Earnings call transcript: Office Properties Income Trust misses Q1 2025 forecasts

Office Properties Income Trust (OPI) reported its first-quarter 2025 earnings, revealing a larger-than-expected loss and a decline in revenue. The company’s earnings per share (EPS) came in at -$0.66, missing the forecasted -$0.54. Revenue was reported at $113.62 million, slightly below the expected $114.79 million. Following the release, OPI’s stock fell by 12.05%, closing at $0.36, a significant drop from its last close of $0.41. According to InvestingPro analysis, the company is currently trading at a low Price/Book multiple of 0.02x, suggesting potential undervaluation despite its challenges. For deeper insights, investors can access comprehensive valuation metrics and 14 additional ProTips through InvestingPro’s detailed analysis.

Key Takeaways

• OPI’s EPS missed expectations by $0.12, indicating financial challenges.
• Revenue fell short of forecasts, reflecting a 19% annual decline.
• The stock price dropped over 12% in reaction to the earnings report.
• Interest expenses increased significantly by 50% year-over-year.
• The company is exploring options to manage upcoming debt maturities.

Company Performance

Office Properties Income Trust faced a challenging first quarter in 2025, with financial results indicating significant pressure from the ongoing work-from-home trends affecting the office sector. The annualized revenue declined by 19% to $405 million, and interest expenses surged by 50% to $53.4 million compared to the previous year. These factors contributed to the company’s underperformance against market expectations. InvestingPro data shows the company maintains a high current ratio of 3.88x, indicating strong short-term liquidity despite operational challenges. The company’s financial health score currently stands at WEAK, based on InvestingPro’s comprehensive analysis of multiple financial indicators.

Financial Highlights

• Revenue: $113.62 million, down from $114.79 million forecasted
• Earnings per share: -$0.66, missing the forecast of -$0.54
• Normalized FFO: $4.4 million or $0.06 per share
• Interest expense: $53.4 million, a 50% increase year-over-year

Earnings vs. Forecast

OPI’s actual earnings per share of -$0.66 fell short of the forecasted -$0.54, marking a $0.12 miss. The revenue also missed expectations, coming in at $113.62 million compared to the anticipated $114.79 million. This underperformance is significant given the company’s ongoing financial challenges and the broader market headwinds.

Market Reaction

Following the earnings release, OPI’s stock price declined by 12.05%, closing at $0.36. This drop reflects investor concerns over the company’s financial health and its ability to navigate the challenging office real estate market. The stock’s performance is now closer to its 52-week low of $0.315, highlighting the market’s cautious outlook. InvestingPro data reveals the stock has experienced a significant decline of 78.45% over the past year, with a beta of 1.55 indicating higher volatility than the broader market. Despite these challenges, the company maintains a notable dividend yield of 9.76%, though investors should note the dividend has seen a 96% reduction in the last twelve months.

Outlook & Guidance

Looking ahead, OPI projects a normalized FFO of $0.09 to $0.11 per share for the second quarter of 2025. The company anticipates a 10-12% decrease in same-property cash basis net operating income. With $280 million in debt principal payments due in 2026 and limited liquidity of $73 million, OPI is actively exploring options to address these financial commitments. For a comprehensive understanding of OPI’s financial position and future prospects, investors can access the detailed Pro Research Report available exclusively on InvestingPro, which includes expert analysis of the company’s debt structure, valuation metrics, and growth potential among 1,400+ top stocks.

Executive Commentary

President and COO Yael Duffy stated, "We are exploring all options to address our financial commitments while simultaneously operating and leasing our properties." She acknowledged the ongoing challenges in the office sector, noting, "The office sector continues to face headwinds associated with the impacts of work from home as well as macroeconomic and political uncertainty." CFO Brian Donnelly added, "Given our liquidity position, financial covenant constraints under our debt agreements and debt principal repayments coming due in 2026, we continue to evaluate options to address these maturities with our financial advisor."

Risks and Challenges

• High vacancy rates in key markets, such as Washington D.C., with over 23% vacancy.
• Increased competition and declining asking rents in the office sector.
• Significant upcoming debt maturities in 2026, necessitating strategic financial planning.
• The impact of macroeconomic and political uncertainty on leasing demand.
• Limited liquidity, constraining the company’s ability to maneuver financially.

