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) June 30, 2021 December 31, 2020 ASSETS Real estate properties: Land $ 865,218 $ 830,884 Buildings and improvements 2,982,746 2,691,259 Total real estate properties, gross 3,847,964 3,522,143 Accumulated depreciation ( 455,135 ) ( 451,914 ) Total real estate properties, net 3,392,829 3,070,229 Assets of properties held for sale 47,698 75,177 Investments in unconsolidated joint ventures 36,669 37,951 Acquired real estate leases, net 570,449 548,943 Cash and cash equivalents 18,667 42,045 Restricted cash 1,414 14,810 Rents receivable 90,985 101,766 Deferred leasing costs, net 46,185 42,626 Other assets, net 6,317 12,889 Total assets $ 4,211,213 $ 3,946,436 LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ 385,000 $ — Senior unsecured notes, net 2,032,764 2,033,242 Mortgage notes payable, net 98,739 169,729 Liabilities of properties held for sale 2,427 891 Accounts payable and other liabilities 127,359 116,480 Due to related persons 17,882 6,114 Assumed real estate lease obligations, net 18,492 10,588 Total liabilities 2,682,663 2,337,044 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ 0.01 par value: 200,000,000 shares authorized, 48,334,357 and 48,318,366 shares issued and outstanding, respectively 483 483 Additional paid in capital 2,616,450 2,615,305 Cumulative net income 155,058 183,895 Cumulative common distributions ( 1,243,441 ) ( 1,190,291 ) Total shareholders’ equity 1,528,550 1,609,392 Total liabilities and shareholders’ equity $ 4,211,213 $ 3,946,436 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Rental income $ 137,099 $ 145,603 $ 281,623 $ 295,488 Expenses: Real estate taxes 15,912 15,781 32,066 32,588 Utility expenses 5,310 5,201 11,742 12,213 Other operating expenses 24,898 25,787 50,337 51,667 Depreciation and amortization 55,371 64,170 119,458 127,113 Loss on impairment of real estate 48,197 — 55,857 — General and administrative 12,970 7,204 24,242 14,313 Total expenses 162,658 118,143 293,702 237,894 Gain on sale of real estate 114 66 54,118 10,822 Interest and other income 2 30 7 736 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,492 , $ 2,402 , $ 4,924 and $ 4,685 , respectively) ( 29,001 ) ( 25,205 ) ( 57,799 ) ( 52,364 ) Loss on early extinguishment of debt ( 11,794 ) ( 557 ) ( 11,794 ) ( 3,839 ) Income (loss) before income tax (expense) benefit and equity in net losses of investees ( 66,238 ) 1,794 ( 27,547 ) 12,949 Income tax (expense) benefit 121 ( 235 ) ( 314 ) ( 274 ) Equity in net losses of investees ( 580 ) ( 260 ) ( 976 ) ( 536 ) Net income (loss) ( 66,697 ) 1,299 ( 28,837 ) 12,139 Other comprehensive income (loss): Unrealized gain on financial instrument — 176 — 115 Other comprehensive income — 176 — 115 Comprehensive income (loss) $ ( 66,697 ) $ 1,475 $ ( 28,837 ) $ 12,254 Weighted average common shares outstanding (basic and diluted) 48,165 48,106 48,163 48,101 Per common share amounts (basic and diluted): Net income (loss) $ ( 1.38 ) $ 0.03 $ ( 0.60 ) $ 0.25 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, 2020 48,318,366 $ 483 $ 2,615,305 $ 183,895 $ — $ ( 1,190,291 ) $ 1,609,392 Share grants — — 321 — — — 321 Net income — — — 37,860 — — 37,860 Distributions to common shareholders — — — — — ( 26,575 ) ( 26,575 ) Balance at March 31, 2021 48,318,366 483 2,615,626 221,755 — ( 1,216,866 ) 1,620,998 Share grants 28,000 — 1,176 — — — 1,176 Share repurchases ( 12,009 ) — ( 352 ) — — — ( 352 ) Net loss — — — ( 66,697 ) — — ( 66,697 ) Distributions to common shareholders — — — — — ( 26,575 ) ( 26,575 ) Balance at June 30, 2021 48,334,357 $ 483 $ 2,616,450 $ 155,058 $ — $ ( 1,243,441 ) $ 1,528,550 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 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 CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 28,837 ) $ 12,139 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 43,313 41,318 Net amortization of debt premiums, discounts and issuance costs 4,924 4,685 Amortization of acquired real estate leases 74,301 85,726 Amortization of deferred leasing costs 3,766 3,380 Gain on sale of real estate ( 54,118 ) ( 10,822 ) Loss on impairment of real estate 55,857 — Loss on early extinguishment of debt 9,294 2,701 Straight line rental income ( 9,204 ) ( 9,051 ) Other non-cash expenses, net 952 957 Equity in net losses of investees 976 536 Change in assets and liabilities: Rents receivable 15,206 ( 2,162 ) Deferred leasing costs ( 8,764 ) ( 8,803 ) Other assets 3,986 5,300 Accounts payable and other liabilities ( 6,044 ) ( 14,429 ) Due to related persons 11,768 ( 285 ) Net cash provided by operating activities 117,376 111,190 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions ( 535,902 ) ( 11,864 ) Real estate improvements ( 31,303 ) ( 32,050 ) Distributions in excess of earnings from unconsolidated joint ventures 306 153 Distributions in excess of earnings from Affiliates Insurance Company — 287 