Office Properties me Trust(OPI) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Normalized FFO for Q3 2022 was $53.8 million or$ 1.11 per share, which was $0.01 below the low end of guidance due to timing of property dispositions [24] - Same property cash basis NOI increased by 30 basis points compared to Q3 2021, reaching the high end of guidance [25] - The normalized FFO payout ratio was 50%, with a rolling 4-quarter CAD payout ratio of 67% [24] Business Line Data and Key Metrics Changes - The company completed 606,000 square feet of new and renewal leasing, with a 21.6% weighted average roll-up in rent and a 7.2-year weighted average lease term [12] - Year-to-date, the company completed over 1.8 million square feet of leasing with an 11% roll-up in rent [13] - Portfolio occupancy improved to 90.7%, a 130 basis points increase from Q2 and a 170 basis points increase from the prior year [10] Market Data and Key Metrics Changes - Overall U.S. leasing activity is trending at just over 70% of pre-pandemic levels, with gateway markets lagging behind secondary growth markets [13] - Investor interest remains mixed due to higher inflation and interest rates, leading to a thinning pool of buyers [11] Company Strategy and Development Direction - The company plans to continue capital recycling efforts into 2023, focusing on leasing, operational efficiencies, and completion of existing development projects [11][22] - The leasing pipeline remains strong with approximately 3.2 million square feet of active prospects [20] - The company is strategically allocating capital to improve common areas and expand the amenity base, resulting in increased occupancy [15] Management's Comments on Operating Environment and Future Outlook - Management noted that aggressive monetary policy and inflation are weighing on market fundamentals, which will continue to be a factor in 2023 [22] - The company remains cautious about the overall economic environment but is pleased with its portfolio position, which includes 63% of rental income from investment-grade tenants [23] Other Important Information - The company sold 10 properties containing 1.3 million square feet for$ 118 million at a weighted average cap rate of approximately 6.2% [10] - The balance sheet is well positioned with $2.4 billion of outstanding debt at a weighted average interest rate below 4% [27] Q&A Session Summary Question: Confidence in closing on the 5 properties discussed - Management expressed confidence in closing the properties as they are in advanced stages under PSA or LOI [33] Question: Outlook for property dispositions in 2023 - Management indicated a fluid list of assets for potential dispositions in 2023, with a focus on being disciplined in the market [34] Question: Target leverage ratio and capital deployment in 2023 - Management aims to reduce leverage to between 6x and 6.5x, while remaining investment-grade rated [36] Question: Sustainability of the dividend given market perceptions - Management remains comfortable with the current dividend coverage, citing low payout ratios and external factors affecting the office market [40] Question: Expected cash and GAAP NOI from upcoming developments - Management projected cash-on-cash stabilized returns of 8% to 10% for 20 Mass Ave and 10% to 12% for Seattle [42] Question: Plans for debt maturities and potential pay down with dispositions - Management plans to use cash on hand and the line of credit to pay off maturing mortgages, with no immediate plans to accelerate debt pay down [47]