OFFICE PROPERTIES INCOME TRUST 10-Q

Item 1. Financial Statements OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) June 30, 2023 December 31, 2022 ASSETS Real estate properties: Land $ 809,590 $ 821,238 Buildings and improvements 3,225,963 3,114,836 Total real estate properties, gross 4,035,553 3,936,074 Accumulated depreciation ( 605,789 ) ( 561,458 ) Total real estate properties, net 3,429,764 3,374,616 Assets of properties held for sale 11,731 2,516 Investments in unconsolidated joint ventures 37,367 35,129 Acquired real estate leases, net 318,975 369,333 Cash and cash equivalents 25,212 12,249 Restricted cash 610 — Rents receivable 110,599 105,639 Deferred leasing costs, net 82,691 73,098 Other assets, net 10,619 7,397 Total assets $ 4,027,568 $ 3,979,977 LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ 240,000 $ 195,000 Senior unsecured notes, net 2,191,676 2,187,875 Mortgage notes payable, net 106,365 49,917 Liabilities of properties held for sale 28 73 Accounts payable and other liabilities 134,425 140,151 Due to related persons 6,232 6,469 Assumed real estate lease obligations, net 12,887 14,157 Total liabilities 2,691,613 2,593,642 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ .01 par value: 200,000,000 shares authorized, 48,587,650 and 48,565,644 shares issued and outstanding, respectively 486 486 Additional paid in capital 2,620,691 2,619,532 Cumulative net income 156,918 169,606 Cumulative common distributions ( 1,442,140 ) ( 1,403,289 ) Total shareholders’ equity 1,335,955 1,386,335 Total liabilities and shareholders’ equity $ 4,027,568 $ 3,979,977 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (amounts in thousands, except per share data) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Rental income $ 133,997 $ 141,316 $ 266,419 $ 288,670 Expenses: Real estate taxes 15,901 16,583 31,234 33,228 Utility expenses 5,742 5,820 13,002 12,685 Other operating expenses 26,634 26,497 52,691 53,860 Depreciation and amortization 51,601 57,536 103,293 118,005 Loss on impairment of real estate — 4,773 — 21,820 Acquisition and transaction related costs 11,181 224 14,399 224 General and administrative 5,785 7,083 11,710 12,789 Total expenses 116,844 118,516 226,329 252,611 Gain (loss) on sale of real estate ( 2,305 ) ( 11,637 ) 243 ( 9,488 ) Interest and other income 337 16 501 17 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,327 , $ 2,366 , $ 4,532 and $ 4,770 , respectively) ( 26,525 ) ( 26,515 ) ( 51,756 ) ( 53,954 ) Loss on early extinguishment of debt — ( 77 ) — ( 77 ) Loss before income tax (expense) benefit and equity in net losses of investees ( 11,340 ) ( 15,413 ) ( 10,922 ) ( 27,443 ) Income tax (expense) benefit ( 211 ) 190 ( 241 ) ( 341 ) Equity in net losses of investees ( 691 ) ( 833 ) ( 1,525 ) ( 1,679 ) Net loss $ ( 12,242 ) $ ( 16,056 ) $ ( 12,688 ) $ ( 29,463 ) Weighted average common shares outstanding (basic and diluted) 48,354 48,249 48,345 48,246 Per common share amounts (basic and diluted): Net loss $ ( 0.25 ) $ ( 0.33 ) $ ( 0.27 ) $ ( 0.61 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Common Distributions Total Shareholders’ Equity Balance at December 31, 2022 48,565,644 $ 486 $ 2,619,532 $ 169,606 $ ( 1,403,289 ) $ 1,386,335 Share grants — — 477 — — 477 Share forfeitures and repurchases ( 1,935 ) — ( 15 ) — — ( 15 ) Net loss — — — ( 446 ) — ( 446 ) Distributions to common shareholders — — — — ( 26,710 ) ( 26,710 ) Balance at March 31, 2023 48,563,709 486 2,619,994 169,160 ( 1,429,999 ) 1,359,641 Share grants 31,500 — 744 — — 744 Share forfeitures and repurchases ( 7,559 ) — ( 47 ) — — ( 47 ) Net loss — — — ( 12,242 ) — ( 12,242 ) Distributions to common shareholders — — — — ( 12,141 ) ( 12,141 ) Balance at June 30, 2023 48,587,650 $ 486 $ 2,620,691 $ 156,918 $ ( 1,442,140 ) $ 1,335,955 Balance at December 31, 2021 48,425,665 $ 484 $ 2,617,169 $ 175,715 $ ( 1,296,659 ) $ 1,496,709 Share grants — — 415 — — 415 Share forfeitures ( 400 ) — ( 1 ) — — ( 1 ) Net loss — — — ( 13,407 ) — ( 13,407 ) Distributions to common shareholders — — — — ( 26,634 ) ( 26,634 ) Balance at March 31, 2022 48,425,265 484 2,617,583 162,308 ( 1,323,293 ) 1,457,082 Share grants 31,500 1 1,078 — — 1,079 Share forfeitures and repurchases ( 1,690 ) — ( 21 ) — — ( 21 ) Net loss — — — ( 16,056 ) — ( 16,056 ) Distributions to common shareholders — — — — ( 26,634 ) ( 26,634 ) Balance at June 30, 2022 48,455,075 $ 485 $ 2,618,640 $ 146,252 $ ( 1,349,927 ) $ 1,415,450 ` The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 12,688 ) $ ( 29,463 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 50,459 49,455 Net amortization of debt premiums, discounts and issuance costs 4,532 4,770 Amortization of acquired real estate leases and assumed real estate lease obligations, net 48,581 65,691 Amortization of deferred leasing costs 4,739 4,096 (Gain) loss on sale of real estate ( 243 ) 9,488 Loss on impairment of real estate — 21,820 Loss on early extinguishment of debt — 77 Straight line rental income ( 8,429 ) ( 5,461 ) Other non-cash expenses, net 673 943 Equity in net losses of investees 1,525 1,679 Change