Executive Summary / Key Takeaways

• Office Properties Income Trust (OPI) faces a critical juncture, marked by a "going concern" warning due to significant debt maturities and a challenging office market.
• Despite a 6.4% roll-up in Q2 2025 rental rates on new and renewal leases, overall rental income and occupancy continue to decline, reflecting persistent headwinds from remote work and tenant consolidation.
• The company is aggressively pursuing asset sales and debt exchanges, having reduced 2025 maturities and suspended its dividend to preserve cash.
• However, substantial debt obligations, particularly $277.4 million due in 2026, coupled with limited financing alternatives and projected cash burn, underscore the urgency of its strategic initiatives.
• OPI's high-credit government tenant base offers a defensive moat, but its concentration in the struggling office sector and older properties limits growth and exacerbates competitive pressures.

A REIT Under Pressure: Setting the Scene for OPI

Office Properties Income Trust (OPI) operates as a Real Estate Investment Trust (REIT) primarily focused on owning and leasing office properties to high-credit-quality tenants across the United States. As of June 30, 2025, its portfolio comprises 125 properties totaling approximately 17.3 million rentable square feet, diversified across 29 states and the District of Columbia. A significant portion of OPI's annualized revenue, approximately 59%, is derived from investment-grade rated tenants or their subsidiaries, with the U.S. government standing as its largest tenant, contributing 17.1% of annualized revenue.

The broader office sector continues to grapple with profound structural shifts, including the widespread adoption of remote work arrangements and tenants actively consolidating their real estate footprints. This has led to declining demand for office space, particularly impacting markets where OPI has a significant concentration, such as Washington, D.C., where vacancy rates exceed 23%. These market dynamics translate directly into declining rents and escalating costs for re-leasing vacant spaces, creating a challenging operating environment for OPI.

In response to these formidable headwinds, OPI has embarked on a multi-pronged strategy centered on aggressive debt management, strategic asset dispositions, and a focused approach to leasing. The company aims to stabilize its financial position and preserve liquidity amidst a period of significant uncertainty. Its foundational strength lies in its high-credit tenant base, which historically provides stable cash flows, and its management by The RMR Group (RMR), which offers operational expertise.

The Competitive Arena: OPI's Position in a Shifting Landscape

OPI operates in a competitive landscape alongside other publicly traded REITs specializing in single-tenant net lease properties and office spaces. Direct competitors include diversified net lease giants like Realty Income Corporation (O) and W. P. Carey Inc. (WPC), as well as more balanced players like Lexington Realty Trust (LXP). OPI's strategic positioning is distinct due to its heavy weighting towards office and government-leased properties, where it derives a substantial portion of its revenue from single tenants. This focus provides a qualitatively higher tenant credit quality and longer lease terms, often ranging from 10 to 20 years, offering a degree of stability that can be particularly valuable in volatile markets.

However, this specialization also presents vulnerabilities. While Realty Income and W. P. Carey benefit from diversified portfolios spanning retail, industrial, and other sectors, OPI's concentration in the office segment exposes it more directly to the adverse impacts of remote work trends. For instance, Realty Income typically exhibits stronger revenue growth, with a 5-year compound annual growth rate (CAGR) of 5-7%, compared to OPI's 3-5% in recent periods. Similarly, W. P. Carey's industrial focus provides better exposure to e-commerce growth, leading to a 4-6% revenue CAGR. OPI's gross margins, around 85%, are slightly lower than Realty Income's (around 90%), reflecting the latter's superior efficiency and scale.

OPI does not explicitly highlight proprietary technological differentiation in its operations. Instead, its competitive advantages stem from its operational execution and tenant relationships, particularly through the management expertise provided by The RMR Group. This management structure is cited for providing "qualitatively faster operational resilience," which can aid in efficient lease renewals and property management. However, this operational strength does not fully offset the broader market shifts impacting the office sector, nor does it provide the same growth avenues as competitors leveraging industrial or retail assets. The "so what" for investors is that OPI's defensive niche in stable government tenants provides a buffer during economic downturns but may limit its ability to capture aggressive growth opportunities compared to more diversified and agile peers.

A History of Growth, A Present of Contraction

OPI was established in June 2009 and experienced a period of significant expansion through 2019, marked by substantial increases in total assets and revenue, driven by strategic acquisitions. However, the post-2019 environment, characterized by evolving office space utilization and macroeconomic headwinds, fundamentally altered its trajectory. The company's financial performance has materially declined, with annualized revenue as of June 30, 2025, falling to $398 million, down nearly 18% compared to a year prior.

In the second quarter of 2025, OPI reported rental income of $114.5 million, a 7.4% decrease from Q2 2024. For the first six months of 2025, rental income was $228.1 million, down 13.3% year-over-year. This decline was primarily driven by increased vacancies and lower rents from lease renewals at comparable properties, as well as the impact of property dispositions. Net Operating Income (NOI) also saw a significant decline, falling 13.9% in Q2 2025 to $65.5 million and 22.8% for the first six months to $126.9 million.

Despite these challenges, OPI has demonstrated some operational resilience in leasing. In Q2 2025, the company executed 15 leases totaling 416,000 square feet, achieving a weighted average rental rate increase of 6.4% over prior rates for the same space. Renewals accounted for two-thirds of this activity, securing over $7 million in annualized revenue. However, concessions and capital commitments remain substantial, with tenant leasing costs and concession commitments averaging $19.21 per rentable square foot for all Q2 2025 leasing activity. Overall portfolio occupancy stood at 81.2% as of June 30, 2025, down from 83.5% a year prior, while same-property occupancy declined from 91.4% to 85.2% over the same period.

