What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-15 compared with 2022-02-16 · 188 added, 185 removed, 358 unchanged (51% of the section changed)

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government is our largest tenant, representing approximately 19.7% of our annualized rental income as of December 31, 2022.

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.

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 generally has increasingly returned to pre-pandemic practices and operations, although recent variants of the virus have caused increased infections and resulted in governments and businesses implementing or

adopting certain requirements, including proof of vaccinations and mask wearing.

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 adverse 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, as a result of the COVID-19 pandemic, we granted temporary rent assistance totaling $2,483 to 18 tenants.

This assistance generally entailed a deferral of, in most cases, one month of rent pursuant to deferred payment plans which required the deferred rent amounts be payable over a 12-month period.

As of December 31, 2021, we had collected 100% of our granted rent deferrals.

The ultimate adverse impact of the COVID-19 pandemic is highly uncertain and subject to change.

As a result, we do not yet know the full extent of potential impacts on our business and operations, our tenants’ businesses and operations or the global economy as a whole.

For more information and risks relating to the COVID-19 pandemic on us and our business, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements” and Part I, Item 1A, “Risk Factors”.

Certain changes in office space utilization accelerated during the COVID-19 pandemic, including increased remote work arrangements, continue to impact the market.

The utilization and demand for office space continues to evolve and the ultimate impact of current trends on the demands for office space at our properties remains uncertain and subject to change.

Accordingly, we do not yet know what the full extent of the impacts will be on our or our tenants’ businesses and operations.

In response to inflationary pressures, the U.S.

Federal Reserve has increased the federal funds rate by 450 basis points since January 1, 2022 and has signaled that further increases are likely to occur throughout 2023.

The inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S.

economy may soon enter an economic recession and they have caused disruptions in the financial markets.

Sustained inflationary pressures, increased interest rates, an economic recession or continued or intensified disruptions in the financial markets could adversely

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affect our financial condition and that of our tenants, could adversely impact the ability or willingness of our tenants to renew our leases or pay rent to us, would impair our ability to effectively deploy our capital or realize upon investments on favorable terms, may restrict our access to, and would likely increase our cost of, capital and may cause the values of our properties and our securities to decline.

For more information and risks relating to the COVID-19 pandemic, inflation and changes in market interest rates and their impacts on us and our business, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements” and Part I, Item 1A, “Risk Factors”.

Property Operations

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Total properties 160 178 149 149

178 181 167 167

Total rentable square feet (3)

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(1) Based on properties we owned on December 31, 2022 and 2021, respectively.

Includes one leasable land parcel as of December 31, 2021.

(2) Based on properties we owned continuously since January 1, 2021;

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.

(3) Subject to changes when space is remeasured or reconfigured for tenants.

(4) 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 years ended December 31, 2021 and 2020 are as follows:

The average effective rental rate per square foot for our properties for the years ended December 31, 2022 and 2021 were as follows:

Year Ended December 31,

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During the year ended December 31, 2022, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

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Changes resulting from:

Acquisition of properties 899 27 926

Disposition of properties (1,489) (837) (2,326)

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(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 year ended December 31, 2022, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the year ended December 31, 2022, 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):

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Total leasing activity $ 27.50 $ 27.21 2,571

(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.

(1) Effective rental rates include 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 exclude lease value amortization.

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During the years ended December 31, 2022 and 2021, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows:

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(3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue.

As of December 31, 2021, we have estimated unspent leasing related obligations of $121,754, of which we expect to spend $72,516 over the next 12 months.

In addition to the capital expenditures described above, we contributed $3,851 to one of our unconsolidated joint ventures during the year ended December 31, 2022.

We did not make any contributions to this unconsolidated joint venture during the year ended December 31, 2021.

Also, as of December 31, 2022, we had estimated unspent leasing related obligations of $156,693, of which we expect to spend $86,031 over the next 12 months.

As of December 31, 2022, we had leases at our properties totaling approximately 1,886,000 rentable square feet that were scheduled to expire during 2023.

As of February 15, 2022, we expect tenants with leases totaling approximately 935,000 rentable square feet that are scheduled to expire during 2022, to not renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration.

Of the approximately 935,000 rentable square feet that is expiring and expected to not renew in 2022, approximately 300,000 rentable square feet is in the planning stage of a redevelopment project at a three-property campus located in Seattle, WA.

As a result of the COVID-19 pandemic and its economic impact, leasing activity has been volatile 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.

As of February 14, 2023, we expect tenants with leases totaling approxim ately 1,120,000 r entable square feet that are scheduled to expire during 2023 not to renew or to downsize their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration.

However, we are in advanced discussions to re-lease certain of this space to new tenants and we continue to proactively engage with our existing tenants and are focused on our overall tenant retention.

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;

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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.

