Office Properties Income Trust Announces Third Quarter 2019 Results

Since January 1, 2019, Have Sold or Currently Have Under Agreement to Sell 60 Properties for $731.5 Million

Third Quarter Net Loss Available for Common Shareholders of $3.9 Million, or $0.08 Per Share

Third Quarter Normalized FFO Available for Common Shareholders of $69.7 Million, or $1.45 Per Share

Occupancy Increased 170 Basis Points in the Third Quarter to 93.3%

Completed 759,000 Square Feet of Leasing in the Third Quarter

NEWTON, Mass.–(BUSINESS WIRE)–Office Properties Income Trust (Nasdaq: OPI) today announced its financial results for the quarter and nine months ended September 30, 2019.

David Blackman, President and Chief Executive Officer of OPI, made the following statement:

“Since the end of the second quarter we continued to make steady progress on our disposition plan, selling 12 properties for a total of $298.1 million. The 60 properties we have sold or have under agreement to sell for $731.5 million since January 1, 2019 are at an average cap rate of 5.6% and have an average age of 22 years, an average occupancy of 71% and a weighted average lease term of 4.5 years. As previously announced, we also sold our 2.8 million shares of The RMR Group Inc. for net proceeds of $104.7 million. With the proceeds of these asset sales, we have reduced our leverage below the midpoint of our targeted leverage range. Our third quarter operating activity also generated continued leasing momentum as we entered new and renewal leases for 759,000 square feet and our consolidated occupancy increased to 93.3% from 91.6% last quarter.”

Results for the Quarter Ended September 30, 2019:

Net loss available for common shareholders for the quarter ended September 30, 2019 was $3.9 million, or $0.08 per diluted share, compared to net loss available for common shareholders of $0.4 million, or $0.02 per diluted share, for the quarter ended September 30, 2018. Net loss available for common shareholders for the quarter ended September 30, 2019 includes an $8.5 million, or $0.18 per diluted share, loss on impairment of real estate, partially offset by an $11.5 million, or $0.24 per diluted share, gain on sale of real estate. Net loss available for common shareholders for the quarter ended September 30, 2018 includes a $17.4 million, or $0.70 per diluted share, unrealized gain on equity securities related to OPI’s investment in The RMR Group Inc., or RMR Inc., which was sold on July 1, 2019, and $16.2 million, or $0.66 per diluted share, of estimated business management incentive fee expense. The weighted average number of diluted common shares outstanding was 48.1 million for the quarter ended September 30, 2019 and 24.8 million for the quarter ended September 30, 2018.

Normalized funds from operations, or Normalized FFO, available for common shareholders for the quarter ended September 30, 2019 were $69.7 million, or $1.45 per diluted share, compared to Normalized FFO available for common shareholders for the quarter ended September 30, 2018 of $53.0 million, or $2.14 per diluted share.

Reconciliations of net income (loss) available for common shareholders determined in accordance with U.S. generally accepted accounting principles, or GAAP, to funds from operations, or FFO, available for common shareholders and Normalized FFO available for common shareholders for the quarters ended September 30, 2019 and 2018 appear later in this press release.

Results for the Nine Months Ended September 30, 2019:

Net loss available for common shareholders for the nine months ended September 30, 2019 was $34.7 million, or $0.72 per diluted share, compared to net income available for common shareholders of $35.4 million, or $1.43 per diluted share, for the nine months ended September 30, 2018. Net loss available for common shareholders for the nine months ended September 30, 2019 includes a $44.0 million, or $0.92 per diluted share, realized loss on equity securities related to the sale of OPI’s investment in RMR Inc. on July 1, 2019 and a $14.1 million, or $0.29 per diluted share, loss on impairment of real estate, partially offset by a $33.5 million, or $0.70 per diluted share, gain on sale of real estate and certain net revenue events during the second quarter of 2019 totaling $8.2 million, or $0.17 per diluted share, including a $7.4 million early termination fee, net of expenses, related to a single tenant property located in San Jose, CA. Net income available for common shareholders for the nine months ended September 30, 2018 includes a $40.7 million, or $1.64 per diluted share, unrealized gain on equity securities and a $17.3 million, or $0.70 per diluted share, net gain on sale of real estate, partially offset by $17.0 million, or $0.69 per diluted share, of estimated business management incentive fee expense and a $5.8 million, or $0.23 per diluted share, loss on impairment of real estate. The weighted average number of diluted common shares outstanding was 48.1 million for the nine months ended September 30, 2019 and 24.8 million for the nine months ended September 30, 2018.

