Earnings call transcript: Office Properties Income Trust Q2 2025 sees revenue rise but EPS falls short

Office Properties Income Trust (OPI) reported its second-quarter 2025 earnings, revealing a mixed financial performance. The company posted a revenue of $114.5 million, surpassing forecasts of $110.44 million, but reported a loss per share of $0.58, missing the expected loss of $0.51. According to InvestingPro data, OPI currently trades at a notably low Price/Book multiple of 0.02x and maintains an EBITDA of $246.1 million for the last twelve months. Despite the earnings miss, OPI’s stock showed resilience, with a premarket increase of 2.93% to $0.246, reflecting investor optimism or other mitigating factors.

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Key Takeaways

• Revenue surpassed expectations by 3.68%, reaching $114.5 million.
• Earnings per share (EPS) missed forecasts by 13.73%, recording a loss of $0.58.
• Premarket stock price rose by 2.93%, signaling investor confidence.
• Leasing challenges persist in the office sector, affecting performance.
• The company suspended its dividend to conserve cash.

Company Performance

Office Properties Income Trust experienced a challenging quarter, with annualized revenue falling to $398 million, down 18% year-over-year. InvestingPro analysis reveals a concerning Financial Health Score of 1.18 (labeled as WEAK), with revenue declining 11.91% over the last twelve months. The company managed to increase its normalized funds from operations (FFO) to $9.4 million, up from $4.4 million the previous year. However, the office sector’s persistent leasing challenges and increased interest expenses have weighed heavily on its overall performance, reflected in the negative return on assets of -4.7%.

Financial Highlights

• Revenue: $114.5 million, up from the forecast of $110.44 million.
• Earnings per share: Loss of $0.58, compared to the expected loss of $0.51.
• Normalized FFO: $9.4 million or $0.13 per share, up from $4.4 million or $0.06 per share last year.
• Interest expense: $53 million, up 37% year-over-year.
• Total liquidity: $90 million in cash.

Earnings vs. Forecast

Office Properties Income Trust reported a revenue surprise of 3.68%, exceeding the forecast of $110.44 million. However, the company missed its EPS forecast, reporting a loss of $0.58 against the expected loss of $0.51, marking a 13.73% surprise. This earnings miss reflects ongoing challenges in the office sector and increased financial pressures.

Market Reaction

Despite the earnings miss, OPI’s stock showed a premarket increase of 2.93%, reaching $0.246. This movement may indicate investor confidence in the company’s long-term strategy or a reaction to the revenue beat. InvestingPro data shows the stock has experienced significant volatility, with a beta of 1.54 and a dramatic 89.94% decline over the past year. The stock remains within its 52-week range, with a high of $3.015 and a low of $0.175, suggesting room for recovery if market conditions improve.

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Outlook & Guidance

Looking forward, OPI projects a normalized FFO of $0.07 to $0.09 per share for Q3 2025. The company anticipates a 7-9% decrease in same property cash basis net operating income (NOI) and plans to invest $43 million in capital expenditures for the year. OPI is also exploring options to address nearly $280 million in debt principal payments due in 2026.

Executive Commentary

Yael Duffy, President and COO, acknowledged the financial decline due to persistent leasing challenges in the office sector. Duffy highlighted the company’s limited room under debt covenants, restricting refinancing or new debt issuance. Despite these challenges, Duffy emphasized ongoing efforts to lease and operate properties while exploring financial commitments and cost reduction strategies.

Risks and Challenges

• Leasing challenges in the office sector continue to impact revenue.
• Increased interest expenses add financial pressure.
• Debt covenants limit refinancing and new debt issuance.
• Significant debt payments due in 2026 pose a financial challenge.
• Declining property valuations and limited buyer interest affect asset sales.

Office Properties Income Trust navigates a complex landscape, balancing immediate financial pressures with strategic initiatives to stabilize and grow its portfolio.

Full transcript - Office Properties Income Trust (OPI) Q2 2025:

Conference Operator: Good morning, and welcome to the Office Properties Income Trust Second 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 conference 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. 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 second 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, 07/31/2025, 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 Yada.

Yael Duffy, President and Chief Operating Officer, Office Properties Income Trust: Thank you, Kevin, and good morning. On today’s call, I will begin with an overview of our portfolio before discussing OPI’s second quarter leasing and disposition activity. From there, Brian will review our financial results and outlook. As of 06/30/2025, OPI’s portfolio included 125 properties totaling 17,300,000 square feet with a weighted average remaining lease term of six point eight years. We ended the quarter with same property occupancy of 85.2%.

