OFFICE PROPERTIES INCOME TRUST 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2022 Annual Report. OVERVIEW (dollars in thousands, except per share and per square foot data) We are a real estate investment trust, or REIT, organized under Maryland law. As of March 31, 2023, our wholly owned properties were comprised of 157 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet. As of March 31, 2023, our properties are located in 30 states and the District of Columbia and contain approximately 20,895,000 rentable square feet. As of March 31, 2023, our properties were leased to 267 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.4 years. The U.S. government is our largest tenant, representing approximately 19.6% of our annualized rental income as of March 31, 2023. The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of March 31, 2023, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. Certain changes in office space utilization that accelerated during the COVID-19 pandemic, including increased remote work arrangements and tenants consolidating their real estate footprint, continue to impact the market. The utilization and demand for office space continues to face headwinds 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 nor the long-term outlook for leasing vacant space. In response to inflationary pressures, the U.S. Federal Reserve has increased the federal funds rate by 450 basis points since March 2022 and has indicated that there may be additional increases. 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 affect our and our tenants’ financial condition, 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 desirable returns on our investments, 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 about the risks relating to these dynamics and conditions and their impacts on us and our business, see Part I, Item IA, “Risk Factors”, of our 2022 Annual Report. On April 11, 2023, we and DHC entered into the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the conditions thereof, DHC will be merged with and into us, with us continuing as the surviving entity. Upon the closing of the Merger, we would acquire DHC’s medical office and senior housing portfolios, which, as of December 31, 2022, consisted of 379 properties, including 105 medical office and life science properties containing approximately 8,811,000 rentable square feet, 264 senior living communities containing approximately 27,000 units and ten wellness centers containing approximately 812,000 rentable square feet. The combined company is expected to be a REIT with a diversified tenant base, a broad portfolio, greater scale and strong growth potential. For more information and risks relating to the Merger, see Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 and Part II, Item 1A “Risk Factors,” of this Quarterly Report on Form 10-Q. Property Operations Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of March 31, 2023 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 15 Table of Contents Occupancy data for our properties as of March 31, 2023 and 2022 was as follows (square feet in thousands): All Properties (1) Comparable Properties (2) March 31, March 31, 2023 2022 2023 2022 Total properties 157 174 151 151 Total rentable square feet (3) 20,895 22,941 19,864 19,835 Percent leased (4) 90.5 % 88.8 % 93.5 % 94.4 % (1) Based on properties we owned on March 31, 2023 and 2022, respectively. (2) Based on properties we owned continuously since January 1, 2022; 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) 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 three months ended March 31, 2023 and 2022 were as follows: Three Months Ended March 31, 2023 2022 Average effective rental rate per square foot (1) : All properties (2) $ 28.85 $ 29.40 Comparable properties (3) $ 28.92 $ 28.84 (1) Average effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified. (2) Based on properties we owned on March 31, 2023 and 2022, respectively. (3) Based on properties we owned continuously since January 1, 2022; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. During the three months ended March 31, 2023, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands): Three Months Ended March 31, 2023 Leased Available for Lease Total Beginning of period 19,004 1,965 20,969 Changes resulting from: Disposition of properties — (89) (89) Lease expirations (302) 302 — Lease renewals (1) 112 (112) — New leases (1) 91 (91) — Remeasurements (2) — 15 15 End of period 18,905 1,990 20,895 (1) Based on leases entered during the three months ended March 31, 2023. (2) Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants. 16 Table of Contents During the three months ended March 31, 2023, we entered into new and renewal leases as summarized in the following table (square feet in thousands): Three Months Ended March 31, 2023 New Leases Renewals Total Rentable square feet leased 91 112 203 Weighted average rental rate change (by rentable square feet) (16.8 %) (19.7 %) (18.5 %) Tenant leasing costs and concession commitments (1) $ 4,995 $ 3,752 $ 8,747 Tenant leasing costs and concession commitments per rentable square foot (1) $ 55.17 $ 33.52 $ 43.20 Weighted (by square feet) average lease term (years) 7.2 6.4 6.8 Total leasing costs and concession commitments per rentable square foot per year (1) $ 7.67 $ 5.20 $ 6.37 (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. During the three months ended March 31, 2023, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three months ended March 31, 