Normalized FFO available for common shareholders for the nine months ended September 30, 2019 were $222.3 million, or $4.63 per diluted share, compared to Normalized FFO available for common shareholders for the nine months ended September 30, 2018 of $158.4 million, or $6.39 per diluted share.

Reconciliations of net income (loss) available for common shareholders determined in accordance with GAAP to FFO available for common shareholders and Normalized FFO available for common shareholders for the nine months ended September 30, 2019 and 2018 appear later in this press release.

Leasing and Occupancy Results:

During the quarter ended September 30, 2019, OPI entered new and renewal leases for an aggregate of 759,000 rentable square feet at weighted (by rentable square feet) average rents that were 5.0% above prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 12.7 years and leasing concessions and capital commitments for these leases were $17.6 million, or $1.82 per square foot, per lease year.

As of September 30, 2019, 93.3% of OPI’s total rentable square feet was leased, compared to 91.6% as of June 30, 2019 and 93.3% as of September 30, 2018.

Pro Forma Same Property Results:

Pro forma results combine the results of OPI and Select Income REIT, or SIR, for the quarters ended September 30, 2019 and 2018 as if the merger of SIR with OPI that closed on December 31, 2018, or the Merger, had occurred on January 1, 2018. Pro forma same property occupancy was 93.3% as of September 30, 2019, compared to 95.8% as of September 30, 2018. Pro Forma Same Property Cash Basis net operating income, or NOI, was $99.3 million for the quarter ended September 30, 2019, which was a 7.1% decrease compared to the same period in 2018.

Reconciliations of net income (loss) available for common shareholders determined in accordance with GAAP to Property NOI and Property Cash Basis NOI for the quarters ended September 30, 2019 and 2018 and a calculation of Pro Forma Same Property NOI and Same Property Cash Basis NOI for the quarter ended September 30, 2019 appear later in this press release.

Recent Property Disposition Activities:

Since July 1, 2019, OPI sold the following 12 properties containing a combined 2.2 million rentable square feet for an aggregate sales price of $298.1 million, excluding closing costs:

1. Gross sales price includes purchase price adjustments, if any, and excludes closing costs.

As of October 31, 2019, OPI has entered into six agreements to sell the following 10 properties containing a combined 0.9 million rentable square feet for an aggregate sales price of $135.9 million, excluding closing costs:

1. Gross sales price includes purchase price adjustments, if any, and excludes closing costs.

Recent Investment Activities:

As previously announced, on July 1, 2019, OPI completed the sale of all of its 2,801,060 shares of class A common stock of RMR Inc., or RMR Inc. common stock, in an underwritten public offering at a price to the public of $40.00 per common share. OPI received $104.7 million in net proceeds, after deducting underwriting fees and other offering expenses, that it used to repay debt.

As previously announced, in July 2019, OPI entered into an agreement to acquire a land parcel near one of its properties located in Boston, MA for $2.9 million, excluding acquisition related costs.

Recent Financing Activities:

During the quarter ended September 30, 2019, OPI repaid the $170.0 million remaining principal balance outstanding under its $300.0 million unsecured term loan due 2020 with cash on hand, proceeds from its property dispositions and proceeds from the sale of its shares of RMR Inc. common stock.

As previously announced, on July 15, 2019, OPI redeemed, at par plus accrued interest, all $350.0 million of its 3.75% senior notes due 2019 using cash on hand and borrowings under its revolving credit facility.

Conference Call:

At 10:00 a.m. Eastern Time this morning, President and Chief Executive Officer, David Blackman, Chief Financial Officer and Treasurer, Matthew Brown, and Vice President, Christopher Bilotto, will host a conference call to discuss OPI’s third quarter 2019 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, November 8, 2019. To access the replay, dial (412) 317-0088. The replay pass code is 10134914.

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 third quarter conference call are strictly prohibited without the prior written consent of OPI.

