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 September 30, 2021, our wholly owned properties were comprised of 178 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 September 30, 2021, our properties are located in 33 states and the District of Columbia and contain approximately 23,274,000 rentable square feet. As of September 30, 2021, our properties were leased to 331 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.0 years. The U.S. government is our largest tenant, representing approximately 19.7% of our annualized rental income as of September 30, 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 September 30, 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 have had a significant impact on the global economy, including the U.S. economy. Many of the restrictions that had been imposed in the United States during the pandemic have since been lifted and commercial activity in the United States has increasingly returned to pre-pandemic practices and operations. We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. To date, the COVID-19 pandemic has not had a significant impact on our business and we continue to believe that our 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 October 26, 2021, we have granted temporary rent assistance totaling $2,483 to 18 tenants who represent approximately 3.3% of our annualized rental income as of September 30, 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 October 26, 2021, we have collected more than 95% of our granted rent deferrals. There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic, 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 September 30, 2021 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For 18 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 September 30, 2021 and 2020 was as follows (square feet in thousands): All Properties (1) Comparable Properties (2) September 30, September 30, 2021 2020 2021 2020 Total properties (3) 178 184 163 163 Total rentable square feet (4) 23,274 24,909 20,729 20,720 Percent leased (5) 89.0 % 91.2 % 91.2 % 93.4 % (1) Based on properties we owned on September 30, 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 and nine months ended September 30, 2021 and 2020 are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Average effective rental rate per square foot (1) : All properties (2) $ 28.86 $ 25.85 $ 27.12 $ 25.89 Comparable properties (3) $ 27.40 $ 27.26 $ 27.37 $ 27.22 (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 September 30, 2021 and 2020, respectively. (3) Based on properties we owned continuously since July 1, 2020 and January 1, 2020, respectively, 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 and nine months ended September 30, 2021, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands): Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Leased Available for Lease Total Leased Available for Lease Total Beginning of period 21,553 2,538 24,091 22,705 2,184 24,889 Changes resulting from: Acquisition of properties 29 20 49 899 27 926 Disposition of properties (799) (74) (873) (2,491) (74) (2,565) Lease expirations (738) 738 — (2,206) 2,206 — Lease renewals (1) 385 (385) — 1,206 (1,206) — New leases (1) 274 (274) — 576 (576) — Remeasurements (2) 1 6 7 16 8 24 End of period 20,705 2,569 23,274 20,705 2,569 23,274 (1) Based on leases entered during the three and nine months ended September 30, 2021. (2) Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants. 19 Table of Contents Leases at our properties totaling approximately 738,000 and 2,206,000 rentable square feet expired during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2021, we entered into new and renewal leases as summarized in the following tables (square feet in thousands): Three Months Ended September 30, 2021 New Leases Renewals Total Rentable square feet leased 274 385 659 Weighted average rental rate change (by rentable square feet) (7.6 %) 5.4 % (0.1 %) Tenant leasing costs and concession commitments (1) $ 27,322 $ 18,811 $ 46,133 Tenant leasing costs and concession commitments per rentable square foot (1) $ 99.81 $ 48.85 $ 70.02 Weighted (by square feet) average lease term (years) 12.9 9.6 10.9 Total leasing costs and concession commitments per rentable square foot per year (1) $ 7.74 $ 5.11 $ 6.40 Nine Months Ended September 30, 2021 New Leases Renewals Total Rentable square feet leased 576 1,206 1,782 Weighted average rental rate change (by rentable square feet) 9.8 % 5.3 % 7.0 % Tenant leasing costs and concession commitments (1)(2) $ 98,517 $ 31,463 $ 129,980 Tenant leasing costs and concession commitments per rentable square foot (1)(2) $ 170.91 $ 26.10 $ 72.94 Weighted (by square feet) average lease term (years) 18.9 7.1 10.9 Total leasing costs and concession commitments per rentable square foot per year (1)(2) $ 9.06 $ 3.66 $ 6.68 (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. (2) Includes commitments