OFFICE PROPERTIES INCOME TRUST 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2023 Annual Report. OVERVIEW (dollars in thousands, except per share and per square foot data) We are a real estate investment trust, or REIT, organized under Maryland law. As of March 31, 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. The U.S. 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. 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 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 March 31, 2024 and 2023 was as follows (square feet in thousands): All Properties (1) Comparable Properties (2) March 31, March 31, 2024 2023 2024 2023 Total properties 151 157 145 145 Total rentable square feet (3) 20,293 20,895 19,134 19,169 Percent leased (4) 85.6 % 90.5 % 88.2 % 94.2 % (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 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. 16 Table of Contents 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, 2024 2023 Average effective rental rate per square foot (1) : All properties (2) $ 29.22 $ 28.85 Comparable properties (3) $ 28.86 $ 28.84 (1) Average effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified. (2) Based on properties we owned on March 31, 2024 and 2023, respectively. (3) Based on properties we owned continuously since January 1, 2023; 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. 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 Changes resulting from: Disposition of properties (248) — (248) Lease expirations (713) 713 — Lease renewals (1) 443 (443) — New leases (1) 45 (45) — End of period 17,375 2,918 20,293 (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 Rentable square feet leased 45 443 488 Weighted average rental rate change (by rentable square feet) (18.7 %) 18.4 % 10.2 % Tenant leasing costs and concession commitments (1) $ 2,826 $ 8,151 $ 10,977 Tenant leasing costs and concession commitments per rentable square foot (1) $ 63.01 $ 18.38 $ 22.48 Weighted (by square feet) average lease term (years) 6.1 9.6 9.3 Total leasing costs and concession commitments per rentable square foot per year (1) $ 10.29 $ 1.92 $ 2.42 (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. 17 Table of Contents 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 New leases $ 29.29 $ 46.33 240 Lease renewals $ 13.87 $ 16.29 496 Total leasing activity $ 18.89 $ 26.07 736 (1) Effective rental rates include contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and exclude lease value amortization. During the three months ended March 31, 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, 2024 2023 Lease related costs (1) $ 16,768 $ 13,041 Building improvements (2) 4,474 4,582 Recurring capital expenditures 21,242 17,623 Development, redevelopment and other activities (3) 6,911 49,471 Total capital expenditures $ 28,153 $ 67,094 (1) Lease related costs generally include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and other tenant inducements. (2) Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. (3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue. 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. Prevailing market conditions and our tenants’ needs at the time we negotiate and enter leases or lease renewals will generally determine rental rates and demand for leased space at our properties, all of which factors are beyond our control. Whenever we renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. We cannot be sure of the rental rates that will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter. Also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations or lower rents upon lease renewal or reletting. Additionally, we may incur significant costs and make significant concessions to renew our leases with current tenants or lease our properties to new tenants. 18 Table of Contents As of March 31, 2024, our lease expirations by year were as follows (square feet in thousands): Year (1) Number of Leases Expiring Leased Square Feet Expiring (2) Percent of Total Cumulative Percent of Total Annualized Rental Income Expiring Percent of Total Cumulative Percent of Total 2024 56 2,270 13.1 % 13.1 % $ 64,683 13.0 % 13.0 % 2025 40 1,885 10.8 % 23.9 % 42,835 8.6 % 21.6 % 2026 38 1,448 8.3 % 32.2 % 40,133 8.1 % 29.7 % 2027 37 2,061 11.9 % 44.1 % 53,084 10.7 % 40.4 % 2028 18 659 3.8 % 47.9 % 31,137 6.2 % 46.6 % 2029 32 1,108 6.4 % 54.3 % 33,828 6.8 % 53.4 % 2030 28 1,014 5.8 % 60.1 % 27,296 5.5 % 58.9 % 2031 19 1,027 5.9 % 66.0 % 29,613 5.9 % 64.8 % 2032 13 343 2.0 % 68.0 % 12,941 2.6 % 67.4 % 2033 and thereafter 52 5,560 32.0 % 100.0 % 162,885 32.6 % 100.0 % Total 333 17,375 100.0 % $ 498,435 100.0 % Weighted average remaining lease term (in years) 6.2 6.6 (1) The year of lease expiration is pursuant to current contract terms. Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability. As of March 31, 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. We generally will seek to renew or extend the terms of leases at properties with tenants when they expire. However, market and economic factors, along with increases in remote work, changes in space utilization and government spending and budget priorities, may cause our tenants not to renew or extend their leases when they expire, or to seek to renew their leases for less space than they currently occupy. If we are unable to extend or renew our leases, or we renew leases for reduced space, it may be time consuming and expensive to relet some of these properties. 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. Current economic conditions in this area or a possible recession, including as a result of current inflationary conditions or otherwise, could reduce demand from tenants for our properties, reduce rents that our tenants in this area are willing to pay when our leases expire and increase lease concessions for new leases and renewals. Additionally, there has been a decrease in demand for new leased office space by the U.S. government, including in the metropolitan Washington, D.C. market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants or maintain or increase our rents when our leases expire. Our manager, RMR, employs a tenant review process for us. RMR assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. We consider investment grade tenants to include: (a) investment grade rated tenants; (b) tenants with investment grade rated parent entities that guarantee the tenant’s lease obligations; and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations. As of March 31, 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). 19 Table of Contents 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. Ft. % of Leased Sq. Ft. Annualized Rental Income % of Total Annualized Rental Income 1 U.S. Government Investment Grade 3,534 20.3 % $ 100,747 20.2 % 2 Alphabet Inc. (Google) Investment Grade 386 2.2 % 23,004 4.6 % 3 Shook, Hardy & Bacon L.L.P. Not Rated 596 3.4 % 19,604 3.9 % 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 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 % 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 % 11 PNC Bank Investment Grade 441 2.5 % 7,019 1.4 % 12 ServiceNow, Inc. Investment Grade 149 0.9 % 6,675 1.3 % 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. Investment Grade 250 1.4 % 6,048 1.2 % 18 Leidos Holdings Inc. Investment Grade 159 0.9 % 5,962 1.2 % 19 Primerica, Inc. 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 % Disposition Activities 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 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. Segment Information We operate in one business segment: ownership of real estate properties. 