- Secured Financing: Completed $1.3 billion in secured financing in the first half of the year.
- Debt Reduction: Reduced total debt by nearly $300 million through a private debt exchange in June.
- Portfolio: 151 properties totaling 20 million square feet with a weighted average remaining lease term of over 6.5 years.
- Annualized Revenue: $483 million.
- Same Property Occupancy: 89.9%.
- Encumbered Assets: 62 properties, 10 million square feet, $286 million annualized revenue, 94% leased, 8-year weighted average lease term.
- Unencumbered Assets: 89 properties, 10 million square feet, $197 million annualized revenue, 73% leased, 4.6-year weighted average lease term.
- Leasing Activity: Executed 208,000 square feet of new and renewal leasing in Q2 with a weighted average lease term of 4 years.
- Known Vacates: 1.8 million square feet expiring in the second half of 2024 and 2 million square feet in 2025, accounting for $70 million of annualized revenue.
- Dispositions: 12 unencumbered properties totaling 1.4 million square feet under agreement to sell for $93.5 million.
- Normalized FFO: $33.2 million or $0.68 per share for Q2, exceeding guidance by $0.04 per share.
- Same Property Cash Basis NOI: Decreased 7.7% compared to Q2 2023.
- Interest Expense: Estimated quarterly run rate of $43 million.
- Capital Expenditures: $30.1 million on recurring capital and $3.9 million on redevelopment capital in Q2.
- Impairment Charge: $132 million to write down the carrying value of 13 properties.
- Total Liquidity: $160 million as of June 30.
- Outstanding Debt: $2.3 billion with a weighted average interest rate of 7.1% and a weighted average maturity of 5.2 years.
Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- OPI completed $1.3 billion in secured financing in the first half of the year, reducing total debt by nearly $300 million.
- The portfolio consists of 151 properties totaling 20 million square feet with a weighted average remaining lease term of over 6.5 years.
- Over 60% of OPI's revenues come from investment-grade tenants or subsidiaries.
- Executed 208,000 square feet of new and renewal leasing in Q2, with renewals driving almost 90% of leasing activity.
- Renewed a 554,000 square foot lease with an investment-grade single tenant user, extending the lease term to 2037.
Negative Points
- Upcoming lease expirations in 2024 and 2025 are heavily concentrated and will negatively impact results in the coming quarters.
- Washington DC, where OPI has its largest concentration, has a market vacancy rate of over 22%, creating additional volatility.
- 1.7 million square feet expiring in 2024 will not renew, and an additional 1.3 million square feet is expected to vacate in 2025.
- Tenant vacancies have driven a year-over-year decrease in same property cash basis NOI by 7.7%.
- Challenges in the office market have negatively impacted property valuations and financing availability, complicating property dispositions.
Q & A Highlights
Q: As you move through the second half of 2024 and close on these dispositions and receive those proceeds, is there anything that precludes you from taking those proceeds and immediately starting to buy back 2025 notes at the meaningful discount that they currently trade at?
A: Brian Donley, Chief Financial Officer, Treasurer: That's something we're evaluating here now. We're looking at all different options to be able to pull in those notes whether it be via cash or exchanges or other options as we talk with our advisor. That's our immediate focus. It's a large amount coming due in February and we're going to do everything we can to sort of get this in short order.
Q: Are you seeing any traction from owners of your 2025 paper to possibly take you up on the debt exchange sometime in the next couple of months?
A: Brian Donley, Chief Financial Officer, Treasurer: Yes, that too is something we're looking at very closely and we're having discussions with various groups. But that is something that is definitely on the table as we try to utilize the maximum amount of notes that we had offered, the 610, which I think is around $43 million left of capacity.
Q: Can you share with us who the tenant was who renewed the 554,000 square feet?
A: Yael Duffy, President, Chief Operating Officer: Yes, it was actually Bank of America. They're one of our top five tenants.
Q: Are you seeing any early shoots of improvement in demand in the DC market? Do you see any movement that federal employees will get back to that market sometime in the next year or two?
A: Yael Duffy, President, Chief Operating Officer: Based on what we're seeing at our own properties, especially the non-specialized portion where it's mostly office, we are not seeing employees back at work of even 50% capacity today.
Q: Can you talk about where you expect NOI to trend on an annualized basis for the pool of assets assuming the 2 million square feet that you guys referenced actually vacates?
A: Brian Donley, Chief Financial Officer, Treasurer: The properties that are held for sale, the 15 with about 2 million square feet, they were 53% occupied. As of quarter end, they generated about $20 million of annualized NOI for the trailing 4 quarters, only $4 million in Q2. We're only projecting $2 million of revenue for Q3 and those properties will start generating losses, which is part of why we're disposing of them.
Q: How much of the 2.2 million square foot pipeline relates to properties currently unencumbered?
A: Yael Duffy, President, Chief Operating Officer: It's about half unencumbered.
Q: Given the commentary on asset sales, are any of the properties that you're considering selling to reduce debt or maybe address the $499 million, are any of those encumbered properties at all?
A: Yael Duffy, President, Chief Operating Officer: All of the properties we're looking to sell or are under agreement are all unencumbered.
A: Brian Donley, Chief Financial Officer, Treasurer: Yes. And as far as whether or not we decide to pursue sales on anything that's part of a debt transaction, yes, there are factors that could impact such as if we were to sell something out of the credit agreement pool of properties, that could affect our availability of the total revolver capacity. So again, unencumbered assets are where we're focused.
Q: Who are the buyers that you're talking to? Are they looking for distressed properties, hoping for a market turnaround, or planning on doing office to residential conversions?
A: Yael Duffy, President, Chief Operating Officer: It's a mix. We have some owner users who pay a premium, some value add investors, and some potential developers. So it does appear to be a mixed bag of buyers.
Q: What are the broker conversations suggesting the life science development could be worth if you've had any conversations on those assets as well?
A: Yael Duffy, President, Chief Operating Officer: Given that those are life science properties, the valuation of what we've put them into the debt agreements is still holding true once stabilized. So it's very much apples and oranges given one is office and one is lab.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