totaling approximately $66,000 in connection with the lease we entered with Sonesta in June 2021 related to the redevelopment of a property in Washington, D.C. These costs represent the estimated costs related to the planned hotel component of the property. During the three and nine months ended September 30, 2021, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and nine months ended September 30, 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 September 30, 2021 Nine Months Ended September 30, 2021 Old Effective Rent Per Square Foot (1) New Effective Rent Per Square Foot (1) Rentable Square Feet Old Effective Rent Per Square Foot (1) New Effective Rent Per Square Foot (1) Rentable Square Feet New leases $ 18.83 $ 27.43 8 $ 20.45 $ 25.57 109 Lease renewals $ 27.99 $ 30.38 506 $ 27.11 $ 28.62 1,271 Total leasing activity $ 27.85 $ 30.33 514 $ 26.58 $ 28.38 1,380 (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. 20 Table of Contents During the three and nine months ended September 30, 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Lease related costs (1) $ 17,074 $ 7,192 $ 35,259 $ 26,226 Building improvements (2) 9,267 10,579 21,558 29,814 Recurring capital expenditures 26,341 17,771 56,817 56,040 Development, redevelopment and other activities (3) 13,272 5,521 30,916 11,260 Total capital expenditures $ 39,613 $ 23,292 $ 87,733 $ 67,300 (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 September 30, 2021, we have estimated unspent leasing related obligations of $129,369, of which we expect to spend $69,248 over the next 12 months. As of September 30, 2021, we had leases at our properties totaling approximately 2,317,000 rentable square feet that were scheduled to expire through December 31, 2022. As of October 27, 2021, we expect tenants with leases totaling approximately 758,000 rentable square feet that are scheduled to expire through December 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. As a result of the COVID-19 pandemic and its economic impact, overall leasing activity has been volatile during 2021 and may remain so until office property market conditions meaningfully improve and stabilize 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 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. Additionally, we may incur significant costs to renew our leases with current tenants or lease our properties to new tenants. 21 Table of Contents As of September 30, 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 25 487 2.4 % 2.4 % $ 16,114 2.8 % 2.8 % 2022 72 1,830 8.8 % 11.2 % 51,980 8.9 % 11.7 % 2023 67 2,430 11.7 % 22.9 % 78,580 13.5 % 25.2 % 2024 58 3,209 15.5 % 38.4 % 83,908 14.4 % 39.6 % 2025 50 2,128 10.3 % 48.7 % 46,006 7.9 % 47.5 % 2026 39 1,853 8.9 % 57.6 % 48,876 8.4 % 55.9 % 2027 33 1,920 9.3 % 66.9 % 49,987 8.6 % 64.5 % 2028 15 1,254 6.1 % 73.0 % 46,543 8.0 % 72.5 % 2029 19 970 4.7 % 77.7 % 27,403 4.7 % 77.2 % 2030 and thereafter 55 4,624 22.3 % 100.0 % 133,615 22.8 % 100.0 % Total 433 20,705 100.0 % $ 583,012 100.0 % Weighted average remaining lease term (in years) 5.9 6.0 (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 September 30, 2021, tenants occupying approximately 5.6% of our rentable square feet and responsible for approximately 5.5% of our annualized rental income as of September 30, 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, 2035 and 2040, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.5%, 1.7%, 2.8%, 1.2%, 3.9%, 1.1%, 0.8%, 1.2%, 0.5%, 0.3%, and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 0.6%, 2.0%, 3.9%, 1.7%, 7.0%, 1.4%, 1.3%, 1.3%, 0.9%, 0.4%, and 0.3% of our annualized rental income, respectively, as of September 30, 2021. In addition, as of September 30, 2021, pursuant to leases with 14 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 14 tenants occupy approximately 6.0% of our rentable square feet and contribute approximately 6.6% of our annualized rental income as of September 30, 2021. (2) Leased square feet is pursuant to leases existing as of September 30, 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 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 22 Table of Contents 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 September 30, 2021, we derive 21.5% 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 September 30, 2021, tenants contributing 52.3% 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 10.2% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents). 