in assets and liabilities: Rents receivable 3,440 6,770 Deferred leasing costs ( 13,106 ) ( 15,194 ) Other assets 3,234 4,821 Accounts payable and other liabilities 5,748 ( 10,460 ) Due to related persons ( 237 ) ( 119 ) Net cash provided by operating activities 88,228 108,913 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate improvements ( 138,724 ) ( 89,144 ) Distributions in excess of earnings from unconsolidated joint ventures — 51 Contributions to unconsolidated joint ventures ( 3,763 ) ( 2,202 ) Proceeds from sale of properties, net 12,527 74,183 Net cash used in investing activities ( 129,960 ) ( 17,112 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable ( 50,000 ) ( 25,283 ) Proceeds from issuance of mortgage notes payable 108,120 — Repayment of senior unsecured notes — ( 300,000 ) Borrowings on unsecured revolving credit facility 205,000 230,000 Repayments on unsecured revolving credit facility ( 160,000 ) — Payment of debt issuance costs ( 8,907 ) — Repurchase of common shares ( 57 ) ( 16 ) Distributions to common shareholders ( 38,851 ) ( 53,268 ) Net cash provided by (used in) financing activities 55,305 ( 148,567 ) Increase (decrease) in cash, cash equivalents and restricted cash 13,573 ( 56,766 ) Cash, cash equivalents and restricted cash at beginning of period 12,249 84,515 Cash, cash equivalents and restricted cash at end of period $ 25,822 $ 27,749 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) (unaudited) Six Months Ended June 30, 2023 2022 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 51,134 $ 56,490 Income taxes paid $ 339 $ 283 NON-CASH INVESTING ACTIVITIES: Real estate improvements accrued, not paid $ 30,852 $ 25,706 Capitalized interest $ 4,732 $ 1,600 SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows: As of June 30, 2023 2022 Cash and cash equivalents $ 25,212 $ 26,006 Restricted cash (1) 610 1,743 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 25,822 $ 27,749 (1) Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our mortgage debts. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) (unaudited) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Office Properties Income Trust and its subsidiaries, or OPI, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022, or our 2022 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles. Pending Merger with Diversified Healthcare Trust On April 11, 2023, we and Diversified Healthcare Trust, or DHC, entered into an Agreement and Plan of Merger, or 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 in the merger, or the Merger. Pursuant to the terms and subject to the conditions and limitations set forth in the Merger Agreement, at the date and time the Merger becomes effective, or the Effective Time, each common share of beneficial interest, $ 0.01 par value per share, of DHC, or the DHC Common Shares, issued and outstanding as of immediately prior to the Effective Time will be automatically converted into the right to receive 0.147 (such ratio, the Exchange Ratio) of our common shares of beneficial interest, $ 0.01 par value per share, or our common shares, 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. Other than as provided in the Merger Agreement, the Exchange Ratio is fixed and will not be adjusted to reflect changes in the market price of our common shares or the DHC Common Shares prior to the Effective Time. Our common shares issued and outstanding immediately prior to the Effective Time will remain issued and outstanding common shares of beneficial ownership of the surviving entity following the Merger. In connection with the Merger, we expect to change our name to “Diversified Properties Trust” and, following the Effective Time, will change our ticker symbol to “DPT.” The transactions contemplated by the Merger Agreement and the terms thereof were evaluated, negotiated and recommended to our Board of Trustees, or our Board, by a special committee of our Board, or the OPI Special Committee, and to DHC’s board of trustees, or the DHC Board, by a special committee of DHC’s Board, or the DHC Special Committee, each consisting of disinterested, independent trustees of us and DHC, respectively. Following the recommendations of the OPI Special Committee and the DHC Special Committee, our Board and the DHC Board each approved the Merger Agreement and the transactions contemplated thereby and resolved to recommend that the OPI and DHC shareholders, respectively, vote in favor of approval of the Merger and the transactions contemplated thereby. Our shareholders will be asked to vote on the approval of the Merger and related matters, including the issuance of our common shares in the Merger, at a special meeting of our shareholders. The consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including, among others: (1) the approval of the Merger by the affirmative vote of at least a majority of all the votes entitled to be cast by holders of outstanding DHC Common Shares at the meeting held for that purpose; (2) the approval of the Merger by the affirmative vote of at least a majority of all the votes entitled to be