				2,370
Depreciation and amortization - unconsolidated joint ventures		(1,081)				(1,345)				(4,803)				(5,903)
Equity in net losses of investees		378				686				1,193				1,259
Loss on early extinguishment of debt settled in cash		—				—				(1,138)				—
Non-cash straight line rent adjustments included in rental income		(3,116)				(8,142)				(16,079)				(27,507)
Lease value amortization included in rental income		1,291				82				5,440				2,710
Net amortization of debt premiums, discounts and issuance costs		2,431				2,476				9,593				10,740
Recurring capital expenditures		(20,212)				(20,929)				(76,252)				(85,742)
CAD (7)		$	42,344			$	39,744			$	179,810			$	188,606
Weighted average common shares outstanding (basic and diluted)		48,161				48,094				48,124				48,062
Per common share amounts (basic and diluted):
Net income (loss)		$	(0.03)			$	1.35			$	0.14			$	0.63
FFO		$	1.28			$	1.38			$	5.30			$	5.98
Normalized FFO		$	1.28			$	1.38			$	5.39			$	6.01
CAD		$	0.88			$	0.83			$	3.74			$	3.92
Distributions declared per share		$	0.55			$	0.55			$	2.20			$	2.20

(1)		Loss on impairment of real estate for the year ended December 31, 2020 represents an adjustment of $2,954 to reduce the carrying value of four properties to their estimated fair value less costs to sell during the nine months ended September 30, 2020. Loss on impairment of real estate for the three months ended December 31, 2019 includes an adjustment of $9,739 to reduce the carrying value of one property to its estimated fair value less costs to sell and a $250 loss on impairment of real estate related to the sale of three properties, offset by the recovery of impairment losses recorded in previous periods of $1,839 related to the sale of four properties. Loss on impairment of real estate for the year ended December 31, 2019 also includes adjustments totaling $11,479 to reduce the carrying value of 10 properties to their estimated fair value less costs to sell and $2,626 of losses on impairment of real estate related to the sale of 35 properties during the nine months ended September 30, 2019.
(2)		Acquisition and transaction related costs for the three months and year ended December 31, 2020 represent costs related to an acquisition opportunity OPI terminated in November 2020. Acquisition and transaction related costs for the year ended December 31, 2019 consist of post-merger activity costs incurred in connection with OPI's acquisition of Select Income REIT on December 31, 2018 in a merger transaction and other related transactions.
(3)		Gain on sale of real estate for the year ended December 31, 2020 represents a $10,855 net gain on the sale of 10 properties. Gain on sale of real estate for the three months ended December 31, 2019 represents a $71,593 net gain on the sale of seven properties. Gain on sale of real estate for the year ended December 31, 2019 also includes a $33,538 net gain on the sale of three properties during the nine months ended September 30, 2019.
(4)		Loss on equity securities, net represents a realized loss for the year ended December 31, 2019 from the sale of OPI's 2.8 million shares of The RMR Group Inc., or RMR Inc., common stock on July 1, 2019.
(5)		Loss on early extinguishment of debt for the year ended December 31, 2020 includes prepayment fees related to the repayment of two mortgage notes, write offs of the unamortized portion of certain discounts and issuance costs resulting from the early repayment of debt and a loss related to the settlement of a mortgage note receivable in connection with a property OPI sold in 2016. Loss on early extinguishment of debt for the year ended December 31, 2019 includes write offs of the unamortized portion of certain discounts and issuance costs resulting from the early repayment of debt.
(6)		OPI calculates FFO and Normalized FFO as shown above. 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 its proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets, any gain or loss on sale of real estate and equity securities, as well as certain other adjustments currently not applicable to OPI. In calculating Normalized FFO, OPI adjusts for the other items shown above and includes 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 OPI’s 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 OPI’s Board of Trustees when determining the amount of distributions to OPI’s shareholders. Other factors include, but are not limited to, requirements to maintain OPI's qualification for taxation as a REIT, limitations in OPI’s credit agreement and public debt covenants, the availability to OPI of debt and equity capital, OPI’s expectation of its future capital requirements and operating performance and OPI’s expected needs for and availability of cash to pay its obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than OPI does.
(7)		OPI calculates CAD as shown above. OPI defines CAD as Normalized FFO minus recurring real estate related capital expenditures and other non-cash and non-recurring items. CAD is among the factors considered by OPI's Board of Trustees when determining the amount of distributions to its shareholders. Other real estate companies and REITs may calculate CAD differently than OPI does.
(8)		Non-cash expenses include equity based compensation, adjustments recorded to capitalize interest expense and amortization of the liability for the amount by which the estimated fair value for accounting purposes exceeded the price OPI paid for its former investment in RMR Inc. common stock in June 2015. This liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to business management fee expense and property management fee expense, which are included in general and administrative and other operating expenses, respectively.