As of December 31, 2021, our lease expirations by year are as follows (square feet in thousands):

Also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations or lower rents upon lease renewal or reletting.

Additionally, we may incur significant costs and make significant concessions to renew our leases with current tenants or lease our properties to new tenants.

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As of December 31, 2022, our lease expirations by year were as follows (square feet in thousands):

Number of Leases Expiring Leased Square Feet Expiring (2)

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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 December 31, 2021, tenants occupying approximately 5.6% of our rentable square feet and responsible for approximately 5.7% of our annualized rental income as of December 31, 2021, currently have exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2035 and 2040 early termination rights become exercisable by other tenants who currently occupy an additional approximately 1.5%, 2.8%, 2.5%, 3.9%, 1.1%, 0.8%, 1.2%, 0.5%, 0.6%, 0.4% and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 1.7%, 3.9%, 2.9%, 7.1%, 1.4%, 1.3%, 1.3%, 0.9%, 0.7%, 0.5% and 0.3% of our annualized rental income, respectively, as of December 31, 2021.

In addition, as of December 31, 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 December 31, 2021.

As of December 31, 2022, tenants occupying approximately 2.4% of our rentable square feet and responsible for approximately 2.3% of our annualized rental income as of December 31, 2022, had exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2035, 2037 and 2040 early termination rights become exercisable by other tenants who occupied an additional approximately 4.6%, 2.8%, 4.5%, 0.9%, 0.9%, 3.3%, 0.8%, 0.7%, 0.1%, 0.8%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 4.8%, 3.1%, 7.9%, 1.2%, 1.3%, 3.8%, 1.3%, 0.9%, 0.1%, 1.2%, 0.2% and 0.4% of our annualized rental income, respectively, as of December 31, 2022.

In addition, as of December 31, 2022, pursuant to leases with 10 of our tenants, these tenants had rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets.

These 10 tenants occupied approximately 5.5% of our rentable square feet and contributed approximately 6.1% of our annualized rental income as of December 31, 2022.

(2) Leased square feet is pursuant to leases existing as of December 31, 2022, 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 at properties with single or majority tenants 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.

However, recent shifts in workplace practices, including as a result of the COVID-19 pandemic, have resulted in a significant increase in alternative work arrangements, including work from home practices.

It is uncertain to what extent and how long work from home arrangements may continue, or if other hybrid work arrangements will continue or increase.

If these arrangements continue or increase, our single or majority tenants may not seek to renew or extend their leases when they expire, or may seek to renew their leases for less space than the currently occupy.

We generally will seek to renew or extend the terms of leases at properties with tenants when they expire.

However, market and economic factors, along with increases in remote work, changes in space utilization and government spending and budget priorities may cause our tenants not to renew or extend their leases when they expire, or to seek to renew their leases for less space than they currently occupy.

If we are unable to extend or renew our leases, or we renew leases for reduced space, 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.

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.

Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants have generally renewed leases for mission critical space 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 to government owned properties or consolidated leased space within a market, 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.

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.

Given the significant uncertainties, including as to the

COVID-19 pandemic, its economic impact and its aftermath, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods.

Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has, in some instances, resulted in delayed decisions by some of our government tenants and greater focus on short term lease renewals.

Given the significant uncertainties, including the extent to which remote or alternative work arrangements may continue or increase, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods.

As of December 31, 2022, we derive 22.6% 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.

A downturn in economic conditions in this area or a possible recession, including as a result of current inflationary conditions or otherwise, could result in reduced demand from tenants for our properties, reduce rents that our tenants in this area are willing to pay when our leases expire and increase lease concessions for new leases and renewals.

Additionally, there has been a

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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.

Our manager, RMR, employs a tenant review process for us.

RMR assesses tenants on an individual basis based on various applicable credit criteria.

In general, depending on facts and circumstances, RMR 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.

We consider investment grade tenants to include:

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Not Rated 596 3.1 % 19,336 3.6 %

4 Bank of America Corporation Investment Grade 577 2.8 % 15,803 2.7 %

5 State of California Investment Grade 523 2.5 % 15,578 2.7 %

4 IG Investments Holdings LLC Not Rated 338 1.8 % 16,788 3.1 %

Not Rated 299 1.4 % 12,752 2.2 %

5 State of California Investment Grade 519 2.7 % 15,865 2.9 %

6 Bank of America Corporation Investment Grade 577 3.0 % 15,765 2.9 %

7 Commonwealth of Massachusetts Investment Grade 311 1.6 % 12,260 2.3 %

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Not Rated 207 1.1 % 11,498 2.1 %

10 Northrop Grumman Corporation Investment Grade 337 1.6 % 11,350 2.0 %

9 Tyson Foods, Inc.

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Not Rated 230 1.2 % 10,745 2.0 %

