What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-01 compared with 2023-10-30 · 176 added, 298 removed, 255 unchanged (65% of the section changed)

3 unchanged sentences

We are a real estate investment trust, or REIT, organized under Maryland law.

As of September 30, 2023, our wholly owned properties were comprised of 154 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 451,000 rentable square feet.

As of September 30, 2023, our properties are located in 30 states and the District of Columbia and contain approximately 20,705,000 rentable square feet.

As of September 30, 2023, our properties were leased to 263 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.4 years.

government is our largest tenant, representing approximately 20.0% of our annualized rental income as of September 30, 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 September 30, 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 duration and ultimate impact of current trends on the demands for office space at our properties remains uncertain and subject to change.

As of March 31, 2024, our wholly owned properties were comprised of 151 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that owned three properties containing approximately 471,000 rentable square feet.

As of March 31, 2024, our properties are located in 30 states and the District of Columbia and contain approximately 20,293,000 rentable square feet.

As of March 31, 2024, our properties were leased to 261 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.6 years.

government is our largest tenant, representing approximately 20.2% of our annualized rental income as of March 31, 2024.

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, 2024, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

Leases representing approximately 13.0% and 8.6% of our annualized rental income are scheduled to expire during the remainder of 2024 and 2025, respectively, and we may be unable to renew leases or find replacement tenants.

Certain changes in office space utilization, 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 duration and ultimate impact of current trends on the demand 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 our properties.

In response to inflationary pressures, the U.S.

Federal Reserve has increased the federal funds rate by 525 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, and global geopolitical hostilities and tensions, have given rise to 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.

On September 1, 2023, we and DHC mutually agreed to terminate the previously disclosed Merger Agreement and entered into the Termination Agreement.

For more information on our terminated merger with DHC, see Note 1 to our Condensed Consolidated Financial Statements.

Higher interest rates, inflationary pressures, geopolitical hostilities and tensions, and concerns that the U.S.

economy may enter an economic recession have caused disruptions in the financial markets and these factors could adversely affect our and our tenants’ financial condition and the ability or willingness of our tenants to renew our leases or pay rent to us.

We also have a significant amount of debt maturing in the next 12 months.

Deteriorating office fundamentals, high interest rates and market sentiment towards the office sector may restrict our access to, and likely increase our cost of, capital as we seek to refinance our debts.

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 2023 Annual Report.

Property Operations

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of September 30, 2023 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of March 31, 2024 and excludes three properties owned by two unconsolidated joint ventures in which we owned 51% and 50% interests.

For more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Occupancy data for our properties as of September 30, 2023 and 2022 was as follows (square feet in thousands):

Occupancy data for our properties as of March 31, 2024 and 2023 was as follows (square feet in thousands):

All Properties (1)

Comparable Properties (2)

September 30,

2024 2023 2024 2023

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85.6 % 90.5 % 88.2 % 94.2 %

(1) Based on properties we owned on September 30, 2023 and 2022, respectively.

(1) Based on properties we owned on March 31, 2024 and 2023, respectively.

(2) Based on properties we owned continuously since January 1, 2023;

excludes two properties classified as held for sale, five properties undergoing significant redevelopment and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

excludes one property classified as held for sale, five properties affected by significant redevelopment activities and three properties owned by two unconsolidated joint ventures in which we owned 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 and nine months ended September 30, 2023 and 2022 were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

The average effective rental rate per square foot for our properties for the three months ended March 31, 2024 and 2023 were as follows:

Three Months Ended March 31,

Average effective rental rate per square foot (1) :

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(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 September 30, 2023 and 2022, respectively.

(3) Based on properties we owned continuously since July 1, 2022 and January 1, 2022, respectively;

During the three and nine months ended September 30, 2023, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Leased Available for Lease Total Leased Available for Lease Total

(2) Based on properties we owned on March 31, 2024 and 2023, respectively.

(3) Based on properties we owned continuously since January 1, 2023;

During the three months ended March 31, 2024, 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, 2024

Leased Available for Lease Total

Beginning of period 17,848 2,693 20,541

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Lease expirations (713) 713 —

Redevelopment expansion (1)

— — — — 87 87

Lease renewals (1)

482 (482) — 1,111 (1,111) —

New leases (1)

104 (104) — 391 (391) —

Remeasurements (3)

— 1 1 — 25 25

End of period 17,375 2,918 20,293

(1) Represents additional rentable square feet resulting from the redevelopment of a property in Washington, D.C., which was completed in June 2023.

(2) Based on leases entered during the three and nine months ended September 30, 2023.

(3) Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants.

During the three and nine months ended September 30, 2023, we entered into new and renewal leases as summarized in the following table (square feet in thousands):

Three Months Ended September 30, 2023

New Leases Renewals Total

Rentable square feet leased 104 482 586

Weighted average rental rate change (by rentable square feet) 1.9 % (3.7 %) (2.7 %)

Tenant leasing costs and concession commitments (1)

$ 13,623 $ 11,736 $ 25,359

Tenant leasing costs and concession commitments per rentable square foot (1)

$ 131.54 $ 24.36 $ 43.33

Weighted (by square feet) average lease term (years) 9.5 6.9 7.4

Total leasing costs and concession commitments per rentable square foot per year (1)

$ 13.84 $ 3.53 $ 5.89

Nine Months Ended September 30, 2023

(1) Based on leases entered during the three months ended March 31, 2024.

