OFFICE PROPERTIES INCOME TRUST 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2020 Annual Report. OVERVIEW (dollars in thousands, except per share and per square foot data) We are a real estate investment trust, or REIT, organized under Maryland law. As of March 31, 2021, our wholly owned properties were comprised of 180 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing a combined approximately 444,000 rentable square feet. As of March 31, 2021, our properties are located in 34 states and the District of Columbia and contain approximately 24,568,000 rentable square feet. As of March 31, 2021, our properties were leased to 340 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 4.9 years. The U.S. government is our largest tenant, representing approximately 25.9% of our annualized rental income as of March 31, 2021. The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of March 31, 2021, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. COVID-19 Pandemic The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact, as well as the general uncertainty surrounding the dangers and impact of the pandemic, continue to have a significant impact on the global economy, including the U.S. economy. To date, the COVID-19 pandemic has not had a significant impact on our business and we believe that our current financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic. However, we have received requests from some of our tenants for rent assistance. As of April 26, 2021, we have granted temporary rent assistance totaling $2,483 to 18 tenants who represent approximately 3.2% of our annualized rental income as of March 31, 2021. This assistance generally entails a deferral of, in most cases, one month of rent pursuant to deferred payment plans which require the deferred rent amounts be payable over a 12-month period, all of which have commenced. As of April 26, 2021, we have collected $2,118, or 85.3%, of our granted rent deferrals. Our manager, RMR LLC, has taken various actions in response to the COVID-19 pandemic to address its operating and financial impact on us and to protect the health and safety of our tenants and other persons who visit our properties. In addition, we are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. For more information regarding these actions and monitoring activities, see our 2020 Annual Report. The U.S economy has been growing as COVID-19 vaccinations are increasingly administered, commercial activities increasingly return to pre-pandemic practices and operations, and as a result of recent and expected future government spending on COVID-19 pandemic relief, infrastructure and other matters. However, there remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic on commercial activities, including risks that may arise from mutations or related strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and the impact on the U.S. economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens’ ability to otherwise achieve immunity to the virus. As a result, we are unable to determine what the ultimate impact will be on our, our tenants’ and other stakeholders’ businesses, operations, financial results and financial position. For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1, “Business—COVID-19 Pandemic” and Part I, Item 1A, “Risk Factors”, of our 2020 Annual Report. Property Operations Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of March 31, 2021 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For 15 Table of Contents more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Occupancy data for our properties as of March 31, 2021 and 2020 was as follows (square feet in thousands): All Properties (1) Comparable Properties (2) March 31, March 31, 2021 2020 2021 2020 Total properties (3) 180 184 175 175 Total rentable square feet (4) 24,568 24,906 22,662 22,658 Percent leased (5) 90.8 % 91.5 % 91.3 % 92.1 % (1) Based on properties we owned on March 31, 2021 and 2020, respectively. (2) Based on properties we owned continuously since January 1, 2020; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. (3) Includes one leasable land parcel. (4) Subject to changes when space is remeasured or reconfigured for tenants. (5) Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date. The average effective rental rate per square foot for our properties for the three months ended March 31, 2021 and 2020 are as follows: Three Months Ended March 31, 2021 2020 Average effective rental rate per square foot (1) : All properties (2) $ 25.95 $ 26.03 Comparable properties (3) $ 27.39 $ 27.28 (1) Average effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified. (2) Based on properties we owned on March 31, 2021 and 2020, respectively. (3) Based on properties we owned continuously since January 1, 2020; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. During the three months ended March 31, 2021, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands): Three Months Ended March 31, 2021 Leased Available for Lease Total Beginning of period 22,705 2,184 24,889 Changes resulting from: Disposition of properties (321) — (321) Lease expirations (658) 658 — Lease renewals (1) 542 (542) — New leases (1) 33 (33) — Remeasurements (2) 1 (1) — End of period 22,302 2,266 24,568 (1) Based on leases entered during the three months ended March 31, 2021. (2) Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants. Leases at our properties totaling approximately 658,000 rentable square feet expired during the three months ended March 31, 2021. During the three months ended March 31, 2021, we entered leases totaling approximately 575,000 rentable square feet, including lease renewals of approximately 542,000 rentable square feet and new leases of approximately 33,000 rentable square feet. The weighted (by rentable square feet) average rents were 3.2% above prior rents for the same space and the weighted (by rentable square feet) average lease term for new and renewal leases entered during the three months ended March 31, 2021 was 5.4 years. 