Supplemental Data:

A copy of OPI’s Third Quarter 2019 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 available for common shareholders, Normalized FFO available for common shareholders, Property NOI, Property Cash Basis NOI, Same Property NOI, Same Property Cash Basis NOI, Pro Forma Same Property NOI and Pro Forma 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 income (loss) from continuing operations, net income (loss) and net income (loss) available for common shareholders as indicators of OPI’s operating performance or as measures of OPI’s liquidity. These measures should be considered in conjunction with income (loss) from continuing operations, net income (loss) and net income (loss) available for common shareholders as presented in OPI’s condensed 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 income (loss) from continuing operations, net income (loss) and net income (loss) available for common shareholders. 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 Property NOI, Property Cash Basis NOI, Same Property NOI, Same Property Cash Basis NOI, Pro Forma Same Property NOI and Pro Forma 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 at 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 available for common shareholders, Normalized FFO available for common shareholders, Property NOI, Property 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’s Pro Forma Same Property Cash Basis NOI as if the Merger had occurred on January 1, 2018 also are provided in the pages attached hereto. Such pro forma financial information is not necessarily indicative of OPI’s expected financial position or results of operations for any future period. Differences could result from numerous factors, including future changes in OPI’s portfolio of investments, OPI’s capital structure, OPI’s property level operating expenses and revenues, including rents expected to be received pursuant to OPI’s existing leases or leases OPI may enter into, changes in interest rates and other reasons. Actual future results are likely to be different from amounts presented in the pro forma financial information and such differences could be significant.

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 RMR Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.

See Notes on pages 7 and 8.

1. Loss on impairment of real estate for the three months ended September 30, 2019 represents an adjustment of $6,342 to reduce the carrying value of eight properties to their estimated fair value less costs to sell and a $2,179 loss on impairment of real estate related to the disposal of one property during the three months ended September 30, 2019. Loss on impairment of real estate for the nine months ended September 30, 2019 also includes an adjustment of $2,380 to reduce the carrying value of one property to its estimated fair value less costs to sell during the three months ended June 30, 2019, an adjustment of $2,757 to reduce the carrying value of one property to its estimated fair value less costs to sell during the three months ended March 31, 2019 and a $447 loss on impairment of real estate related to the disposal of a portfolio consisting of 34 properties located in Northern Virginia and Maryland during the three months ended March 31, 2019.

   Loss on impairment of real estate for the nine months ended September 30, 2018 represents an adjustment of $6,116 during the three months ended March 31, 2018 to reduce the carrying value of three properties to their estimated fair value less costs to sell, an adjustment of $322 to increase the carrying value of one property removed from held for sale status to its estimated fair value during the three months ended June 30, 2018 and an adjustment of $6 to reduce the carrying value of one property to its estimated fair value less costs to sell during the three months ended June 30, 2018.
   
   

2. Acquisition and transaction related costs for the three months ended September 30, 2018 and the nine months ended September 30, 2019 and 2018 consist of costs incurred in connection with the Merger.
   
   
3. Incentive fees under OPI’s business management agreement with The RMR Group LLC are payable after the end of each calendar year, are calculated based on common share total return, as defined, and are included in general and administrative expenses in OPI’s condensed consolidated statements of income (loss). In calculating net income (loss) in accordance with GAAP, OPI recognizes estimated business management incentive fee expense, if any, in the first, second and third quarters. Although OPI recognizes this expense, if any, in the first, second and third quarters for purposes of calculating net income (loss), OPI does not include such expense in the calculation of Normalized FFO available for common shareholders until the fourth quarter, when the amount of the business management incentive fee expense for the calendar year, if any, is determined. No estimated business management incentive fees were included in net income (loss) for the three and nine months ended September 30, 2019. Net income (loss) for the three and nine months ended September 30, 2018 includes $16,236 and $16,973, respectively, of estimated business management incentive fee expense.
   
   
4. Gain on sale of real estate for the nine months ended September 30, 2019 includes an $11,463 gain on the sale of two properties during the three months ended September 30, 2019 and a $22,075 gain on the sale of one property during the six months ended June 30, 2019. During the nine months ended September 30, 2018, OPI recorded a $17,329 gain on the sale of one property.
   
   
5. Gain (loss) on equity securities, net represents a realized loss for the nine months ended September 30, 2019 for the sale of OPI’s 2.8 million shares of RMR Inc. common stock on July 1, 2019, and unrealized gains in the three and nine months ended September 30, 2018 to adjust the carrying value of OPI’s former investment in RMR Inc. common stock to its fair value as of the end of the period.
   
   
6. Loss on early extinguishment of debt for the three and nine months ended September 30, 2019 includes write offs of the unamortized portion of certain discounts and issuance costs resulting from the early repayment of debt.
   
   
7. Income from discontinued operations includes operating results related to OPI’s former equity method investment in SIR that OPI sold in October 2018.
   
   
8. OPI calculates FFO available for common shareholders and Normalized FFO available for common shareholders as shown above.

Contacts

Olivia Snyder, Manager, Investor Relations

(617) 219-1410

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