During the three months ended March 31, 2024, we entered into new and renewal leases as summarized in the following table (square feet in thousands):

Three Months Ended March 31, 2024

New Leases Renewals Total

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(1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.

During the three and nine months ended September 30, 2023, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and nine months ended September 30, 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 September 30, 2023 Nine Months Ended September 30, 2023

During the three months ended March 31, 2024, 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, 2024, 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, 2024

Old Effective Rent Per Square Foot (1)

New Effective Rent Per Square Foot (1)

Rentable Square Feet Old Effective Rent Per Square Foot (1)

New Effective Rent Per Square Foot (1)

Rentable Square Feet

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(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 and nine months ended September 30, 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 September 30, Nine Months Ended September 30,

2023 2022 2023 2022

During the three months ended March 31, 2024 and 2023, 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,

Lease related costs (1)

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Building improvements (2)

8,516 8,585 18,453 16,070

Recurring capital expenditures 21,242 17,623

Development, redevelopment and other activities (3)

28,326 36,811 118,232 114,637

Total capital expenditures $ 28,153 $ 67,094

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

Includes capitalized interest and other operating costs of $1,978 and $8,691 for the three and nine months ended September 30, 2023, respectively, and $2,089 and $5,029 for the three and nine months ended September 30, 2022, respectively.

In addition to the capital expenditures described above, we contributed $3,763 to one of our unconsolidated joint ventures during the nine months ended September 30, 2023.

Also, as of September 30, 2023, we had estimated unspent leasing related obligations of $137,223, of which we expect to spend $73,666 over the next 12 months.

As of September 30, 2023, we had leases at our properties totaling approximately 2,614,820 rentable square feet that were scheduled to expire through September 30, 2024.

As of October 27, 2023, we expect tenants with leases totaling approximately 1,832,201 rentable square feet that are scheduled to expire through September 30, 2024, excluding space that has been re-leased and space for which we are in advanced negotiations to re-lease, 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.

Includes capitalized interest and other operating costs of $1,172 and $2,992 for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, we had estimated unspent leasing related obligations of $103,390, of which we expect to spend $62,367 over the next 12 months.

As of March 31, 2024, we had leases at our properties totaling approximately 2,546,000 rentable square feet that were scheduled to expire through March 31, 2025.

As of April 30, 2024, we expect tenants with leases totaling approximately 2,249,000 rentable square feet that are scheduled to expire through March 31, 2025, excluding space that has been re-leased and space for which we are in advanced negotiations to re-lease, 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.

Of the 2,249,000 rentable square feet leased to tenants known to be vacating, 2,008,000 rentable square feet relate to properties not encumbered by debt.

However, we continue to proactively engage with our existing tenants and are focused on overall tenant retention.

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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 September 30, 2023, our lease expirations by year were as follows (square feet in thousands):

As of March 31, 2024, our lease expirations by year were as follows (square feet in thousands):

Number of Leases Expiring Leased

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Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability.

As of September 30, 2023, tenants occupying approximately 3.6% of our rentable square feet and responsible for approximately 3.6% of our annualized rental income as of September 30, 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, 2032, 2034, 2035, 2036, 2037 and 2040, early termination rights become exercisable by other tenants who occupied an additional approximately 1.0%, 2.6%, 2.6%, 1.6%, 1.3%, 3.9%, 0.8%, 0.9%, 0.6%, 0.3%, 0.2%, 0.9%, 0.1%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 1.1%, 2.9%, 5.0%, 2.2%, 1.6%, 4.4%, 1.4%, 1.0%, 0.5%, 0.6%, 0.6%, 1.2%, 0.3%, 0.2% and 0.4% of our annualized rental income, respectively, as of September 30, 2023.

In addition, as of September 30, 2023, pursuant to leases with nine 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 nine tenants occupied approximately 4.8% of our rentable square feet and contributed approximately 5.2% of our annualized rental income as of September 30, 2023.

(2) Leased square feet is pursuant to leases existing as of September 30, 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.

As of March 31, 2024, tenants occupying approximately 3.0% of our rentable square feet and responsible for approximately 3.0% of our annualized rental income as of March 31, 2024 had exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2032, 2034, 2035, 2036, 2037 and 2040, early termination rights become exercisable by other tenants who occupied an additional approximately 0.5%, 3.8%, 1.4%, 1.4%, 3.9%, 2.6%, 1.4%, 0.6%, 0.4%, 0.2%, 0.9%, 0.1%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 0.8%, 6.5%, 2.0%, 2.0%, 4.7%, 2.3%, 1.9%, 0.6%, 0.6%, 0.7%, 1.3%, 0.3%, 0.2% and 0.4% of our annualized rental income, respectively, as of March 31, 2024.

In addition, as of March 31, 2024, pursuant to leases with eight 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 eight tenants occupied approximately 4.3% of our rentable square feet and contributed approximately 4.6% of our annualized rental income as of March 31, 2024.

(2) Leased square feet is pursuant to leases existing as of March 31, 2024, 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.

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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.

As of September 30, 2023, we derived 21.6% of our annualized rental income from our properties located in the metropolitan Washington, D.C.

As of March 31, 2024, we derived 23.1% 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.

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and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations.

As of September 30, 2023, tenants contributing 53.6% 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 10.4% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

As of September 30, 2023, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands):

As of March 31, 2024, tenants contributing 53.5% 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 8.1% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

As of March 31, 2024, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands):

Tenant Credit Rating Sq.

