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) March 31, 2022 December 31, 2021 ASSETS Real estate properties: Land $ 851,356 $ 874,108 Buildings and improvements 3,024,610 3,036,978 Total real estate properties, gross 3,875,966 3,911,086 Accumulated depreciation ( 506,098 ) ( 495,912 ) Total real estate properties, net 3,369,868 3,415,174 Assets of properties held for sale 57,115 26,598 Investments in unconsolidated joint ventures 35,011 34,838 Acquired real estate leases, net 466,317 505,629 Cash and cash equivalents 97,656 83,026 Restricted cash 1,402 1,489 Rents receivable 106,865 112,886 Deferred leasing costs, net 55,448 53,883 Other assets, net 8,011 8,160 Total assets $ 4,197,693 $ 4,241,683 LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ — $ — Senior unsecured notes, net 2,481,903 2,479,772 Mortgage notes payable, net 97,893 98,178 Liabilities of properties held for sale 626 594 Accounts payable and other liabilities 136,017 142,609 Due to related persons 7,864 6,787 Assumed real estate lease obligations, net 16,308 17,034 Total liabilities 2,740,611 2,744,974 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ 0.01 par value: 200,000,000 shares authorized, 48,425,265 and 48,425,665 shares issued and outstanding, respectively 484 484 Additional paid in capital 2,617,583 2,617,169 Cumulative net income 162,308 175,715 Cumulative common distributions ( 1,323,293 ) ( 1,296,659 ) Total shareholders’ equity 1,457,082 1,496,709 Total liabilities and shareholders’ equity $ 4,197,693 $ 4,241,683 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 March 31, 2022 2021 Rental income $ 147,354 $ 144,524 Expenses: Real estate taxes 16,645 16,154 Utility expenses 6,865 6,432 Other operating expenses 27,363 25,439 Depreciation and amortization 60,469 64,087 Loss on impairment of real estate 17,047 7,660 General and administrative 5,706 11,272 Total expenses 134,095 131,044 Gain on sale of real estate 2,149 54,004 Interest and other income 1 5 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,404 and $ 2,432 , respectively) ( 27,439 ) ( 28,798 ) Income (loss) before income tax expense and equity in net losses of investees ( 12,030 ) 38,691 Income tax expense ( 531 ) ( 435 ) Equity in net losses of investees ( 846 ) ( 396 ) Net income (loss) $ ( 13,407 ) $ 37,860 Weighted average common shares outstanding (basic) 48,243 48,161 Weighted average common shares outstanding (diluted) 48,243 48,196 Per common share amounts (basic and diluted): Net income (loss) $ ( 0.28 ) $ 0.78 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 Common Distributions Total Shareholders’ Equity Balance at December 31, 2021 48,425,665 $ 484 $ 2,617,169 $ 175,715 $ ( 1,296,659 ) $ 1,496,709 Share grants — — 415 — — 415 Share forfeitures ( 400 ) — ( 1 ) — — ( 1 ) Net loss — — — ( 13,407 ) — ( 13,407 ) Distributions to common shareholders — — — — ( 26,634 ) ( 26,634 ) Balance at March 31, 2022 48,425,265 $ 484 $ 2,617,583 $ 162,308 $ ( 1,323,293 ) $ 1,457,082 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 ` 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) Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 13,407 ) $ 37,860 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 24,965 21,629 Net amortization of debt premiums, discounts and issuance costs 2,404 2,432 Amortization of acquired real estate leases 34,079 41,575 Amortization of deferred leasing costs 2,106 1,820 Gain on sale of real estate ( 2,149 ) ( 54,004 ) Loss on impairment of real estate 17,047 7,660 Straight line rental income ( 2,686 ) ( 5,357 ) Other non-cash expenses, net 142 49 Equity in net losses of investees 846 396 Change in assets and liabilities: Rents receivable 5,184 11,320 Deferred leasing costs ( 7,082 ) ( 4,826 ) Other assets ( 341 ) ( 259 ) Accounts payable and other liabilities ( 11,919 ) ( 9,609 ) Due to related persons 1,077 7,256 Net cash provided by operating activities 50,266 57,942 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate improvements ( 36,229 ) ( 15,329 ) Distributions in excess of earnings from unconsolidated joint ventures 51 153 Contributions to unconsolidated joint ventures ( 1,070 ) — Proceeds from sale of properties, net 28,464 129,072 Net cash (used in) provided by investing activities ( 8,784 ) 113,896 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable ( 305 ) ( 643 ) Distributions to common shareholders ( 26,634 ) ( 26,575 ) Net cash used in financing activities ( 26,939 ) ( 27,218 ) Increase in cash, cash equivalents and restricted cash 14,543 144,620 Cash, cash equivalents and restricted cash at beginning of period 84,515 56,855 Cash, cash equivalents and restricted cash at end of period $ 99,058 $ 201,475 