16 Table of Contents During the three months ended March 31, 2021, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows (square feet in thousands): Three Months Ended March 31, 2021 New Leases Renewals Total Rentable square feet leased 33 542 575 Tenant leasing costs and concession commitments (1) $ 1,207 $ 5,938 $ 7,145 Tenant leasing costs and concession commitments per rentable square foot (1) $ 35.97 $ 10.96 $ 12.42 Weighted (by square feet) average lease term (years) 7.0 5.3 5.4 Total leasing costs and concession commitments per rentable square foot per year (1) $ 5.12 $ 2.05 $ 2.28 (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. During the three months ended March 31, 2021, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three months ended March 31, 2021, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands): Three Months Ended March 31, 2021 Old Effective Rent Per Square Foot (1) New Effective Rent Per Square Foot (1) Rentable Square Feet New leases $ 17.46 $ 21.29 79 Lease renewals $ 24.31 $ 25.66 529 Total leasing activity $ 23.42 $ 25.10 608 (1) Effective rental rate includes contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excludes lease value amortization. During the three months ended March 31, 2021 and 2020, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows: Three Months Ended March 31, 2021 2020 Lease related costs (1) $ 6,970 $ 7,113 Building improvements (2) 4,526 9,230 Recurring capital expenditures 11,496 16,343 Development, redevelopment and other activities (3) 4,906 3,161 Total capital expenditures $ 16,402 $ 19,504 (1) Lease related costs generally include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and other tenant inducements. (2) Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. (3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue. As of March 31, 2021, we have estimated unspent leasing related obligations of $50,405, of which we expect to spend $25,939 over the next 12 months. As of March 31, 2021, we had leases at our properties totaling approximately 3,517,000 rentable square feet that were scheduled to expire through March 31, 2022. As of April 28, 2021, we expect tenants with leases totaling approximately 2,701,000 rentable square feet that are scheduled to expire through March 31, 2022, to not renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration. Of the approximately 2,701,000 rentable square feet that are expiring and expected to not renew, 1,371,000 rentable square feet have been sold and 263,000 rentable square feet are within a property that is in the planning stage for a potential redevelopment. As a result of the COVID-19 pandemic and its economic impact, overall new leasing volume has remained at a reduced level during the three months ended March 31, 2021 and that trend may continue until market conditions meaningfully improve for a sustained period. However, we remain focused on proactive dialogues with our existing tenants and overall tenant retention. Prevailing market conditions and government and other tenants’ needs at the time we negotiate and enter leases or lease renewals will 17 Table of Contents generally determine rental rates and demand for leased space at our properties, and market conditions and our tenants’ needs are beyond our control. Whenever we renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. We cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter; also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations. As of March 31, 2021, our lease expirations by year are as follows (square feet in thousands): Year (1) Number of Leases Expiring Leased Square Feet Expiring (2) Percent of Total Cumulative Percent of Total Annualized Rental Income Expiring Percent of Total Cumulative Percent of Total 2021 57 3,219 14.4 % 14.4 % $ 56,305 10.0 % 10.0 % 2022 82 2,120 9.5 % 23.9 % 60,395 10.8 % 20.8 % 2023 63 2,402 10.8 % 34.7 % 77,080 13.7 % 34.5 % 2024 56 3,534 15.8 % 50.5 % 88,579 15.8 % 50.3 % 2025 55 2,146 9.6 % 60.1 % 46,562 8.3 % 58.6 % 2026 32 1,734 7.8 % 67.9 % 46,244 8.2 % 66.8 % 2027 32 1,923 8.6 % 76.5 % 48,638 8.7 % 75.5 % 2028 15 875 3.9 % 80.4 % 25,723 4.6 % 80.1 % 2029 15 934 4.2 % 84.6 % 24,831 4.4 % 84.5 % 2030 and thereafter 43 3,415 15.4 % 100.0 % 86,667 15.5 % 100.0 % Total 450 22,302 100.0 % $ 561,024 100.0 % Weighted average remaining lease term (in years) 4.9 4.9 (1) The year of lease expiration is pursuant to current contract terms. Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability. As of March 31, 2021, tenants occupying approximately 6.5% of our rentable square feet and responsible for approximately 7.5% of our annualized rental income as of March 31, 2021 currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2021, 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, and 2035, early termination rights become exercisable by other tenants who currently occupy an additional approximately 1.3%, 2.9%, 1.5%, 1.1%, 2.1%, 1.1%, 0.6%, 1.1%, 0.1%, and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 1.6%, 3.1%, 1.7%, 1.8%, 3.7%, 1.4%, 1.1%, 1.4%, 0.2%, and 0.4% of our annualized rental income, respectively, as of March 31, 2021. In addition, as of March 31, 2021, pursuant to leases with 13 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 13 tenants occupy approximately 5.1% of our rentable square feet and contribute approximately 6.1% of our annualized rental income as of March 31, 2021. (2) Leased square feet is pursuant to leases existing as of March 31, 2021, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to changes when space is remeasured or reconfigured for new tenants. We generally will seek to renew or extend the terms of leases in our single tenant properties when they expire. Because of the capital many of the tenants in these properties have invested in the properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties. We believe that recent government budgetary and spending priorities and enhancements in technology have resulted in a decrease in government office use for employees. Furthermore, over the past several years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties. This activity has reduced the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. However, efforts to manage space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy. Also, our government tenants’ desire to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations are often more prevalent in those circumstances. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals; however, activity prior to the outbreak of the COVID-19 pandemic suggested that the U.S. government had begun to shift its leasing strategy to include 18 Table of Contents longer term leases and was actively exploring 10 to 20 year lease terms at renewal, in some instances. It is also possible that as a result of the COVID-19 pandemic, government tenants may seek to manage space utilization rates in order to provide greater physical distancing for employees, mostly through lease renewals, which may require us to spend significant amounts for tenant improvements. However, the COVID-19 pandemic and its aftermath have had negative impacts on government budgets and resources, although there are indications that to date, certain of those impacts may not have been as negative as originally expected, and it is unclear what the effect of these impacts will be on government demand for leasing office space. In addition, the new presidential administration may result in a change in the federal government’s policy priorities, which may impact leasing at our government leased properties. Given the significant uncertainties, including as to the COVID-19 pandemic, its economic impact and its aftermath and the new presidential administration, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on our financial results for future periods. As of March 31, 2021, we derive 24.0% of our annualized rental income from our properties located in the metropolitan Washington, D.C. market area, which includes Washington, D.C., Northern Virginia and suburban Maryland. A downturn in economic conditions in this area, including as a result of the COVID-19 pandemic, could result in reduced demand from tenants for our properties or reduce the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased office space by the U.S. government in the metropolitan Washington, D.C. market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants when our leases expire. Our manager, RMR LLC, employs a tenant review process for us. RMR LLC assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR LLC evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. RMR LLC also often uses a third party service to monitor the credit ratings, both actual and implied, of our existing tenants. We consider investment grade tenants to include: (a) investment grade rated tenants; (b) tenants with investment grade rated parent entities that guarantee the tenant’s lease obligations; and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations. As of March 31, 2021, tenants contributing 56.1% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 8.6% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents). 19 Table of Contents As of March 31, 2021, tenants representing 1% or more of our total annualized rental income were as follows: Tenant Credit Rating Sq. Ft. % of Leased Sq. Ft. Annualized Rental Income % of Total Annualized Rental Income 1 U.S. Government Investment Grade 5,310 23.8 % $ 145,196 25.9 % 2 Shook, Hardy & Bacon L.L.P. Not Rated 596 2.7 % 19,377 3.5 % 3 State of California Investment Grade 648 2.9 % 19,243 3.4 % 4 Bank of America Corporation Investment Grade 577 2.6 % 15,803 2.8 % 5 F5 Networks, Inc. Not Rated 299 1.3 % 13,027 2.3 % 6 Commonwealth of Massachusetts Investment Grade 311 1.4 % 12,281 2.2 % 7 CareFirst Inc. Not Rated 207 0.9 % 11,870 2.1 % 8 Northrop Grumman Corporation Investment Grade 337 1.5 % 11,447 2.0 % 9 Tyson Foods, Inc. Investment Grade 248 1.1 % 11,198 2.0 % 10 Micro Focus International plc Non Investment Grade 406 1.8 % 8,710 1.6 % 11 CommScope Holding Company Inc Non Investment Grade 228 1.0 % 8,166 1.5 % 12 State of Georgia Investment Grade 308 1.4 % 7,248 1.3 % 13 PNC Bank Investment Grade 441 2.0 % 6,915 1.2 % 14 Compass Group plc Investment Grade 267 1.2 % 6,639 1.2 % 15 ServiceNow, Inc. Investment Grade 149 0.7 % 6,623 1.2 % 16 Allstate Insurance Co. Investment Grade 468 2.1 % 6,473 1.2 % 17 Automatic Data Processing, Inc. Investment Grade 289 1.3 % 6,037 1.1 % 18 Church & Dwight Co., Inc. Investment