Proceeds from sale of properties, net 166,432 81,528 Proceeds from repayment of mortgage note receivable — 2,880 Net cash (used in) provided by investing activities ( 400,467 ) 40,934 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable ( 71,939 ) ( 114,413 ) Repayment of senior unsecured notes ( 310,000 ) ( 400,000 ) Proceeds from issuance of senior unsecured notes, net 297,699 145,275 Borrowings on unsecured revolving credit facility 420,000 481,467 Repayments on unsecured revolving credit facility ( 35,000 ) ( 281,467 ) Payment of debt issuance costs ( 941 ) ( 503 ) Repurchase of common shares ( 352 ) ( 57 ) Distributions to common shareholders ( 53,150 ) ( 53,021 ) Net cash provided by (used in) financing activities 246,317 ( 222,719 ) Decrease in cash, cash equivalents and restricted cash ( 36,774 ) ( 70,595 ) Cash, cash equivalents and restricted cash at beginning of period 56,855 100,696 Cash, cash equivalents and restricted cash at end of period $ 20,081 $ 30,101 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 (CONTINUED) (dollars in thousands) (unaudited) Six Months Ended June 30, 2021 2020 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 53,722 $ 53,811 Income taxes paid $ 287 $ — NON-CASH INVESTING ACTIVITIES: Real estate improvements accrued, not paid $ 18,472 $ 15,112 Real estate acquisitions $ ( 13,031 ) $ — Capitalized interest $ 150 $ 69 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 June 30, 2021 2020 Cash and cash equivalents $ 18,667 $ 24,485 Restricted cash (1) 1,414 5,616 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 20,081 $ 30,101 (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. 7 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, 2020, or our 2020 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. 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 six months ended June 30, 2021 and 2020, there were no dilutive common shares and certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive. Note 3. Real Estate Properties As of June 30, 2021, our wholly owned properties were comprised of 181 properties containing a combined approximately 24,091,000 rentable square feet. The aggregate undepreciated carrying value of our wholly owned properties as of June 30, 2021 was $ 3,889,200 , including $ 41,236 classified as held for sale, 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. 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 2021 and 2053. 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 June 30, 2021, we entered into 25 leases for approximately 548,000 rentable square feet for a weighted (by rentable square feet) average lease term of 16.6 years and we made commitments for approximately $ 76,702 of leasing related costs. During the six months ended June 30, 2021, we entered into 45 leases for approximately 1,123,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.9 years and we made commitments for approximately $ 83,847 of leasing related costs. As of June 30, 2021, we had estimated unspent leasing related obligations of $ 113,099 . 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 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 During the six months ended June 30, 2021, we acquired two properties containing a combined approximately 877,000 rentable square feet for an aggregate purchase price of $ 548,933 , including net purchase price adjustments of $ 1,761 and 8 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) acquisition related costs of $ 694 . These acquisitions were accounted for as asset acquisitions. We allocated the purchase prices of these acquisitions based on the relative estimated fair values of the acquired assets and assumed liabilities as follows: Acquisition Date Location Number of Properties Rentable Square Feet Purchase Price Land Buildings and Improvements Acquired Real Estate Leases Assumed Real Estate Lease Obligations June 2021 Chicago, IL (1) 1 531,000 $ 368,331 $ 42,935 $ 258,348 $ 76,136 $ ( 9,088 ) June 2021 Atlanta, GA 1 346,000 180,602 13,040 135,459 32,103 — 2 877,000 $ 548,933 $ 55,975 $ 393,807 $ 108,239 $ ( 9,088 ) (1) Purchase price includes an adjustment of $ 13,031 to record an estimated real estate tax liability as of the acquisition date. As of July 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 third 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. Disposition Activities During the six months ended June 30, 2021, we sold two properties and a warehouse facility adjacent to a property we own containing a combined approximately 1,692,000 rentable square feet for an aggregate sales price of $ 169,845 , excluding closing costs. 