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) Three Months Ended March 31, 2022 2021 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 28,630 $ 36,136 NON-CASH INVESTING ACTIVITIES: Real estate improvements accrued, not paid $ 25,165 $ 9,164 Capitalized interest $ 607 $ 50 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 March 31, 2022 2021 Cash and cash equivalents $ 97,656 $ 184,462 Restricted cash (1) 1,402 17,013 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 99,058 $ 201,475 (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, 2021, or our 2021 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 of beneficial interest, $.01 per share, or 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. The calculation of basic and diluted earnings per share is as follows: Three Months Ended March 31, 2022 2021 Numerators: Net income (loss) $ ( 13,407 ) $ 37,860 Income attributable to unvested participating securities — ( 123 ) Net income (loss) used in calculating earnings per share $ ( 13,407 ) $ 37,737 Denominators: Weighted average common shares outstanding - basic 48,243 48,161 Effect of dilutive securities: unvested share awards (1) — 35 Weighted average common shares outstanding - diluted 48,243 48,196 Net income (loss) per common share - basic $ ( 0.28 ) $ 0.78 Net income (loss) per common share - diluted $ ( 0.28 ) $ 0.78 (1) For the three months ended March 31, 2022, 22 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 March 31, 2022, our wholly owned properties were comprised of 174 properties containing approximately 22,941,000 rentable square feet, with an undepreciated carrying value of $ 3,937,509 , including $ 61,543 classified as held for sale. We also had noncontrolling ownership interests of 51 % and 50 % in two unconsolidated joint ventures that own three properties containing 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 2022 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 8 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) services. During the three months ended March 31, 2022, we entered into 21 leases for approximately 572,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.7 years and we made commitments for approximately $ 32,748 of leasing related costs. As of March 31, 2022, we have estimated unspent leasing related obligations of $ 128,009 . 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. Disposition Activities During the three months ended March 31, 2022, we sold four properties containing approximately 330,000 rentable square feet for an aggregate sales price of $ 29,470 , 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 January 2022 1 Rockville, MD 129,000 $ 6,750 $ ( 72 ) February 2022 2 Chesapeake, VA 172,000 18,945 2,296 March 2022 1 Milwaukee, WI 29,000 3,775 ( 75 ) 4 330,000 $ 29,470 $ 2,149 (1) Gross sales price is the gross contract price, excluding closing costs. As of March 31, 2022, we had three properties containing approximately 583,000 rentable square feet classified as held for sale in our condensed consolidated balance sheet. During the three months ended March 31, 2022, we recorded a $ 2,184 loss on impairment of real estate to adjust the carrying value of one property that was classified as held for sale to its estimated fair value less costs to sell and a $ 14,863 loss on impairment of real estate to adjust the carrying value of one property that was held and used to its estimated fair value, based on a negotiated sales price with a third-party buyer. As of April 27, 2022, we have entered into agreements to sell two properties containing approximately 470,000 rentable square feet, including one property that was classified as held for sale as of March 31, 2022, for an aggregate sales price of $ 38,300 , excluding closing costs. These sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change. 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 March 31, 2022 and December 31, 2021, our investments in unconsolidated joint ventures consisted of the following: OPI Carrying Value of Investments at Joint Venture OPI Ownership March 31, 2022 December 31, 2021 Number of Properties Location Rentable Square Feet Prosperity Metro Plaza 51 % $ 20,310 $ 20,672 2 Fairfax, VA 329,000 1750 H Street, NW 50 % 14,701 14,166 1 Washington, D.C. 115,000 Total $ 35,011 $ 34,838 3 444,000 9 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) 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 March 31, 2022 and December 31, 2021 (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 March 31, 2022, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $ 6,855 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 $ 2,686 and $ 5,357 for the