23 Table of Contents As of September 30, 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 4,196 20.3 % $ 115,035 19.7 % 2 Alphabet Inc (Google) Investment Grade 386 1.9 % 20,924 3.6 % 3 State of California Investment Grade 651 3.1 % 19,381 3.3 % 4 Shook, Hardy & Bacon L.L.P. Not Rated 596 2.9 % 19,187 3.3 % 5 Bank of America Corporation Investment Grade 577 2.8 % 15,803 2.7 % 6 IG Investments Holdings LLC Non Investment Grade 333 1.6 % 14,553 2.5 % 7 F5 Networks, Inc. Not Rated 299 1.4 % 13,027 2.2 % 8 Commonwealth of Massachusetts Investment Grade 311 1.5 % 12,260 2.1 % 9 CareFirst Inc. Not Rated 207 1.0 % 11,870 2.0 % 10 Northrop Grumman Corporation Investment Grade 337 1.6 % 11,350 1.9 % 11 Tyson Foods, Inc. Investment Grade 248 1.2 % 11,198 1.9 % 12 Sonesta International Hotels Corporation (1) Not Rated 230 1.1 % 10,745 1.8 % 13 CommScope Holding Company Inc Non Investment Grade 228 1.1 % 8,921 1.5 % 14 Micro Focus International plc Non Investment Grade 242 1.2 % 7,431 1.3 % 15 State of Georgia Investment Grade 308 1.5 % 7,248 1.2 % 16 PNC Bank Investment Grade 441 2.1 % 6,924 1.2 % 17 ServiceNow, Inc. Investment Grade 149 0.7 % 6,623 1.1 % 18 Compass Group plc Investment Grade 267 1.3 % 6,496 1.1 % 19 Allstate Insurance Co. Investment Grade 468 2.3 % 6,475 1.1 % 20 Automatic Data Processing, Inc. Investment Grade 289 1.4 % 6,037 1.0 % 21 Church & Dwight Co., Inc. Investment Grade 250 1.2 % 6,031 1.0 % Total 11,013 53.2 % $ 337,519 57.5 % (1) In June 2021, we entered into a 30-year lease with Sonesta. The lease relates to the redevelopment of a property we own in Washington, D.C to a mixed use and Sonesta's lease relates to the planned hotel component of the property. The term of the lease commences upon our delivery of the completed hotel, which is estimated to occur in the first quarter of 2023. For more information about our lease with Sonesta, see Note 10 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q. Acquisition Activities During the nine months ended September 30, 2021, we acquired three properties containing a combined approximately 926,000 rentable square feet for an aggregate purchase price of $576,975, excluding purchase price adjustments and acquisition related costs. 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. 24 Table of Contents Disposition Activities During the nine months ended September 30, 2021, we sold six properties and a warehouse facility adjacent to a property we own containing a combined approximately 2,565,000 rentable square feet for an aggregate sales price of $198,415, excluding closing costs. In October 2021, we sold two vacant land parcels adjacent to properties we own located in Sterling, VA for a sales price of $28,500, excluding closing costs. As of October 27, 2021, we have also entered into an agreement to sell five properties located in Brookhaven, GA for a sales price of $56,000, excluding closing costs. Also, we are currently marketing for sale 17 properties containing approximately 2,161,000 rentable square feet that we expect to generate approximately $200,000 of gross proceeds. We expect to substantially complete these dispositions by mid-year 2022. We cannot be sure we will sell any properties we are marketing for prices in excess of their carrying values or otherwise. In addition, our pending 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. Financing Activities Senior Unsecured Note Issuances In May 2021, we issued $300,000 of 2.650% senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of $296,826, after deducting underwriters' discounts and offering expenses, which we used to redeem all $310,000 of our 5.875% senior unsecured notes due 2046. In August 2021, we issued $350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of $346,630, after deducting underwriters' discounts and offering expenses, which we used to redeem all $300,000 of our 4.15% senior unsecured notes due 2022. In September 2021, we issued $400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of $395,698, after deducting underwriters' discounts and offering expenses, which we used to repay amounts outstanding under our revolving credit facility. Senior Unsecured Note Redemptions In June 2021, we redeemed, at par plus accrued interest, all $310,000 of our 5.875% senior unsecured notes due 2046 using cash on hand and the net proceeds from the issuance of our 2.650% senior unsecured notes due 2026. In September 2021, we redeemed, at a premium plus accrued interest, all $300,000 of our 4.15% senior unsecured notes due 2022 using a portion of the net proceeds from the issuance of our 2.400% senior unsecured notes due 2027. Mortgage Note Repayment 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 using cash on hand and borrowings under our revolving credit facility. Segment Information We operate in one business segment: ownership of real estate properties. 