OPI Earnings Call: Debt Moves Amid Revenue Concerns

Office Properties Income Trust ((OPI)) has held its Q4 earnings call. Read on for the main highlights of the call.

The latest earnings call from Office Properties Income Trust (OPI) painted a mixed picture, reflecting the company’s ongoing strategies and challenges. While there were commendable efforts in managing debt maturities and positive leasing activities, the decrease in revenue, high vacancy rates, and projected cash burn are significant concerns that investors should note.

Debt Maturity Management

OPI has made significant strides in managing its debt maturity. The company completed $1.8 billion in secured financings and exchanged $488 million of new notes for $378 million of outstanding notes, effectively reducing the total debt principal by nearly $200 million compared to the previous year. This strategic move demonstrates OPI’s commitment to maintaining financial stability.

Leasing Activity Growth

The company experienced notable growth in leasing activity, with total leasing volume increasing by more than 20% year-over-year. OPI signed 52 leases covering over 2 million square feet, with a weighted average lease term of nearly nine years and a rental rate increase of 6.3%. This indicates a robust demand for OPI’s properties and a positive trend in leasing performance.

Strong Quarterly Lease Roll-Up

In the fourth quarter, OPI executed 13 leases totaling 359,000 square feet, achieving a 24.3% roll-up in rent. This represents the strongest quarterly growth in over four years, showcasing the company’s ability to negotiate favorable lease terms and capitalize on market opportunities.

Decrease in Annualized Revenue and Occupancy

Despite the positive leasing activity, OPI faced a decline in annualized revenue, which decreased to $428 million from $513 million a year ago. The total portfolio occupancy also fell, with a reduction of 2.8 million square feet leased in 2024, ending with an 85% occupancy rate. This decline highlights the challenges OPI faces in maintaining revenue streams.

High Vacancy and Challenging Market Conditions

OPI’s vacancy rate in Washington, D.C., remains high at nearly 33%, reflecting challenging leasing conditions and pressure on net effective rents. This high vacancy rate poses a significant hurdle for the company as it navigates a competitive real estate market.

Substantial Known Vacates in 2025

Looking ahead, OPI faces substantial known vacates in 2025, with 2 million square feet—representing nearly 10% of annualized rental income—set to expire. Of this, 1.5 million square feet are known to vacate, posing a risk to future revenue and occupancy levels.

Projected Cash Burn and Limited Liquidity

The company projects a cash burn of $60 million to $70 million in 2025, with limited options to address upcoming debt maturities, excluding cash repayments or debt-for-equity exchanges. This projection underscores the financial challenges OPI may encounter in the near future.

Forward-Looking Guidance

In its forward-looking guidance, OPI reported normalized funds from operations (FFO) of $20.9 million or $0.36 per share for the fourth quarter, slightly surpassing their guidance range. However, for the first quarter of 2025, OPI expects normalized FFO to range between $0.08 and $0.10 per share, reflecting anticipated lower net operating income and increased interest expenses. The company also projects a decrease in same-property cash basis NOI by 8% to 10% compared to the first quarter of 2024, driven by tenant vacancies and elevated free rent levels.

In conclusion, the earnings call of Office Properties Income Trust highlights a company at a crossroads, with significant efforts in debt management and leasing activity contrasted by challenges in revenue and occupancy. Investors should be cautious of the high vacancy rates and projected cash burn, while keeping an eye on the company’s strategic moves in addressing these issues.