three months ended March 31, 2022 and 2021, respectively. Rents receivable, excluding properties classified as held for sale, include $ 85,388 and $ 82,978 of straight line rent receivables at March 31, 2022 and December 31, 2021, 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 $ 22,536 and $ 18,860 for the three months ended March 31, 2022 and 2021, respectively, of which tenant reimbursements totaled $ 21,475 and $ 17,803 , 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 March 31, 2022, the U.S. government, 11 state governments and four other government tenants combined were responsible for approximately 29.0 % of our annualized rental income. As of March 31, 2021, the U.S. government, 11 state governments and three other government tenants combined were responsible for approximately 36.3 % of our annualized rental income. The U.S. government is our largest tenant by annualized rental income and represented approximately 19.4 % and 25.9 % of our annualized rental income as of March 31, 2022 and 2021, respectively. Geographic Concentration At March 31, 2022, our 174 wholly owned properties were located in 32 states and the District of Columbia. Properties located in Virginia, California, the District of Columbia, Illinois and Georgia were responsible for approximately 12.1 %, 11.1 %, 10.0 %, 10.0 % and 8.4 % of our annualized rental income as of March 31, 2022, respectively. 10 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Note 6. Indebtedness Our principal debt obligations at March 31, 2022 were: (1) $ 2,512,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $ 97,996 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 March 31, 2022, on the amount outstanding under our revolving credit facility, if any. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at March 31, 2022. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of March 31, 2022 and December 31, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.6 % and 1.2 %, respectively. We did not borrow any funds under our revolving credit facility during the three months ended March 31, 2022 or 2021. As of March 31, 2022 and April 27, 2022, we had no amounts outstanding under our revolving credit facility and $ 750,000 available for borrowing. Our credit agreement and senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR, 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 March 31, 2022. At March 31, 2022, three of our properties with an aggregate net book value of $ 187,129 were encumbered by mortgage notes with an aggregate principal amount of $ 97,996 . Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants. In April 2022, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $ 24,863 , an annual interest rate of 4.22 % and a maturity date in July 2022. 11 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Note 7. Fair Value of Assets and Liabilities The following table presents certain of our assets measured at fair value at March 31, 2022, 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 Real estate properties (1) $ 9,800 $ — $ 9,800 $ — Assets of properties held for sale (2) $ 2,500 $ — $ — $ 2,500 (1) We recorded an impairment charge of $ 14,863 to reduce the carrying value of one property in our condensed consolidated balance sheet to its estimated fair value based on 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 an impairment charge of $ 2,184 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 $ 138 , 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 March 31, 2022 and December 31, 2021, 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 March 31, 2022 As of December 31, 2021 Financial Instrument Carrying Value (1) Fair Value Carrying Value (1) Fair Value Senior unsecured notes, 4.00 % interest rate, due in 2022 $ 299,731 $ 300,537 $ 299,500 $ 304,148 Senior unsecured notes, 4.25 % interest rate, due in 2024 345,152 352,203 344,581 365,449 Senior unsecured notes, 4.50 % interest rate, due in 2025 640,232 648,885 639,370 687,749 Senior unsecured notes, 2.650 % interest rate, due in 2026 297,370 275,885 297,213 298,502 Senior unsecured notes, 2.400 % interest rate, due in 2027 347,000 312,221 346,845 339,764 Senior unsecured notes, 3.450 % interest rate, due in 2031 395,852 344,830 395,744 388,458 Senior unsecured notes, 6.375 % interest rate, due in 2050 156,566 160,963 156,519 177,098 Mortgage notes payable (2) 97,893 98,249 98,178 100,294 Total $ 2,579,796 $ 2,493,773 $ 2,577,950 $ 2,661,462 (1) Includes unamortized debt premiums, discounts and issuance costs totaling $ 30,200 and $ 32,351 as of March 31, 2022 and December 31, 2021, respectively. (2) In April 2022, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $ 24,863 , an annual interest rate of 4.22 % and a maturity date in July 2022. We estimated the fair values of our senior unsecured notes (except for our senior unsecured notes due 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 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. 