13 CommScope Holding Company Inc Non Investment Grade 228 1.1 % 9,245 1.6 %

14 Micro Focus International plc Non Investment Grade 242 1.2 % 7,430 1.3 %

11 Northrop Grumman Corporation Investment Grade 337 1.8 % 10,639 2.0 %

12 CommScope Holding Company Inc.

Non Investment Grade 228 1.2 % 9,370 1.7 %

13 Sonoma Biotherapeutics, Inc.

Not Rated 84 0.4 % 7,468 1.4 %

14 State of Georgia Investment Grade 308 1.6 % 7,383 1.4 %

15 PNC Bank Investment Grade 441 2.3 % 6,924 1.3 %

16 Micro Focus International plc Non Investment Grade 215 1.1 % 6,905 1.3 %

17 Compass Group plc Investment Grade 267 1.4 % 6,703 1.2 %

18 ServiceNow, Inc.

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Investment Grade 468 2.5 % 6,479 1.2 %

19 Compass Group plc Investment Grade 267 1.3 % 6,442 1.1 %

20 Leidos Holdings Inc.

Investment Grade 159 0.8 % 6,117 1.1 %

21 Automatic Data Processing, Inc.

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Investment Grade 250 1.3 % 6,037 1.1 %

23 Primerica, Inc.

Investment Grade 344 1.8 % 5,442 1.0 %

10,845 56.8 % $ 333,840 61.5 %

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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.

The term of the lease commences upon our delivery of the completed hotel, which is estimated to occur in the second quarter of 2023.

For more information about our lease with Sonesta, see Note 7 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Acquisition Activities

During the year ended December 31, 2021, we acquired three properties containing 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 “Business —Acquisition Policies” in Part I, Item 1 of this Annual Report on Form 10-K and Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

(2) In August 2022, we entered into an approximately 10-year lease with Sonoma Biotherapeutics, Inc.

at a property we own in Seattle, WA that is currently undergoing redevelopment.

The term of the lease is estimated to commence in the fourth quarter of 2023.

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Disposition Activities

During the year ended December 31, 2021, we sold six properties, a warehouse facility adjacent to a property we own located in Kansas City, MO and two vacant land parcels adjacent to properties we own located in Sterling, VA containing approximately 2,565,000 rentable square feet for an aggregate sales price of $226,915, excluding closing costs.

Since January 1, 2022, we also sold three of the properties classified as held for sale as of December 31, 2021 containing approximately 301,000 rentable square feet for an aggregate sales price of $25,695, excluding closing costs.

We continue to evaluate our portfolio for opportunities to strategically recycle capital and are currently in various stages of marketing for sale more than 30 properties containing over 3,000,000 rentable square feet.

As of February 15, 2022, we have entered into an agreement to sell one property containing approximately 29,000 rentable square feet for a sales price of $3,850, excluding closing costs.

During the year ended December 31, 2022, we sold 18 properties, including one leasable land parcel, containing approximately 2,326,000 rentable square feet for an aggregate sales price of $211,020, excluding closing costs.

As a result of current commercial real estat e market conditions, including rising interest rates, the pace of our dispositions has moderated and we expect that trend to continue until commercial real estate industry conditions generally, and office market conditions specifically, improve.

However, we continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing certain of our properties for sale, and we may decide to seek to sell additional properties in the future.

As of February 14, 2023, we have entered into agreements to sell two properties containing approximately 207,000 rentable square feet for an aggregate sales price of $7,600, excluding closing costs.

We cannot be sure we will sell any properties we are marketing for sale 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.

In a ddition, our pending 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.

For more information about our disposition activities, see “Business —Disposition Policies” in Part I, Item 1 of this Annual Report on Form 10-K and Note 4 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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, together with cash on hand, 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 $346,607, 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 $395,632, after deducting underwriters’ discounts and offering expenses, which we used to repay amounts outstanding under our revolving credit facility and for general business purposes.

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 Repayments

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.

In February 2022, we gave notice of our intention to prepay, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $25,055 at December 31, 2021, an annual interest rate of 4.22% and a maturity date in July 2022.

We expect to make this prepayment in April 2022 using cash on hand.

Senior Unsecured Note Redemption

In June 2022, we redeemed, at par plus accrued interest, all $300,000 of our 4.00% senior unsecured notes due July 2022 using cash on hand and borrowings under our revolving credit facility.

Mortgage Note Prepayments

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 using cash on hand.

In October 2022, we prepaid, at a discounted amount of $22,176 plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $22,901, an annual interest rate of 4.80% and a maturity date in June 2023 using cash on hand and borrowings under our revolving credit facility.

Revolving Credit Facility

In November 2022, we exercised our option to extend the maturity date of our revolving credit facility by six months to July 31, 2023.

Subject to the payment of an extension fee and meeting certain other conditions, we may extend the maturity date of our revolving credit facility by one additional six month period.