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 Loss on Impairment of Real Estate January 2021 — Kansas City, MO (2) 10,000 $ 845 $ ( 63 ) $ — January 2021 1 Richmond, VA 311,000 130,000 54,181 — April 2021 1 Huntsville, AL 1,371,000 39,000 — 5,371 2 1,692,000 $ 169,845 $ 54,118 $ 5,371 (1) Gross sales price is the gross contract price, includes purchase price adjustments, if any, and excludes closing costs. (2) Consists of a warehouse facility adjacent to a property we own in Kansas City, MO. As of June 30, 2021, we had three properties under agreement to sell for an aggregate sales price of $ 21,920 , excluding closing costs. These properties were classified as held for sale in our condensed consolidated balance sheet as of June 30, 2021 and are summarized below: Date of Sale Agreement Number of Properties Location Rentable Square Feet Gross Sales Price (1) Loss on Impairment of Real Estate April 2021 1 Liverpool, NY (2) 38,000 $ 650 $ — May 2021 1 Fresno, CA (2) 532,000 6,000 33,917 May 2021 1 Memphis, TN 205,000 15,270 — 3 775,000 $ 21,920 $ 33,917 (1) Gross sales price is the gross contract price, includes purchase price adjustments, if any, and excludes closing costs. (2) The sales of these properties were completed in July 2021. 9 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) As of June 30, 2021, we also had an additional four properties with approximately 546,000 rentable square feet classified as held for sale in our condensed consolidated balance sheet. We recorded a $ 16,569 loss on impairment of real estate during the six months ended June 30, 2021, including $ 14,280 recorded during the three months ended June 30, 2021, to adjust the carrying value of these properties to their estimated fair values less cost to sell. 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 June 30, 2021 and December 31, 2020, our investments in unconsolidated joint ventures consisted of the following: OPI Carrying Value of Investments at Joint Venture OPI Ownership June 30, 2021 December 31, 2020 Number of Properties Location Rentable Square Feet Prosperity Metro Plaza 51 % $ 21,431 $ 21,888 2 Fairfax, VA 329,000 1750 H Street, NW 50 % 15,238 16,063 1 Washington, D.C. 115,000 Total $ 36,669 $ 37,951 3 444,000 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 June 30, 2021 and December 31, 2020 (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 June 30, 2021, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $ 7,220 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 4. Leases 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 a remote contingency 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 $ 3,847 and $ 3,468 for the three months ended June 30, 2021 and 2020, respectively, and $ 9,204 and $ 9,051 for the six months ended June 30, 2021 and 2020, respectively. Rents receivable, excluding properties classified as held for sale, include $ 74,674 and $ 68,824 of straight line rent receivables at June 30, 2021 and December 31, 2020, 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 $ 17,488 and $ 36,348 for the 10 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) three and six months ended June 30, 2021, respectively, of which tenant reimbursements totaled $ 16,639 and $ 34,442 , respectively. For the three and six months ended June 30, 2020, such payments totaled $ 18,302 and $ 38,048 , respectively, of which tenant reimbursements totaled $ 17,229 and $ 35,851 , respectively. Note 5. Concentration Tenant and Credit 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 June 30, 2021, the U.S. government, 11 state governments and four other government tenants combined were responsible for approximately 31.9 % of our annualized rental income. As of June 30, 2020, the U.S. government, 11 state governments and two other government tenants combined were responsible for approximately 35.1 % of our annualized rental income. The U.S. government is our largest tenant by annualized rental income and represented approximately 22.0 % and 25.2 % of our annualized rental income as of June 30, 2021 and 2020, respectively. Geographic Concentration At June 30, 2021, our 181 wholly owned properties were located in 34 states and the District of Columbia. Properties located in California, Virginia, the District of Columbia, Illinois and Georgia were responsible for 12.1 %, 12.1 %, 9.4 %, 9.0 % and 7.9 % of our annualized rental income as of June 30, 2021, respectively. Note 6. Indebtedness Our principal debt obligations at June 30, 2021 were: (1) $ 385,000 of outstanding borrowings under our $ 750,000 unsecured revolving credit facility; (2) $ 2,062,000 aggregate outstanding principal amount of senior unsecured notes; and (3) $ 98,903 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 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 June 30, 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 June 30, 2021. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of June 30, 2021 and December 31, 2020, the annual interest rate payable on borrowings under our revolving credit facility was 1.2 %. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.2 % and 1.3 % for the three months ended June 30, 2021 and 2020, respectively, and 1.2 % and 2.1 % for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and July 28, 2021, we had $ 385,000 and $ 380,000 , respectively, outstanding under our revolving credit facility, and $ 365,000 and $ 370,000 , respectively, 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 June 30, 2021. In May 2021, we issued $ 300,000 of 2.650 % senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of $ 296,758 , after deducting underwriters’ discounts and offering expenses. These notes require semi-annual payments of interest only through maturity on June 15, 2026 and may be repaid at par plus accrued and unpaid interest on or after May 15, 2026. 11 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) In June 2021, we redeemed, at par plus accrued interest, all $ 310,000 of our 5.875 % senior unsecured notes due 2046. As a result of this redemption, we recognized a loss on early extinguishment of debt of $ 8,581 during the six months ended June 30, 2021, from the write off of unamortized debt issuance costs. Also in June 2021, we prepaid, at a premium plus accrued interest, a mortgage note secured by three properties with an outstanding principal balance of $ 71,000 , an annual interest rate of 3.55 % and a maturity date in May 2023. As a result of the prepayment of this mortgage note, we recognized a loss on early extinguishment of debt of $ 3,213 during the six months ended June 30, 2021, from a prepayment penalty and the write off of unamortized discounts. At June 30, 2021, three of our properties with an aggregate net book value of $ 190,969 were encumbered by mortgage notes with an aggregate principal amount of $ 98,903 . Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants. Note 7. Fair Value of Assets and Liabilities The following table presents certain of our assets measured at fair value at June 30, 2021, 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)(2) $ 33,300 $ — $ 6,000 $ 27,300 (1) We recorded an impairment charge of $ 33,917 to reduce the carrying value of one property that is classified as held for sale in our condensed consolidated balance sheet to its estimated fair value, less estimated costs to sell of $ 200 , based upon a negotiated sales price with a third party buyer (Level 2 inputs as defined in the fair value hierarchy under GAAP). See Note 3 for more information. (2) We recorded impairment charges of $ 16,569 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 estimated costs to sell of $ 714 , based on third party offers (Level 3 inputs as defined in the fair value hierarchy under GAAP). See Note 3 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 As of December 31, 2020 Financial Instrument Carrying Value (1) Fair Value Carrying Value (1) Fair Value Senior unsecured notes, 4.15 % interest rate, due in 2022 $ 299,383 $ 305,106 $ 298,853 $ 306,192 Senior unsecured notes, 4.00 % interest rate, due in 2022 299,039 309,770 298,579 306,756 Senior unsecured notes, 4.25 % interest rate, due in 2024 343,440 371,942 342,299 365,435 Senior unsecured notes, 4.50 % interest rate, due in 2025 637,645 706,485 635,921 688,399 Senior unsecured notes, 2.650 % interest rate, due in 2026 (2) 296,834 303,923 — — Senior unsecured notes, 5.875 % interest rate, due in 2046 (3) — — 301,264 322,028 Senior unsecured notes, 6.375 % interest rate, due in 2050 156,423 174,442 156,326 171,590 Mortgage notes payable (4) 98,739 101,892 169,729 174,952 Total $ 2,131,503 $ 2,273,560 $ 2,202,971 $ 2,335,352 (1) Includes unamortized debt premiums, discounts and issuance costs totaling $ 29,400 and $ 39,871 as of June 30, 2021 and December 31, 2020, respectively. (2) These senior notes were issued in May 2021. (3) These senior notes were redeemed in June 2021. (4) Balance as of December 31, 2020 includes one mortgage note secured by three properties with an outstanding principal balance of $ 71,000 that was prepaid in June 2021. 12 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) 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 values may differ materially from the actual fair values. Note 8. Shareholders’ Equity Share Awards On June 17, 2021, in accordance with our Trustee compensation arrangements, we awarded to each of our eight Trustees 3,500 of our common shares, valued at $ 29.88 per share, the closing price of our common shares on Nasdaq on that day. Share Purchases During the six months ended June 30, 2021, we purchased an aggregate of 12,009 of our common shares valued at a weighted average share price of $ 29.33 per share, from one of our Trustees and certain 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 six months ended June 30, 2021, 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 14, 2021 January 25, 2021 February 18, 2021 $ 0.55 $ 26,575 April 15, 2021 April 26, 2021 May 20, 2021 0.55 26,575 $ 1.10 $ 53,150 On July 15, 2021, we declared a regular quarterly distribution to common shareholders of record on July 26, 2021 of $ 0.55 per share, or approximately $ 26,600 . We expect to pay this distribution on or about August 19, 2021. Note 9. 