Grade 250 1.1 % 6,031 1.1 % Total 11,339 50.8 % $ 322,284 57.6 % Acquisition Activities As of April 28, 2021, we have entered into an agreement to acquire a property adjacent to a property we own in Boston, MA containing approximately 49,000 rentable square feet for $26,975, excluding acquisition related costs. This acquisition is expected to occur before the end of the second quarter. However, this acquisition is subject to conditions; accordingly, we cannot be sure that we will complete this acquisition or that this acquisition will not be delayed or the terms will not change. For more information about our acquisition activities, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Disposition Activities During the three months ended March 31, 2021, we sold two properties containing a combined approximately 321,000 rentable square feet for an aggregate sales price of $130,845, excluding closing costs. In April 2021, we sold a property located in Huntsville, AL containing approximately 1,371,000 rentable square feet for a sales price of $39,000, excluding closing costs. Also in April 2021, we entered into an agreement to sell a property located in Liverpool, NY containing approximately 38,000 rentable square feet for a sales price of $650, excluding closing costs. This sale is expected to occur before the end of the second quarter. However, this sale is subject to conditions; accordingly, we cannot be sure that we will complete this sale or that this sale will not be delayed or the terms will not change. For more information about our disposition activities, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Segment Information We operate in one business segment: ownership of real estate properties. 20 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share amounts) Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020 Comparable Properties (1) Results Three Months Ended March 31, Non-Comparable Properties Results Three Months Ended March 31, Consolidated Results Three Months Ended March 31, 2021 2020 $ Change % Change 2021 2020 2021 2020 $ Change % Change Rental income $ 140,975 $ 140,931 $ 44 — % $ 3,549 $ 8,954 $ 144,524 $ 149,885 $ (5,361) (3.6 %) Operating expenses: Real estate taxes 15,907 15,688 219 1.4 % 247 1,119 16,154 16,807 (653) (3.9 %) Utility expenses 6,274 6,767 (493) (7.3 %) 158 245 6,432 7,012 (580) (8.3 %) Other operating expenses 24,935 24,376 559 2.3 % 504 1,504 25,439 25,880 (441) (1.7 %) Total operating expenses 47,116 46,831 285 0.6 % 909 2,868 48,025 49,699 (1,674) (3.4 %) Net operating income (2) $ 93,859 $ 94,100 $ (241) (0.3 %) $ 2,640 $ 6,086 96,499 100,186 (3,687) (3.7 %) Other expenses: Depreciation and amortization 64,087 62,943 1,144 1.8 % Loss on impairment of real estate 7,660 — 7,660 n/m General and administrative 11,272 7,109 4,163 58.6 % Total other expenses 83,019 70,052 12,967 18.5 % Gain on sale of real restate 54,004 10,756 43,248 n/m Interest and other income 5 706 (701) (99.3 %) Interest expense (28,798) (27,159) (1,639) 6.0 % Loss on early extinguishment of debt — (3,282) 3,282 n/m Income before income tax expense and equity in net losses of investees 38,691 11,155 27,536 n/m Income tax expense (435) (39) (396) n/m Equity in net losses of investees (396) (276) (120) 43.5 % Net income $ 37,860 $ 10,840 $ 27,020 n/m Weighted average common shares outstanding (basic) 48,161 48,095 66 0.1 % Weighted average common shares outstanding (diluted) 48,196 48,095 101 0.2 % Per common share amounts (basic and diluted): Net income $ 0.78 $ 0.23 $ 0.55 n/m n/m - not meaningful (1) Comparable properties consists of 175 properties we owned on March 31, 2021 and which we owned continuously since January 1, 2020 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. (2) Our definition of net operating income, or NOI, and our reconciliation of net income to NOI are included below under the heading “Non-GAAP Financial Measures.” References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended March 31, 2021, compared to the three months ended March 31, 2020. Rental income. The decrease in rental income reflects decreases in rental income of $6,168 as a result of property disposition activities and $49 for a property undergoing significant redevelopment, offset by increases in rental income of $812 related to acquired properties and $44 related to comparable properties. Rental income includes non-cash straight line rent adjustments totaling $5,357 in the 2021 period and $5,583 in the 2020 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling ($722) in the 2021 period and ($1,432) in the 2020 period. 21 Table of Contents Real estate taxes. The decrease in real estate taxes primarily reflects decreases in real estate taxes of $690 as a result of property disposition activities and $182 for a property undergoing significant redevelopment, offset by an increase of $219 for comparable properties. Real estate taxes for comparable properties increased primarily due to a refund received in the 2020 period at one of our properties as a result of a successful real estate tax appeal, as well as the effect of higher real estate tax rates and valuation assessments at certain of our comparable properties in the 2021 period. Utility expenses. The decrease in utility expenses reflects decreases in utility expenses for comparable properties of $493 and $196 as a result of property disposition activities, offset by an increase in utility expenses of $109 for a property undergoing significant redevelopment. Utility expenses for comparable properties declined primarily due to a decrease in electricity and water usage resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, as well as the implementation of real time energy management programs at certain of our properties. Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees. The decrease in other operating expenses primarily reflects a decrease of $1,062 as a result of property disposition activities, offset by an increase in other operating expenses of $559 for comparable properties and $62 for acquired properties. Other operating expenses for comparable properties increased primarily due to higher snow removal costs in the 2021 period, partially offset by lower cleaning costs as a result of cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic and lower parking garage maintenance costs at certain of our properties due to lower parking activity resulting from the COVID-19 pandemic. Depreciation and amortization. The increase in depreciation and amortization is primarily the result of increases of $1,697 related to the accelerated amortization of an intangible lease asset as a result of an early lease termination, $591 related to depreciation and amortization of improvements made to certain of our properties after January 1, 2020 and $354 for acquired properties, offset by a decrease of $1,498 related to property disposition activities. Loss on impairment of real estate. We recorded a $7,660 loss on impairment of real estate in the 2021 period to reduce the carrying value of two properties to their estimated fair values less costs to sell. General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The increase in general and administrative expenses is primarily the result of $5,200 of estimated business management incentive fees recorded in the 2021 period, partially offset by a decrease in base business management fees resulting from declines in our share price in the 2021 period compared to the 2020 period, the expiration of an office lease in January 2021 where we were the lessee and lower legal costs. Gain on sale of real estate. We recorded a $54,004 net gain on sale of real estate resulting from the sale of two properties in the 2021 period. We recorded a $10,756 net gain on sale of real estate resulting from the sale of six properties in the 2020 period. Interest and other income. The decrease in interest and other income is primarily due to a settlement we received in the 2020 period resulting from a dispute with a vendor, the effect of lower returns on cash invested in the 2021 period compared to the 2020 period and the June 2020 payoff of a mortgage note receivable in connection with a property we sold in 2016. Interest expense. The increase in interest expense is primarily due to the issuance of $162,000 of 6.375% senior unsecured notes in June and July 2020 and $250,000 of our 4.50% senior unsecured notes in September 2020, partially offset by lower interest expense incurred as a result of having no amounts outstanding under our revolving credit facility during the 2021 period and the repayment of four mortgage notes with an aggregate principal balance of $152,187 in 2020. Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of $3,282 in the 2020 period from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of two mortgage notes and the redemption of our 3.60% senior unsecured notes due 2020. Income tax expense. The increase in income tax expense is primarily the result of the net gain on sale of real estate recorded in the 2021 period. Equity in net losses of investees. Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures. 22 Table of Contents Net income. Net income and net income per basic and diluted common share increased in the 2021 period compared to the 2020 period primarily as a result of the changes noted above. Non-GAAP Financial Measures We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or SEC, including the calculations below of NOI, funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income as presented in our condensed consolidated statements of comprehensive income. We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties. Net Operating Income The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our property level results of operations. We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do. The following table presents the reconciliation of net income to NOI for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, 2021 2020 Net income $ 37,860 $ 10,840 Equity in net losses of investees 396 276 Income tax expense 435 39 Income before income tax expense and equity in net losses of investees 38,691 11,155 Loss on early extinguishment of debt — 3,282 Interest expense 28,798 27,159 Interest and other income (5) (706) Gain on sale of real estate (54,004) (10,756) General and administrative 11,272 7,109 Loss on impairment of real estate 7,660 — Depreciation and amortization 64,087 62,943 NOI $ 96,499 $ 100,186 23 Table of Contents Funds From Operations and Normalized Funds From Operations We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income, calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. The following table presents the reconciliation of net income to FFO and Normalized FFO for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, 2021 2020 Net income $ 37,860 $ 10,840 Add (less): Depreciation and amortization: Consolidated properties 64,087 62,943 Unconsolidated joint venture properties 1,006 1,241 Loss on impairment of real estate 7,660 — Gain on sale of real estate (54,004) (10,756) FFO 56,609 64,268 Add (less): Loss on early extinguishment of debt — 3,282 Estimated business management incentive fees 5,200 — Normalized FFO $ 61,809 $ 67,550 Weighted average common shares outstanding (basic) 48,161 48,095 Weighted average common shares outstanding (diluted) 48,196 48,095 FFO per common share (basic) $ 1.18 $ 1.34 FFO per common share (diluted) $ 1.17 $ 1.34 Normalized FFO per common share (basic and diluted) $ 1.28 $ 1.40 LIQUIDITY AND CAPITAL RESOURCES Our Operating Liquidity and Resources (dollar amounts in thousands) Our principal sources of funds to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate from our properties, net proceeds from property sales and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon: • our ability to collect rent from our tenants; • our ability to maintain or increase the occupancy of, and the rental rates at, our properties; • our ability to control operating and capital expenses at our properties; • our ability to successfully sell properties that we market for sale; • our ability to develop or redevelop properties to produce cash flows in excess of our cost of capital; and 24 Table of Contents • our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating and capital expenses. With $750,000 available under our revolving credit facility as of April 28, 2021 and no debt maturities until 2022, we believe that we are well positioned to weather the present disruptions facing the real estate industry and the economy generally. As a result of the COVID-19 pandemic, we have received requests from some of our tenants for rent assistance. As of April 26, 2021, we have granted temporary rent assistance totaling $2,483 to 18 tenants who represent approximately 3.2% of our annualized rental income as of March 31, 2021. This assistance generally entails a deferral of, in most cases, one month of rent pursuant to deferred payment plans which require the deferred rent amounts be payable over a 12-month period, all of which have commenced. As of April 26, 2021, we have collected $2,118, or 85.3%, of our granted rent deferrals. Although some of our tenants have sought temporary rent assistance, we remain focused on proactive dialogu es with our existing tenants and overall tenant retention. Also, we believe we will benefit from the approximately 64.7% of our annualized rental income as of March 31, 2021 paid by investment grade tenants, the majority of which is made up of government tenants, and the diversity of our tenant base, both geographically and by industry, which may help mitigate the economic impact of the COVID-19 pandemic . On April 15, 2021, we announced a continuation of our regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year). We determine our distribution payout ratio with consideration for our expected capital expenditures as well as cash flows from operations and debt obligations. We expect to accretively grow our property portfolio through our capital recycling program, pursuant to which we plan to sell certain properties from time to time to fund future acquisitions and to maintain leverage consistent with our current investment grade ratings with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution. During the three months ended March 31, 2021, we sold two properties for an aggregate sales price of $130,845, excluding closing costs and sold another property in April 2021 for a sales price of $39,000, excluding closing costs. In addition, as of April 28, 2021 , we have entered into an agreement to sell one property for a sales price of $650, excluding closing costs and have entered into an agreement to acquire a property adjacent to a property we own in Boston, MA for $26,975, excluding acquisition related costs. Given the current economic conditions, we continue to carefully consider our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital. Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows. The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows: Three Months Ended March 31, 2021 2020 Cash, cash equivalents and restricted cash at beginning of period $ 56,855 $ 100,696 Net cash provided by (used in): Operating activities 57,942 37,601 Investing activities 113,896 42,095 Financing activities (27,218) (146,386) Cash, cash equivalents and restricted cash at end of period $ 201,475 $ 34,006 The increase in cash provided by operating activities for the 2021 period compared to the 2020 period was a result of favorable changes in working capital in the 2021 period compared to the 2020 period, partially offset by a decline in NOI as a result of property sales. The increase in cash provided by investing activities in the 2021 period compared to the 2020 period is primarily due to higher cash proceeds received from our sales of properties and lower acquisition activity in the 2021 period compared to the 2020 period. The decrease in cash used in financing activities in the 2021 period compared to the 2020 period is primarily due to a decrease in net debt repayment activity in the 2021 period compared to the 2020 period, which included the redemption of $400,000 of our 3.60% senior unsecured notes and the repayment of approximately $67,000 in mortgage debt using borrowings under our revolving credit facility and proceeds received from our sales of properties. 25 Table of Contents Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share amounts) In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 revolving credit facility. 