For more information about our financing activities, see “Business —Our Financing Policies” in Part I, Item 1 of this Annual Report on Form 10-K and Note 9 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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ownership of real estate properties.

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RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Year Ended December 31, 2022, Compared to Year Ended December 31, 2021

Non-Comparable

Properties Results

Comparable Properties (1) Results

Year Ended Consolidated Results

Year Ended December 31, December 31, Year Ended December 31,

Year Ended December 31,

Non-Comparable Properties Results Year Ended December 31, Consolidated Results

Year Ended December 31,

Change 2022 2021 2022 2021 $

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Depreciation and amortization 222,564 241,494 (18,930) (7.8 %)

Loss on impairment of real estate 62,420 2,954 59,466 n/m

Loss on impairment of real estate 21,820 62,420 (40,600) (65.0 %)

Acquisition and transaction related costs 292 — 292 n/m

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Total other expenses 269,810 330,772 (60,962) (18.4 %)

Gain on sale of real estate 78,354 10,855 67,499 n/m

Interest and other income 7 779 (772) (99.1 %)

Gain on sale of real estate 11,001 78,354 (67,353) (86.0 %)

Interest and other income 217 7 210 n/m

Interest expense (103,480) (112,385) 8,905 (7.9 %)

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 (5,428) 8,248 (13,676) (165.8 %)

Gain (loss) on early extinguishment of debt 682 (14,068) 14,750 (104.8 %)

Loss before income tax expense and equity in net losses of investees (2,330) (5,428) 3,098 (57.1 %)

Income tax expense (270) (251) (19) 7.6 %

Equity in net losses of investees (3,509) (2,501) (1,008) 40.3 %

Net income (loss) $ (8,180) $ 6,678 $ (14,858) n/m

Net loss $ (6,109) $ (8,180) $ 2,071 (25.3 %)

Weighted average common shares outstanding (basic and diluted) 48,278 48,195 83 0.2 %

Per common share amounts (basic and diluted):

Net income (loss) $ (0.17) $ 0.14 $ (0.31) n/m

Net loss $ (0.14) $ (0.17) $ 0.03 (17.6 %)

n/m - not meaningful

(1) Comparable properties consists of 149 properties we owned on December 31, 2022 and which we owned continuously since January 1, 2021 and excludes properties classified as held for sale, 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.”

(2) Our definition of net operating income, or NOI, and our reconciliation of net 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 year ended December 31, 2022 compared to the year ended December 31, 2021.

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Rental income.

The decrease in rental income reflects decreases in rental income of $27,158 related to property disposition activities, $12,675 related to properties undergoing significant redevelopment and $3,655 related to comparable properties,

offset by an increase in rental income of $32,051 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 2021.

The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our properties in 2021.

The decrease in rental income reflects decreases in rental income of $29,470 related to property disposition activities and $12,939 related to properties undergoing significant redevelopment, partially offset by increases in rental income of $13,060 for acquired properties and $7,142 for comparable properties.

Rental income for acquired properties reflects a reduction to reimbursement revenue of $8,715 resulting from the reversal of previously estimated real estate taxes at two

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properties we acquired in 2021 due to favorable real estate tax assessments and successful appeals received in 2022.

The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at properties located in Washington, D.C.

and Seattle, WA that began redevelopment projects during April 2021 and February 2022, respectively, partially offset by termination fee revenue at the Seattle, WA property related to the termination of the former tenant’s lease in February 2022 prior to commencement of the redevelopment.

The increase in rental income for comparable properties is primarily due to higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in 2022 and operating expenses that were previously paid directly by certain of our tenants now being paid by and reimbursed to us pursuant to lease amendments with those tenants executed in 2022, as well as lease termination fee revenue received and higher parking income as a result of higher parking volumes, partially offset by reductions in occupied space at certain of our properties in 2022.

Rental income includes non-cash straight line rent adjustments totaling $10,830 in 2022 and $15,368 in 2021, and amortization of acquired real estate leases and assumed real estate lease obligations totaling ($975) in 2022 and ($2,288) in 2021.

Real estate taxes.

The increase in real estate taxes primarily reflects an increase in real estate taxes of $11,729 for acquired properties, offset by decreases in real estate taxes of $2,174 related to property disposition activities, $1,844 related to properties undergoing significant redevelopment and $860 for comparable properties.

Real estate taxes for comparable properties declined primarily due to decreases in assessed values and refunds received in 2021 at certain of our properties as a result of successful real estate tax appeals.

The decrease in real estate taxes reflects decreases in real estate taxes of $9,472 for acquired properties, $3,432 related to property disposition activities and $2,386 related to properties undergoing significant redevelopment, partially offset by an increase in real estate taxes of $1,164 for comparable properties.