Q&A

Due to the lack of a specific Q&A session transcript, no detailed analyst questions or company responses are available for this quarter.

Full transcript - Office Properties Income Trust (OPI) Q1 2025:

Conference Operator: Good morning and welcome to the Office Properties Income Trust First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Kevin Barry, Senior Director of Investor Relations, Office Properties Income Trust: Good morning and thank you for joining us today. With me on the call are OPI’s President and Chief Operating Officer, Yael Duffy and Chief Financial Officer and Treasurer, Brian Donnelly. In just a moment, they will provide details about our business and our performance for the first quarter of twenty twenty five. I would like to note that the recording and retransmission of today’s conference call is prohibited without the prior written consent of the company. Also note that today’s conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws.

These forward looking statements are based on OPI’s beliefs and expectations as of today, Thursday, 05/01/2025 and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today’s conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website opireit.com. Investors are cautioned not to place undue reliance upon any forward looking statements. In addition, we will be discussing non GAAP numbers during this call, including normalized FFO and cash basis net operating income or cash basis NOI.

A reconciliation of these non GAAP figures to net income are available in OPI’s earnings release presentation that we issued last night, which can be found on our website. And finally, we will be providing guidance on this call, including normalized FFO and cash basis NOI. We are not providing a reconciliation of these non GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all such as gains and losses or impairment charges related to the disposition of real estate. I will now turn the call over to Yael.

Yael Duffy, President and Chief Operating Officer, Office Properties Income Trust: Thank you, Kevin, and good morning. On today’s call, I will provide an overview of our portfolio and review trends we are seeing in the office market before outlining OPI’s first quarter leasing and disposition activity. From there, I will turn the call over to Brian to discuss our financial results. As of 03/31/2025, OPI’s portfolio consisted of 125 properties totaling 17,300,000 square feet with a weighted average remaining lease term of seven years. We ended the quarter with same property occupancy of 85.4%.

Approximately 60% of our revenues come from investment grade rated tenants or their subsidiaries. The U. S. Government is our largest tenant, representing 16.8% of our annualized revenue. The office sector continues to face headwinds associated with the impacts of work from home as well as macroeconomic and political uncertainty.

Throughout the country, we face pressure in our re leasing efforts with minimal tenants in the market to absorb large blocks of vacant space. In instances where activity exists, leasing demand has been concentrated towards trophy assets as tenants seek amenity rich buildings that will entice employees back to the office. Given OPI’s portfolio is predominantly comprised of older properties and the capital required to reposition assets is often cost prohibitive, new leasing interest has been minimal. Accordingly, we have experienced negative net absorption, declining asking rents and heightened competition. In Washington, D.

C, where OPI has concentration, the market vacancy rate is over 23% and conditions have worsened due to federal leasing uncertainty. Despite our leasing efforts, strategies to preserve cash flow and manage our debt maturity schedule, OPI’s financial performance has declined in this difficult operating environment. Annualized revenue was down $93,000,000 or 19% to $4.00 $5,000,000 compared to a year ago. Interest expense increased $17,900,000 to $53,400,000 representing a 50% increase year over year. We have little room under our debt covenants, which restricts us from refinancing or issuing new debt.

Dollars $280,000,000 in debt principal payments are due in 2026 and our liquidity is currently limited to $73,000,000 of cash. In response to these challenges, we are exploring all options to address our financial commitments while simultaneously operating and leasing our properties. Turning to our leasing results. In the first quarter, we executed 11 leases totaling 223,000 square feet at a weighted average lease term of ten point three years and a 13.5% roll up in rent. Concessions and capital commitments of $4.62 per square foot per year declined 22 quarter over quarter.

Notable leasing activity included a new eleven year lease for 45,000 square feet in Omaha, Nebraska, a twelve year lease renewal for 101,000 square feet in Fremont, California and an eight year renewal for 100,000 square feet in Irving, Texas. We are closely monitoring the Department of Government efficiencies measures to reduce the government’s office square footage as part of its efforts to optimize its real estate. While the ultimate impact on OPI’s portfolio remains uncertain, we have not yet received any lease termination notices related to these efficiency measures. Today, the GSA represents 2,400,000 square feet or approximately $68,000,000 of OPI’s annualized revenue. Of this, approximately 432,000 square feet or $14,900,000 in annualized revenue is within their soft term, which gives the GSA a right to terminate the lease in whole or in part without penalty.