The Liquidity Tightrope: Debt, Dispositions, and Dividend Suspension

OPI faces a severe liquidity crunch, prompting a "substantial doubt about its ability to continue as a going concern" warning. As of July 30, 2025, the company's total available liquidity was a mere $90.1 million in cash. This is set against significant near-term obligations, including $72.4 million in outstanding lease obligations and principal debt repayments of $13.0 million in the remainder of 2025, followed by a substantial $277.4 million due in 2026.

The company has been actively engaged in a series of strategic maneuvers to address its debt maturities. In 2024, OPI completed $1.8 billion in secured financings and undertook significant debt exchanges, including exchanging $488 million of new notes for $378 million of its 2025 senior unsecured notes. This was complemented by aggressive asset dispositions, with 24 properties sold for nearly $200 million in 2024. In January 2025, the remaining $171.6 million of 2025 unsecured notes were redeemed using proceeds from asset sales and cash on hand. Further debt management included a private debt exchange in March 2025, where $21.0 million of outstanding unsecured notes were exchanged for $14.4 million of new 8.00% senior priority guaranteed notes due 2030.

Despite these efforts, OPI's $325.0 million secured revolving credit facility was fully drawn as of June 30, 2025, and July 29, 2025, indicating limited immediate borrowing capacity. The company's ability to incur additional debt is constrained by narrow margins under its financial covenants. To preserve cash, OPI's Board of Trustees suspended the quarterly common share dividend in July 2025, a move expected to retain approximately $3 million annually. The company also utilized an At-The-Market (ATM) program, selling 3.93 million common shares for $961,000 in net proceeds during Q2 2025, though no further sales occurred after June 30, 2025.

Outlook and the Path Forward: Navigating a Precarious Future

OPI's outlook reflects the ongoing challenges and the critical need for successful strategic execution. For the third quarter of 2025, management projects Normalized FFO to be between $0.07 and $0.09 per share. This sequential decrease from Q2 is attributed to lower NOI, higher operating expenses, and a seasonally weaker performance expected from its hotel at 20 Mass Ave in Washington, D.C. Recurring General & Administrative (G&A) expenses are projected at approximately $5 million for Q3, with an estimated quarterly interest expense run rate of $52 million.

Management anticipates same-property cash basis NOI to decrease by 7% to 9% in Q3 2025 compared to Q3 2024, primarily driven by tenant vacancies. For the second half of 2025, capital expenditures are projected at approximately $43 million, comprising $10 million for building capital and $33 million for leasing capital. Critically, OPI is projecting cash from operations to be a use of $45 million to $55 million during the balance of 2025, including capital expenditures, underscoring the ongoing liquidity strain.

The company continues its disposition strategy, with three properties currently under agreement to sell for $28.9 million. Two of these properties are expected to close in September 2025 for $10.7 million, with the third anticipated to close in 2027. This strategy aims to mitigate occupancy risk and reduce carrying costs, although management acknowledges that declining property valuations and a limited buyer pool make dispositions challenging. The company is also monitoring the U.S. government's efficiency measures, which could impact its significant GSA tenant base, though many GSA leases are believed to be for mission-critical agencies.

Key Risks to the Investment Thesis

The most significant risk to OPI's investment thesis remains the "substantial doubt about its ability to continue as a going concern." This stems directly from its significant debt maturities, particularly the $277.4 million due in 2026, and the limited alternatives available for refinancing. Should the company fail to consummate transactions to address this maturing debt, its Board of Trustees may consider a reorganization in a bankruptcy court.

The persistent headwinds in the office sector, including increased remote work and tenant consolidation, continue to pressure occupancy rates and rental income. OPI's portfolio, with its concentration in older properties and the Washington, D.C. market, faces heightened competition and declining demand, making re-leasing efforts difficult and costly. Furthermore, a substantial portion of upcoming lease expirations, particularly for single-tenant properties, are expected not to renew, leading to further vacancies and revenue declines.

The challenging market for office property dispositions adds another layer of risk. Declining valuations and a limited buyer pool can lengthen transaction timelines and impact sales prices, potentially hindering OPI's ability to generate sufficient proceeds to meet its debt obligations. While OPI's high-credit tenant base provides some stability, the overall market and economic conditions, including higher interest rates and inflationary pressures, could adversely affect its tenants' financial health and their willingness to renew leases or pay rent.

Conclusion

Office Properties Income Trust is at a pivotal juncture, grappling with the profound structural shifts in the office real estate market and a pressing debt maturity schedule. The company's core investment thesis, once anchored by stable cash flows from high-credit government tenants, is now being tested by declining occupancy, increasing operational costs, and a constrained capital environment. While OPI has demonstrated proactive management through strategic debt exchanges, asset dispositions, and a necessary dividend suspension, these actions are defensive measures aimed at preserving liquidity and addressing immediate financial pressures.

The path forward for OPI hinges on its ability to successfully execute its remaining disposition pipeline and secure further debt refinancing or exchanges, particularly for the substantial 2026 maturities. Without a unique technological moat to differentiate its offerings in a competitive and evolving market, OPI's operational resilience, driven by its RMR management, must be maximized to retain its existing high-quality tenants and attract new ones to its multi-tenant properties. Investors must weigh the inherent stability offered by its government-backed leases against the significant "going concern" risk and the ongoing challenges of a fundamentally altered office landscape. The coming quarters will be critical in determining if OPI can outrun the decay impacting its sector and secure a viable long-term future.