OFFICE PROPERTIES INCOME TRUST 10-Q

Item 1. Financial Statements OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) September 30, 2024 December 31, 2023 ASSETS Real estate properties: Land $ 716,254 $ 786,310 Buildings and improvements 2,980,356 3,279,369 Total real estate properties, gross 3,696,610 4,065,679 Accumulated depreciation ( 619,474 ) ( 650,179 ) Total real estate properties, net 3,077,136 3,415,500 Assets of properties held for sale 125,781 37,310 Investments in unconsolidated joint ventures 17,552 18,128 Acquired real estate leases, net 209,943 263,498 Cash and cash equivalents 22,363 12,315 Restricted cash 13,906 14,399 Rents receivable 146,580 133,264 Deferred leasing costs, net 95,395 86,971 Other assets, net 17,295 8,284 Total assets $ 3,725,951 $ 3,989,669 LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured debt, net $ 980,125 $ 2,400,478 Secured debt, net 1,341,844 172,131 Liabilities of properties held for sale 3,419 2,525 Accounts payable and other liabilities 105,923 140,166 Due to related persons 5,906 7,025 Assumed real estate lease obligations, net 10,148 11,665 Total liabilities 2,447,365 2,733,990 Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $ .01 par value: 200,000,000 shares authorized, 53,910,981 and 48,755,415 shares issued and outstanding, respectively 539 488 Additional paid in capital 2,633,253 2,621,493 Cumulative net income 112,747 100,174 Cumulative common distributions ( 1,467,953 ) ( 1,466,476 ) Total shareholders’ equity 1,278,586 1,255,679 Total liabilities and shareholders’ equity $ 3,725,951 $ 3,989,669 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (amounts in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Rental income $ 120,620 $ 133,361 $ 383,741 $ 399,780 Expenses: Real estate taxes 16,927 14,257 47,363 45,491 Utility expenses 7,869 7,460 21,782 20,462 Other operating expenses 26,619 27,946 81,097 80,637 Depreciation and amortization 46,047 52,266 146,779 155,559 Loss on impairment of real estate 41,847 — 173,579 — Transaction related costs 738 16,135 971 30,534 General and administrative 4,927 5,720 15,861 17,430 Total expenses 144,974 123,784 487,432 350,113 Gain on sale of real estate 8,456 244 6,008 487 Interest and other income 196 281 1,779 782 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,183 , $ 2,276 , $ 9,261 and $ 6,808 respectively) ( 42,580 ) ( 28,835 ) ( 116,405 ) ( 80,591 ) Gain on early extinguishment of debt 264 — 225,637 — (Loss) income before income tax expense and equity in net losses of investees ( 58,018 ) ( 18,733 ) 13,328 ( 29,655 ) Income tax expense ( 230 ) ( 95 ) ( 179 ) ( 336 ) Equity in net losses of investees ( 166 ) ( 765 ) ( 576 ) ( 2,290 ) Net (loss) income $ ( 58,414 ) $ ( 19,593 ) $ 12,573 $ ( 32,281 ) Weighted average common shares outstanding (basic and diluted) 51,197 48,403 49,444 48,365 Per common share amounts (basic and diluted): Net (loss) income $ ( 1.14 ) $ ( 0.41 ) $ 0.25 $ ( 0.67 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Common Distributions Total Shareholders’ Equity Balance at December 31, 2023 48,755,415 $ 488 $ 2,621,493 $ 100,174 $ ( 1,466,476 ) $ 1,255,679 Common share grants — — 362 — — 362 Common share repurchases ( 869 ) — ( 6 ) — — ( 6 ) Net loss — — — ( 5,184 ) — ( 5,184 ) Distributions to common shareholders — — — — ( 487 ) ( 487 ) Balance at March 31, 2024 48,754,546 488 2,621,849 94,990 ( 1,466,963 ) 1,250,364 Issuance of common shares 1,406,952 14 3,166 — — 3,180 Common share grants 104,643 1 486 — — 487 Common share repurchases ( 7,505 ) — ( 15 ) — — ( 15 ) Net income — — — 76,171 — 76,171 Distributions to common shareholders — — — — ( 488 ) ( 488 ) Balance at June 30, 2024 50,258,636 503 2,625,486 171,161 ( 1,467,451 ) 1,329,699 Issuance of common shares 3,184,432 32 7,416 — — 7,448 Common share grants 544,555 5 520 — — 525 Common share repurchases ( 76,642 ) ( 1 ) ( 169 ) — — ( 170 ) Net loss — — — ( 58,414 ) — ( 58,414 ) Distributions to common shareholders — — — — ( 502 ) ( 502 ) Balance at September 30, 2024 53,910,981 $ 539 $ 2,633,253 $ 112,747 $ ( 1,467,953 ) $ 1,278,586 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED) (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Common Distributions Total Shareholders’ Equity Balance at December 31, 2022 48,565,644 $ 486 $ 2,619,532 $ 169,606 $ ( 1,403,289 ) $ 1,386,335 Common share grants — — 477 — — 477 Common share forfeitures and repurchases ( 1,935 ) — ( 15 ) — — ( 15 ) Net loss — — — ( 446 ) — ( 446 ) Distributions to common shareholders — — — — ( 26,710 ) ( 26,710 ) Balance at March 31, 2023 48,563,709 486 2,619,994 169,160 ( 1,429,999 ) 1,359,641 Common share grants 31,500 — 744 — — 744 Common share forfeitures and repurchases ( 7,559 ) — ( 47 ) — — ( 