Turning to OPI’s upcoming lease expirations. Lease expirations through 2026 total 1,600,000 square feet, representing $45,000,000 or 11% of OPI’s annualized rental income. As we have discussed on prior calls, single tenant properties will drive most of our expirations and we expect 780,000 square feet or $19,400,000 of annualized revenue will not renew. Our current leasing pipeline totaled nearly 2,000,000 square feet, of which one third could result in positive net absorption. Turning to dispositions.

During the quarter, we sold three properties consisting of 249,000 square feet for $26,900,000 Additionally, we are under agreement to sell another three vacant properties consisting of 376,000 square feet for a total sales price of $28,900,000 We do not have any other properties being marketed for sale. However, we continue to evaluate disposition opportunities that will allow OPI to mitigate occupancy risk and carry costs associated with vacant properties. As we consider future sales, we must balance the impact of potential dispositions on our liquidity, debt covenants and operating metrics. Before I turn the call over to Brian, I would like to highlight the recent publication of the RMR Group’s annual sustainability report, which offers a comprehensive overview of our managers’ commitment and progress in addressing sustainability. As we continue to work through challenges in the office market, we remain committed to enhancing OPI’s corporate sustainability practices and advancing initiatives that benefit our tenants and communities.

Links to the report and the supplemental report specific to OPI’s highlights are available on our website at opireit.com. Brian?

Brian Donnelly, Chief Financial Officer and Treasurer, Office Properties Income Trust: Thank you, Yael and good morning. For the first quarter, we reported normalized FFO of $4,400,000 or $06 per share, which came in $02 below our guidance range as a result of non cash amortization included in interest expense related to our debt exchanges. This compares to normalized FFO of $20,900,000 or $0.36 per share for the fourth quarter of twenty twenty four. The decrease on a sequential quarter basis was driven by lower NOI as a result of asset sales, tenant vacancies and higher interest expense. Turning to our outlook for the second quarter of twenty twenty five, we expect normalized FFO to be between $09 and $0.11 per share for Q2.

The increase sequentially from Q1 is primarily driven by higher NOI as a result of lower seasonal operating expenses and the seasonally stronger performance expected from our hotel in Washington DC. We project recurring G and A expense to be $5,000,000 for Q2. Our current estimated quarterly interest expense run rate is $53,000,000 consisting of $41,000,000 of cash interest expense and $12,000,000 of non cash amortization of financing costs. We expect same property cash basis NOI to decrease 10% to 12% as compared to the second quarter of twenty twenty four driven by tenant vacancies and an increase of free rent from recent leasing activity. This NOI guidance does not include any potential changes to our same store portfolio.

Turning to our investing activities. We spent $13,800,000 on capital expenditures during the first quarter. We are reducing our twenty twenty five full year CapEx guidance from a total projected spend of $80,000,000 to approximately $75,000,000 comprised of $17,000,000 of building capital and $58,000,000 of leasing capital. During the first quarter, we sold three properties with 249,000 square feet for proceeds of $26,900,000 1 of the properties sold was encumbered by our twenty twenty seven senior notes and the proceeds of $5,000,000 were used to pay down debt principal. At quarter end, we had three properties with a carrying value of 10,400,000 classified as held for sale.

As of today, have three properties under agreement for sale for $29,000,000 Turning to the balance sheet. In mid March, we completed the private debt exchange of $21,000,000 of our outstanding senior unsecured notes due 2026, ’20 ’20 ’7 and 02/1931 with a weighted average interest rate of 3.1% or $14,000,000 of new 8% senior priority guaranteed notes due 02/1930. Our total liquidity today is $73,000,000 of cash. We are currently projecting cash from operations to be a use of $50,000,000 to $55,000,000 during the balance of 2025 including capital expenditures. OPI’s upcoming maturities consist of approximately $120,000,000 due at March 2026 under our senior secured notes due 2027 and $134,000,000 of senior unsecured notes due June 2026.

Given our liquidity position, financial covenant constraints under our debt agreements and debt principal repayments coming due in 2026, we continue to evaluate options to address these maturities with our financial advisor. Operator, that concludes our call.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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