cast by holders of our outstanding common shares at the meeting held for that purpose; (3) the approval of the issuance of our common shares to be issued in the Merger, or the Share Issuance, by the affirmative vote of at least a majority of all votes cast by holders of our outstanding common shares at the meeting held for that purpose; (4) the absence of any statute, rule or regulation by any governmental entity of competent jurisdiction or any temporary, preliminary or permanent judgment, order or decree by any court of competent jurisdiction which would prohibit or make illegal or prevent the consummation of the Merger or any of the transactions contemplated by the Merger Agreement; (5) 8 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) the effectiveness of the registration statement on Form S-4, as amended, or the Form S-4, filed by us with the Securities and Exchange Commission, or the SEC, in connection with the Share Issuance; (6) the approval (subject to notice of issuance) of The Nasdaq Stock Market LLC, or Nasdaq, of the listing of our common shares to be issued in the Merger; (7) the replacement of our existing revolving 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; (8) the receipt of certain tax opinions by us and DHC; and (9) the other party’s representations and warranties being accurate (subject to certain customary materiality exceptions) and the other party having performed or complied in all material respects with its agreements and covenants in the Merger Agreement. The Merger Agreement contains certain customary representations, warranties and covenants, including covenants providing that we and DHC will use reasonable best efforts to conduct our and its respective businesses in all material respects in the ordinary course during the period between the execution of the Merger Agreement and the earlier of the Effective Time or the termination of the Merger Agreement, and to refrain from taking certain types of actions without the other party’s consent during the period between the execution of the Merger Agreement and the earlier of the Effective Time or the termination of the Merger Agreement, subject in each case to specified exceptions. In connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of April 11, 2023, with JPMorgan Chase Bank, N.A., or JPM, pursuant to which JPM 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 of June 30, 2023, we have issued four mortgage notes with an aggregate principal balance of $ 108,120 secured by properties that previously collateralized the senior secured bridge facility, and as a result, we subsequently amended the commitment letter to reduce the principal amount of the senior secured bridge facility to $ 259,880 . For more information regarding our mortgage notes, see Note 6. Note 2. Per Common Share Amounts We calculate basic earnings per common share using the two class method. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, together with the related impact on earnings, are considered when calculating diluted earnings per share. The calculation of basic and diluted earnings per share is as follows (amounts in thousands, except per share data): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Numerators: Net loss $ ( 12,242 ) $ ( 16,056 ) $ ( 12,688 ) $ ( 29,463 ) Income attributable to unvested participating securities ( 56 ) ( 100 ) ( 182 ) ( 200 ) Net loss used in calculating earnings per share $ ( 12,298 ) $ ( 16,156 ) $ ( 12,870 ) $ ( 29,663 ) Denominators: Weighted average common shares outstanding - basic and diluted 48,354 48,249 48,345 48,246 Net loss per common share - basic and diluted $ ( 0.25 ) $ ( 0.33 ) $ ( 0.27 ) $ ( 0.61 ) Note 3. Real Estate Properties As of June 30, 2023, our wholly owned properties were comprised of 155 properties containing approximately 20,784,000 rentable square feet, with an undepreciated carrying value of $ 4,050,183 , including $ 14,630 classified as held for sale. We also had noncontrolling ownership interests of 51 % and 50 % in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet. We generally lease space at our properties on a gross lease, modified gross lease or net lease basis pursuant to fixed term contracts expiring between 2023 and 2053. Some of our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended June 30, 2023, we entered into 23 leases for approximately 713,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.3 years and we made commitments of $ 40,638 for leasing related costs. During the six months ended June 30, 2023, we entered into 39 leases for approximately 916,000 rentable square feet for a weighted 9 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) (by rentable square feet) average lease term of 9.5 years and we made commitments for approximately $ 49,385 of leasing related costs. As of June 30, 2023, we had estimated unspent leasing related obligations of $ 151,798 . We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. Impairment indicators may include declining tenant occupancy, lack of progress releasing vacant space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining useful lives of our long lived assets. If we change our estimate of the remaining useful lives, we allocate the carrying value of the affected assets over their revised remaining useful lives. Disposition Activities During the six months ended June 30, 2023, we sold five properties containing approximately 296,000 rentable square feet for an aggregate sales price of $ 13,075 , excluding closing costs. The sales of these properties, as presented in the table below, do not represent significant dispositions individually or in the aggregate, nor do they represent a strategic shift in our business. As a result, the results of operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss). Date of Sale Number of Properties Location Rentable Square Feet Gross Sales Price (1) Gain (Loss) on Sale of Real Estate January 2023 3 Richmond, VA 89,000 $ 5,350 $ 2,548 April 2023 1 Phoenix, AZ 107,000 4,900 511 June 2023 1 Vernon Hills, IL 100,000 2,825 ( 2,816 ) 5 296,000 $ 13,075 $ 243 (1) Gross sales price is the gross contract price, excluding closing costs. As of June 30, 2023, we had two properties classified as held for sale in our condensed consolidated balance sheet. As of July 25, 2023, we have entered into an agreement to sell one of the properties classified as held for sale containing approximately 80,000 rentable square feet for a sales price of $ 10,500 , excluding closing costs. This pending sale is subject to conditions, and 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. Unconsolidated Joint Ventures We own interests in two joint ventures that own three properties. We account for these investments under the equity method of accounting. As of June 30, 2023 and December 31, 2022, our investments in unconsolidated joint ventures consisted of the following: OPI Carrying Value of Investments at Joint Venture OPI Ownership June 30, 2023 December 31, 2022 Number of Properties Location Rentable Square Feet Prosperity Metro Plaza 51 % $ 18,810 $ 19,237 2 Fairfax, VA 329,000 1750 H Street, NW 50 % 18,557 15,892 1 Washington, D.C. 115,000 Total $ 37,367 $ 35,129 3 444,000 10 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) The following table provides a summary of the mortgage debt of our two unconsolidated joint ventures: Joint Venture Interest Rate (1) Maturity Date Principal Balance at June 30, 2023 and December 31, 2022 (2) Prosperity Metro Plaza 4.09 % 12/1/2029 $ 50,000 1750 H Street, NW (3) 3.69 % 8/1/2027 32,000 Weighted Average / Total 3.93 % $ 82,000 (1) Includes the effect of mark to market purchase accounting. (2) Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interests in the joint ventures we do not own. None of the debt is recourse to us. (3) In July 2023, the maturity date of this mortgage loan was extended by three years at the same interest rate. At June 30, 2023, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $ 6,245 was primarily attributable to the difference between the amount we paid to purchase our interest in these joint ventures, including transaction costs, and the historical carrying value of the net assets of these joint ventures. This difference is being amortized over the remaining useful life of the related properties and the resulting amortization expense is included in equity in net losses of investees in our condensed consolidated statements of comprehensive income (loss). Note 4. Leases Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. Allowances for bad debts are recognized as a direct reduction of rental income. In certain circumstances, some leases provide the tenant with the right to terminate if the legislature or other funding authority does not appropriate the funding necessary for the tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the full term of the lease because we believe the occurrence of early terminations to be a remote contingency based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis. We increased rental income to record revenue on a straight line basis by $ 4,256 and $ 2,775 for the three months ended June 30, 2023 and 2022, respectively, and $ 8,429 and $ 5,461 for the six months ended June 30, 2023 and 2022, respectively. Rents receivable, excluding properties classified as held for sale, included $ 94,705 and $ 86,305 of straight line rent receivables at June 30, 2023 and December 31, 2022, respectively. We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $ 22,190 and $ 43,560 for the three and six months ended June 30, 2023, respectively, of which tenant reimbursements totaled $ 20,853 and $ 40,919 , respectively. For the three and six months ended June 30, 2022, such payments totaled $ 22,101 and $ 44,637 , respectively, of which tenant reimbursements totaled $ 21,009 and $ 42,484 , respectively. Note 5. Concentration Tenant and Credit Concentration We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. As of June 30, 2023 and 2022, the U.S. government and certain state and other government tenants combined were responsible for approximately 28.5 % and 28.4 %, respectively, of our annualized rental income. The U.S. government is our largest tenant by annualized rental income and represented approximately 19.6 % and 18.5 % of our annualized rental income as of June 30, 2023 and 2022, respectively. 