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Not Rated 596 3.4 % 19,604 3.9 %

4 Bank of America Corporation Investment Grade 577 3.1 % 18,159 3.4 %

4 IG Investments Holdings LLC Not Rated 339 2.0 % 18,319 3.7 %

5 Bank of America Corporation Investment Grade 577 3.3 % 16,893 3.4 %

6 State of California Investment Grade 467 2.7 % 14,086 2.8 %

7 Tyson Foods, Inc.

Investment Grade 248 1.3 % 11,954 2.3 %

7 Northrop Grumman Corporation Investment Grade 337 1.9 % 10,781 2.2 %

8 Sonesta International Hotels Corporation Not Rated 234 1.3 % 10,404 2.1 %

10 CommScope Holding Company Inc.

Non Investment Grade 228 1.2 % 9,582 1.8 %

9 State of Georgia Investment Grade 308 1.8 % 7,713 1.5 %

10 Sonoma Biotherapeutics, Inc.

Not Rated 107 0.6 % 7,634 1.5 %

12 State of Georgia Investment Grade 308 1.7 % 7,345 1.4 %

13 Commonwealth of Massachusetts Investment Grade 212 1.1 % 7,269 1.4 %

11 PNC Bank Investment Grade 441 2.5 % 7,019 1.4 %

15 Micro Focus International plc Non Investment Grade 215 1.2 % 6,836 1.3 %

16 Compass Group plc Investment Grade 267 1.4 % 6,697 1.3 %

12 ServiceNow, Inc.

Investment Grade 149 0.9 % 6,675 1.3 %

18 Allstate Insurance Co.

Investment Grade 468 2.5 % 6,484 1.2 %

13 Allstate Insurance Corporation Investment Grade 468 2.7 % 6,486 1.3 %

14 Automatic Data Processing, Inc.

Investment Grade 289 1.7 % 6,346 1.3 %

15 Open Text Corporation Non Investment Grade 190 1.1 % 6,178 1.2 %

16 Compass Group plc Investment Grade 267 1.5 % 6,076 1.2 %

17 Church & Dwight Co., Inc.

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Investment Grade 344 2.0 % 5,734 1.2 %

20 Science Applications International Corp.

Non Investment Grade 159 0.9 % 5,254 1.1 %

Total 9,601 55.1 % $ 290,963 58.3 %

(1) In July 2023, we received notice from Tyson Foods, Inc.

exercising its option to terminate its lease at a property we own in Chicago, IL effective January 2025, prior to the stated lease expiration date of January 31, 2028.

We are amortizing termination fees of approximately $1,400 per quarter through January 2025 as a result of this early termination.

(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 first quarter of 2024.

Disposition Activities

During the nine months ended September 30, 2023, we sold six properties containing approximately 376,000 rentable square feet for an aggregate sales price of $23,575, excluding closing costs.

The net proceeds from these sales were used to repay amounts outstanding under our revolving credit facility.

We continue to evaluate our portfolio 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 October 27, 2023, we have entered into agreements to sell two properties containing approximately 177,000 rentable square feet for an aggregate sales price of $21,299, excluding closing costs.

During the three months ended March 31, 2024, we sold one property containing approximately 248,000 rentable square feet for a sales price of $38,500, excluding closing costs.

The net proceeds from this sale were used to repay amounts outstanding under our revolving credit facility.

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

In April 2024, we entered into an agreement to sell one property containing approximately 126,000 rentable square feet for a sales price of $7,800, 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 sales are subject to conditions;

accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.

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 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022

Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023

Comparable Properties (1) Results

Three Months Ended September 30,

Three Months Ended March 31,

Non-Comparable

Properties Results

Three Months Ended September 30,

Three Months Ended March 31,

Consolidated Results

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 $ Change % Change 2024 2023 2024 2023 $ Change % Change

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Depreciation and amortization 50,341 51,692 (1,351) (2.6 %)

Acquisition and transaction related costs 16,135 — 16,135 n/m

General and administrative 5,720 6,564 (844) (12.9 %)

Total other expenses 74,121 59,552 14,569 24.5 %

Gain on sale of real estate 244 16,925 (16,681) (98.6 %)

Interest and other income 281 56 225 n/m

Interest expense (28,835) (24,969) (3,866) 15.5 %

(Loss) income before income tax expense and equity in net losses of investees (18,733) 18,006 (36,739) n/m

Income tax expense (95) (90) (5) 5.6 %

Equity in net losses of investees (765) (952) 187 (19.6 %)

Net (loss) income $ (19,593) $ 16,964 $ (36,557) n/m

Weighted average common shares outstanding (basic and diluted) 48,403 48,286 117 0.2 %

Per common share amounts (basic and diluted):

Net (loss) income $ (0.41) $ 0.35 $ (0.76) n/m

n/m - not meaningful

(1) Comparable properties consists of 147 properties we owned on September 30, 2023 and which we owned continuously since July 1, 2022 and excludes two properties classified as held for sale, five properties undergoing significant redevelopment 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) income 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 September 30, 2023, compared to the three months ended September 30, 2022.

Rental income.

Rental income declined $5,440 as a result of our property disposition activities, partially offset by increases of $532 from new leases at properties undergoing significant redevelopment and $586 for comparable properties as a result of increased termination fee revenue and recovery of allowances for bad debts in the 2023 period, partially offset by increased vacancies and lower rents from lease renewals at certain of our properties in the 2023 period.