The decrease in real estate taxes for acquired properties reflects the reversal of previously estimated real estate taxes at two properties we acquired in 2021 due to favorable real estate tax assessments and successful appeals received in 2022.

Real estate taxes for comparable properties increased primarily due to real estate taxes that were previously paid by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Utility expenses.

The decrease in utility expenses reflects decreases in utility expenses of $559 related to property disposition activities and $393 for properties undergoing significant redevelopment, offset by increases of $621 for acquired properties and $198 for comparable properties.

Utility expenses for comparable properties increased primarily due to utility expenses 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.

The increase in utility expenses reflects increases in utility expenses of $3,252 for comparable properties and $805 for acquired properties, partially offset by decreases in utility expenses of $1,999 related to property disposition activities and $304 for properties undergoing significant redevelopment.

The increase in utility expenses for comparable properties is primarily due to increases in electricity usage as a result of higher building utilization levels at certain of our properties and the impact of inflation in 2022, as well as utility expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

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 reflects increases of $4,683 for acquired properties and $160 for comparable properties, offset by decreases of $3,226 related to property disposition activities and $1,257 related to properties undergoing significant redevelopment.

The increase in other operating expenses reflects increases of $8,180 for comparable properties and $4,564 for acquired properties, partially offset by decreases of $6,982 related to property disposition activities and $1,221 related to properties undergoing significant redevelopment.

The increase in other operating expenses for comparable properties is primarily due to higher repairs and maintenance costs, higher cleaning expenses due to increased building utilization levels and the impact of inflation in 2022, increased insurance costs and an increase related to other operating expenses that were previously paid by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects decreases of $14,505 for comparable properties and $11,131 related to property disposition activities, offset by an increase of $15,564 for acquired properties.

Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated after January 1, 2020, partially offset by depreciation and amortization of improvements made to certain of our properties during 2020 and 2021.

The decrease in depreciation and amortization reflects decreases of $18,921 related to property disposition activities, $9,990 for comparable properties and $2,656 related to properties undergoing significant redevelopment, partially offset by an increase of $12,637 for acquired properties.

Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated since January 1, 2021, partially offset by depreciation and amortization of improvements made to certain of our properties since January 1, 2021.

Loss on impairment of real estate .

We recorded a $62,420 loss on impairment of real estate in 2021 to reduce the carrying value of eight properties to their estimated fair value less costs to sell, which includes $45,196 related to three properties containing approximately 2,001,000 rentable square feet that were sold during the year ended December 31, 2021, $6,991 related to two properties containing approximately 158,000 rentable square feet that were classified as held for sale as of December 31, 2021 and $10,233 related to three properties containing approximately 448,000 rentable square feet that were previously classified as held for sale as of September 30, 2021 and were removed from held for sale status as of December 31, 2021.

We recorded a $2,954 loss on impairment of real estate in 2020 to reduce the carrying value of four properties to their estimated fair value less costs to sell that were sold during 2020.

We recorded a $21,820 loss on impairment of real estate in 2022 to reduce the carrying value of seven properties to their estimated fair values less costs to sell.

We recorded a $62,420 loss on impairment of real estate in 2021 to reduce the carrying value of eight properties to their estimated fair values less costs to sell.

Acquisition and transaction related costs.

Acquisition and transaction related costs incurred in 2020 represent costs related to an acquisition which we terminated in November 2020.

Acquisition and transaction related costs consist of costs related to our evaluation of potential acquisitions, dispositions and other strategic transactions.

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 expiration of an office lease in January 2021 for which we were the lessee, as well as decreases in equity compensation expense, legal fees and state franchise tax expense, partially offset by an increase in business management fees in 2021 resulting from an increase in average total market capitalization in 2021 compared to 2020.

The decrease in general and administrative expenses is primarily the result of a decrease in base business management fees resulting from a decrease in average total market capitalization in 2022 compared to 2021 and a state franchise tax refund received in 2022.

Gain on sale of real estate.

We recorded a $78,354 net gain on sale of real estate in 2021 resulting from the sale of six properties, a warehouse facility adjacent to a property we own located in Kansas City, MO and two vacant land parcels adjacent to properties we own located in Sterling, VA.

We recorded a $10,855 net gain on sale of real estate in 2020 resulting from the sale of 10 properties.

We recorded an $11,001 net gain on sale of real estate in 2022 resulting from the sale of 18 properties, including one leasable land parcel.

We recorded a $78,354 net gain on sale of real estate in 2021 resulting from the sale of six properties, a warehouse facility and two vacant land parcels.

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Interest and other income.

The decrease in interest and other income is primarily due to a settlement payment we received in 2020 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 2021 compared to 2020.

Interest expense.