2023, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands): Three Months Ended March 31, 2023 Old Effective Rent Per Square Foot (1) New Effective Rent Per Square Foot (1) Rentable Square Feet New leases $ 30.83 $ 30.25 108 Lease renewals $ 37.39 $ 32.52 249 Total leasing activity $ 35.41 $ 31.84 357 (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. During the three months ended March 31, 2023 and 2022, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows: Three Months Ended March 31, 2023 2022 Lease related costs (1) $ 13,041 $ 8,664 Building improvements (2) 4,582 2,783 Recurring capital expenditures 17,623 11,447 Development, redevelopment and other activities (3) 49,471 37,524 Total capital expenditures $ 67,094 $ 48,971 (1) Lease related costs generally include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and other tenant inducements. (2) Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. (3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue. In addition to the capital expenditures described above, we contributed $2,263 to one of our unconsolidated joint ventures during the three months ended March 31, 2023. Also, as of March 31, 2023, we had estimated unspent leasing related obligations of $139,874, of which we expect to spend $84,834 over the next 12 months. As of March 31, 2023, we had leases at our properties totaling approximately 1,734,000 rentable square feet that were scheduled to expire through March 31, 2024. As of April 25, 2023, we expect tenants with leases totaling approximately 1,184,000 rentable square feet that are scheduled to expire through March 31, 2024, not to renew or to downsize their leased space 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, some of which may offset expected vacancies, and we continue to proactively engage with our existing tenants and are focused on our overall tenant retention. Prevailing market conditions and our tenants’ needs at the time we negotiate and enter leases or lease renewals will generally determine rental 17 Table of Contents rates and demand for leased space at our properties, all of which factors are beyond our control. Whenever we renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. We cannot be sure of the rental rates that 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 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. As of March 31, 2023, our lease expirations by year were as follows (square feet in thousands): Year (1) Number of Leases Expiring Leased Square Feet Expiring (2) Percent of Total Cumulative Percent of Total Annualized Rental Income Expiring Percent of Total Cumulative Percent of Total 2023 57 1,734 9.2 % 9.2 % $ 55,765 10.3 % 10.3 % 2024 50 2,915 15.4 % 24.6 % 75,074 13.8 % 24.1 % 2025 39 2,091 11.1 % 35.7 % 47,456 8.8 % 32.9 % 2026 36 1,489 7.9 % 43.6 % 40,116 7.4 % 40.3 % 2027 35 2,056 10.9 % 54.5 % 52,360 9.7 % 50.0 % 2028 19 1,320 7.0 % 61.5 % 50,315 9.3 % 59.3 % 2029 23 891 4.7 % 66.2 % 25,895 4.8 % 64.1 % 2030 25 885 4.7 % 70.9 % 25,515 4.7 % 68.8 % 2031 14 860 4.5 % 75.4 % 24,306 4.5 % 73.3 % 2032 and thereafter 49 4,664 24.6 % 100.0 % 145,537 26.7 % 100.0 % Total 347 18,905 100.0 % $ 542,339 100.0 % Weighted average remaining lease term (in years) 5.9 6.4 (1) The year of lease expiration is pursuant to current contract terms. Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability. As of March 31, 2023, tenants occupying approximately 2.8% of our rentable square feet and responsible for approximately 2.8% of our annualized rental income as of March 31, 2023 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 3.8%, 2.8%, 3.7%, 1.2%, 0.9%, 3.2%, 0.9%, 0.8%, 0.1%, 0.9%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 4.0%, 3.0%, 7.2%, 1.6%, 1.4%, 3.7%, 1.3%, 0.9%, 0.1%, 1.2%, 0.2% and 0.4% of our annualized rental income, respectively, as of March 31, 2023. In addition, as of March 31, 2023, 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 6.2% of our annualized rental income as of March 31, 2023. (2) Leased square feet is pursuant to leases existing as of March 31, 2023, 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 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. 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 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, in some instances, resulted in delayed decisions by some of our government tenants 18 Table of Contents and greater focus on short term lease renewals. Given the significant uncertainties, including the extent to which remote or alternative work arrangements and tenants consolidating their real estate footprint 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 March 31, 2023, we derived 22.3% 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. Current economic conditions in this area or a possible recession, including as a result of current inflationary conditions or otherwise, could reduce 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 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 or maintain or increase our rents when our leases expire. 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: (a) investment grade rated tenants; (b) tenants with investment grade rated parent entities that guarantee the tenant’s lease obligations; and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations. As of March 31, 2023, tenants contributing 53.1% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 9.9% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents). 19 Table of Contents As of March 31, 2023, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands): Tenant Credit Rating Sq. Ft. % of Leased Sq. Ft. Annualized Rental Income % of Total Annualized Rental Income 1 U.S. Government Investment Grade 3,816 20.2 % $ 106,239 19.6 % 2 Alphabet Inc. (Google) Investment Grade 386 2.0 % 22,119 4.1 % 3 Shook, Hardy & Bacon L.L.P. Not Rated 596 3.2 % 19,163 3.5 % 4 IG Investments Holdings LLC Not Rated 338 1.8 % 17,281 3.2 % 5 State of California Investment Grade 519 2.7 % 15,970 2.9 % 6 Bank of America Corporation Investment Grade 577 3.1 % 15,911 2.9 % 7 Commonwealth of Massachusetts Investment Grade 311 1.6 % 12,260 2.3 % 8 Tyson Foods, Inc. Investment Grade 248 1.3 % 11,954 2.2 % 9 CareFirst Inc. Not Rated 207 1.1 % 11,622 2.1 % 10 Northrop Grumman Corporation Investment Grade 337 1.8 % 10,795 2.0 % 11 Sonesta International Hotels Corporation (1) Not Rated 230 1.2 % 10,745 2.0 % 12 CommScope Holding Company Inc. Non Investment Grade 228 1.2 % 9,466 1.7 % 13 Sonoma Biotherapeutics, Inc. (2) Not Rated 107 0.6 % 7,866 1.5 % 14 State of Georgia Investment Grade 308 1.6 % 7,345 1.4 % 15 PNC Bank Investment Grade 441 2.3 % 6,927 1.3 % 16 Micro Focus International plc Non Investment Grade 215 1.1 % 6,836 1.3 % 17 Compass Group plc Investment Grade 267 1.4 % 6,697 1.2 % 18 ServiceNow, Inc. Investment Grade 149 0.8 % 6,675 1.2 % 19 Allstate Insurance Co. Investment Grade 468 2.5 % 6,484 1.2 % 20 Automatic Data Processing, Inc. Investment Grade 289 1.5 % 6,196 1.1 % 21 Church & Dwight Co., Inc. Investment Grade 250 1.3 % 6,043 1.1 % 22 Leidos Holdings Inc. Investment Grade 159 0.8 % 5,950 1.1 % 23 Primerica, Inc. Investment Grade 344 1.8 % 5,441 1.0 % Total 10,790 56.9 % $ 335,985 61.9 % (1) In June 2021, we entered into a 30-year lease with Sonesta. The lease relates to the redevelopment of a property we own in Washington, D.C to a mixed use and Sonesta's lease relates to the planned hotel component of the property. The term of the lease commences upon our delivery of the completed hotel, which is estimated to occur in the second quarter of 2023. For more information about our lease with Sonesta, see Note 9 to our Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q. (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. Disposition Activities During the three months ended March 31, 2023, we sold three properties containing approximately 89,000 rentable square feet for a sales price of $5,350, excluding closing costs. As a result of current commercial 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 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 April 25, 2023, we have entered into an agreement to sell one property containing approximately 107,000 rentable square feet for a sales price of $4,900, 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. For more information about our disposition activities, see Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 20 Table of Contents Segment Information We operate in one business segment: ownership of real estate properties. 21 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share amounts) Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022 Comparable Properties (1) Results Three Months Ended March 31, Non-Comparable Properties Results Three Months Ended March 31, Consolidated Results Three Months Ended March 31, 2023 2022 $ Change % Change 2023 2022 2023 2022 $ Change % Change Rental income $ 132,437 $ 132,265 $ 172 0.1 % $ (15) $ 15,089 $ 132,422 $ 147,354 $ (14,932) (10.1 %) Operating expenses: Real estate taxes 15,224 14,968 256 1.7 % 109 1,677 15,333 16,645 (1,312) (7.9 %) Utility expenses 7,129 5,951 1,178 19.8 % 131 914 7,260 6,865 395 5.8 % Other operating expenses 25,637 24,195 1,442 6.0 % 420 3,168 26,057 27,363 (1,306) (4.8 %) Total operating expenses 47,990 45,114 2,876 6.4 % 660 5,759 48,650 50,873 (2,223) (4.4 %) Net operating income (loss) (2) $ 84,447 $ 87,151 $ (2,704) (3.1 %) $ (675) $ 9,330 83,772 96,481 (12,709) (13.2 %) Other expenses: Depreciation and amortization 51,692 60,469 (8,777) (14.5 %) Loss on impairment of real estate — 17,047 (17,047) n/m Acquisition and transaction related costs 3,218 — 3,218 n/m General and administrative 5,925 5,706 219 3.8 % Total other expenses 60,835 83,222 (22,387) (26.9 %) Gain on sale of real estate 2,548 2,149 399 18.6 % Interest and other income 164 1 163 n/m Interest expense (25,231) (27,439) 2,208 (8.0 %) Income (loss) before income tax expense and equity in net losses of investees 418 (12,030) 12,448 (103.5 %) Income tax expense (30) (531) 501 (94.4 %) Equity in net losses of investees (834) (846) 12 (1.4 %) Net loss $ (446) $ (13,407) $ 12,961 (96.7 %) Weighted average common shares outstanding (basic and diluted) 48,336 48,243 93 0.2 % Per common share amounts (basic and diluted): Net loss $ (0.01) $ (0.28) $ 0.27 (96.4 %) n/m - not meaningful (1) Comparable properties consists of 151 properties we owned on March 31, 2023 and which we owned continuously since January 1, 2022 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. (2) Our definition of net operating income, or NOI, and our reconciliation of net loss to NOI are included below under the heading “Non-GAAP Financial Measures.” References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Rental income. The decrease in rental income reflects decreases in rental income of $8,801 as a result of property disposition activities and $6,303 for properties undergoing significant redevelopment, partially offset by an increase in rental income of $172 for comparable properties. The decrease in rental income for properties undergoing significant redevelopment is primarily due to termination fee revenue in the 2022 period and the reduction in occupied space at a property located in Seattle, WA that began a redevelopment project after the former tenant’s lease was terminated in February 2022. Rental income includes non-cash straight line rent adjustments totaling $4,173 in the 2023 period and $2,686 in the 2022 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $79 in the 2023 period and $(343) in the 2022 period. 22 Table of Contents Real estate taxes. The decrease in real estate taxes primarily reflects decreases of $1,353 related to property disposition activities and $215 for properties undergoing significant redevelopment, partially offset by an increase of $256 for comparable properties. Real estate taxes for comparable properties increased primarily due to refunds received in the 2022 period as a result of successful real estate tax appeals for certain of our properties. Utility expenses. The increase in utility expenses reflects an increase in utility expenses of $1,178 for comparable properties, partially offset by decreases in utility expenses of $734 related to property disposition activities and $49 for properties undergoing significant redevelopment. The increase in utility expenses for comparable properties is primarily due to the impact of inflation in the 2023 period, 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 decrease in other operating expenses primarily reflects decreases of $2,340 related to property disposition activities and $408 for properties undergoing significant redevelopment, partially offset by an increase of $1,442 for comparable properties. The increase in other operating expenses for comparable properties is primarily due to the impact of inflation in the 2023 period, higher repairs and maintenance costs and higher insurance costs. Depreciation and amortization. The decrease in depreciation and amortization primarily reflects decreases of $4,263 for comparable properties, $2,974 related to property disposition activities and $1,540 for properties undergoing significant redevelopment. Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated since January 1, 2022, partially offset by depreciation and amortization of improvements made to certain of our properties since January 1, 2022. Loss on impairment of real estate. We recorded a $2,184 loss on impairment of real estate to reduce the carrying value of one property to its estimated fair value less costs to sell and a $14,863 loss on impairment of real estate to reduce the carrying value of one property that was held and used to its estimated fair value in the 2022 period. Acquisition and transaction related costs. Acquisition and transaction related costs consist of costs related to our evaluation of potential acquisitions, dispositions and other strategic transactions, including costs incurred in connection with the Merger and related transactions. For more information regarding the Merger, see Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The increase in general and administrative expenses is primarily the result of a state franchise tax refund received in the 2022 period, as well as higher legal, accounting and other professional services costs in the 2023 period, partially offset by a decrease in base business management fees resulting from a decrease in average total market capitalization in the 2023 period compared to the 2022 period. Gain on sale of real estate. We recorded a $2,548 gain on sale of real estate resulting from the sale of three properties in the 2023 period. We recorded a $2,149 net gain on sale of real estate resulting from the sale of four properties in the 2022 period. Interest and other income. The increase in interest and other income is primarily due to the effect of higher interest rates earned on cash balances invested in the 2023 period compared to the 2022 period. Interest expense. The decrease in interest expense reflects the redemption of our $300,000 senior unsecured notes with an interest rate of 4.0% in June 2022, the repayment of two mortgage notes since April 1, 2022 with an aggregate principal balance of approximately $48,000 and an average interest rate of 4.5% and higher capitalized interest in the 2023 period, partially offset by higher average amounts outstanding and higher average interest rates on borrowings under our revolving credit facility during the 2023 period. Income tax expense. Income tax expense is primarily the result of operating income earned in jurisdictions where we are subject to state income taxes and can fluctuate based on the timing of our income, including as a result of gains or losses on the sale of real estate. 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. 23 Table of Contents Net loss. Net loss and net loss per basic and diluted common share decreased in the 2023 period compared to the 2022 period primarily as a result of the changes noted above. Non-GAAP Financial Measures We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the SEC, including the calculations below of NOI, funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties. Net Operating Income The calculation of NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do. The following table presents the reconciliation of net loss to NOI for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Net loss $ (446) $ (13,407) Equity in net losses of investees 834 846 Income tax expense 30 531 Income (loss) before income tax expense and equity in net losses of investees 418 (12,030) Interest expense 25,231 27,439 Interest and other income (164) (1) Gain on sale of real estate (2,548) (2,149) General and administrative 5,925 5,706 Acquisition and transaction related costs 3,218 — Loss on impairment of real estate — 17,047 Depreciation and amortization 51,692 60,469 NOI $ 83,772 $ 96,481 24 Table of Contents Funds From Operations and Normalized Funds From Operations We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. The following table presents the reconciliation of net loss to FFO and Normalized FFO for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Net loss $ (446) $ (13,407) Add (less): Depreciation and amortization: Consolidated properties 51,692 60,469 Unconsolidated joint venture properties 830 762 Loss on impairment of real estate — 17,047 Gain on sale of real estate (2,548) (2,149) FFO 49,528 62,722 Add (less): Acquisition and transaction related costs 3,218 — Normalized FFO $ 52,746 $ 62,722 Weighted average common shares outstanding (basic and diluted) 48,336 48,243 FFO per common share (basic and diluted) $ 1.02 $ 1.30 Normalized FFO per common share (basic and diluted) $ 1.09 $ 1.30 LIQUIDITY AND CAPITAL RESOURCES Our Operating Liquidity and Resources (dollar amounts in thousands, except per share amounts) Our principal sources of funds to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate from our properties, net proceeds from property sales and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon: • our ability to collect rent from our tenants; • our ability to maintain or increase the occupancy of, and the rental rates at, our properties; • our ability to control operating and capital expenses at our properties; • our ability to successfully sell properties that we market for sale; • our ability to develop, redevelop or reposition properties to produce cash flows in excess of our cost of capital and property operating and capital expenses; and 25 Table of Contents • our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating and capital expenses. On April 13, 2023, we announced a regular quarterly cash distribution of $0.25 per common share ($1.00 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 payment of debt obligations. We reduced our quarterly cash distribution to increase financial flexibility through the closing of the Merger. Following the Merger, we expect the combined company’s annual distribution will remain at $1.00 per common share per year. Pursuant to our capital recycling program, we 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. During the three months ended March 31, 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 currently in various stages of marketing certain of our properties for sale. As of April 25, 2023, we have entered into an agreement to sell one property for a sales price of $4,900, excluding closing costs. W e continue to carefully consider our capital allocation strategy to position us to opportunistically recycle and deploy capital. Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows. The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows: Three Months Ended March 31, 2023 2022 Cash, cash equivalents and restricted cash at beginning of period $ 12,249 $ 84,515 Net cash provided by (used in): Operating activities 51,900 50,266 Investing activities (63,816) (8,784) Financing activities 23,011 (26,939) Cash, cash equivalents and restricted cash at end of period $ 23,344 $ 99,058 The increase in cash provided by operating activities for the 2023 period compared to the 2022 period was primarily due to favorable changes in working capital, partially offset by decreases in NOI at certain of our properties in the 2023 period. The increase in cash used in investing activities in the 2023 period compared to the 2022 period was primarily due to increased capital expenditures in the 2023 period related to our two redevelopment projects in Washington D.C. and Seattle, WA, as well as lower proceeds received from property sales in the 2023 period. The increase in cash provided by financing activities in the 2023 period was primarily due to higher borrowings under our revolving credit facility to fund capital improvements at our properties in the 2023 period. 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 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 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. In March 2023, we amended our credit agreement to, among other things, replace LIBOR with SOFR as the benchmark interest rate for calculating interest payable on amounts outstanding under our revolving credit facility. We are required to pay interest at a rate of SOFR plus a premium, which was 110 basis points per annum at March 31, 2023, on the amount outstanding under our revolving credit facility. 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, 2023. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. Effective April 1, 2023, based upon changes to our credit ratings, the 26 Table of Contents interest rate premium and facility fee increased to 145 basis points per annum and 30 basis points per annum, respectively. As of March 31, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 6.0%. As of March 31, 2023 and April 25, 2023, we had $245,000 and $260,000, respectively, outstanding under our revolving credit facility, and $505,000 and $490,000, respectively, available for borrowing. Our credit agreement includes a feature under which the maximum borrowing availability may be increased to up to $1,950,000 in certain circumstances. Our credit agreement provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under our $750,000 revolving credit facility only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries. As of March 31, 2023, 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 2024 350,000 2025 650,000 2026 300,000 2027 350,000 2028 and thereafter 562,000 Total $ 2,262,000 None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our $50,000 mortgage note requires monthly payments of interest only through maturity. In addition to our debt obligations, as of March 31, 2023, we had estimated unspent leasing related obligations of $139,874, of which we expect to spend $84,834 over the next 12 months. We are currently in the process of redeveloping a property located in Washington, D.C. containing approximately 340,000 rentable square feet. Upon completion, the property will contain approximately 430,000 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 March 31, 2023, we had incurred $164,417 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. See Note 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q 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 $162,000 and completion of the redevelopment in the fourth quarter of 2023. As of March 31, 2023, we had incurred $74,493 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. When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives. Such alternatives may include incurring term debt, issuing debt or equity securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay 27 Table of Contents 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. In connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of April 11, 2023, with JPM, pursuant to which JPM has committed to provide, subject to the terms and conditions of the commitment letter, a senior secured bridge facility to us in an aggregate principal amount of $368,000. As a condition to the Merger, we have agreed to either extend or replace our existing credit agreement, on terms that, among other things, would not be reasonably likely to be materially adverse to the business, operations or financial condition of us after giving effect to the Merger and would not delay or prevent the consummation of the Merger. In addition, in connection with the closing of the Merger, we expect to pay off DHC’s credit facility and to assume $2,350,000 of principal amount of DHC’s unsecured senior notes. Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention. For instance, it is uncertain what the ultimate impacts of inflationary pressures, rising or sustained high 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 three months ended March 31, 2023, we paid quarterly distributions to our shareholders totaling $26,710 using cash on hand and borrowings under our revolving credit facility. On April 13, 2023, we declared a regular quarterly distribution payable to shareholders of record on April 24, 2023 of $0.25 per share, or approximately $12,100. We expect to pay this distribution on or about May 18, 2023 using cash on hand and borrowings under our revolving credit facility. For more information regarding the distributions we paid and declared during 2023, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We own 51% and 50% interests in two unconsolidated joint ventures which own three properties. The properties owned by these joint ventures are encumbered by an aggregate $82,000 principal amount of mortgage indebtedness, none of which is recourse to us. We do not control the activities that are most significant to these joint ventures and, as a result, we account for our investments in these joint ventures under the equity method of accounting. For more information on the financial condition and results of operations of these joint ventures, see Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Other than these joint ventures, as of March 31, 2023, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 28 Table of Contents Debt Covenants (dollars in thousands) Our principal debt obligations at March 31, 2023 consisted of $245,000 of borrowings outstanding under our 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 ceasing to act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances. As of March 31, 2023, 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 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. Accordingly, if that credit rating is downgraded, our interest expense and related costs under our credit agreement would increase. In March 2023, Moody’s Investors Service, or Moody’s, downgraded our senior unsecured debt rating from Ba1 to Ba2 and S&P Global Ratings downgraded our senior unsecured debt rating from BBB- to BB+. As a result, the interest rate premium under our revolving credit facility increased 35 basis points effective April 1, 2023. In April 2023, following the announcement of the Merger, Moody’s downgraded our senior unsecured debt rating from Ba2 to Ba3. Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances). Related Person Transactions We have relationships and historical and continuing transactions with RMR, RMR Inc. and others related to them. For more information about these and other such relationships and related person transactions, see Notes 8 and 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item IA of our 2022 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services. Critical Accounting Estimates The preparation of our Condensed Consolidated 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. A discussion of our critical accounting estimates is included in our 2022 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2022.