Rental income includes non-cash straight line rent adjustments totaling $8,691 in the 2023 period and $1,765 in the 2022 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $56 in the 2023 period and $(204) in the 2022 period.

Real estate taxes.

Real estate taxes for non-comparable properties declined $1,001 as a result of successful tax appeals at certain properties undergoing significant redevelopment and $939 related to property disposition activities, and declined $217 for comparable properties primarily due to successful tax appeals at certain of our properties in the 2023 period.

Utility expenses.

Utility expenses declined $465 related to our property disposition activities and $240 for comparable properties as a result of higher utility expenses in the 2022 period for expenses previously paid directly by a certain tenant that were paid by us pursuant to a lease amendment executed in 2022 with that tenant, partially offset by an increase of $179 for properties undergoing significant redevelopment due to the related lease-up of the properties.

Other operating expenses.

Other operating expenses increased $1,236 for comparable properties and $259 for properties undergoing significant redevelopment due to the related lease-up of the properties, partially offset by a decrease of $1,286 related to property disposition activities.

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.

Depreciation and amortization for comparable properties declined $2,694 due to certain leasing related assets becoming fully depreciated since July 1, 2022, partially offset by depreciation and amortization of improvements made to certain of our properties since July 1, 2022.

Depreciation and amortization for properties undergoing significant redevelopment increased $1,175 due to the substantial completion of our 20 Mass Ave.

redevelopment in Washington, D.C.

in June 2023 and $797 related to our property disposition activities.

Acquisition and transaction related costs 233 3,218 (2,985) (92.8 %)

Acquisition and transaction related costs in the 2023 period consist of costs incurred in connection with our terminated merger with DHC and related transactions.

For more information regarding our terminated merger with DHC, see Note 1 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

General and administrative 5,644 5,925 (281) (4.7 %)

The decrease in general and administrative expenses is primarily the result of a decrease in base business management fees resulting from a decrease in average total market capitalization and a decrease in share based compensation in the 2023 period compared to the 2022 period.

Gain on sale of real estate.

We recorded a $244 gain on sale of real estate resulting from the sale of one property in the 2023 period.

We recorded a $16,925 net gain on sale of real estate resulting from the sale of 10 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 increase in interest expense reflects higher average interest rates on borrowings under our revolving credit facility and higher average amounts outstanding, as well as the issuance of six mortgage notes with an aggregate principal balance of $177,320 and a weighted average interest rate of 7.8% during 2023, partially offset by the repayment of two mortgage notes since July 1, 2022 with an aggregate principal balance of approximately $73,000 and a weighted average interest rate of 4.0%.

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.

Net (loss) income.

Net (loss) income and net (loss) income 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.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022

Comparable Properties (1) Results

Nine Months Ended September 30,

Non-Comparable

Properties Results

Nine Months Ended September 30,

Consolidated Results

Nine Months Ended September 30,

2023 2022 $ Change % Change 2023 2022 2023 2022 $ Change % Change

Rental income $ 396,434 $ 394,807 $ 1,627 0.4 % $ 3,346 $ 31,546 $ 399,780 $ 426,353 $ (26,573) (6.2 %)

Operating expenses:

Real estate taxes 45,664 45,244 420 0.9 % (173) 4,398 45,491 49,642 (4,151) (8.4 %)

Utility expenses 19,862 18,573 1,289 6.9 % 600 2,098 20,462 20,671 (209) (1.0 %)

Other operating expenses 78,519 73,929 4,590 6.2 % 2,118 7,668 80,637 81,597 (960) (1.2 %)

Total operating expenses 144,045 137,746 6,299 4.6 % 2,545 14,164 146,590 151,910 (5,320) (3.5 %)

Net operating income (loss) (2)

$ 252,389 $ 257,061 $ (4,672) (1.8 %) $ 801 $ 17,382 253,190 274,443 (21,253) (7.7 %)

Other expenses:

Depreciation and amortization 155,559 170,993 (15,434) (9.0 %)

Loss on impairment of real estate — 21,820 (21,820) n/m

Acquisition and transaction related costs 30,534 224 30,310 n/m

General and administrative 17,430 19,353 (1,923) (9.9 %)

Total other expenses 56,218 60,835 (4,617) (7.6 %)

Gain on sale of real estate 487 7,437 (6,950) (93.5 %)

(Loss) gain on sale of real estate (2,384) 2,548 (4,932) (193.6 %)

Interest and other income 1,357 164 1,193 n/m

1 unchanged sentence

Loss on early extinguishment of debt (425) — (425) n/m

Loss before income tax expense and equity in net losses of investees (29,655) (9,437) (20,218) n/m

(Loss) income before income tax expense and equity in net losses of investees (4,898) 418 (5,316) n/m

Income tax expense (56) (30) (26) 86.7 %

Equity in net losses of investees (230) (834) 604 (72.4 %)

Net loss $ (32,281) $ (12,499) $ (19,782) 158.3 %

Net loss $ (5,184) $ (446) $ (4,738) n/m

Weighted average common shares outstanding (basic and diluted) 48,466 48,336 130 0.3 %

Per common share amounts (basic and diluted):

Net loss $ (0.67) $ (0.27) $ (0.40) 148.1 %

Net loss $ (0.11) $ (0.01) $ (0.10) n/m

n/m - not meaningful

(1) Comparable properties consists of 147 properties we owned on September 30, 2023 and which we owned continuously since January 1, 2022 and excludes two properties classified as held for sale, five properties undergoing significant redevelopment and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(2) Our definition of 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 nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

(1) Comparable properties consists of 145 properties we owned on March 31, 2024 and which we owned continuously since January 1, 2023 and excludes one property classified as held for sale, five properties affected by significant redevelopment activities and three properties owned by two unconsolidated joint ventures in which we owned 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, 2024, compared to the three months ended March 31, 2023.