12 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Note 8. Shareholders’ Equity Distributions During the three months ended March 31, 2022, 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 13, 2022 January 24, 2022 February 17, 2022 $ 0.55 $ 26,634 On April 14, 2022, we declared a regular quarterly distribution payable to common shareholders of record on April 25, 2022 in the amount of $ 0.55 per share, or approximately $ 26,600 . We expect to pay this distribution on or about May 19, 2022. Note 9. Business and Property Management Agreements with RMR We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR 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, we recognized net business management fees of $ 4,710 and $ 9,474 for the three months ended March 31, 2022 and 2021, respectively. Based on our common share total return, as defined in our business management agreement, as of March 31, 2022, no estimated incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2022. The actual amount of annual incentive fees for 2022, 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, 2022, and will be payable in January 2023. The net business management fees we recognized for the three months ended March 31, 2021 included $ 5,200 of accrued estimated incentive fees based on our common share total return as of March 31, 2021. We did no t incur an incentive fee payable to RMR for the year ended December 31, 2021. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). We and RMR amended our business management agreement effective August 1, 2021 to provide that (i) for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Office REIT Index will be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR and (ii) for periods prior to August 1, 2021, the SNL U.S. REIT Office Index will continue to be used. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Office Index. Pursuant to our property management agreement with RMR, we recognized aggregate net property management and construction supervision fees of $ 6,128 and $ 4,612 for the three months ended March 31, 2022 and 2021, respectively. Of these amounts, for the three months ended March 31, 2022 and 2021, $ 4,226 and $ 4,080 , respectively, were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,902 and $ 532 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. The amounts capitalized 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 on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR’s centralized accounting personnel, our share of RMR’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. We reimbursed RMR $ 5,966 and $ 6,052 for these expenses and costs for the three months ended March 31, 2022 and 2021, 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). 13 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Note 10. Related Person Transactions We have relationships and historical and continuing transactions with RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR 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., the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR. Jennifer Clark, our other Managing Trustee and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR and an officer of ABP Trust. Our other officers are also officers and employees of RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR or its subsidiaries provide management services. Mr. Portnoy serves as chair of the boards and as a managing director or managing trustee of these public companies. Other officers of RMR, including Ms. Clark, serve as managing trustees, managing directors or officers of certain of these companies. Our Manager, RMR. We have two agreements with RMR to provide management services to us. See Note 9 for more information regarding our management agreements with RMR. Leases with RMR. We lease office space to RMR in certain of our properties for RMR’s property management offices. Pursuant to our lease agreements with RMR, we recognized rental income from RMR for leased office space of $ 284 and $ 288 for the three months ended March 31, 2022 and 2021, 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. Portnoy is a director and controlling shareholder of Sonesta and Ms. Clark is also a director of Sonesta. For more information about these and other such relationships and certain other related person transactions, refer to our 2021 Annual Report. 14 Table of Contents