11 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Geographic Concentration At June 30, 2023, our 155 wholly owned properties were located in 30 states and the District of Columbia. Properties located in California, Virginia, Illinois, the District of Columbia and Georgia were responsible for approximately 11.9 %, 11.1 %, 10.7 %, 10.3 % and 9.2 % of our annualized rental income as of June 30, 2023, respectively. Note 6. Indebtedness Our principal debt obligations at June 30, 2023 were: (1) $ 240,000 of outstanding borrowings under our $ 750,000 unsecured revolving credit facility; (2) $ 2,212,000 aggregate outstanding principal amount of senior unsecured notes; and (3) $ 108,120 aggregate outstanding principal amount of mortgage notes. Our $ 750,000 revolving credit facility is governed by a credit agreement, or our credit agreement, with a syndicate of institutional lenders that includes a feature under which the maximum aggregate borrowing availability may be increased to up to $ 1,950,000 in certain circumstances. Our revolving credit facility is available for general business purposes, including acquisitions. In June 2023, we exercised our option to extend the maturity date of our revolving credit facility by six months to January 31, 2024 and paid an extension fee of $ 469 . 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 the secured overnight financing rate, or SOFR, as the benchmark interest rate for calculating interest payable on the amounts outstanding under our revolving credit facility. We are required to pay interest at a rate of SOFR plus a premium, which was 145 basis points per annum at June 30, 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 30 basis points per annum at June 30, 2023. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of June 30, 2023 and December 31, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 6.6 % and 5.4 %, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 6.5 % and 6.2 % for the three and six months ended June 30, 2023, respectively, and 2.4 % for both the three and six months ended June 30, 2022. As of June 30, 2023 and July 25, 2023, we had $ 240,000 and $ 230,000 , respectively, outstanding under our revolving credit facility, and $ 510,000 and $ 520,000 , respectively, available for borrowing. Our credit agreement and senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR, ceasing to act as our business and property manager. Our credit agreement and senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indentures and their supplements at June 30, 2023. Mortgage Note Issuances During the six months ended June 30, 2023, we issued the following four mortgage notes with an aggregate principal balance of $ 108,120 and a weighted average interest rate of 7.863 %: Issuance Date Principal Balance Interest Rate Maturity May 2023 $ 30,680 7.210 % 7/1/2033 June 2023 26,340 8.139 % 7/1/2028 June 2023 42,700 8.272 % 7/1/2028 June 2023 8,400 7.305 % 7/1/2033 Total / Weighted Average $ 108,120 7.863 % Mortgage Note Repayment In June 2023, we repaid at maturity, a mortgage note secured by one property with an outstanding principal balance of $ 50,000 and an annual interest rate of 3.70 %. 12 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) At June 30, 2023, four of our properties with a net book value of $ 153,078 were encumbered by mortgage notes with an aggregate principal balance of $ 108,120 . Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants. Note 7. Fair Value of Assets and Liabilities Our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, accounts payable, a revolving credit facility, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At June 30, 2023 and December 31, 2022, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows: As of June 30, 2023 As of December 31, 2022 Financial Instrument Carrying Value (1) Fair Value Carrying Value (1) Fair Value Senior unsecured notes, 4.25 % interest rate, due in 2024 $ 348,004 $ 330,082 $ 346,863 $ 331,601 Senior unsecured notes, 4.50 % interest rate, due in 2025 644,542 561,672 642,818 589,388 Senior unsecured notes, 2.650 % interest rate, due in 2026 298,151 221,097 297,839 232,770 Senior unsecured notes, 2.400 % interest rate, due in 2027 347,776 235,344 347,466 256,606 Senior unsecured notes, 3.450 % interest rate, due in 2031 396,396 210,204 396,178 268,004 Senior unsecured notes, 6.375 % interest rate, due in 2050 156,807 79,704 156,711 113,075 Mortgage notes payable (2) (3) 106,365 111,230 49,917 49,099 Total $ 2,298,041 $ 1,749,333 $ 2,237,792 $ 1,840,543 (1) Includes unamortized debt premiums, discounts and issuance costs totaling $ 22,079 and $ 24,208 as of June 30, 2023 and December 31, 2022, respectively. (2) Balances as of December 31, 2022 include a mortgage note secured by one property with an outstanding principal balance of $ 50,000 that was repaid in June 2023. (3) Balances as of June 30, 2023 include four mortgage notes issued