Rental income.

Rental income for non-comparable properties declined $22,443 as a result of our property disposition activities and $5,757 for properties undergoing significant redevelopment due to termination fee revenue in the 2022 period and increased vacancy at a property that began a redevelopment project in February 2022, partially offset by an increase of $1,627 for comparable properties as a result of decreased amortization of acquired real estate leases in the 2023 period and an increase in reimbursement revenue resulting from higher operating expenses, partially offset by lower termination fee revenue and increased vacancies at certain of our properties in the 2023 period.

Rental income for non-comparable properties increased $10,516 as a result of lease termination fee revenue received related to a property that was sold in March 2024 and $3,369 for properties affected by significant redevelopment activities due to the lease-up of certain of those properties.

Rental income for comparable properties declined $6,872 as a result of increased vacancies and lower rents from lease renewals at certain of our properties in the 2024 period.

Rental income includes non-cash straight line rent adjustments totaling $7,379 in the 2024 period and $4,173 in the 2023 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $33 in the 2024 period and $79 in the 2023 period.

Real estate taxes.

Real estate taxes for non-comparable properties declined $3,384 related to our property disposition activities and $1,187 for properties undergoing significant redevelopment as a result of successful tax appeals at certain properties undergoing significant redevelopment, partially offset by an increase of $420 for comparable properties primarily due to successful tax appeals in the 2022 period.

Real estate taxes for non-comparable properties increased $916 for properties affected by significant redevelopment activities due to the substantial completion of certain of those properties, partially offset by a decrease of $489 related to our property disposition activities.

Real estate taxes for comparable properties decreased $51 primarily due to refunds received in the 2024 period as a result of successful tax appeals at certain of our properties.

Utility expenses.

Utility expenses declined $1,655 related to our property disposition activities, partially offset by increases of $1,289 for comparable properties and $157 for properties undergoing significant redevelopment due to the related lease-up of those properties.

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 executed in 2022 with those tenants.

Utility expenses for non-comparable properties increased $369 for properties affected by significant redevelopment activities due to the lease-up of certain of those properties, partially offset by a decline of $115 related to our property disposition activities.

Utility expenses for comparable properties increased $637 primarily due to the lease-up of certain previously vacant properties and increased utility expenses for newly vacant properties where tenants previously paid utility expenses directly in the 2024 period.

Other operating expenses.

Other operating expenses for non-comparable properties declined $5,450 related to our property disposition activities and $100 for properties undergoing significant redevelopment, partially offset by an increase of $4,590 for comparable properties due to the impact of inflation in the 2023 period, higher repairs and maintenance costs and higher insurance costs, as well as other operating expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments executed in 2022 with those tenants, partially offset by lower snow removal costs in the 2023 period.

Other operating expenses for non-comparable properties increased $518 for properties affected by significant redevelopment activities due to the substantial completion of certain of those properties, partially offset by a decline of $129 related to our property disposition activities.

Other operating expenses for comparable properties increased $881 due to higher snow removal costs and higher insurance costs in the 2024 period.

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects decreases of $9,401 for comparable properties, $4,142 related to our property disposition activities and $1,891 for properties undergoing significant redevelopment.

Depreciation and amortization for comparable properties decreased 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 $21,820 loss on impairment of real estate in the 2022 period to reduce the carrying value of seven properties to their estimated fair values less costs to sell.

Depreciation and amortization for comparable properties declined $2,994 due to certain leasing related assets becoming fully depreciated since January 1, 2023, partially offset by depreciation and amortization of improvements made to certain of our properties since January 1, 2023.

Depreciation and amortization for non-comparable properties increased $3,029 for properties affected by significant redevelopment activities due to the substantial completion of certain of those properties, partially offset by a decline of $1,386 related to our property disposition activities.

Acquisition and transaction related costs.

Acquisition and transaction related costs consist of costs in the 2023 period incurred in connection with our terminated merger with DHC and related transactions.

For more information regarding our terminated merger with DHC, see Note 1 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Acquisition and transaction related costs consist of costs incurred in connection with our terminated merger with Diversified Healthcare Trust and related transactions.

General and administrative.

Gain on sale of real estate.

We recorded a $487 net gain on sale of real estate resulting from the sale of six properties in the 2023 period.

We recorded a $7,437 net gain on sale of real estate resulting from the sale of 16 properties in the 2022 period.

(Loss) gain on sale of real estate.

We recorded a $2,384 loss on sale of real estate resulting from the sale of one property in the 2024 period.

We recorded a $2,548 gain on sale of real estate resulting from the sale of three properties in the 2023 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.

The increase in interest and other income is primarily due to the effect of higher cash balances invested in the 2024 period compared to the 2023 period.

Interest expense.