Office Properties Income Trust
Calculation and Reconciliation of NOI, Cash Basis NOI, Same Property NOI and Same Property Cash Basis NOI(1)
(amounts in thousands)
(unaudited)
		Three Months Ended December 31,								Year Ended December 31,
		2020				2019				2020				2019
Calculation of NOI and Cash Basis NOI:
Rental income		$	146,625			$	160,184			$	587,919			$	678,404
Property operating expenses		(49,457)				(57,026)				(195,968)				(228,962)
NOI		97,168				103,158				391,951				449,442
Non-cash straight line rent adjustments included in rental income		(3,116)				(8,142)				(16,079)				(27,507)
Lease value amortization included in rental income		1,291				82				5,440				2,710
Lease termination fees included in rental income		(90)				(2)				(98)				(9,185)
Non-cash amortization included in property operating expenses (2)		(121)				(121)				(484)				(484)
Cash Basis NOI		$	95,132			$	94,975			$	380,730			$	414,976
Reconciliation of Net Income (Loss) to NOI and Cash Basis NOI:
Net income (loss)		$	(1,664)			$	65,029			$	6,678			$	30,335
Equity in net losses of investees		378				686				1,193				1,259
Income tax expense		157				269				377				778
Income (loss) before income tax expense and equity in net losses of investees		(1,129)				65,984				8,248				32,372
Loss on early extinguishment of debt		—				—				3,839				769
Interest expense		28,842				30,032				108,303				134,880
Interest and other income		(41)				(198)				(779)				(1,045)
Loss on equity securities, net		—				—				—				44,007
Dividend income		—				—				—				(1,960)
Gain on sale of real estate		(33)				(71,593)				(10,855)				(105,131)
General and administrative		7,071				7,271				28,443				32,728
Acquisition and transaction related costs		232				—				232				682
Loss on impairment of real estate		—				8,150				2,954				22,255
Depreciation and amortization		62,226				63,512				251,566				289,885
NOI		97,168				103,158				391,951				449,442
Non-cash amortization included in property operating expenses (2)		(121)				(121)				(484)				(484)
Lease termination fees included in rental income		(90)				(2)				(98)				(9,185)
Lease value amortization included in rental income		1,291				82				5,440				2,710
Non-cash straight line rent adjustments included in rental income		(3,116)				(8,142)				(16,079)				(27,507)
Cash Basis NOI		$	95,132			$	94,975			$	380,730			$	414,976

FAQ

What were Office Properties Income Trust's Q4 2020 financial results?

OPI reported a net loss of $1.7 million for Q4 2020, with a Normalized FFO per share of $1.28.

How much did OPI's cash available for distribution (CAD) increase in 2020?

CAD increased by 6.5% year-over-year, reaching $42.3 million in Q4 2020.

What is the average rent collection rate for OPI in Q4 2020?

OPI maintained an average monthly rent collection rate of approximately 99% throughout Q4 2020.

What leasing activity did OPI achieve in 2020?

In 2020, OPI completed over 2 million square feet of leasing activity.

What is the current utilization rate of OPI's properties?

As of December 31, 2020, OPI's properties were 91.2% leased.