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 $ 10,551 and $ 20,025 for the three and six months ended June 30, 2021, respectively, and $ 4,302 and $ 9,001 for the three and six months ended June 30, 2020, respectively. The net business management fees we recognized for the three and six months ended June 30, 2021 include $ 5,911 and $ 11,111 , respectively, of estimated business management incentive fees based on our common share total return, as defined in our business management agreement, as of June 30, 2021. We did no t recognize any estimated business management fees for the three or six months ended June 30, 2020. The actual amount of annual incentive fees for 2021, 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, 2021, and will be payable in January 2022. We did no t incur an incentive fee payable to RMR LLC for the year ended December 31, 2020. 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 property management and construction supervision fees of $ 4,914 and $ 9,526 for the three and six months ended June 30, 2021, respectively, and $ 5,128 and $ 10,192 for the three and six months ended June 30, 2020, respectively. Of these amounts, for the three and six months ended June 30, 2021, $ 3,935 and $ 8,015 , respectively, were expensed to other operating expenses in our condensed 13 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) consolidated financial statements and $ 979 and $ 1,511 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. For the three and six months ended June 30, 2020, $ 4,242 and $ 8,650 , respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $ 886 and $ 1,542 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. 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 expenses incurred to provide management services to us, except for the 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 $ 5,925 and $ 11,977 for these expenses and costs for the three and six months ended June 30, 2021, respectively, and $ 6,259 and $ 12,250 for the three and six months ended June 30, 2020, 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). See Note 10 for more information regarding our relationships, agreements and transactions with RMR LLC. Note 10. 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 and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. David Blackman resigned as our President and Chief Executive Officer, effective December 31, 2020, and as a Managing Trustee, effective June 17, 2021. In replacement of Mr. Blackman, Christopher J. Bilotto was appointed as our President and Chief Operating Officer, effective January 1, 2021, and Jennifer Clark was elected as a Managing Trustee on June 17, 2021. Mr. Bilotto is an officer and employee of RMR LLC, Ms. Clark is a managing director and an executive officer of RMR Inc. and an officer and employee of RMR LLC, and 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 Ms. Clark, serve as managing trustees, managing directors or officers of certain of these companies. Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 9 for more information regarding our management agreements with RMR LLC. 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 $ 287 and $ 575 for the three and six months ended June 30, 2021, respectively, and $ 274 and $ 554 for the three and six months ended June 30, 2020, respectively. Sonesta . In June 2021, we entered into a 30 -year lease agreement with a subsidiary of Sonesta International Hotels Corporation, or Sonesta, in connection with the redevelopment of an office property we own in Washington, D.C. as a mixed use property. Sonesta’s lease is for the planned full-service hotel component of the property that will include approximately 230,000 rentable square feet, which represents approximately 54 % of the total square feet upon completion of the redevelopment. The term of the lease commences upon our delivery of the completed hotel, which we estimate to occur in the first quarter of 2023. Sonesta has two options to extend the term for 10 years each. Pursuant to the lease agreement, Sonesta will pay us annual base rent of approximately $ 6,436 beginning 18 months after the lease commences. The annual base rent will increase by 10 % every five years throughout the term. Sonesta is also obligated to pay its pro rata share of the operating costs for the building. We estimate that the total cost to build the hotel space will be approximately $ 66,000 . Mr. Adam Portnoy is a director and controlling shareholder of Sonesta and Ms. Jennifer Clark is also a director of Sonesta. 14 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) For more information about these and other such relationships and certain other related person transactions, refer to our 2020 Annual Report. 15 Table of Contents