The increase in interest expense reflects higher average amounts outstanding and higher average interest rates on borrowings under our revolving credit facility, as well as the issuance of six mortgage notes with an aggregate principal balance of $177,320 and a weighted average interest rate of 7.8% during the 2023 period, partially offset by the redemption of our $300,000 senior unsecured notes with an interest rate of 4.0% in June 2022, higher capitalized interest in the 2023 period and the repayment of three mortgage notes since January 1, 2022 with an aggregate principal balance of approximately $98,000 and a weighted average interest rate of 4.1%.

The increase in interest expense is due to higher weighted average interest rates and higher outstanding debt balances in the 2024 period.

Loss on early extinguishment of debt .

We recorded a loss on early extinguishment of debt of $77 in the 2022 period from the write off of unamortized discounts and debt issuance costs associated with the redemption of our senior unsecured notes due July 2022.

We recorded a loss on early extinguishment of debt of $425 in the 2024 period for the write off of unamortized discounts resulting from the early redemption of our $350,000 senior unsecured notes due May 2024.

Income tax expense.

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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.

Equity in net losses of investees represents our proportionate share of losses from our investments in our unconsolidated joint ventures.

Net loss and net loss per basic and diluted common share increased in the 2024 period compared to the 2023 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 (loss) income as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net (loss) income 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 (loss) income.

We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, 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 loss as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net 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 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 (loss) income in order to provide results that are more closely related to our property level results of operations.

The calculation of NOI excludes certain components of net loss in order to provide results that are more closely related to our property level results of operations.

We calculate NOI as shown below.

3 unchanged sentences

Other real estate companies and REITs may calculate NOI differently than we do.

The following table presents the reconciliation of net (loss) income to NOI for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Net (loss) income $ (19,593) $ 16,964 $ (32,281) $ (12,499)

The following table presents the reconciliation of net loss to NOI for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Net loss $ (5,184) $ (446)

Equity in net losses of investees 230 834

4 unchanged sentences

Interest and other income (1,357) (164)

Gain on sale of real estate (244) (16,925) (487) (7,437)

Loss (gain) on sale of real estate 2,384 (2,548)

General and administrative 5,644 5,925

Acquisition and transaction related costs 233 3,218

Loss on impairment of real estate — — — 21,820

Depreciation and amortization 50,341 51,692

2 unchanged sentences

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 (loss) income, 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.

FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net 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.

2 unchanged sentences

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) income to FFO and Normalized FFO for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Net (loss) income $ (19,593) $ 16,964 $ (32,281) $ (12,499)

The following table presents the reconciliation of net loss to FFO and Normalized FFO for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Net loss $ (5,184) $ (446)

Depreciation and amortization:

1 unchanged sentence

Unconsolidated joint venture properties 642 830

Loss on impairment of real estate — — — 21,820

Gain on sale of real estate (244) (16,925) (487) (7,437)

Loss (gain) on sale of real estate 2,384 (2,548)

FFO 48,183 49,528

1 unchanged sentence

Loss on early extinguishment of debt 425 —

Lease termination fees for sold property (10,524) —

Normalized FFO $ 38,317 $ 52,746

13 unchanged sentences

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

• our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating and capital expenses.

On October 12, 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.

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 nine months ended September 30, 2023, we sold six properties for an aggregate sales price of $23,575 , excluding closing costs.

W e 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 October 27, 2023, we have entered into agreements to sell two properties for an aggregate sales price of $21,299, excluding closing costs.

We plan to selectively sell certain properties from time to time to manage leverage levels and to improve our asset diversification, our geographic make-up and the average age of our properties, lengthen the weighted average term of our leases and increase tenant retention.

During the three months ended March 31, 2024, we sold one property for an aggregate sales price of $38,500 , excluding closing costs.

W e continue to evaluate our portfolio and are currently in various stages of marketing certain of our properties for sale.

In April 2024, we entered into an agreement to sell one property containing approximately 126,000 rentable square feet for a sales price of $7,800, 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 sales are subject to conditions;

accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.

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.

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.

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:

Nine Months Ended September 30,

Three Months Ended March 31,

Cash, cash equivalents and restricted cash at beginning of period $ 26,714 $ 12,249

4 unchanged sentences

Cash, cash equivalents and restricted cash at end of period $ 44,106 $ 23,344

The decrease in cash provided by operating activities for the 2023 period compared to the 2022 period was primarily due to decreases in NOI in the 2023 period due to property dispositions, reductions in occupied space at certain of our properties and an increase in costs incurred in connection with the terminated merger with DHC and related transactions.

The change from cash flow provided by investing activities in the 2022 period to cash flows used in investing activities in the 2023 period was primarily due to lower proceeds received from property sales in the 2023 period and increased capital expenditures in the 2023 period related to our redevelopment activities.

The change from cash flow used in financing activities in the 2022 period to cash flows provided by financing activities in the 2023 period was primarily due to the redemption of $300,000 of our senior unsecured notes in the 2022 period and the issuance of $177,320 of mortgage notes and decreased distributions to our common shareholders in the 2023 period.

The decrease in cash provided by operating activities for the 2024 period compared to the 2023 period was primarily due to decreased NOI due to property dispositions and reductions in occupied space at certain of our properties in the 2024 period.

The decrease in cash used in investing activities in the 2024 period compared to the 2023 period was primarily due to higher proceeds received from property sales and decreased capital expenditures in the 2024 period.

The change from cash provided by financing activities in the 2023 period to cash used in financing activities in the 2024 period was primarily due to lower net borrowings and payment of debt issuance costs in the 2024 period, partially offset by decreased distributions to our common shareholders in the 2024 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.

