OFFICE PROPERTIES INCOME TRUST 10-Q

Item 1. Financial Statements OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) September 30, December 31, 2020 2019 ASSETS Real estate properties: Land $ 840,931 $ 840,550 Buildings and improvements 2,685,988 2,652,681 Total real estate properties, gross 3,526,919 3,493,231 Accumulated depreciation ( 436,346 ) ( 387,656 ) Total real estate properties, net 3,090,573 3,105,575 Assets of properties held for sale 20,716 70,877 Investments in unconsolidated joint ventures 38,533 39,756 Acquired real estate leases, net 604,233 732,382 Cash and cash equivalents 45,035 93,744 Restricted cash 12,604 6,952 Rents receivable 100,363 83,556 Deferred leasing costs, net 44,485 40,107 Other assets, net 16,503 20,187 Total assets $ 3,973,045 $ 4,193,136 LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ — $ — Senior unsecured notes, net 2,031,197 2,017,379 Mortgage notes payable, net 170,244 309,946 Liabilities of properties held for sale 331 14,693 Accounts payable and other liabilities 116,047 125,048 Due to related persons 7,349 7,141 Assumed real estate lease obligations, net 11,205 13,175 Total liabilities 2,336,373 2,487,382 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ 0.01 par value: 200,000,000 shares authorized, 48,318,366 and 48,201,941 shares issued and outstanding, respectively 483 482 Additional paid in capital 2,614,346 2,612,425 Cumulative net income 185,559 177,217 Cumulative other comprehensive loss — ( 200 ) Cumulative common distributions ( 1,163,716 ) ( 1,084,170 ) Total shareholders’ equity 1,636,672 1,705,754 Total liabilities and shareholders’ equity $ 3,973,045 $ 4,193,136 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (amounts in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Rental income $ 145,806 $ 167,411 $ 441,294 $ 518,220 Expenses: Real estate taxes 16,113 18,824 48,701 55,363 Utility expenses 7,564 9,518 19,777 26,369 Other operating expenses 26,366 30,376 78,033 90,204 Depreciation and amortization 62,227 74,939 189,340 226,373 Loss on impairment of real estate 2,954 8,521 2,954 14,105 Acquisition and transaction related costs — — — 682 General and administrative 7,059 7,990 21,372 25,457 Total expenses 122,283 150,168 360,177 438,553 Gain on sale of real estate — 11,463 10,822 33,538 Dividend income — — — 1,960 Loss on equity securities, net — — — ( 44,007 ) Interest and other income 2 358 738 847 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,477 , $ 2,560 , $ 7,162 and $ 8,264 , respectively) ( 27,097 ) ( 32,367 ) ( 79,461 ) ( 104,848 ) Loss on early extinguishment of debt — ( 284 ) ( 3,839 ) ( 769 ) Income (loss) before income tax (expense) benefit and equity in net losses of investees ( 3,572 ) ( 3,587 ) 9,377 ( 33,612 ) Income tax (expense) benefit 54 ( 156 ) ( 220 ) ( 509 ) Equity in net losses of investees ( 279 ) ( 196 ) ( 815 ) ( 573 ) Net income (loss) ( 3,797 ) ( 3,939 ) 8,342 ( 34,694 ) Other comprehensive income (loss): Unrealized gain (loss) on financial instrument 85 80 200 ( 287 ) Equity in unrealized gain (loss) of investees — ( 46 ) — 91 Other comprehensive income (loss) 85 34 200 ( 196 ) Comprehensive income (loss) $ ( 3,712 ) $ ( 3,905 ) $ 8,542 $ ( 34,890 ) Weighted average common shares outstanding (basic and diluted) 48,132 48,073 48,111 48,051 Per common share amounts (basic and diluted): Net income (loss) $ ( 0.08 ) $ ( 0.08 ) $ 0.17 $ ( 0.72 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Other Comprehensive Loss Cumulative Common Distributions Total Shareholders’ Equity Balance at December 31, 2019 48,201,941 $ 482 $ 2,612,425 $ 177,217 $ ( 200 ) $ ( 1,084,170 ) $ 1,705,754 Share grants — — 379 — — — 379 Share repurchases ( 1,012 ) — ( 27 ) — — — ( 27 ) Net current period other comprehensive loss — — — — ( 61 ) — ( 61 ) Net income — — — 10,840 — — 10,840 Distributions to common shareholders — — — — — ( 26,511 ) ( 26,511 ) Balance at March 31, 2020 48,200,929 482 2,612,777 188,057 ( 261 ) ( 1,110,681 ) 1,690,374 Share grants 28,000 — 1,121 — — — 1,121 Share repurchases ( 1,129 ) — ( 30 ) — — — ( 30 ) Net current period other comprehensive income — — — — 176 — 176 Net income — — — 1,299 — — 1,299 Distributions to common shareholders — — — — — ( 26,510 ) ( 26,510 ) Balance at June 30, 2020 48,227,800 482 2,613,868 189,356 ( 85 ) ( 1,137,191 ) 1,666,430 Share grants 108,600 1 864 — — — 865 Share forfeitures and repurchases ( 18,034 ) — ( 386 ) — — — ( 386 ) Amount reclassified from cumulative other comprehensive loss to net loss — — — — 85 — 85 Net loss — — — ( 3,797 ) — — ( 3,797 ) Distributions to common shareholders — — — — — ( 26,525 ) ( 26,525 ) Balance at September 30, 2020 48,318,366 $ 483 $ 2,614,346 $ 185,559 $ — $ ( 1,163,716 ) $ 1,636,672 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Other Comprehensive Income (Loss) Cumulative Common Distributions Total Shareholders’ Equity Balance at December 31, 2018 48,082,903 $ 481 $ 2,609,801 $ 146,882 $ 106 $ ( 978,302 ) $ 1,778,968 Share grants 9,000 — 865 — — — 865 Amount reclassified from cumulative other comprehensive