The increase in interest expense is primarily due to higher average outstanding debt balances in 2021 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, lower interest expense incurred as a result of having a lower average balance outstanding under our revolving credit facility during 2021 compared to 2020 and lower average interest rates on amounts outstanding and an increase in interest expense capitalized related to redevelopment projects.

Loss on early extinguishment of debt .

We recorded a loss on early extinguishment of debt of $14,068 in 2021 from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note due in 2023 and the redemption of our senior unsecured notes due 2022 and 2046.

In 2020, we 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 that was repaid in 2020 related to a property sold in 2016.

The increase in interest and other income is primarily due to the effect of higher interest rates earned on cash balances invested in 2022 compared to 2021.

Inter est expense.

Th e decrease in interest expense reflects financing activities since January 1, 2021, which included the redemption of $910,000 of senior unsecured notes with a weighted average interest rate of 4.7% and the repayment of three mortgage notes totaling approximately $119,000 with a weighted average interest rate of 3.9%, as well as higher capitalized interest in 2022, partially offset by the issuance of $1,050,000 of senior unsecured notes with a weighted average interest rate of 2.9%, as well as a higher average balance outstanding and higher weighted average interest rate on borrowings under our revolving credit facility during 2022 compared to 2021.

Gain (loss) on early extinguishment of debt .

We recorded a net gain on early extinguishment of debt of $682 in 2022 resulting from the prepayment of a mortgage note due in 2023 at a discounted principal amount and the write off of the unamortized portion of certain premiums, discounts and debt issuance costs resulting from the prepayment of this mortgage note and the June 2022 redemption of our senior unsecured notes due July 2022.

Income tax expense.

The decrease in income tax expense reflects lower operating income in certain jurisdictions in 2021 where we are subject to state income taxes.

The increase in income tax expense reflects higher operating income in certain jurisdictions in 2022 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 2021 compared to 2020 primarily as a result of the changes noted above.

The increase in equity in net losses of investees was primarily due to reductions in occupied space at properties owned by our unconsolidated joint ventures in 2022.

Our net loss and net loss per basic and diluted common share decreased in 2022 compared to 2021 primarily as a result of the changes noted above.

Non-GAAP Financial Measures

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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 years ended December 31, 2021 and 2020.

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The following table presents the reconciliation of net loss to NOI for the years ended December 31, 2022 and 2021:

Year Ended December 31,

Net income (loss) $ (8,180) $ 6,678

Net loss $ (6,109) $ (8,180)

Equity in net losses of investees 3,509 2,501

Income tax expense 270 251

Income (loss) before income tax expense and equity in net losses of investees (5,428) 8,248

Loss on early extinguishment of debt 14,068 3,839

Loss before income tax expense and equity in net losses of investees (2,330) (5,428)

(Gain) loss on early extinguishment of debt (682) 14,068

Interest expense 103,480 112,385

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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 years ended December 31, 2021 and 2020.

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The following table presents the reconciliation of net loss to FFO and Normalized FFO for the years ended December 31, 2022 and 2021:

Year Ended December 31,

Net income (loss) $ (8,180) $ 6,678

Net loss $ (6,109) $ (8,180)

Depreciation and amortization:

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Acquisition and transaction related costs 292 —

Loss on early extinguishment of debt 14,068 3,839

(Gain) loss on early extinguishment of debt (682) 14,068

Normalized FFO $ 229,942 $ 234,875

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• our ability to successfully sell properties that we market for sale;

• our ability to develop, redevelop or reposition properties to produce cash flows in excess of our cost of capital;

• our ability to develop, redevelop or reposition properties to produce cash flows in excess of our cost of capital and property operating and capital expenses;

• 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 January 12, 2023, 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 selectively sell certain properties from time to time to fund future acquisitions and to manage leverage at levels we believe appropriate 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 year ended December 31, 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, a warehouse facility adjacent to a property we own located in Kansas City, MO and two vacant land parcels adjacent to properties we own in Sterling, VA for an aggregate sales price of $226,915, excluding closing costs.

Since January 1, 2022, we also sold three additional properties for an aggregate sales price of $25,695, excluding closing costs.

We continue to evaluate our portfolio for opportunities to strategically recycle capital and are currently in various stages of marketing for sale more than 30

properties containing over 3,000,000 rentable square feet.

As of February 15, 2022, we have entered into an agreement to sell one property for a sales price of $3,850, excluding closing costs.

We continue to carefully consider our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.

We determine our distribution payout ratio with consideration for our expected capital expenditures, as well as cash flows from operations and payment of debt obligations.

We expect to accretively grow our property portfolio through our capital recycling program, pursuant to which we plan to selectively sell certain properties from time to time to manage leverage levels and to acquire new properties or portfolios with a goal of improving our asset diversification, our geographical footprint and the average age of our properties, lengthening the weighted average term of our leases and increasing tenant retention, and increasing our distributions to shareholders.