during the six months ended June 30, 2023 with an aggregate outstanding principal balance of $ 108,120 . We estimated the fair values of our senior unsecured notes (except for our senior unsecured notes due 2050) using an average of the bid and ask price of the notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair value of our senior unsecured notes due 2050 based on the closing price on Nasdaq (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair values of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates (Level 3 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values. Note 8. Shareholders’ Equity Share Awards On June 13, 2023, in accordance with our Trustee compensation agreements, we awarded to each of our nine Trustees 3,500 of our common shares, valued at $ 7.90 per share, the closing price of our common shares on Nasdaq on that day. Share Purchases During the three and six months ended June 30, 2023, we purchased an aggregate of 6,779 and 7,754 of our common shares, valued at a weighted average share price of $ 6.48 and $ 7.37 from one of our Trustees and certain former officers and employees of RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. 13 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Distributions During the six months ended June 30, 2023, we declared and paid regular quarterly distributions to common shareholders as follows: Declaration Date Record Date Paid Date Distributions Per Common Share Total Distributions January 12, 2023 January 23, 2023 February 16, 2023 $ 0.55 $ 26,710 April 13, 2023 April 24, 2023 May 18, 2023 0.25 12,141 $ 0.80 $ 38,851 On July 13, 2023, we declared a regular quarterly distribution payable to common shareholders of record on July 24, 2023 in the amount of $ 0.25 per share, or approximately $ 12,150 . We expect to pay this distribution on or about August 17, 2023. Note 9. Business and Property Management Agreements with RMR We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations. Pursuant to our business management agreement with RMR, we recognized net business management fees of $ 3,592 and $ 7,543 for the three and six months ended June 30, 2023, respectively, and $ 4,492 and $ 9,202 for the three and six months ended June 30, 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of June 30, 2023, no estimated incentive fees are included in the net business management fees we recognized for the three and six months ended June 30, 2023. The actual amount of annual incentive fees for 2023, if any, will be based on our common share total return for the three year period ending December 31, 2023, and will be payable in January 2024. We did no t incur an incentive fee payable to RMR for the year ended December 31, 2022. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). Pursuant to our property management agreement with RMR, we recognized aggregate net property management and construction supervision fees of $ 6,163 and $ 12,482 for the three and six months ended June 30, 2023, respectively, and $ 6,394 and $ 12,522 for the three and six months ended June 30, 2022, respectively. Of these amounts, for the three and six months ended June 30, 2023, $ 3,801 and $ 7,534 , respectively, were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 2,362 and $ 4,948 , respectively, were capitalized as building improvements in our condensed consolidated balance sheet. For the three and six months ended June 30, 2022, $ 4,015 and $ 8,241 , respectively, were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 2,379 and $ 4,281 , respectively, were capitalized as building improvements in our condensed consolidated balance sheet. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets. In connection with the Merger, on April 11, 2023, we and RMR entered into a Third Amended and Restated Property Management Agreement, or the Amended Property Management Agreement. For more information about the Amended Property Management Agreement, refer to Note 10. We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR’s centralized accounting personnel, our share of RMR’s costs for providing our internal audit function and as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR. We reimbursed RMR $ 6,617 and $ 12,964 for these expenses and costs for the three and six months ended June 30, 2023, respectively, and $ 6,047 and $ 12,013 for the three and six months ended June 30, 2022, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). 