In June 2023, we exercised our option to extend the maturity date of our revolving credit facility by six months to January 31, 2024.

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 145 basis points per annum at September 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 September 30, 2023.

Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings.

As of September 30, 2023, the annual interest rate payable on

borrowings under our revolving credit facility was 6.9%.

As of September 30, 2023 and October 27, 2023, we had $200,000 and $205,000, respectively, outstanding under our revolving credit facility, and $550,000 and $545,000, respectively, available for borrowing, subject to meeting required financial covenants.

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.

We are currently in discussion with our lenders regarding a new revolving credit facility.

We are also evaluating different options to repay our maturing senior notes, including new financings and potential property sales.

While our plans could be impacted by factors outside of our control, including unfavorable market, economic and commercial real estate conditions, we believe based on our current discussions and history of working with our lenders that it is probable that these plans will allow us to repay our maturing debt.

Mortgage Notes Issuances

During the nine months ended September 30, 2023, we issued six mortgage notes with an aggregate principal balance of $177,320 and a weighted average interest rate of 7.8%.

The net proceeds from these mortgage loans were used to repay amounts outstanding under our revolving credit facility.

See Note 6 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our mortgage note issuances.

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 3.7% using cash on hand and borrowings under our revolving credit facility.

As of September 30, 2023, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, were as follows:

In order to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses or fund acquisitions, we maintain a revolving credit facility which is governed by our credit agreement.

Our obligations under our credit agreement are secured by a pledge by certain of our subsidiaries of all of their respective equity interests in certain of our direct and indirect property owning subsidiaries and first mortgage liens on 19 properties owned by the pledged subsidiaries with a gross book value of real estate assets of $994,753 as of March 31, 2024.

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

The maturity date of our credit agreement is January 29, 2027, and, subject to the payment of an extension fee and meeting certain other requirements, we can extend the stated maturity date of our revolving credit facility by one year.

Our credit agreement contains a number of covenants, including covenants that require us to maintain certain financial ratios, restrict our ability to incur additional debt in excess of calculated amounts and, subject to limited exceptions, restrict our ability to increase our distribution rate above the current level of $0.01 per common share per quarter and enter into share repurchases.

Availability of borrowings under our credit agreement is subject to ongoing minimum performance and market values of the 19 collateral properties, our satisfying certain financial covenants and other credit facility conditions.

Interest payable on borrowings under our credit agreement is based on a rate of SOFR plus a margin of 350 basis points.

We are also required to pay an unused facility fee on the amount of total lending commitments, which was 25 basis points per annum at March 31, 2024.

As of March 31, 2024, the annual interest rate payable on borrowings under our credit agreement was 8.9%.

As of March 31, 2024 and April 30, 2024, we had $190,000 and $180,000, respectively, outstanding under our revolving credit facility, $100,000 outstanding under our term loan and $135,000 and $145,000, respectively, available for borrowing under our revolving credit facility.

Senior Secured Notes Issuance and Senior Unsecured Notes Redemption

In February 2024, we issued $300,000 of the 2029 Notes.

The aggregate net proceeds from this offering were $270,848, after initial purchaser discounts and other offering expenses.

The 2029 Notes are fully and unconditionally guaranteed on a joint, several and senior secured basis by certain of our subsidiaries and secured by a pledge of all of the respective equity

interests of the subsidiary guarantors and first mortgage liens on 17 properties with a gross book value of real estate assets of $607,727 as of March 31, 2024.

The 2029 Notes require semi-annual payments of interest only and are prepayable, at par plus accrued interest, after March 31, 2028.

In March 2024, we redeemed, at par plus accrued interest, all $350,000 of our 4.25% senior unsecured notes due 2024 using the proceeds from the 2029 Notes and borrowings under our revolving credit facility.

As of March 31, 2024, our debt maturities (other than our revolving credit facility), consisting of senior notes, a term loan and mortgage notes, were as follows:

Year Debt Maturities

2 unchanged sentences

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

Our mortgage debts currently require monthly payments of interest only;

however, certain of our mortgages will require payments of principal and interest after a specified date through maturity.

In addition to our debt obligations, as of September 30, 2023, we had estimated unspent leasing related obligations of $137,223, of which we expect to spend $73,666 over the next 12 months.

We substantially completed the redevelopment of a property located in Washington, D.C.

containing approximately 427,000 rentable square feet in June 2023.

We currently estimate the total project costs associated with this redevelopment, including lease related costs that will continue to be incurred subsequent to the substantial completion date, to be approximately $227,000.

As of September 30, 2023, we had incurred $182,839 related to this project.

In August 2023, a 30-year lease for approximately 230,000 rentable square feet commenced at this property that is approximately 25.1% higher than the prior rental rate for the same space, making the redevelopment project 55% leased.

See Note 10 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 to be approximately $162,000 and completion of the redevelopment in the first quarter of 2024.

As of September 30, 2023, we had incurred $117,873 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 any revolving credit facility we may then have, 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.

Our mortgage notes currently require monthly payments of interest only;

however, certain of our mortgage notes will require payments of principal and interest after a specified date through maturity.

In addition to our debt obligations, as of March 31, 2024, we had estimated unspent leasing related obligations of $103,390, of which we expect to spend $62,367 over the next 12 months.

We substantially completed the redevelopment of a three-property campus located in Seattle, WA containing approximately 300,000 rentable square feet in March 2024.