During the year ended December 31, 2022, we sold 18 properties, including one leasable land parcel, for an aggregate sales price of $211,020, excludin g closing costs.

Since January 1, 2023, we sold three properties for a sales price of $5,350 , excluding closing costs.

As a result of current real estate market conditions, including rising interest rates, the pace of our dispositions has moderated and we expect that trend to continue until commercial real estate industry conditions generally, and office market conditions specifically, improve.

However, we continue to evaluate our portfolio to strategically recycle capital and are

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current ly in various stages of marketing certain of our properti es for sale.

As of February 14, 2023, we have entered into agreements to sell two properties for an aggregate sales price of $7,600, excluding closing costs.

W e 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.

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Cash, cash equivalents and restricted cash at end of period $ 12,249 $ 84,515

The decrease in cash provided by operating activities for the year ended December 31, 2021 compared to the prior year is primarily the result of property sales and reductions in occupied space at certain of our properties in 2021, partially offset by properties acquired during 2021 and favorable changes in working capital.

The increase in cash used in investing activities for the year ended December 31, 2021 compared to the prior year is primarily due to higher acquisition activity and real estate improvement activity in 2021 compared to the prior year, partially offset by higher cash proceeds received from our sales of properties.

The increase in cash provided by financing activities for the year ended December 31, 2021 compared to the prior year is primarily due to the aggregate issuance of $1,050,000 of senior unsecured notes in 2021 compared to $412,000 of such issuances in the prior year, partially offset by higher debt repayment activity in 2021, which included the aggregate redemption of $610,000 of senior unsecured notes and the repayment of $71,000 of mortgage debt compared to the redemption of $400,000 of senior unsecured notes and the repayment of $152,187 of mortgage debt in 2020.

The decrease in cash provided by operating activities in 2022 compared to 2021 was primarily a result of higher deferred leasing costs incurred as a result of leasing activity, disposition activities and unfavorable changes in working capital in 2022.

The decrease in cash used in investing activities in 2022 compared to 2021 is primarily due to higher acquisition activity in 2021, partially offset by increased capital expenditures in 2022 related to our two redevelopment projects in Washington, D.C.

and Seattle, WA.

The increase in cash used in financing activities in 2022 compared to 2021 is a result of net debt repayment activity in 2022 that included the redemption of all $300,000 of our 4.00% senior unsecured notes due July 2022 and the repayment of two mortgage notes with an aggregate principal balance of approximately $48,000, which was partially offset by borrowing activity under our revolving credit facility to facilitate these payments, compared to the aggregate issuance of $1,050,000 of senior unsecured notes in 2021, partially offset by the aggregate redemption of $610,000 of senior unsecured notes and the repayment of $71,000 of mortgage debt in 2021.

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.

In November 2022, we exercised our option to extend the maturity date of our revolving credit facility by six months to July 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the maturity date of our revolving credit facility by one additional six month period.

We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.

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As of December 31, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 5.4%.

As of December 31, 2021 and February 15, 2022, we had no amounts outstanding under our revolving credit facility and $750,000 available for borrowing.

As of December 31, 2022 and February 14, 2023, we had $195,000 an d $220,000 outstanding under our revolving credit facility and $555,000 and $530,000 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 non-recourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.

During the year ended December 31, 2021, we completed the following senior unsecured notes and mortgage notes transactions:

Senior Unsecured Note Issuances

We used the net proceeds from this offering plus cash on hand 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.

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.

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

Mortgage Note Repayment

As of December 31, 2021, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows:

During the year ended December 31, 2022, we repaid the following senior unsecured notes and mortgage notes:

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Senior Unsecured Note Redemption

In June 2022, we redeemed, at par plus accrued interest, all $300,000 of our 4.00% senior unsecured notes due July 2022 using cash on hand and borrowings under our revolving credit facility.

Mortgage Note Prepayments

As of December 31, 2022, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and one mortgage note, were as follows:

Year Debt Maturities

2023 $ 50,000

Thereafter 562,000

Total $ 2,262,000

(1) In February 2022, we gave notice of our intention to prepay, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $25,055 at December 31, 2021, an annual interest rate of 4.22% and a maturity date in July 2022.

We expect to make this prepayment in April 2022 using cash on hand.

(2) Our $300,000 4.00% senior notes mature in July 2022.

We currently have availability under our $750,000 revolving credit facility to redeem these senior notes prior to maturity if we elect to do so.

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates.

Our $98,301 in mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of December 31, 2021, we have estimated unspent leasing related obligations of $121,754, of which we expect to spend $72,516 over the next 12 months.

Our $50,000 mortgage note requires monthly payments of interest only through maturity.

In addition to our debt obligations, as of December 31, 2022, we had estimated unspent leasing related obligations of $156,693, of which we expect to spend $86,031 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 December 31, 2021, we have incurred approximately $47,330 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 are also in the planning stage for a redevelopment project at a three-property campus located in Seattle, WA containing approximately 300,000 rentable square feet.

