Office Properties Income Trust (OPI) is a real estate investment trust (REIT) that owns and operates office properties across the United States. The company has faced significant challenges in recent years as the office sector has struggled with declining occupancy rates and tenant demand.
Business Overview OPI's roots trace back to 1997 when it was founded as Select Income REIT. The company began operations in 1998, initially focusing on owning and operating commercial properties, primarily office buildings and industrial properties. In 2009, Select Income REIT merged with Commonwealth REIT to form Office Properties Income Trust, expanding its portfolio to include additional office and industrial properties across the United States. Over the following years, OPI continued to grow its portfolio through strategic acquisitions and property developments. A significant milestone for the company was its listing on the Nasdaq stock exchange in 2015, which provided greater access to capital markets to support its growth initiatives. During this period, OPI also worked to diversify its tenant base, reducing its concentration in government and government-related tenants.
OPI has faced significant headwinds in recent years, as shifts in office space utilization, including increased remote work arrangements and tenant consolidation, have adversely impacted demand for the company's properties. As of September 30, 2024, OPI's total portfolio occupancy stood at 82.8%, with same-property occupancy at 89.3%. Looking ahead, leases representing 4.4% and 9.8% of annualized rental income are scheduled to expire in 2024 and 2025, respectively, and the company may struggle to find replacement tenants.
OPI owns 145 wholly owned properties totaling 19.54 million rentable square feet, with a weighted average remaining lease term of approximately 7 years. The portfolio is diversified by industry and geography, with nearly 60% of revenue coming from investment grade or equivalent tenants. OPI faces challenges from shifts in office space utilization, including increased remote work and tenant consolidation. This has disproportionately impacted OPI's unencumbered properties, where the majority of known vacates in 2024-2025 are concentrated. OPI is focused on retaining tenants and mitigating the impact through strategic property dispositions.
Financial Performance For the third quarter of 2024, OPI reported normalized funds from operations (FFO) of $22.1 million, or $0.43 per share, missing the consensus estimate of $0.47 per share. The company's same-property cash basis net operating income (NOI) declined 4% year-over-year, driven by lower occupancy and rental rates. OPI ended the quarter with $146.45 million in total liquidity, comprised of $22.36 million in cash and $125 million in available borrowing capacity under its revolving credit facility.
Looking ahead, OPI provided guidance for the fourth quarter of 2024, expecting normalized FFO to be between $0.33 and $0.35 per share. The company also expects same-property cash basis NOI to decline 2-4% compared to the prior-year period, citing continued tenant vacancies and elevated free rent. These projections underscore the challenging environment facing OPI and the broader office sector.
For the most recent fiscal year, OPI reported revenue of $533.55 million, net income of -$69.42 million, operating cash flow of $141.73 million, and free cash flow of $141.73 million. In the most recent quarter, revenue was $120.62 million, net income was -$58.41 million, operating cash flow was -$17.06 million, and free cash flow was $39.95 million. Year-over-year revenue growth was -9.6%, primarily due to property dispositions and higher vacancy rates at certain properties.
OPI's 145 wholly owned properties are located in 30 states and the District of Columbia. Properties located in Virginia, California, District of Columbia, Illinois and Georgia were responsible for approximately 12.4%, 10.6%, 10.6%, 9.7% and 9.7% of OPI's annualized rental income as of September 30, 2024, respectively.
For Q3 2024, OPI reported normalized FFO of $0.43 per share, which was $0.03 below the low end of their guidance range. The primary drivers for the Q3 2024 FFO miss were a $0.02 miss in rental income due to higher reserves for uncollectible rents and a $0.01 miss from higher operating expenses. The decrease in FFO from Q3 2024 to Q4 2024 is primarily driven by lower NOI and increased interest expense. OPI's full year 2024 capital expenditure guidance is expected to be around $110 million, comprising $20 million in building capital and $90 million in leasing capital.
Liquidity and Debt Maturities OPI's balance sheet has been a significant area of focus for investors. As of September 30, 2024, the company had $2.3 billion in total outstanding debt, with a weighted average interest rate of 7.1% and a weighted average maturity of 4.9 years. The company's largest near-term maturity is $456.7 million of senior unsecured notes due in February 2025.
Given the limited financing alternatives available to refinance this debt, the illiquid nature of OPI's real estate assets, and its ability to incur additional debt while maintaining compliance with existing covenants, the company has concluded that there is substantial doubt about its ability to continue as a going concern. OPI is currently in negotiations with certain holders of the 2025 notes regarding a potential debt exchange transaction, but there is no assurance that an agreement will be reached.
OPI's debt-to-equity ratio stands at 1.82, with $22.36 million in cash and $125 million available under a $325 million secured revolving credit facility that matures in January 2027. The company's current ratio and quick ratio are both 1.47.
Property Dispositions and Leasing Activity In an effort to improve liquidity, OPI has been actively marketing properties for sale. During the third quarter, the company sold six properties for $46 million and has an additional 17 properties under agreement for sale at an aggregate price of $119 million. However, the company has acknowledged that selling properties in the current market environment remains challenging, as valuations for office assets remain depressed and financing is not readily available.
On the leasing front, OPI executed 14 leases totaling 987,000 square feet in the third quarter, with a weighted average lease term of 10.2 years. The majority of this activity was driven by renewals, including a 554,000 square foot lease with Bank of America and a 235,000 square foot lease with AT&T. While the company has highlighted increased leasing activity at its multi-tenant properties, it continues to face headwinds at its single-tenant buildings where tenants are vacating.
Risks and Outlook OPI's future performance is heavily dependent on its ability to navigate the challenges facing the office sector, address its near-term debt maturities, and maintain occupancy and rental rates at its properties. The company's substantial doubt about its ability to continue as a going concern, if unresolved, could result in a reorganization through bankruptcy.
Additionally, OPI faces risks related to high inflation, rising interest rates, economic recession, and continued shifts in office space utilization. The company's geographic concentration in certain markets, such as the Washington, D.C. area, also exposes it to regional economic conditions.
While OPI's management team is actively pursuing strategic initiatives to improve the company's liquidity and financial position, the outlook for the office REIT remains uncertain. Investors should closely monitor the company's progress in addressing its near-term debt maturities and its ability to maintain occupancy and rental rates in the face of an increasingly challenging market environment.