25 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share amounts) Three Months Ended September 30, 2021, Compared to Three Months Ended September 30, 2020 Comparable Properties (1) Results Three Months Ended September 30, Non-Comparable Properties Results Three Months Ended September 30, Consolidated Results Three Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 2021 2020 $ Change % Change Rental income $ 128,995 $ 130,319 $ (1,324) (1.0 %) $ 18,577 $ 15,487 $ 147,572 $ 145,806 $ 1,766 1.2 % Operating expenses: Real estate taxes 13,730 14,273 (543) (3.8 %) 6,337 1,840 20,067 16,113 3,954 24.5 % Utility expenses 6,547 6,639 (92) (1.4 %) 842 925 7,389 7,564 (175) (2.3 %) Other operating expenses 23,470 23,933 (463) (1.9 %) 3,067 2,433 26,537 26,366 171 0.6 % Total operating expenses 43,747 44,845 (1,098) (2.4 %) 10,246 5,198 53,993 50,043 3,950 7.9 % Net operating income (2) $ 85,248 $ 85,474 $ (226) (0.3 %) $ 8,331 $ 10,289 93,579 95,763 (2,184) (2.3 %) Other expenses: Depreciation and amortization 59,533 62,227 (2,694) (4.3 %) Loss on impairment of real estate (3) 2,954 (2,957) (100.1 %) General and administrative 448 7,059 (6,611) (93.7 %) Total other expenses 59,978 72,240 (12,262) (17.0 %) Gain on sale of real restate 36 — 36 n/m Interest and other income — 2 (2) (100.0 %) Interest expense (26,929) (27,097) 168 (0.6 %) Loss on early extinguishment of debt (2,274) — (2,274) n/m Income (loss) before income tax (expense) benefit and equity in net losses of investees 4,434 (3,572) 8,006 n/m Income tax (expense) benefit (34) 54 (88) (163.0 %) Equity in net losses of investees (688) (279) (409) 146.6 % Net income (loss) $ 3,712 $ (3,797) $ 7,509 (197.8 %) Weighted average common shares outstanding (basic) 48,211 48,132 79 0.2 % Weighted average common shares outstanding (diluted) 48,244 48,132 112 0.2 % Per common share amounts (basic and diluted): Net income (loss) $ 0.08 $ (0.08) $ 0.16 (200.0 %) n/m - not meaningful (1) Comparable properties consists of 164 properties we owned on September 30, 2021 and which we owned continuously since July 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 (loss) 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 September 30, 2021, compared to the three months ended September 30, 2020. 26 Table of Contents Rental income. The increase in rental income reflects an increase in rental income of $14,477 related to acquired properties, offset by decreases in rental income of $7,158 as a result of property disposition activities, $4,229 for properties undergoing significant redevelopment and $1,324 related to comparable properties. The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at a property located in Washington, D.C. that began a redevelopment project during 2021. The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our properties in the 2021 period. Rental income includes non-cash straight line rent adjustments totaling $3,924 in the 2021 period and $3,912 in the 2020 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $(447) in the 2021 period and $(1,312) in the 2020 period. Real estate taxes. The increase in real estate taxes primarily reflects an increase in real estate taxes of $5,844 related to acquired properties, offset by decreases of $932 related to property disposition activities, $543 for comparable properties and $415 for properties undergoing significant redevelopment. Real estate taxes for comparable properties decreased primarily due to decreases in assessed values and refunds received in the 2021 period at certain of our properties as a result of successful real estate tax appeals. Utility expenses. The decrease in utility expenses reflects decreases in utility expenses of $155 for properties undergoing significant redevelopment, $151 related to property disposition activities and $92 for comparable properties, offset by an increase in utility expenses of $223 for acquired properties. The decrease in utility expenses for comparable properties is primarily due to a decrease in electricity and water usage as a result of reductions in occupied space at certain of our properties in the 2021 period, partially offset by an increase related to utility expenses in the 2021 period previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in January 2021. 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 increase in other operating expenses primarily reflects an increase of $1,910 for acquired properties, offset by decreases of $841 related to property disposition activities, $463 for comparable properties and $435 for properties undergoing significant redevelopment. The decrease in other operating expenses for comparable properties is primarily due to a decrease in repairs and maintenance expenses at certain of our properties in the 2021 period. Depreciation and amortization. The decrease in depreciation and amortization primarily reflects decreases of $4,868 for comparable properties and $4,817 related to property disposition activities, offset by an increase of $6,991 for acquired properties. Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated after July 1, 2020. Loss on impairment of real estate. We recorded a $2,954 loss on impairment of real estate in the 2020 period to reduce the carrying value of four 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 decrease in general and administrative expenses is primarily the result of the reversal of $6,627 of previously accrued estimated business management incentive fees in the 2021 period and the expiration of an office lease in January 2021 for which we were the lessee, partially offset by an increase in base business management fees resulting from an increase in average total market capitalization in the 2021 period compared to the 2020 period. Gain on sale of real estate. Gain on sale of real estate for the 2021 period represents a net gain on the sale of three properties. Interest and other income. Interest and other income reflects interest earned, if any, on cash balances invested. Interest expense. The decrease in interest expense is primarily due to lower weighted average interest expense incurred on balances outstanding in the 2021 period as a result of financing activities since July 1, 2020, which included the aggregate redemption or repayment of debt totaling $720,635 with a weighted average interest rate of 4.8% and the aggregate issuance of $1,312,000 of senior unsecured notes with a weighted average interest rate of 3.2%, partially offset by higher interest expense incurred as a result of a higher average outstanding balance under our revolving credit facility during the 2021 period compared to the 2020 period. Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of $2,274 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts associated with the prepayment of our senior unsecured notes due 2022. 27 Table of Contents Income tax (expense) benefit. Income tax (expense) benefit is primarily the result of operating income or losses in jurisdictions where we are subject to state income taxes. 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. Net income (loss). The change in net income (loss) and net income (loss) per basic and diluted common share from 2020 to 2021 is primarily a result of the changes noted above. RESULTS OF OPERATIONS (amounts in thousands, except per share amounts) Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020 Comparable Properties (1) Results Nine Months Ended September 30, Non-Comparable Properties Results Nine Months Ended September 30, Consolidated Results Nine Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 2021 2020 $ Change % Change Rental income $ 388,517 $ 391,233 $ (2,716) (0.7 %) $ 40,678 $ 50,061 $ 429,195 $ 441,294 $ (12,099) (2.7 %) Operating expenses: Real estate taxes 42,584 42,616 (32) (0.1 %) 9,549 6,085 52,133 48,701 3,432 7.0 % Utility expenses 17,182 17,338 (156) (0.9 %) 1,949 2,439 19,131 19,777 (646) (3.3 %) Other operating expenses 69,751 69,551 200 0.3 % 7,123 8,482 76,874 78,033 (1,159) (1.5 %) Total operating expenses 129,517 129,505 12 — % 18,621 17,006 148,138 146,511 1,627 1.1 % NOI (2) $ 259,000 $ 261,728 $ (2,728) (1.0 %) $ 22,057 $ 33,055 281,057 294,783 (13,726) (4.7 %) Other expenses: Depreciation and amortization 178,991 189,340 (10,349) (5.5 %) Loss on impairment of real estate 55,854 2,954 52,900 n/m General and administrative 24,690 21,372 3,318 15.5 % Total other expenses 259,535 213,666 45,869 21.5 % Gain on sale of real estate 54,154 10,822 43,332 n/m Interest and other income 7 738 (731) (99.1 %) Interest expense (84,728) (79,461) (5,267) 6.6 % Loss on early extinguishment of debt (14,068) (3,839) (10,229) n/m Income (loss) before income tax expense and equity in net losses of investees (23,113) 9,377 (32,490) n/m Income tax expense (348) (220) (128) 58.2 % Equity in net losses of investees (1,664) (815) (849) 104.2 % Net income (loss) $ (25,125) $ 8,342 $ (33,467) n/m Weighted average common shares outstanding (basic and diluted) 48,179 48,111 68 0.1 % Per common share amounts (basic and diluted): Net income (loss) $ (0.52) $ 0.17 $ (0.69) n/m n/m - not meaningful (1) Comparable properties consists of 163 properties we owned on September 30, 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 NOI and our reconciliation of net income (loss) 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 nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Rental income. The decrease in rental income reflects decreases in rental income of $17,798 related to property disposition activities, $8,472 for properties undergoing significant redevelopment and $2,716 for comparable properties, offset by an 28 Table of Contents increase in rental income of $16,887 for acquired properties. The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at a property located in Washington, D.C. that began a redevelopment project during the 2021 period. The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our properties in the 2021 period. Rental income includes non-cash straight line rent adjustments totaling $13,128 in the 2021 period and $12,963 in the 2020 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $(1,836) in the 2021 period and $(4,149) in the 2020 period. Real estate taxes. The increase in real estate taxes primarily reflects an increase in real estate taxes of $5,992 for acquired properties, offset by decreases in real estate taxes of $1,478 related to property disposition activities, $1,050 for properties undergoing significant redevelopment and $32 for comparable properties. Utility expenses. The decrease in utility expenses reflects decreases in utility expenses of $439 related to property disposition activities, $290 for properties undergoing significant redevelopment and $156 for comparable properties, offset by an increase in utility expenses of $239 for acquired properties. 