Office Properties me Trust(OPI) - 2021 Q2 - Quarterly Report

PART I. Financial Information Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, detailing balance sheets, income, and cash flows, with key insights into asset changes and net loss Condensed Consolidated Balance Sheets Total assets increased to $4.21 billion as of June 30, 2021, driven by real estate, while liabilities grew and equity decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total real estate properties, net | $3,392,829 | $3,070,229 | | Total assets | $4,211,213 | $3,946,436 | | Unsecured revolving credit facility | $385,000 | $— | | Senior unsecured notes, net | $2,032,764 | $2,033,242 | | Total liabilities | $2,682,663 | $2,337,044 | | Total shareholders' equity | $1,528,550 | $1,609,392 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a net loss of $66.7 million for Q2 2021, primarily due to a $48.2 million real estate impairment and debt extinguishment losses Quarterly Performance Comparison (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Rental Income | $137,099 | $145,603 | | Loss on impairment of real estate | $48,197 | $— | | Net Income (Loss) | $(66,697) | $1,299 | | Net Income (Loss) per Share | $(1.38) | $0.03 | Six-Month Performance Comparison (in thousands, except per share data) | Metric | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Rental Income | $281,623 | $295,488 | | Gain on sale of real estate | $54,118 | $10,822 | | Net Income (Loss) | $(28,837) | $12,139 | | Net Income (Loss) per Share | $(0.60) | $0.25 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities was $117.4 million for H1 2021, with $400.5 million used in investing for acquisitions, and $246.3 million provided by financing Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $117,376 | $111,190 | | Net cash (used in) provided by investing activities | $(400,467) | $40,934 | | Net cash provided by (used in) financing activities | $246,317 | $(222,719) | | Decrease in cash, cash equivalents and restricted cash | $(36,774) | $(70,595) | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies, property acquisitions and sales, debt financing activities, and the U.S. government's tenant contribution - During the first six months of 2021, OPI acquired two properties for an aggregate purchase price of $548.9 million and sold two properties and a warehouse facility for an aggregate sales price of $169.8 million[26][29] - The U.S. government is the largest tenant, representing 22.0% of annualized rental income as of June 30, 2021, down from 25.2% a year prior[41] - In May 2021, the company issued $300 million of 2.650% senior notes due 2026. In June 2021, it redeemed all $310 million of its 5.875% senior notes due 2046, resulting in a loss on early extinguishment of debt of $8.6 million[46][47] - The company declared and paid two quarterly distributions of $0.55 per common share during the first six months of 2021, totaling $53.15 million[57] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, property operations, and financial condition, highlighting portfolio occupancy, limited COVID-19 impact, capital recycling, and non-GAAP measures Overview As of June 30, 2021, OPI owned 181 properties totaling 24.1 million square feet, with the U.S. government as the largest tenant and limited COVID-19 impact - As of June 30, 2021, OPI's portfolio comprised 181 wholly-owned properties with approximately 24.1 million rentable square feet[71] - The impact of the COVID-19 pandemic has been limited. As of July 27, 2021, the company granted temporary rent deferrals totaling $2,483 thousand to 18 tenants, and has collected $2,259 thousand (91.0%) of this amount[72] Property Operations Portfolio occupancy was 89.5% as of June 30, 2021, with 1.12 million square feet leased in H1 2021 at an 11.2% rental rate increase, and 54.1% of income from investment-grade tenants Occupancy Data (All Properties) | Metric | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Total properties | 181 | 184 | | Total rentable square feet (thousands) | 24,091 | 24,909 | | Percent leased | 89.5% | 91.7% | Leasing Activity - Six Months Ended June 30, 2021 | Leasing Type | Rentable Square Feet (thousands) | Weighted Avg. Rental Rate Change | Weighted Avg. Lease Term (Years) | | :--- | :--- | :--- | :--- | | New Leases | 302 | +23.3% | 24.3 | | Renewals | 821 | +5.3% | 6.0 | | Total | 1,123 | +11.2% | 10.9 | - As of June 30, 2021, 54.1% of annualized rental income came from