income to net income — — — — ( 371 ) — ( 371 ) Net current period other comprehensive loss — — — — ( 32 ) — ( 32 ) Net income — — — 34,019 — — 34,019 Distributions to common shareholders — — — — — ( 26,445 ) ( 26,445 ) Balance at March 31, 2019 48,091,903 481 2,610,666 180,901 ( 297 ) ( 1,004,747 ) 1,787,004 Share grants 24,000 — 971 — — — 971 Share forfeitures and repurchases ( 2,459 ) — ( 67 ) — — — ( 67 ) Net current period other comprehensive loss — — — — ( 198 ) — ( 198 ) Net loss — — — ( 64,774 ) — — ( 64,774 ) Distributions to common shareholders — — — — — ( 26,450 ) ( 26,450 ) Balance at June 30, 2019 48,113,444 481 2,611,570 116,127 ( 495 ) ( 1,031,197 ) 1,696,486 Share grants 103,100 1 888 — — — 889 Share repurchases ( 13,212 ) — ( 396 ) — — — ( 396 ) Net current period other comprehensive income — — — — 34 — 34 Net loss — — — ( 3,939 ) — — ( 3,939 ) Distributions to common shareholders — — — — — ( 26,461 ) ( 26,461 ) Balance at September 30, 2019 48,203,332 $ 482 $ 2,612,062 $ 112,188 $ ( 461 ) $ ( 1,057,658 ) $ 1,666,613 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 8,342 $ ( 34,694 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 62,570 68,095 Net amortization of debt premiums, discounts and issuance costs 7,162 8,264 Amortization of acquired real estate leases 126,409 157,108 Amortization of deferred leasing costs 5,208 4,329 Gain on sale of real estate ( 10,822 ) ( 33,538 ) Loss on impairment of real estate 2,954 14,105 Loss on early extinguishment of debt 2,701 769 Straight line rental income ( 12,963 ) ( 19,365 ) Other non-cash expenses, net 1,542 1,907 Loss on equity securities, net — 44,007 Equity in net losses of investees 815 573 Change in assets and liabilities: Rents receivable ( 4,853 ) 17,185 Deferred leasing costs ( 10,722 ) ( 22,759 ) Other assets ( 860 ) ( 32 ) Accounts payable and other liabilities ( 11,593 ) ( 30,603 ) Due to related persons 208 ( 27,213 ) Net cash provided by operating activities 166,098 148,138 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions ( 11,864 ) — Real estate improvements ( 55,135 ) ( 39,010 ) Distributions in excess of earnings from unconsolidated joint ventures 408 1,973 Distributions in excess of earnings from Affiliates Insurance Company 287 — Proceeds from sale of properties, net 81,528 572,131 Proceeds from repayment of mortgage note receivable 2,880 — Proceeds from sale of RMR Inc. common shares, net — 104,674 Net cash provided by investing activities 18,104 639,768 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable ( 154,734 ) ( 11,001 ) Repayment of unsecured term loans — ( 388,000 ) Repayment of senior unsecured notes ( 400,000 ) ( 350,000 ) Proceeds from issuance of senior unsecured notes, net 408,932 — Borrowings on unsecured revolving credit facility 561,467 420,000 Repayments on unsecured revolving credit facility ( 561,467 ) ( 385,000 ) Payment of debt issuance costs ( 1,477 ) — Repurchase of common shares ( 434 ) ( 459 ) Distributions to common shareholders ( 79,546 ) ( 79,356 ) Net cash used in financing activities ( 227,259 ) ( 793,816 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) (unaudited) Nine Months Ended September 30, 2020 2019 Decrease in cash, cash equivalents and restricted cash $ ( 43,057 ) $ ( 5,910 ) Cash, cash equivalents and restricted cash at beginning of period 100,696 38,943 Cash, cash equivalents and restricted cash at end of period $ 57,639 $ 33,033 Nine Months Ended September 30, 2020 2019 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 83,116 $ 114,226 Income taxes paid $ 1,097 $ 491 SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows: As of September 30, 2020 2019 Cash and cash equivalents $ 45,035 $ 29,002 Restricted cash (1) 12,604 4,031 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 57,639 $ 33,033 (1) Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our mortgage debts. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) (unaudited) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Office Properties Income Trust and its subsidiaries, or OPI, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or our 2019 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles. Note 2. Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective approach. The implementation of this standard did not have a material impact in our condensed consolidated financial statements. Note 3. Per Common Share Amounts We calculate basic earnings per common share by dividing net income (loss) by the weighted average number of our common shares outstanding during the period. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, together with the related impact on earnings, are considered when calculating diluted earnings per share. For the three and nine months ended September 30, 2020 and 2019, certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive. Note 4. Real Estate Properties As of September 30, 2020, our wholly owned properties were comprised of 184 properties with approximately 24,909,000 rentable square feet, with an aggregate undepreciated carrying value of $ 3,544,937 , including $ 18,018 classified as held for sale, and we had noncontrolling ownership interests in three properties totaling approximately 444,000 rentable square feet through two unconsolidated joint ventures in which we own 51 % and 50 % interests. We generally lease space at our properties on a gross lease, modified gross lease or net lease basis pursuant to fixed term contracts expiring between 2020 and 2040. Some of our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended September 30, 2020, we entered into 17 leases for approximately 595,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.6 years and we made commitments for approximately $ 6,238 of leasing related costs. During the nine months ended September 30, 2020, we entered into 60 leases for approximately 1,826,000 rentable square feet for a weighted (by rentable square feet) average lease term of 7.1 years and we made commitments for approximately $ 35,697 of leasing related costs. As of September 30, 2020, we have estimated unspent leasing related obligations of $ 61,307 . We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. The future net undiscounted cash 9 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to the consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives. Acquisition Activities In February 2020, we acquired a property adjacent to a property we own in Boston, MA for $ 11,864 , including $ 364 of acquisition related costs. This acquisition was accounted for as an asset acquisition. The purchase price of this acquisition was allocated to land and building in the amounts of $ 2,618 and $ 9,246 , respectively. In August 2020, we terminated a previously disclosed agreement to acquire an office property in Denver, CO for a purchase price of $ 38,100 . In October 2020, we entered into an agreement to acquire three properties containing approximately 194,000 square feet adjacent to properties we own in an office park in Brookhaven, GA for $ 15,250 , excluding acquisition related costs. Disposition Activities During the nine months ended September 30, 2020, we sold six properties with a combined 734,784 rentable square feet for an aggregate sales price of $ 85,363 , excluding closing costs and including the repayment of one mortgage note with an outstanding principal balance of $ 13,095 , an annual interest rate of 5.9 % and a maturity date in August 2021. The sales of these properties, as presented in the table below, do not represent significant dispositions individually or in the aggregate nor do they represent a strategic shift in our business. As a result, the results of operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss). Date of Sale Number of Properties Location Rentable Square Feet Gross Sales Price (1) Gain (Loss) on Sale of Real Estate January 2020 2 Stafford, VA 64,656 $ 14,063 $ 4,704 January 2020 1 Windsor, CT 97,256 7,000 314 February 2020 1 Lincolnshire, IL 222,717 12,000 1,176 March 2020 1 Trenton, NJ 267,025 30,100 ( 192 ) March 2020 1 Fairfax, VA 83,130 22,200 4,820 6 734,784 $ 85,363 $ 10,822 (1) Gross sales price is equal to the gross contract price, includes purchase price adjustments, if any, and excludes closing costs. As of September 30, 2020, we had four properties with an aggregate undepreciated carrying value of $ 18,018 under agreement to sell for a sales price of $ 25,100 , excluding closing costs. These properties were classified as held for sale in our condensed consolidated balance sheet as of September 30, 2020. We recorded a $ 2,954 loss on impairment of real estate during the three months ended September 30, 2020 to adjust the carrying value of these properties to their estimated fair value less costs to sell. The operating results of these properties are included in continuing operations in our condensed consolidated statements of comprehensive income (loss). The sale of these properties was completed in October 2020. 10 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Unconsolidated Joint Ventures We own interests in two joint ventures that own three properties. We account for these investments under the equity method of accounting. As of September 30, 2020 and December 31, 2019, our investments in unconsolidated joint ventures consisted of the following: OPI Carrying Value of Investments at Joint Venture OPI Ownership September 30, 2020 December 31, 2019 Number of Properties Location Rentable Square Feet Prosperity Metro Plaza 51 % $ 22,080 $ 22,483 2 Fairfax, VA 328,655 1750 H Street, NW 50 % 16,453 17,273 1 Washington, D.C. 115,411 Total $ 38,533 $ 39,756 3 444,066 The following table provides a summary of the mortgage debt of our two unconsolidated joint ventures: Joint Venture Interest Rate (1) Maturity Date Principal Balance at September 30, 2020 and December 31, 2019 (2) Prosperity Metro Plaza 4.09 % 12/1/2029 $ 50,000 1750 H Street, NW 3.69 % 8/1/2024 32,000 Weighted Average / Total 3.93 % $ 82,000 (1) Includes the effect of mark to market purchase accounting. (2) Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interests in the joint ventures we do not own. None of the debt is recourse to us. At September 30, 2020, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $ 7,584 is primarily attributable to the difference between the amount we paid to purchase our interest in these joint ventures, including transaction costs, and the historical carrying value of the net assets of these joint ventures. This difference is being amortized over the remaining useful life of the related properties and the resulting amortization expense is included in equity in net losses of investees in our condensed consolidated statements of comprehensive income (loss). Note 5. Leases Revenue Recognition. Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. In certain circumstances, some leases provide the tenant with the right to terminate if the legislature or other funding authority does not appropriate the funding necessary for the tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the full term of the lease because we believe the occurrence of early terminations to be remote contingencies based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis. We increased rental income to record revenue on a straight line basis by $ 3,912 and $ 6,904 for the three months ended September 30, 2020 and 2019, respectively, and $ 12,963 and $ 19,365 for the nine months ended September 30, 2020 and 2019, respectively. Rents receivable, excluding properties classified as held for sale, include $ 66,499 and $ 54,837 of straight line rent receivables at September 30, 2020 and December 31, 2019, respectively. We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $ 18,606 and $ 56,654 for the three and nine months ended September 30, 2020, respectively, of which tenant reimbursements totaled $ 17,495 and $ 53,346 , respectively. For the three and nine months ended September 30, 2019, such payments totaled $ 23,092 and $ 69,182 , respectively, of which tenant reimbursements totaled $ 21,914 and $ 65,577 , respectively. 11 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) As a result of the COVID-19 pandemic, some of our tenants have requested rent assistance. As of October 27, 2020, we have granted temporary rent assistance totaling $ 2,550 to 19 of our tenants who represent approximately 3.6 % of our annualized rental income, as defined below, as of September 30, 2020, pursuant to deferred payment plans. These tenants are obligated to pay, in most cases, the deferred rent over a 12 -month period, certain of which commenced in September 2020. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as or less than the original lease. Because the deferred rent amounts referenced above will be repaid, the cash flows from the respective leases are substantially the same as before the rent deferrals. The deferred amounts did not impact our operating results for the three and nine months ended September 30, 2020. As of September 30, 2020, deferred payments totaling $ 2,096 are included in rents receivable in our condensed consolidated balance sheet. Right of Use Asset and Lease Liability . For leases where we are the lessee, we are required to record a right of use asset and lease liability for all leases with an initial term greater than 12 months. As of September 30, 2020, we had one lease that met these criteria where we are the lessee, which expires on January 31, 2021. We sublease a portion of the space, which sublease expires on January 31, 2021. The values of the right of use asset and related liability representing our future obligation under the lease arrangement for which we are the lessee were $ 670 and $ 689 , respectively, as of September 30, 2020, and $ 2,149 and $ 2,179 , respectively, as of December 31, 2019. The right of use asset and related lease liability are included within other assets, net and accounts payable and other liabilities, respectively, within our condensed consolidated balance sheets. Rent expense incurred under the lease, net of sublease revenue, was $ 409 and $ 411 for the three months ended September 30, 2020 and 2019, respectively, and $ 1,301 and $ 1,226 for the nine months ended September 30, 2020 and 2019, respectively. Note 6. Concentration Tenant Concentration We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. As of September 30, 2020, the U.S. Government, 11 state governments and two other government tenants combined were responsible for approximately 35.6 % of our annualized rental income. As of September 30, 2019, the U.S. Government, 13 state governments and three other government tenants combined were responsible for approximately 36.3 % of our annualized rental income. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 25.2 % and 25.8 % of our annualized rental income as of September 30, 2020 and 2019, respectively. Geographic Concentration At September 30, 2020, our 184 wholly owned properties were located in 34 states and the District of Columbia. Properties located in Virginia, California, the District of Columbia, Texas and Maryland were responsible for 15.2 %, 12.1 %, 10.9 %, 8.3 % and 6.6 % of our annualized rental income as of September 30, 2020, respectively. Note 7. Indebtedness Our principal debt obligations at September 30, 2020 were: (1) $ 2,072,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $ 171,475 aggregate outstanding principal amount of mortgage notes. Our $ 750,000 revolving credit facility is governed by a credit agreement, or our credit agreement, with a syndicate of institutional lenders that includes a feature under which the maximum aggregate borrowing availability may be increased to up to $ 1,950,000 in certain circumstances. Our $ 750,000 revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by two additional six month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at September 30, 2020, on the amount outstanding under our revolving credit facility. We also pay a facility fee on 12 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2020. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2020 and December 31, 2019, the annual interest rate payable on borrowings under our revolving credit facility was 1.2 % and 2.7 %, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.2 % and 3.3 % for the three months ended September 30, 2020 and 2019, respectively, and 2.0 % and 3.4 % for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and October 29, 2020, we had no amounts outstanding under our revolving credit facility and $ 750,000 available for borrowing. Our credit agreement and senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our credit agreement and senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indentures and their supplements at September 30, 2020. In January 2020, we redeemed, at par plus accrued interest, all $ 400,000 of our 3.60 % senior unsecured notes due 2020. As a result of the redemption of our 3.60 % senior unsecured notes due 2020, we recognized a loss on early extinguishment of debt of $ 61 during the nine months ended September 30, 2020, to write off unamortized discounts. In March 2020, in connection with the sale of one property, we prepaid, at a premium plus accrued interest, a mortgage note secured by that property with an outstanding principal balance of $ 13,095 , an annual interest rate of 5.9 % and a maturity date in August 2021, which was classified in liabilities of properties held for sale in our condensed consolidated balance sheet as of December 31, 2019. As a result of the prepayment of this mortgage note, we recognized a loss on early extinguishment of debt of $ 508 during the nine months ended September 30, 2020, from a prepayment penalty and the write off of unamortized debt issuance costs. In March 2020, we prepaid, at a premium plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $ 66,780 , an annual interest rate of 4.0 % and a maturity date in September 2030. As a result of the prepayment of this mortgage note, we recognized a loss on early extinguishment of debt of $ 2,713 during the nine months ended September 30, 2020, from a prepayment penalty and the write off of unamortized discounts. In April 2020, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $ 32,677 , an annual interest rate of 5.7 % and a maturity date in July 2020. As a result of the prepayment of this mortgage note, we recognized a gain on early extinguishment of debt of $ 163 during the nine months ended September 30, 2020, from the write off of unamortized premiums. In June 2020, we issued $ 150,000 of our 6.375 % senior unsecured notes due 2050 in an underwritten public offering. In connection with this offering, we granted the underwriters a 30 day option to purchase up to an additional $ 22,500 aggregate principal amount of these notes. In July 2020, the underwriters partially exercised this option to purchase an additional $ 12,000 of these notes. The aggregate net proceeds from this offering were $ 156,186 , after underwriters’ discounts and offering expenses. These notes require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after June 23, 2025. In August 2020, we repaid at maturity, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $ 39,635 and an annual interest rate of 2.2 %. In September 2020, we issued $ 250,000 of our 4.50 % senior unsecured notes due 2025 in an underwritten public offering. These notes are a further issuance of our existing $ 400,000 of senior unsecured notes due 2025 that were initially issued by Select Income REIT, or SIR, in February 2015, which we assumed in connection with our acquisition of SIR in a merger transaction on December 31, 2018. The public offering price of these notes was 101.414 % of the principal amount, raising net proceeds of $ 251,269 , after underwriters’ discounts and estimated offering expenses. These notes require semi-annual payments of interest only through maturity. 13 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) At September 30, 2020, seven of our properties with an aggregate net book value of $ 307,837 were encumbered by mortgage notes with an aggregate principal amount of $ 171,475 . Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants. Note 8. Fair Value of Assets and Liabilities The following table presents certain of our assets measured at fair value at September 30, 2020, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: Fair Value at Reporting Date Using Description Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Non-recurring Fair Value Measurements Assets Assets of properties held for sale (1) $ 21,446 $ — $ 21,446 $ — (1) We recorded impairment charges of $ 2,954 to reduce the carrying value of four properties that are classified as held for sale in our condensed consolidated balance sheet to their estimated fair value, less costs to sell of $ 786 , based upon a negotiated sale price with a third party buyer (a Level 2 input as defined in the fair value hierarchy under GAAP). See Note 4 for more information. In addition to the assets described in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, accounts payable, a revolving credit facility, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At September 30, 2020 and December 31, 2019, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows: As of September 30, 2020 As of December 31, 2019 Financial Instrument Carrying Value (1) Fair Value Carrying Value (1) Fair Value Senior unsecured notes, 3.60 % interest rate, due in 2020 (2) $ — $ — $ 399,934 $ 400,048 Senior unsecured notes, 4.00 % interest rate, due in 2022 298,348 304,746 297,657 306,096 Senior unsecured notes, 4.15 % interest rate, due in 2022 298,589 303,359 297,795 307,221 Senior unsecured notes, 4.25 % interest rate, due in 2024 341,729 352,331 340,018 364,602 Senior unsecured notes, 4.50 % interest rate, due in 2025 (3) 635,114 659,029 381,055 419,578 Senior unsecured notes, 5.785 % interest rate, due in 2046 301,178 310,124 300,920 322,028 Senior unsecured notes, 6.375 % interest rate, due in 2050 (4) 156,239 165,758 — — Mortgage notes payable (5) 170,244 174,567 323,074 331,675 Total $ 2,201,441 $ 2,269,914 $ 2,340,453 $ 2,451,248 (1) Includes unamortized debt premiums, discounts and issuance costs totaling $ 42,034 and $ 45,756 as of September 30, 2020 and December 31, 2019, respectively. (2) These senior unsecured notes were redeemed in January 2020. (3) An additional $ 250,000 of these senior unsecured notes were issued in September 2020. (4) $ 150,000 of these senior unsecured notes were issued in June 2020. In July 2020, we issued an additional $ 12,000 of these senior unsecured notes in connection with the underwriters partial exercise of their option to purchase additional notes. (5) Balance as of December 31, 2019 includes one mortgage note with a carrying value of $ 13,128 net of unamortized issuance costs totaling $ 38 which is classified in liabilities of properties held for sale in our condensed consolidated balance sheet. This mortgage note was secured by a property in Fairfax, VA that was sold in March 2020. The mortgage note was repaid at closing. We estimated the fair value of our senior unsecured notes (except for our senior unsecured notes due 2046 and 2050) using an average of the bid and ask price of the notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair value of our senior unsecured notes due 2046 and 2050 based on the closing price on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair values of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates (Level 3 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value. 14 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Note 9. Shareholders’ Equity Share Awards On May 27, 2020, in accordance with our Trustee compensation arrangements, we awarded to each of our eight Trustees 3,500 of our common shares, valued at $ 26.61 per share, the closing price of our common shares on Nasdaq on that day. On September 17, 2020, we awarded under our equity compensation plan an aggregate of 108,600 of our common shares, valued at $ 23.04 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC. Share Purchases During the three and nine months ended September 30, 2020, we purchased an aggregate of 17,448 and 19,589 of our common shares, respectively, valued at weighted average share prices of $ 21.61 and $ 22.15 per share, respectively, from one of our Trustees, our officers and certain other current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. Distributions During the nine months ended September 30, 2020, we declared and paid regular quarterly distributions to common shareholders as follows: Declaration Date Record Date Paid Date Distributions Per Common Share Total Distributions January 16, 2020 January 27, 2020 February 20, 2020 $ 0.55 $ 26,511 April 2, 2020 April 13, 2020 May 21, 2020 0.55 26,510 July 16, 2020 July 27, 2020 August 20, 2020 0.55 26,525 $ 1.65 $ 79,546 On October 15, 2020, we declared a regular quarterly distribution to common shareholders of record on October 26, 2020 of $ 0.55 per share, or approximately $ 26,600 . We expect to pay this distribution on or about November 19, 2020. Note 10. Business and Property Management Agreements with RMR LLC We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations. Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $ 4,236 and $ 5,159 for the three months ended September 30, 2020 and 2019, respectively, and $ 13,237 and $ 16,203 for the nine months ended September 30, 2020 and 2019, respectively. Based on our common share total return, as defined in our business management agreement, as of September 30, 2020 and 2019, no estimated incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2020 or 2019. The actual amount of annual incentive fees for 2020, if any, will be based on our common share total return, as defined in our business management agreement, for the three year period ending December 31, 2020, and will be payable in 2021. We did no t incur an incentive fee payable to RMR LLC for the year ended December 31, 2019. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $ 5,189 and $ 5,622 for the three months ended September 30, 2020 and 2019, respectively, and $ 15,381 and $ 16,605 for the nine months ended September 30, 2020 and 2019, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative 15 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) expenses incurred to provide management services to us, except for the applicable employment and related expenses of RMR LLC’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC’s centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function and as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $ 6,437 and $ 6,850 for these expenses and costs for the three months ended September 30, 2020 and 2019, respectively, and $ 18,687 and $ 20,007 for these expenses and costs for the nine months ended September 30, 2020 and 2019, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). Note 11. Related Person Transactions We have relationships and historical and continuing transactions with RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. David Blackman, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer of RMR LLC. Mr. Blackman has announced his decision to retire and, therefore, resign as our President and Chief Executive Officer, effective December 31, 2020, and as our Managing Trustee, effective as of June 30, 2021 or such earlier date as his successor Managing Trustee is elected to our Board. In replacement of Mr. Blackman, Christopher J. Bilotto has been appointed as our President and Chief Operating Officer, effective January 1, 2021. Mr. Bilotto currently serves as our Vice President and Chief Operating Officer, and he is an officer and employee of RMR LLC. In addition, each of our other officers is also an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these public companies. Other officers of RMR LLC, including Mr. Blackman and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. See Note 9 for further information relating to our awards of common shares to our officers and certain other employees of RMR LLC in September 2020 and our repurchases of common shares from one of our Trustees, our officers, and certain other current and former employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to them. We include amounts recognized as expense for awards of our common shares to our officers and to other RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. For more information regarding our management agreements with RMR LLC, see Note 10. Leases with RMR LLC. We lease office space to RMR LLC in certain of our properties for RMR LLC’s property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of $ 282 and $ 288 for the three months ended September 30, 2020 and 2019, respectively, and $ 836 and $ 854 for the nine months ended September 30, 2020 and 2019, respectively. Affiliates Insurance Company, or AIC . Until its dissolution on February 13, 2020 we, ABP Trust and five other companies to which RMR LLC provides management services owned AIC in equal amounts. We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers. As of September 30, 2020 and December 31, 2019, our investment in AIC had a carrying value of $ 11 and $ 298 , respectively. These amounts are included in other assets, net in our condensed consolidated balance sheets. In June 2020, we received an additional liquidating distribution of approximately $ 287 from AIC in connection with its dissolution. We did no t recognize any income related to our investment in AIC for the three or nine months ended September 30, 2020, respectively, and we recognized income of $ 83 and $ 617 for the three and nine months ended September 30, 2019, respectively. These 16 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) amounts are included in equity in net losses of investees in our condensed consolidated statements of comprehensive income (loss). Our other comprehensive loss for the 2019 period includes our proportionate part of unrealized gains (losses) on fixed income securities, which were owned by AIC, related to our investment in AIC. For more information about these and other such relationships and certain other related person transactions, refer to our 2019 Annual Report. 17 Table of Contents