20 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share amounts) Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023 Comparable Properties (1) Results Three Months Ended March 31, Non-Comparable Properties Results Three Months Ended March 31, Consolidated Results Three Months Ended March 31, 2024 2023 $ Change % Change 2024 2023 2024 2023 $ Change % Change Rental income $ 120,681 $ 127,553 $ (6,872) (5.4 %) $ 18,754 $ 4,869 $ 139,435 $ 132,422 $ 7,013 5.3 % Operating expenses: Real estate taxes 14,032 14,083 (51) (0.4 %) 1,677 1,250 15,709 15,333 376 2.5 % Utility expenses 7,615 6,978 637 9.1 % 536 282 8,151 7,260 891 12.3 % Other operating expenses 25,715 24,834 881 3.5 % 1,612 1,223 27,327 26,057 1,270 4.9 % Total operating expenses 47,362 45,895 1,467 3.2 % 3,825 2,755 51,187 48,650 2,537 5.2 % Net operating income (2) $ 73,319 $ 81,658 $ (8,339) (10.2 %) $ 14,929 $ 2,114 88,248 83,772 4,476 5.3 % Other expenses: Depreciation and amortization 50,341 51,692 (1,351) (2.6 %) Acquisition and transaction related costs 233 3,218 (2,985) (92.8 %) General and administrative 5,644 5,925 (281) (4.7 %) Total other expenses 56,218 60,835 (4,617) (7.6 %) (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 Interest expense (35,476) (25,231) (10,245) 40.6 % Loss on early extinguishment of debt (425) — (425) 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 $ (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 $ (0.11) $ (0.01) $ (0.10) n/m n/m - not meaningful (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 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. 21 Table of Contents Real estate taxes. 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 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 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. 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 incurred in connection with our terminated merger with Diversified Healthcare Trust and related transactions. General and administrative. 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 2024 period compared to the 2023 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 cash balances invested in the 2024 period compared to the 2023 period. Interest expense. 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 $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. 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 our unconsolidated joint ventures. Net loss. 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. 22 Table of Contents Non-GAAP Financial Measures 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 in order to provide results that are more closely related to our property level results of operations. We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do. The following table presents the reconciliation of net loss to NOI for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Net loss $ (5,184) $ (446) Equity in net losses of investees 230 834 Income tax expense 56 30 (Loss) income before income tax expense and equity in net losses of investees (4,898) 418 Loss on early extinguishment of debt 425 — Interest expense 35,476 25,231 Interest and other income (1,357) (164) 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 Depreciation and amortization 50,341 51,692 NOI $ 88,248 $ 83,772 23 Table of Contents Funds From Operations and Normalized Funds From Operations We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net loss, calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. The following table presents the reconciliation of net loss to FFO and Normalized FFO for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Net loss $ (5,184) $ (446) Add (less): Depreciation and amortization: Consolidated properties 50,341 51,692 Unconsolidated joint venture properties 642 830 Loss (gain) on sale of real estate 2,384 (2,548) FFO 48,183 49,528 Add (less): Acquisition and transaction related costs 233 3,218 Loss on early extinguishment of debt 425 — Lease termination fees for sold property (10,524) — Normalized FFO $ 38,317 $ 52,746 Weighted average common shares outstanding (basic and diluted) 48,466 48,336 FFO per common share (basic and diluted) $ 0.99 $ 1.02 Normalized FFO per common share (basic and diluted) $ 0.79 $ 1.09 LIQUIDITY AND CAPITAL RESOURCES Our Operating Liquidity and Resources (dollar amounts in thousands, except per share amounts) Our principal sources of funds to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate from our properties, net proceeds from property sales and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon: • our ability to collect rent from our tenants; • our ability to maintain or increase the occupancy of, and the rental rates at, our properties; • our ability to control operating and capital expenses at our properties; • our ability to successfully sell properties that we market for sale; and • 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. 24 Table of Contents 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 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: Three Months Ended March 31, 2024 2023 Cash, cash equivalents and restricted cash at beginning of period $ 26,714 $ 12,249 Net cash provided by (used in): Operating activities 26,632 51,900 Investing activities (4,362) (63,816) Financing activities (4,878) 23,011 Cash, cash equivalents and restricted cash at end of period $ 44,106 $ 23,344 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 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 25 Table of Contents 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 2024 $ — 2025 650,000 2026 300,000 2027 450,000 2028 123,487 2029 and thereafter 915,833 Total $ 2,439,320 None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. 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 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 26 Table of Contents 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, sustained high interest rates or any economic recession will be. A protracted and extensive economic recession or continued or intensified disruptions in capital markets could limit our access to financing from public sources and would likely increase our cost of capital. During the three months ended March 31, 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 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 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 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. 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. 27 Table of Contents 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 Plus: accumulated depreciation 678,278 Plus: adjustments to reflect original cost of real estate assets 1,047,942 Less: 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 We have relationships and historical and continuing transactions with RMR, RMR Inc. and others related to them. For more information about these and other such relationships and related person transactions, see Notes 10 and 11 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2023 Annual Report, our definitive Proxy Statement for our 2024 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” in Part I, Item 1A of our 2023 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services. Critical Accounting Estimates The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the Condensed Consolidated Financial Statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles. A discussion of our critical accounting estimates is included in our 2023 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2023. 28 Table of Contents