investment-grade rated tenants[94] Results of Operations Q2 2021 saw a 5.8% decrease in rental income and a net loss of $66.7 million, primarily due to a $48.2 million impairment charge and an 80.0% rise in G&A expenses Consolidated Results - Three Months Ended June 30 (in thousands) | Line Item | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Rental income | $137,099 | $145,603 | $(8,504) | (5.8%) | | Net operating income (NOI) | $90,979 | $98,834 | $(7,855) | (7.9%) | | Loss on impairment of real estate | $48,197 | $— | $48,197 | n/m | | General and administrative | $12,970 | $7,204 | $5,766 | 80.0% | | Net income (loss) | $(66,697) | $1,299 | $(67,996) | n/m | - The decrease in rental income for Q2 2021 was primarily due to property dispositions ($4.7 million) and properties undergoing redevelopment ($4.2 million)[110] - The increase in G&A expenses for Q2 2021 was mainly due to recording $5.9 million of estimated business management incentive fees, which were not recorded in the 2020 period[116] Non-GAAP Financial Measures The company uses non-GAAP measures like FFO and Normalized FFO, with Q2 2021 Normalized FFO at $1.15 per share, down from $1.40 per share in Q2 2020 due to lower NOI FFO and Normalized FFO Reconciliation - Q2 (in thousands, except per share) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Net income (loss) | $(66,697) | $1,299 | | FFO | $37,680 | $66,640 | | Normalized FFO | $55,385 | $67,197 | | FFO per common share | $0.78 | $1.39 | | Normalized FFO per common share | $1.15 | $1.40 | FFO and Normalized FFO Reconciliation - H1 (in thousands, except per share) | Metric | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Net income (loss) | $(28,837) | $12,139 | | FFO | $94,289 | $130,908 | | Normalized FFO | $117,194 | $134,747 | | FFO per common share | $1.96 | $2.72 | | Normalized FFO per common share | $2.43 | $2.80 | Liquidity and Capital Resources The company's liquidity relies on operating cash flow, property sales, and its $750 million revolving credit facility, with $365 million available and manageable debt maturities - The company maintains a $750 million revolving credit facility. As of July 28, 2021, $380 million was outstanding, with $370 million available for borrowing[150][151] - The company has estimated unspent leasing-related obligations of $113.1 million, with $67.3 million expected to be spent over the next 12 months[157] - A redevelopment project in Washington, D.C. is estimated to cost $200 million, with completion expected in Q1 2023. The project is 54% pre-leased[158] - The company believes it was in compliance with all debt covenants as of June 30, 2021[164] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with $2.16 billion in fixed-rate debt and $385 million in floating-rate debt, and is monitoring the LIBOR phase-out - As of June 30, 2021, the company had $2.16 billion of fixed-rate debt. A hypothetical 1% increase in interest rates would decrease the fair value of this debt by approximately $76.9 million[169][171] - The company had $385 million of floating-rate debt outstanding. A 1% increase in interest rates would increase annual interest expense by $3.85 million, impacting annual EPS by approximately $0.08[175][177] - The company is monitoring the planned phase-out of LIBOR, which is the benchmark for its revolving credit facility, and expects the agreement to be amended to provide for a comparable replacement rate[181] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[182] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[183] PART II. Other Information Risk Factors There have been no material changes to the risk factors from those previously disclosed in the 2020 Annual Report on Form 10-K - There have been no material changes to the risk factors from those previously disclosed in the 2020 Annual Report[199] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company purchased 12,009 common shares at an average price of $29.33 per share to satisfy tax withholding obligations for share awards Issuer Purchases of Equity Securities - June 2021 | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 2021 | 12,009 | $29.33 | Exhibits This section lists the exhibits filed with the Form 10-Q, including supplemental indentures for new debt, officer certifications, and XBRL data files - Key exhibits filed include the Third Supplemental Indenture for the 2.650% Senior Notes due 2026, Rule 13a-14(a) certifications, and the Section 1350 certification[202][204]