14 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Management Agreements Between Our Joint Ventures and RMR . RMR provides management services to our two unconsolidated joint ventures. We are not obligated to pay management fees to RMR under our management agreements with RMR for the services it provides regarding the joint ventures. The joint ventures pay management fees directly to RMR. Note 10. Related Person Transactions We have relationships and historical and continuing transactions with RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR. Jennifer B. Clark, our other Managing Trustee and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR and an officer of ABP Trust. Each of our officers is an officer and employee of RMR. Some of our Independent Trustees also serve as independent trustees of other public companies to which RMR or its subsidiaries provide management services. Mr. Portnoy serves as chair of the boards and as a managing trustee of these public companies. Other officers of RMR serve as managing trustees or officers of certain of these companies. Our Manager, RMR. We have two agreements with RMR to provide management services to us. RMR also provides management services to our two unconsolidated joint ventures. See Note 9 for more information regarding our and our unconsolidated joint ventures’ management agreements with RMR. Leases with RMR. We lease office space to RMR in certain of our properties for RMR’s property management offices. Pursuant to our lease agreements with RMR, we recognized rental income from RMR for leased office space of $ 244 and $ 467 for the three and six months ended June 30, 2023, respectively, and $ 285 and $ 569 for the three and six months ended June 30, 2022, respectively. Sonesta . In June 2021, we entered into a 30 -year lease agreement with a subsidiary of Sonesta International Hotels Corporation, or Sonesta, in connection with the redevelopment of an office property we own in Washington, D.C. as a mixed-use property. Sonesta’s lease is for the full-service hotel component of the property that includes approximately 230,000 rentable square feet, which represents approximately 54 % of the total square feet upon completion of the redevelopment. We substantially completed the redevelopment in June 2023 and the term of the lease is estimated to commence in August 2023. Sonesta has two options to extend the term for 10 years each. Pursuant to the lease agreement, Sonesta will pay us annual base rent of approximately $ 6,436 beginning 18 months after the lease commences. The annual base rent will increase by 10 % every five years throughout the term. Sonesta is also obligated to pay its pro rata share of the operating costs for the building. We estimate that the total cost to build the hotel space will be approximately $ 77,000 , of which approximately $ 73,000 has been incurred as of June 30, 2023. Mr. Portnoy is a director and controlling shareholder of Sonesta and Ms. Clark is also a director of Sonesta. Merger Agreement with Diversified Healthcare Trust . As described further in Note 1, 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 in the merger. Subject to the satisfaction or waiver of the conditions to closing, the Merger is expected to close during the third quarter of 2023. RMR serves as our and DHC’s manager and will continue to manage the surviving entity following the Merger. Contemporaneously with the execution of the Merger Agreement, on April 11, 2023, we and RMR entered into the Amended Property Management Agreement. The effectiveness of the Amended Property Management Agreement is conditioned upon and will be concurrent with the consummation of the Merger. If the Merger is not consummated, the Amended Property Management Agreement will not become effective and the Second Amended and Restated Property Management Agreement, or the Current Property Management Agreement, will remain in effect. Pursuant to the Amended Property Management Agreement, at the Effective Time, properties currently owned by DHC that are subject to its existing property management agreement, including its medical office and life science properties, will become subject to the terms and conditions of the Amended Property Management Agreement. Also pursuant to the Amended Property Management Agreement, RMR will be entitled to a renovation and repositioning fee equal to 3 % of the cost of any major capital projects and repositionings at senior living communities currently owned by DHC that the surviving entity may 15 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) request RMR to oversee from time to time, consistent with DHC’s existing property management agreement with RMR. The terms of the Amended Property Management Agreement are otherwise consistent with the terms of the Current Property Management Agreement. In addition, contemporaneously with the execution of the Merger Agreement, we, DHC and RMR entered into a letter agreement pursuant to which, on the terms and subject to conditions contained therein, DHC and RMR have acknowledged and agreed that, effective upon consummation of the Merger, DHC shall have terminated its business and property management agreements with RMR for convenience, and RMR shall have waived its right to receive payment of the termination fee pursuant to each such agreement upon such termination. The foregoing terminations and waivers apply only in respect of the Merger and do not apply to any other transaction or arrangement. For more information about these and other such relationships and certain other related person transactions, refer to our 2022 Annual Report and our joint proxy statement/prospectus that is included in our registration statement on Form S-4 filed with the SEC. 16 Table of Contents