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 March 31, 2021, on the amount outstanding under our revolving credit facility, if any. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at March 31, 2021. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of March 31, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.2%. As of March 31, 2021 and April 28, 2021, we had no amounts outstanding under our revolving credit facility and $750,000 available for borrowing. Our credit agreement includes a feature under which the maximum borrowing availability may be increased to up to $1,950,000 in certain circumstances. Our credit agreement provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under our $750,000 revolving credit facility only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries. As of March 31, 2021, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows: Year Debt Maturities 2021 $ 896 2022 625,518 2023 143,784 2024 350,000 2025 650,000 Thereafter 472,000 Total $ 2,242,198 None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our $170,198 in mortgage debts generally require monthly payments of principal and interest through maturity. In addition to our debt obligations, as of March 31, 2021, we have estimated unspent leasing related obligations of $50,405, of which we expect to spend $25,939 over the next 12 months. We are currently in the planning stage for a potential redevelopment project at a property located in Washington, D.C. containing approximately 340,000 rentable square feet. This redevelopment project may require significant capital expenditures and time to complete. We cannot be sure that we will complete this redevelopment project, that our plans for this project will not change or that this project will ultimately be successful. We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from property sales, incurrences or assumptions of mortgage debt and net proceeds from offerings of debt or equity securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives. Such alternatives may include incurring term debt, issuing debt or equity securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. 26 Table of Contents Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention. For instance, it is uncertain what the duration and severity of the current economic impact resulting from the COVID-19 pandemic will be. A protracted and extensive economic recession may cause a decline in financing availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources. During the three months ended March 31, 2021, we paid a quarterly distribution to our shareholders totaling $26,575 using cash on hand. On April 15, 2021, we declared a regular quarterly distribution payable to shareholders of record on April 26, 2021 of $0.55 per share, or approximately $26,600. We expect to pay this distribution on or about May 20, 2021 using cash on hand. For more information regarding the distributions we paid and declared during 2021, see Note 8 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We own 51% and 50% interests in two unconsolidated joint ventures which own three properties. The properties owned by these joint ventures are encumbered by an aggregate $82,000 principal amount of mortgage indebtedness, none of which is recourse to us. We do not control the activities that are most significant to these joint ventures and, as a result, we account for our investments in these joint ventures under the equity method of accounting. For more information on the financial condition and results of operations of these joint ventures, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Other than these joint ventures, as of March 31, 2021, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Debt Covenants (dollars in thousands) Our principal debt obligations at March 31, 2021 consisted of an aggregate outstanding principal balance of $2,072,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $170,198, that were assumed in connection with certain of our acquisitions. Also, the three properties owned by two joint ventures in which we own 51% and 50% interests secure two additional mortgage notes. Our publicly issued senior unsecured notes are governed by indentures and their supplements. Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding 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 RMR LLC ceasing to act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances. As of March 31, 2021, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. Neither our credit agreement nor our senior unsecured notes indentures and their supplements contain provisions for acceleration which could be triggered by our credit ratings. However, under our credit agreement our highest senior credit rating is used to determine the fees and interest rates we pay. Accordingly, if that credit rating is downgraded, our interest expense and related costs under our credit agreement would increase. Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances). Related Person Transactions We have relationships and historical and continuing transactions with RMR LLC, RMR Inc. and others related to them. For more information about these and other such relationships and related person transactions, see Notes 9 and 10 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2020 Annual Report, our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and our other filings with the 27 Table of Contents SEC. In addition, see the section captioned “Risk Factors” of our 2020 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.