This project included 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, including lease related costs that will continue to be incurred subsequent to the completion date, will be approximately $162,000.

As of March 31, 2024, we had incurred $138,755 related to this project.

In August 2022, we entered into a 10.6 year lease for 83,774 rentable square feet at one of the life science properties that is 109.0% higher than the prior rental rate for the same space, making the redevelopment project 28% 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 credit agreement 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 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 ventures or other arrangements that may provide us with additional sources of financing.

Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations.

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 capital expenditures and to pay our obligations or fund future acquisitions.

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.

We currently do not have sufficient sources of liquidity to repay our $650,000 senior unsecured notes due 2025 and are evaluating market-based alternatives to obtain debt financing.

Based on the significant number of unencumbered properties in our portfolio, our successful history of obtaining debt financings and our current financing metrics, we believe it is probable that we can obtain new debt financing that will allow us to satisfy the 2025 senior unsecured notes as they become due.

We have also engaged Moelis & Company LLC as our financial advisor to assist in evaluating our options to address our upcoming debt maturities.

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.

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.

For instance, it is uncertain what the ultimate impacts of inflationary pressures, 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 nine months ended September 30, 2023, we paid quarterly distributions to our shareholders totaling $50,998 using cash on hand and borrowings under our revolving credit facility.

On October 12, 2023, we declared a regular quarterly distribution payable to shareholders of record on October 23, 2023 of $0.25 per share, or approximately $12,200.

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

During the three months ended March 31, 2024, we paid quarterly distributions to our shareholders totaling $487 using cash on hand.

On April 11, 2024, we declared a regular quarterly distribution payable to shareholders of record on April 22, 2024 of $0.01 per share, or approximately $487.

We expect to pay this distribution on or about May 16, 2024 using cash on hand.

We determine our distribution payout ratio with consideration for restrictions under our credit agreement, our expected capital expenditures, cash flows from operations and payment of debt obligations.

For more information regarding the distributions we paid and declared during 2024, see Note 9 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.

In July 2023, the maturity date of the mortgage loan secured by the property owned by our unconsolidated joint venture, in which we have a 50% interest, was extended by three years at the same interest rate.

In October 2023, our joint venture partner that has a 50% equity interest in the 1750 H Street, NW joint venture failed to fund a $600 capital call.

We are currently evaluating our options regarding this funding and there can be no assurance that we will be successful pursuing any remedies available to us under the joint venture agreement.

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.

We owned 51% and 50% interests in two unconsolidated joint ventures which owned three properties at March 31, 2024.

As of March 31, 2024, the properties owned by these joint ventures were encumbered by an aggregate $82,000 principal amount of mortgage indebtedness, none of which is recourse to us.

In March 2024, our 1750 H Street, NW joint venture did not have sufficient cash flow to pay its monthly debt service, resulting in an event of default.

We expect the non-recourse mortgage lender to this joint venture to take full possession of the property in the second quarter.

As of March 31, 2024, we did not control the activities that are most significant to these joint ventures and, as a result, we accounted 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 4 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 September 30, 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.

Other than these joint ventures, as of March 31, 2024, 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.

Debt Covenants (dollars in thousands)

Our principal debt obligations as of September 30, 2023 consisted of $200,000 of borrowings outstanding under our revolving credit facility, an outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and mortgage notes with an outstanding principal balance $177,320.

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 September 30, 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 principal debt obligations as of March 31, 2024 consisted of $190,000 of borrowings outstanding under our revolving credit facility, $100,000 outstanding principal amount under our secured term loan, an outstanding principal balance of $2,162,000 of senior notes and mortgage notes with an outstanding principal balance of $177,320.

Also, the three properties owned by two joint ventures in which we owned 51% and 50% interests secured two additional mortgage notes.

Our senior notes are governed by indentures and their supplements.

Our credit agreement and our senior 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 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 increase our distribution rate above the current level of $0.01 per common share per quarter.

As of March 31, 2024, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and our senior notes indentures and their supplements.

Our mortgage notes are non-recourse, subject to certain limited exceptions, and do 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, or S&P, 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 with DHC, Moody’s downgraded our senior unsecured debt rating from Ba2 to Ba3.

In September 2023, following the termination of the merger with DHC, Moody’s downgraded our senior unsecured debt rating from Ba3 to B2 and S&P downgraded our senior unsecured debt rating from BB+ to BB.

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).

As of March 31, 2024, adjusted total assets for covenant purposes as defined in our senior notes indentures were $5,302,159.

Assets serving as collateral under our credit agreement, our secured senior notes or mortgage notes represented $1,986,221 of adjusted total assets, as defined in our senior notes indentures.

Our unencumbered assets represented $3,315,938 of adjusted total assets.

The following table presents the calculation of adjusted total assets to total assets in accordance with GAAP as of March 31, 2024:

Total assets $ 3,957,930

accumulated depreciation 678,278

adjustments to reflect original cost of real estate assets 1,047,942

accounts receivable and intangibles (381,991)

Adjusted total assets $ 5,302,159

Neither our credit agreement nor our senior notes indentures and their supplements contain provisions for acceleration which could be triggered by our credit ratings.

Our credit agreement and our senior notes indentures and their supplements contain cross default provisions to any other debts of more than $25,000 (or more than $50,000 in certain circumstances).

Related Person Transactions

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Item 2. Management’s Discussion and Analysis