This project includes the repositioning of two properties from office to life science and maintaining the third building for office use.

containing approximately 340,000 rentable square feet.

We currently estimate the total project costs associated with this redevelopment will be approximately $215,000 and completion of the redevelopment in the second quarter of 2023.

As of December 31, 2022, we had incurred $148,107 related to this project.

See Note 7 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for more information regarding this lease and related redevelopment costs.

We are also in the process of redeveloping a three-property campus located in Seattle, WA containing approximately 300,000 rentable square feet.

This project includes the repositioning of two properties from office to life science and maintaining the third property for office use.

We currently estimate the total project costs associated with this redevelopment will be approximately $162,000 and completion of the redevelopment in the fourth quarter of 2023.

As of December 31, 2022, we had incurred $48,824 related to this project.

In August 2022, we entered into an approximately 10-year lease for approximately 84,000 rentable square feet at one of the life science properties that is approximately 109.0% higher than the prior rental rate for the same space, making the redevelopment project 28% 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.

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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.

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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.

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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.

For instance, it is uncertain what the ultimate impacts of inflationary pressures, rising interest rates or any economic recession will be.

A protracted and extensive economic recession or continued or intensified disruptions in capital markets could limit our access to financing from public sources and would likely increase our cost of capital.

During the year ended December 31, 2022, we paid quarterly distributions to our shareholders totaling $106,630 using cash on hand and borrowings under our revolving credit facility.

On January 12, 2023, we declared a regular quarterly distribution payable to shareholders of record on January 23, 2023 in the amount of $0.55 per share, or approximately $26,700.

We expect to pay this distribution on or about February 17, 2022 using cash on hand.

We expect to pay this distribution on or about February 16, 2023 using cash on hand and borrowings under our revolving credit facility.

For more information regarding the distributions we paid during 2022, see Note 11 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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Debt Covenants (dollars in thousands)

Our principal debt obligations at December 31, 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 $98,301 that were assumed in connection with certain of our acquisitions.

Our principal debt obligations at December 31, 2022 consisted of $195,000 of borrowings outstanding under our $750,000 revolving credit facility, an outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and a mortgage note with an outstanding principal balance of $50,000 that was assumed in connection with an acquisition.

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 December 31, 2022, 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.

Our mortgage note is non-recourse, subject to certain limited exceptions, and does 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.

However, under our credit agreement, our highest senior credit rating, as defined in our credit agreement, 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.

In November 2022, Moody’s downgraded our senior unsecured debt rating from Baa3 to Ba 1.

However, as of February 14, 2023, our highest senior credit rating, as defined in our credit agreement, remains unchanged and therefore, the fees and interest rates we pay under our credit agreement have not increased as a result of the downgrade to our senior unsecured debt rating.

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).

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Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc.

We have relationships and historical and continuing transactions with RMR, RMR Inc.

and others related to them.

For more information about these and other such relationships and related person transactions, see Notes 6 and 7 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference, and our other filings with the SEC, including our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2022.

For more information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward Looking Statements,” Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

Critical Accounting Estimates

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however, our management is ultimately responsible for the purchase price allocations and determination of useful lives.

We compute depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to 12 years for personal property.

We compute depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to seven years for personal property.

We do not depreciate the allocated cost of land.

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These accounting policies involve significant judgments made based upon our experience and the experience of our management and our Board of Trustees, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability and willingness of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located.

Competition, economic conditions, changing government priorities and other factors may cause occupancy declines in the future.

Competition, economic

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conditions, changing government priorities and other factors may cause occupancy declines in the future.

In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own or decrease the carrying values of our assets.

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In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties.

Our manager, RMR LLC, is a member of the ENERGY STAR program, a joint program of the U.S.

Our manager, RMR, is a member of the ENERGY STAR program, a joint program of the U.S.

Environmental Protection Agency and the U.S.

1 unchanged sentence

Green Building Council, a nonprofit organization focused on promoting energy efficiency at commercial properties through its LEED® green building program.

RMR LLC’s annual Sustainability Report summarizes the environmental, social and governance initiatives RMR LLC and its client companies, including OPI, employ.

RMR LLC’s Sustainability Report may be accessed on RMR Inc.’s website at www.rmrgroup.com/corporate-sustainability/default.aspx.

RMR’s annual Sustainability Report summarizes the environmental, social and governance initiatives RMR and its clients, including OPI, employ.

RMR’s Sustainability Report may be accessed on RMR Inc.’s website at www.rmrgroup.com/corporate-sustainability/default.aspx.

The information on or accessible through RMR Inc.’s website is not incorporated by reference into this Annual Report on Form 10-K.

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis