OFFICE PROPERTIES INCOME TRUST 10-Q

Item 1A. Risk Factors Our business is subject to risks and uncertainties , a number of which are described under the caption “Risk Factors” in our 2022 Annual Report. The Merger may subject us to additional risks that are described below. The risks described in our 2022 Annual Report and below may not be the only risks we face but are risks we believe may be material at this time. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our 2022 Annual Report or included below occurs, our business, financial condition, liquidity, results of operations or ability to pay distributions to our shareholders could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our 2022 Annual Report and below and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities. 33 Table of Contents Risks Relating to the Merger The Exchange Ratio is fixed and will not be adjusted for any changes in the market price of either our common shares or the DHC Common Shares. At the Effective Time, each DHC Common Share outstanding immediately prior to the Effective Time will be converted into the right to receive 0.147 of our newly issued common shares, or the Merger Consideration, subject to adjustment for certain reclassifications, distributions, recapitalizations or similar transactions and other exceptional distributions as described in the Merger Agreement, with cash paid in lieu of fractional shares. The Exchange Ratio is fixed in the Merger Agreement and will not be adjusted for changes in the market price of our common shares or the DHC Common Shares. Changes in the market price of our common shares prior to the consummation of the Merger will affect the market value of the Merger Consideration . The market price of our common shares and the DHC Common Shares may change as a result of a variety of factors (many of which are beyond our and DHC’s control), including the following: • market reaction to the announcement of the Merger and the Share Issuance, approval by our shareholders of the Merger and the Share Issuance and by the DHC shareholders of the Merger and the prospects of the combined company; • changes in our or DHC’s respective businesses, operations, assets, liabilities, financial position and prospects, or in the market’s assessments thereof; • changes in the operating performance of us or DHC, or similar companies; • changes in market valuations of similar companies; • market assessments of the likelihood that the Merger will be completed; • the possibility that persons may engage in short sales of our common shares or the DHC Common Shares; • changes or anticipated changes in interest rates, general market and economic conditions and other factors generally affecting the price of our common shares and the DHC Common Shares; • federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and DHC operate; • dissident shareholder activity; • changes that affect the real estate market generally or the sectors applicable to us or DHC; • changes in the United States or global economy or capital, financial or securities markets generally; and • other factors beyond our or DHC’s control, including those described and referred to above under this “Risk Factors” section. The market price of our common shares at the consummation of the Merger may vary from the price on the date the Merger Agreement was executed, on the date of the joint proxy statement/prospectus to be included in the Form S-4, on the date of our special meeting of shareholders and on the date of the DHC special meeting of shareholders. As a result, the market value of the Merger Consideration represented by the Exchange Ratio will also vary. Because the Merger will be completed after the date of the special meetings, at the time of the applicable special meeting, the exact market price of our common shares that DHC shareholders will receive upon consummation of the Merger will not be known. You should therefore consider that: • if the market price of our common shares increases between the date the Merger Agreement was signed or the date of our special meeting or the DHC special meeting and the closing of the Merger, DHC shareholders will receive common shares of ours that have a market value upon consummation of the Merger that is greater than, as applicable, the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed or on the date of our special meeting or the DHC special meeting, respectively; and • if the market price of our common shares declines between the date the Merger Agreement was signed or the date of our special meeting or the DHC special meeting and the closing of the Merger, DHC shareholders will receive a number of our common shares that have a market value upon consummation of the Merger that is less than, as 34 Table of Contents applicable, the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed or on the date of our special meeting or the DHC special meeting, respectively. The Merger is subject to the satisfaction or waiver of conditions which may not be satisfied or completed on a timely basis, if at all. Failure to complete the Merger could have material and adverse effects on us and could result in us being required to pay DHC a termination fee. The consummation of the Merger is subject to the satisfaction or waiver of conditions, including, among others, (i) the receipt of approvals by our shareholders of the Merger and the Share Issuance, (ii) the receipt of the approval by DHC’s shareholders of the Merger, and (iii) the extension or replacement of our revolving credit agreement on terms that, among other things, would not be reasonably likely to be materially adverse to our business, operations or financial condition after giving effect to the Merger and would not delay or prevent the consummation of the Merger. These conditions make the completion and the timing of the completion of the Merger uncertain. Also, either we or DHC may terminate the Merger Agreement if the Merger is not completed by September 29, 2023 , except that this right to terminate the Merger Agreement will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was a principal cause of, or resulted in, the failure of the Merger to be completed on or before such date. We cannot provide assurance that the Merger will be consummated on the terms or timeline currently contemplated, or at all. If the Merger is not completed on a timely basis, or at all, we may be adversely affected and subject to a number of risks, including the following: • we will be required to pay our costs relating to the Merger, such as financial advisory, legal, accounting and printing fees, whether or not the Merger is completed; • if the Merger Agreement is terminated under certain circumstances specified therein, we may be required to pay to DHC a termination fee of $11.2 million; • we may experience negative reactions from the financial markets or our tenants or vendors; • the time and resources committed by our management to matters relating to the Merger could otherwise have been devoted to pursuing other opportunities; and • the market price of our common shares could decline to the extent that the current market price reflects, and is positively affected by, a market assumption that the Merger will be completed. We or DHC may waive one or more of the conditions to the Merger without re-soliciting shareholder approval. If permitted by applicable law, we or DHC may determine to waive, in whole or in part, one or more of the conditions to our or DHC’s obligations to consummate the Merger. Any determination whether to waive any condition to the Merger and whether to re-solicit shareholder approval or amend the Proxy Statement as a result of a waiver will be made by us or DHC, as applicable, at the time of such waiver based on the facts and circumstances as they exist at that time. The Merger Agreement contains provisions that could discourage a potential competing acquirer of either us or DHC, or could result in any competing proposal being at a lower price than it might otherwise be. The Merger Agreement contains provisions that, subject to certain exceptions, restrict our ability and the ability of DHC to initiate, solicit, propose, knowingly encourage or knowingly facilitate competing third-party proposals to effect, among other things, a merger, reorganization, share exchange, consolidation or the sale of 20% or more of the shares or consolidated net revenues, net income or total assets of us or DHC. In addition, we and DHC generally each have an opportunity to offer to modify the terms of the Merger Agreement in response to any superior proposal (as defined in the Merger Agreement) that may be made to the other party before our or DHC’s board of trustees, in each case acting on the recommendation of the special committee of the respective board, as the case may be, may withdraw or modify its recommendation in response to such superior proposal or terminate the Merger Agreement to enter into a definitive agreement with respect to such superior proposal. Upon termination of the Merger Agreement under certain circumstances relating to an acquisition proposal, we may be required to pay to DHC a termination fee of $11.2 million, or DHC may be required to pay to us a termination fee of $5.9 million, in each case plus reasonable fees and expenses. These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us or DHC from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share value or implied premium to our shareholders than the value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed 35 Table of Contents to pay because of the added expense of the termination fee and expense reimbursement that may become payable in certain circumstances under the Merger Agreement. Our and DHC’s business and property management agreements with RMR contain provisions that could discourage a potential competing acquirer of either us or DHC, or could result in any competing proposal being at a significantly lower price than it might otherwise be. The termination of our or DHC’s management agreements with RMR may require us or DHC, as applicable, to pay a substantial termination fee to RMR. RMR has agreed to waive its right to receive payment of the termination fee under its business and property management agreements with DHC upon the termination of those agreements when the Merger is consummated. This waiver by RMR applies only in respect of the Merger and does not apply in respect of any competing proposal, superior proposal or other transaction or arrangement. The termination provisions of our or DHC’s business and property management agreements with RMR substantially increase the cost to us and DHC of terminating these agreements, which may discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us or DHC from considering or proposing such an acquisition or could result in any competing proposal being at a significantly lower price than it might otherwise be. The pendency of the Merger could adversely affect our and DHC’s business and operations. During the pendency of the Merger, due to operating covenants in the Merger Agreement, we and DHC may each be unable to undertake or pursue certain strategic transactions or significant capital projects, financing transactions or other actions that are not in the ordinary course of business, even if such actions may be beneficial to us or DHC. In addition, some tenants or vendors may delay or defer decisions related to their business dealings with us and DHC during the pendency of the Merger, which could negatively impact the revenues, earnings, cash flows or expenses of us and/or DHC, regardless of whether the Merger is completed. Our and DHC’s shareholders will be diluted by the consummation of the Merger . The consummation of the Merger will dilute the ownership position of our existing shareholders and result in DHC shareholders having an ownership stake in us that is smaller than their current stake in DHC. Upon consummation of the Merger, based upon the number of our common shares and DHC Common Shares outstanding as of the date of the Merger Agreement, we estimate that our shareholders immediately prior to the Merger (in their capacities as such) will own approximately 58% of the combined company as a result of the Merger and DHC shareholders immediately prior to the Merger (in their capacities as such) will own approximately 42% of the combined company as a result of the Merger, in each case without taking into account whether any of our or DHC’s shareholders were also shareholders of DHC or us, respectively, at that time. Consequently, our shareholders may have less influence over the management and policies of the combined company after the Effective Time than they currently exercise over our management and policies. Our Trustees and executive officers, DHC’s trustees and executive officers and RMR may have interests in the Merger that are different from, or in addition to, the interests of our and DHC’s shareholders, generally. This may create potential conflicts of interest or the appearance thereof, which may lead to increased dissident shareholder activity, including litigation. The interests of our and DHC’s respective trustees and executive officers and of RMR include, among other things, the continued service as a trustee or executive officer of the combined company following the Merger, as applicable, certain rights to continuing indemnification and directors’ and officers’ liability insurance for DHC’s trustees and executive officers, continuation of our business and property management agreements with RMR following the Merger and the potential for increased fees payable to RMR in connection with the Merger. There is a risk that these interests may influence our and DHC’s respective trustees and executive officers and RMR to support the Merger. These interests of our and DHC’s respective trustees and executive officers and of RMR in the Merger may increase the risk of litigation intended to enjoin or prevent the Merger and the risk of other dissident shareholder activity related thereto. In the past, and in particular following the announcement of a significant transaction, periods of volatility in the overall market or declines in the market price of a company’s securities, shareholder litigation and dissident shareholder proposals have often been instituted against companies alleging conflicts of interest in business dealings with affiliated or related persons and entities. The relationships described above may precipitate such activities by dissident shareholders and, if instituted against us or DHC or our respective trustees or executive officers, such activities could result in substantial costs, a material delay or prevention of the Merger and a diversion of management’s attention, even if the shareholder action is without merit or unsuccessful. 36 Table of Contents Lawsuits may be commenced seeking to enjoin or prevent the Merger or seeking other relief which may delay or prevent the completion of the Merger and result in us or DHC incurring substantial costs. Public company merger and acquisition transactions are often subject to lawsuits initiated by plaintiff’s counsel seeking to enjoin or prevent the transaction or obtain other relief. We, our Trustees, officers and advisors and DHC, its trustees, officers and advisors may become subject to similar litigation with respect to the Merger. We are aware that several law firms have indicated that they are investigating the Merger and related matters, including actions taken by our board of trustees, to determine whether they may seek to assert claims. Any such lawsuit could seek, among other things, injunctive or other equitable relief including a request to rescind parts of the Merger Agreement and to otherwise enjoin the parties from consummating the Merger, as well as require payment of fees and other costs by the defendants. We, DHC and any other defendant may incur substantial costs defending any such lawsuit, including the distraction of management’s attention, even if such lawsuits are without merit or unsuccessful. No assurance can be made as to the outcome of any such lawsuits. If the plaintiffs were successful in obtaining an injunction prohibiting the parties from completing the Merger or in obtaining other relief, the completion of the Merger may be prevented or delayed or its terms could change. Following the Merger, the principal amount of our indebtedness will increase and we may need to incur more debt in the future. Such increase in our indebtedness may increase the risks we face. We expect to assume certain of DHC’s existing indebtedness upon consummation of the Merger. As of March 31, 2023, we had indebtedness of approximately $2.5 billion in principal amount and DHC had indebtedness of approximately $2.8 billion in principal amount. Our increased indebtedness could have important consequences to holders of our common shares, including: • increasing our vulnerability to general adverse economic and industry conditions, including inflationary pressures and rising and sustained high interest rates; • requiring us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, capital expenditures, development or redevelopment projects and other general corporate purposes and reduce the cash available for distributions; • limiting our ability to obtain additional financing on favorable terms or at all in order to refinance existing debts or fund working capital, capital expenditures, development or redevelopment projects, acquisitions, other debt service requirements or for other general corporate purposes; • increasing the costs to us of incurring additional debt; • increasing our exposure to floating interest rates; • limiting our ability to compete with other companies that are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions; • restricting us from making strategic acquisitions, developing or redeveloping properties, or exploiting business opportunities; • restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our existing and future indebtedness; • exposing us to potential events of default (if not cured or waived) under covenants contained in debt instruments that could have a material adverse effect on our business, financial condition and operating results; and • limiting our ability to react to changing market conditions in the real estate industry. The impact of any of these potential adverse consequences could have a material adverse effect on our results of operations, financial condition and liquidity. If we default under any of our debt obligations, we may be in default under other debt agreements of ours that have cross default provisions, including our credit agreement and our senior unsecured notes indentures and their supplements. In such case, our lenders or noteholders may demand immediate payment of any outstanding debt and we could be forced to liquidate our assets for less than the values we would receive in a more orderly process. 37 Table of Contents Risks Relating to Taxation We may incur adverse tax consequences if DHC has failed or fails to qualify for taxation as a REIT for United States federal income tax purposes. If DHC has failed or fails to qualify for taxation as a REIT for United States federal income tax purposes and the Merger is completed, we may inherit significant tax liabilities and could lose our qualification for taxation as a REIT should DHC’s disqualifying activities continue after the Merger. Even if we retain our qualification for taxation as a REIT, if DHC does not qualify for taxation as a REIT for a taxable year before the Merger or the taxable year that includes the Merger and if no relief is available, we will face serious tax consequences that could substantially reduce our cash available for distribution to our shareholders because: • we, as successor by merger to DHC, will inherit any of DHC’s corporate income tax liabilities, including penalties and interest; • we would be subject to tax on the built-in gain on each asset of DHC existing at the Effective Time if we were to dispose of a DHC asset during the five year period following the Effective Time; and • we, as successor by merger to DHC, will inherit any DHC earnings and profits and could be required to pay a special distribution and/or employ applicable deficiency dividend procedures (including interest payments to the United States Internal Revenue Service) to eliminate any earnings and profits accumulated by DHC for taxable periods for which DHC did not qualify for taxation as a REIT. As a result of these factors, DHC’s failure before the Merger to qualify for taxation as a REIT could impair our ability after the Merger to expand our business and raise capital, and could materially adversely affect the value of our common shares. Finally, if there is an adjustment to DHC’s real estate investment trust taxable income or dividends paid deductions, we could elect to use the deficiency dividend procedure in respect of preserving DHC’s REIT qualification. That deficiency dividend procedure could require us to make significant distributions to our shareholders and to pay significant interest to the United States Internal Revenue Service. REITs are subject to a range of complex organizational and operational requirements. As REITs, we and DHC must distribute to our respective shareholders with respect to each taxable year at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), without regard to the deduction for dividends paid and excluding net capital gain. A REIT must also meet certain requirements with respect to the nature of its income and assets and the ownership of its shares. For any taxable year that we or DHC fail to qualify for taxation as a REIT, we or DHC, as applicable, will not be allowed a deduction for distributions paid to our or DHC’s shareholders, as applicable, in computing taxable income, and thus would become subject to United States federal income tax as if we or DHC were a regular taxable corporation. In such an event, we or DHC, as the case may be, could be subject to potentially significant tax liabilities. Unless entitled to relief under certain statutory provisions, we or DHC, as the case may be, would also be disqualified from treatment as a REIT for the four taxable years following the year in which we or DHC lost our qualification, and dispositions of assets within five years after requalifying as a REIT could give rise to gain that would be subject to corporate income tax. If we or DHC failed to qualify for taxation as a REIT, the market price of our common shares may decline, and we may need to reduce substantially the amount of distributions to our shareholders because of our potentially increased tax liability. Risks Relating to an Investment in Our Common Shares Following the Merger The market price of our common shares may decline as a result of the Merger or the Share Issuance. The market price of our common shares may decline as a result of the Merger or the Share Issuance if we do not achieve the perceived benefits of the Merger or the Share Issuance or the effect thereof on our financial results is not consistent with the expectations of financial or industry analysts. In addition, upon consummation of the Merger, our shareholders and DHC shareholders will own our common shares, and we will operate an expanded business with a different mix of assets, risks and liabilities. Our and DHC’s respective current shareholders may not wish to continue to invest in us as the combined company, or for other reasons may wish to dispose of some or all of our common shares that they own. If, following the Effective Time, large amounts of our common shares are sold, the market price of our common shares could decline. 38 Table of Contents The combined company may not continue to pay distributions at or above the rate currently paid by us. Our Board of Trustees reduced our cash distribution rate to $0.25 per share per quarter, or $1.00 per share per year, beginning in the second quarter of 2023. The combined company may not be able to increase or maintain this distribution rate for various reasons, including the following: • the combined company may not have sufficient cash to pay such distributions due to capital expenditure requirements or changes in its cash requirements, cash flow or financial position, including as a result of the additional indebtedness incurred in connection with the Merger; • decisions on whether, when and in what amounts to pay any future distributions will remain at all times entirely at the discretion of the combined company’s board of trustees, which reserves the right to change its distribution practices at any time and for any reason, subject to applicable REIT requirements; and • any of the other risks described herein or in our 2022 Annual Report. The timing, amount and form of any future combined company distributions will be determined at the discretion of the combined company’s board of trustees, and the combined company’s shareholders will have no contractual or other legal right to distributions that have not been declared by the combined company’s board of trustees.