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 and reductions in occupied space at certain of our properties in the 2021 period, partially offset by an increase related to utility expenses in the 2021 period previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in January 2021. Other operating expenses. The decrease in other operating expenses primarily reflects decreases in other operating expenses of $2,557 related to property disposition activities and $885 for properties undergoing significant redevelopment, offset by increases in other operating expenses of $2,083 for acquired properties and $200 for comparable properties. Depreciation and amortization. The decrease in depreciation and amortization primarily reflects decreases of $11,359 for comparable properties and $7,187 related to property disposition activities, offset by increases of $8,158 for acquired properties and $39 for properties undergoing significant redevelopment. Depreciation and amortization for comparable properties decreased due to certain leasing related assets becoming fully depreciated after January 1, 2020. Loss on impairment of real estate. We recorded a $55,854 loss on impairment of real estate in the 2021 period to reduce the carrying value of six properties to their estimated fair values less costs to sell, which includes $45,196 related to three properties containing approximately 2,001 rentable square feet that were sold during the nine months ended September 30, 2021, as well as $10,658 related to three properties containing approximately 448 rentable square feet that were classified as held for sale as of September 30, 2021. We recorded a $2,954 loss on impairment of real estate in the 2020 period to reduce the carrying value of four properties to their estimated fair values less costs to sell. General and administrative . The increase in general and administrative expenses is primarily the result of $4,484 of estimated business management incentive fees recorded in the 2021 period and an increase in base business management fees resulting from an increase in average total market capitalization in the 2021 period compared to the 2020 period, partially offset by the expiration of an office lease in January 2021 for which we were the lessee and lower accounting and legal costs. Gain on sale of real estate. We recorded a $54,154 net gain on sale of real estate resulting from the sale of four properties and a warehouse facility adjacent to a property we own during the 2021 period. We recorded a $10,822 net gain on sale of real estate resulting from the sale of six properties during the 2020 period. Interest and other income. The decrease in interest and other income is primarily due to a settlement payment we received in the 2020 period resulting from a dispute with a vendor, the June 2020 payoff of a mortgage note receivable in connection with a property we sold in 2016 and the effect of lower returns on cash invested in the 2021 period compared to the 2020 period. Interest expense. The increase in interest expense is primarily due to higher average outstanding debt balances in the 2021 period resulting from the aggregate issuance of $1,462,000 of senior unsecured notes with a weighted average interest rate of 3.5% since January 1, 2020, partially offset by the aggregate redemption or repayment of debt totaling $833,187 with a weighted average interest rate of 4.8% since January 1, 2020 and lower interest expense incurred as a result of having a lower average balance outstanding under our revolving credit facility during the 2021 period compared to the 2020 period and lower average interest rates on amounts outstanding. Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of $14,068 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note and the redemption of our senior unsecured notes due 2022 and 2046. In the 2020 period, we 29 Table of Contents recorded a loss on early extinguishment of debt of $3,839 from prepayment fees incurred, the write off of unamortized discounts, premiums and debt issuance costs associated with the prepayment of three mortgage notes and a loss on the settlement of a mortgage note receivable related to a property sold in 2016. Income tax expense. Income tax expense primarily reflects operating income earned in jurisdictions where we are subject to state income taxes. 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. Net income (loss). Our net income (loss) and net income (loss) per basic and diluted common share decreased 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 (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). 