Approximately 59% of our revenues come from investment grade rated tenants or their subsidiaries. The U. S. Government is our largest tenant representing 17.1% of our annualized revenue. As we have long telegraphed, OPI’s financial performance has materially declined as leasing challenges in the office sector have persisted.

Specifically, annualized revenue of $398,000,000 is down $85,000,000 or nearly 18% compared to a year ago. Interest expense in the second quarter of $53,000,000 is up $14,000,000 or 37% year over year. We have little room under our debt covenants, which restricts us from refinancing or issuing new debt. Nearly $280,000,000 in debt principal payments are due in 2026 and our total liquidity is $90,000,000 of cash. Despite these ongoing challenges, we continue to lease and operate our properties while simultaneously exploring options to address our financial commitments and reduce costs.

To that end, earlier this month, OPI’s Board of Trustees made the decision to suspend the quarterly dividend, us to preserve approximately $3,000,000 of cash annually. Turning to leasing activity. In the second quarter, we executed 15 leases totaling 416,000 square feet at a weighted average lease term of five point four years and at rental rates that were 6.4% higher than prior rental rates for the same space. Renewals accounted for two thirds of our activity and secures over $7,000,000 in annualized revenue. Concessions and capital commitments of $3.53 per square foot per year declined 24% quarter over quarter.

We have 1,300,000 square feet of leases scheduled to expire through 2026, representing $30,000,000 or 7.6% of OPI’s annualized rental income. The majority of these expirations are related to single tenant properties and we expect 742,000 square feet or $11,200,000 of annualized revenue will not renew. Today, our leasing pipeline totaled 2,000,000 square feet of which over 60% is attributable to renewal discussions. Any leasing that results in positive net absorption will likely come from our multi tenant properties where the infrastructure and building amenities to attract new tenants already exist. Turning to dispositions.

Earlier this month, we sold one property totaling 56,000 square feet via auction for $2,200,000 excluding closing costs. As property valuations continue to decline and the potential buyer pool targeting office acquisitions is limited, dispositions remain challenging. We have found that transaction timelines have significantly lengthened and often require a relaunching of marketing efforts as buyers are unable to transact. Despite these dynamics, we continue opportunities that may mitigate occupancy risk and reduce the carrying costs associated with vacant properties. I will now turn the call over to Brian.

Brian Donnelly, Chief Financial Officer and Treasurer, Office Properties Income Trust: Thank you, Yael, good morning. For the second quarter, we reported normalized FFO of $9,400,000 or $0.13 per share, which came in $02 above the high end of our guidance range as a result of lower than anticipated seasonal operating expenses. This compares to normalized FFO of $4,400,000 or $06 per share for the 2025. The increase on a sequential quarter basis was driven by higher NOI as a result of lower operating expenses and stronger performance from our hotel at 20 Mass Ave in Washington DC. Turning to our outlook for the 2025, we expect normalized FFO to be between $07 and $09 per share for Q3.

The decrease sequentially from Q2 is primarily driven by lower NOI related to lower rental income, higher operating expenses and a seasonally weaker quarter expected from our hotel at 20 Mass Ave. We project recurring G and A expense to be approximately $5,000,000 for Q3 and our current estimated quarterly interest expense run rate is approximately $52,000,000 consisting of $41,000,000 of cash interest expense and $11,000,000 of non cash amortization of financing costs. We expect same property cash basis NOI to decrease 7% to 9% as compared to the 2024 driven by tenant vacancies. This NOI guidance does not include any potential changes to our same store portfolio. Year to date, we have invested nearly $28,000,000 in capital expenditures.

The 2025, we anticipate approximately 43,000,000 in CapEx comprised of $10,000,000 of building capital and $33,000,000 of leasing capital. At quarter end, we had three properties with a carrying value of $8,000,000 classified as held for sale. In July, we sold one of these properties, which was encumbered by our twenty twenty seven senior secured notes for $2,200,000 excluding closing costs and used the net proceeds to pay down the principal balance of that debt. Today, have three properties under agreement to sell for $28,900,000 excluding closing costs. We currently expect two of the three properties to sell in September 2025 for $10,700,000 and the third property to close in 2027.

Turning to the balance sheet. Our total liquidity today is $90,000,000 of cash. We’re currently projecting cash from operations to be a use of $45,000,000 to $55,000,000 during the balance of 2025 including capital expenditures. Given our liquidity position, financial covenant constraints under our debt agreement and debt principal payments coming due in 2026, we continue to evaluate options to address these maturities with our financial advisor. That concludes our prepared remarks.

Thank you for joining us today. Operator, you may now end the call.

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

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