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 (loss) 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 (loss) to NOI for the three and nine months ended September 30, 2021 and 2020. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) $ 3,712 $ (3,797) $ (25,125) $ 8,342 Equity in net losses of investees 688 279 1,664 815 Income tax expense (benefit) 34 (54) 348 220 Income (loss) before income tax expense (benefit) and equity in net losses of investees 4,434 (3,572) (23,113) 9,377 Loss on early extinguishment of debt 2,274 — 14,068 3,839 Interest expense 26,929 27,097 84,728 79,461 Interest and other income — (2) (7) (738) Gain on sale of real estate (36) — (54,154) (10,822) General and administrative 448 7,059 24,690 21,372 Loss on impairment of real estate (3) 2,954 55,854 2,954 Depreciation and amortization 59,533 62,227 178,991 189,340 NOI $ 93,579 $ 95,763 $ 281,057 $ 294,783 30 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 (loss), 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 (loss) to FFO and Normalized FFO for the three and nine months ended September 30, 2021 and 2020. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) $ 3,712 $ (3,797) $ (25,125) $ 8,342 Add (less): Depreciation and amortization: Consolidated properties 59,533 62,227 178,991 189,340 Unconsolidated joint venture properties 745 1,244 2,674 3,722 Loss on impairment of real estate (3) 2,954 55,854 2,954 Gain on sale of real estate (36) — (54,154) (10,822) FFO 63,951 62,628 158,240 193,536 Add (less): Loss on early extinguishment of debt 2,274 — 14,068 3,839 Estimated business management incentive fees (6,627) — 4,484 — Normalized FFO $ 59,598 $ 62,628 $ 176,792 $ 197,375 Weighted average common shares outstanding (basic) 48,211 48,132 48,179 48,111 Weighted average common shares outstanding (diluted) 48,244 48,132 48,179 48,111 FFO per common share (basic and diluted) $ 1.33 $ 1.30 $ 3.28 $ 4.02 Normalized FFO per common share (basic and diluted) $ 1.24 $ 1.30 $ 3.67 $ 4.10 LIQUIDITY AND CAPITAL RESOURCES Our Operating Liquidity and Resources (dollar amounts in thousands, except per share amounts) 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 31 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. On October 14, 2021, we announced a 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 nine months ended September 30, 2021, we acquired three properties for an aggregate purchase price of $576,975, excluding purchase price adjustments and acquisition related costs, and we sold six properties and a warehouse facility adjacent to a property we own for an aggregate sales price of $198,415, excluding closing costs. In October 2021, we sold two vacant land parcels adjacent to properties we own located in Sterling, VA for a sales price of $28,500, excluding closing costs. As of October 27, 2021, we have also entered into an agreement to sell five properties located in Brookhaven, GA for a sales price of $56,000, excluding closing costs. In addition, we are currently marketing for sale 17 properties containing approximately 2,161,000 rentable square feet that we expect to generate approximately $200,000 of gross proceeds. We expect to substantially complete these dispositions by mid-year 2022. 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: Nine Months Ended September 30, 2021 2020 Cash, cash equivalents and restricted cash at beginning of period $ 56,855 $ 100,696 Net cash provided by (used in): Operating activities 158,682 166,098 Investing activities (435,698) 18,104 Financing activities 276,181 (227,259) Cash, cash equivalents and restricted cash at end of period $ 56,020 $ 57,639 The decrease in cash provided by operating activities for the 2021 period compared to the 2020 period was primarily a result of a decline in NOI as a result of property sales in the 2021 period compared to the 2020 period. The increase in cash used in investing activities in the 2021 period compared to the 2020 period is primarily due to higher acquisition activity in the 2021 period compared to the 2020 period, partially offset by higher cash proceeds from our sales of properties. The increase in cash provided by financing activities in the 2021 period compared to the 2020 period is primarily due to the aggregate issuance of $1,050,000 of senior unsecured notes in the 2021 period compared to $412,000 of such issuances in the 2020 period, partially offset by higher debt repayment activity in the 2021 period, which included the aggregate redemption of $610,000 of senior unsecured notes and the repayment of $71,000 of mortgage debt. 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 September 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 September 30, 32 Table of Contents 2021. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.2%. As of September 30, 2021 and October 27, 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. Senior Unsecured Note Issuances In May 2021, we issued $300,000 of 2.650% senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of $296,826, after deducting underwriters’ discounts and offering expenses. We used the net proceeds from this offering to redeem all $310,000 of our 5.875% senior unsecured notes due 2046. 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. In August 2021, we issued $350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of $346,630, after deducting underwriters’ discounts and offering expenses. We used the net proceeds from this offering to redeem all $300,000 of our 4.15% senior unsecured notes due 2022, repay amounts outstanding under our revolving credit facility and for general business purposes. These notes require semi-annual payments of interest only through maturity on February 1, 2027 and may be repaid at par plus accrued and unpaid interest on or after January 1, 2027. In September 2021, we issued $400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of $395,698, after deducting underwriters’ discounts and offering expenses. We used the net proceeds of this offering to repay amounts outstanding under our revolving credit facility and for general business purposes. These notes require semi-annual payments of interest only through maturity on October 15, 2031 and may be repaid at par plus accrued and unpaid interest on or after July 15, 2031. Senior Unsecured Note Redemptions In June 2021, we redeemed, at par plus accrued interest, all $310,000 of our 5.875% senior unsecured notes due 2046 using cash on hand and the net proceeds from the issuance of our 2.650% senior unsecured notes due 2026. In September 2021, we redeemed, at a premium plus accrued interest, all $300,000 of our 4.15% senior unsecured notes due 2022 using a portion of the net proceeds from the issuance of our 2.400% senior unsecured notes due 2027. Mortgage Note Repayment 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 using cash on hand and borrowings under our revolving credit facility. 33 Table of Contents As of September 30, 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 $ 302 2022 325,518 2023 72,784 2024 350,000 2025 650,000 Thereafter 1,212,000 Total $ 2,610,604 None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our $98,604 in mortgage debts generally require monthly payments of principal and interest through maturity. In addition to our debt obligations, as of September 30, 2021, we have estimated unspent leasing related obligations of $129,369, of which we expect to spend $69,248 over the next 12 months. We are currently in the process of redeveloping a property located in Washington, D.C. We currently estimate the total project costs associated with this redevelopment will be approximately $200,000 and completion of the redevelopment in the first quarter of 2023. As of September 30, 2021, we have incurred approximately $25,800 related to this project. In June 2021, we entered into a 30-year lease for approximately 230,000 rentable square feet at this property that is approximately 25.1% higher than the prior rental rate for the same space, making the redevelopment project 54% pre-leased. 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. 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 COVID-19 pandemic and its ultimate economic impact will be. A protracted and extensive economic downturn 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 nine months ended September 30, 2021, we paid quarterly distributions to our shareholders totaling $79,734 using cash on hand. On October 14, 2021, we declared a regular quarterly distribution payable to shareholders of record on October 25, 2021 of $0.55 per share, or approximately $26,600. We expect to pay this distribution on or about November 18, 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 34 Table of Contents 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 September 30, 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. U.S. Government Funding The U.S. government recently increased its debt ceiling, which the U.S. Department of the Treasury has stated will provide the U.S. Government with sufficient funding to pay its obligations through December 3, 2021. It is uncertain whether the U.S. government will further increase its debt ceiling. If it does not, and does not find other means to sufficiently fund its obligations, the U.S. government could default on its debts or other obligations, which could potentially include its rent owed to us. Debt Covenants (dollars in thousands) Our principal debt obligations at September 30, 2021 consisted of an aggregate outstanding principal balance of $2,512,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $98,604, 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 September 30, 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 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.