47 ) Net loss — — — ( 12,242 ) — ( 12,242 ) Distributions to common shareholders — — — — ( 12,141 ) ( 12,141 ) Balance at June 30, 2023 48,587,650 486 2,620,691 156,918 ( 1,442,140 ) 1,335,955 Common share grants 210,300 2 656 — — 658 Common share forfeitures and repurchases ( 40,704 ) — ( 240 ) — — ( 240 ) Net loss — — — ( 19,593 ) — ( 19,593 ) Distributions to common shareholders — — — — ( 12,147 ) ( 12,147 ) Balance at September 30, 2023 48,757,246 $ 488 $ 2,621,107 $ 137,325 $ ( 1,454,287 ) $ 1,304,633 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 12,573 $ ( 32,281 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 89,587 77,635 Net amortization of debt premiums, discounts and issuance costs 9,261 6,808 Amortization of acquired real estate leases and assumed real estate lease obligations, net 49,055 71,332 Amortization of deferred leasing costs 9,562 7,359 Gain on sale of real estate ( 6,008 ) ( 487 ) Loss on impairment of real estate 173,579 — Gain on early extinguishment of debt ( 238,008 ) — Straight line rental income ( 23,796 ) ( 17,120 ) Other non-cash expenses, net 587 1,053 Equity in net losses of investees 576 2,290 Changes in assets and liabilities: Rents receivable 6,830 ( 1,375 ) Deferred leasing costs ( 18,231 ) ( 17,904 ) Other assets ( 4,320 ) ( 4,426 ) Accounts payable and other liabilities ( 18,686 ) 14,952 Due to related persons ( 1,119 ) 1,297 Net cash provided by operating activities 41,442 109,133 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate improvements ( 93,081 ) ( 175,628 ) Contributions to unconsolidated joint ventures — ( 3,763 ) Proceeds from sale of property, net 79,830 22,449 Net cash used in investing activities ( 13,251 ) ( 156,942 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable — ( 50,000 ) Proceeds from issuance of mortgage notes payable — 177,320 Repayment of senior unsecured notes ( 350,242 ) — Proceeds from issuance of senior secured notes 280,500 — Borrowings on revolving credit facility 327,000 225,000 Repayments on revolving credit facility ( 332,000 ) ( 220,000 ) Borrowings on secured term loan 100,000 — Payment of debt issuance costs ( 42,226 ) ( 5,843 ) Repurchases of common shares ( 191 ) ( 291 ) Distributions to common shareholders ( 1,477 ) ( 50,998 ) Net cash (used in) provided by financing activities ( 18,636 ) 75,188 Increase in cash, cash equivalents and restricted cash 9,555 27,379 Cash, cash equivalents and restricted cash at beginning of period 26,714 12,249 Cash, cash equivalents and restricted cash at end of period $ 36,269 $ 39,628 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents OFFICE PROPERTIES INCOME TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) (unaudited) Nine Months Ended September 30, 2024 2023 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 121,651 $ 79,324 Income taxes paid $ 302 $ 374 NON-CASH INVESTING ACTIVITIES: Real estate improvements accrued, not paid $ 16,595 $ 41,445 Capitalized interest $ 969 $ 6,423 NON-CASH FINANCING ACTIVITIES: Extinguishment of unsecured senior notes in exchange for senior secured notes and common shares $ ( 295,462 ) $ — SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows: As of September 30, 2024 2023 Cash and cash equivalents $ 22,363 $ 24,358 Restricted cash (1) 13,906 15,270 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 36,269 $ 39,628 (1) Restricted cash consists of cash held for operations and amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our debt agreements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) (unaudited) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Office Properties Income Trust and its subsidiaries, or OPI, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2023, or our 2023 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles. Going Concern Our portfolio has been adversely affected by shifts in office space utilization, including increased remote work arrangements and tenants consolidating their real estate footprint. Demand for office space continues to face headwinds and declining rents and increasing costs to relet space when tenants can be identified continue to impact the market. In addition, there are limited debt or equity financing alternatives available to us to refinance our debt and financing sources we have utilized have increased our cost of capital. The duration and ultimate impact of these factors on our properties and our business remains uncertain and subject to change; however, these conditions continue to have a significant negative impact on our results of operations, financial position and cash flows. As of October 30, 2024, our total available liquidity was comprised of $ 146,448 of cash and, in addition to long-term debt, our $ 456,700 of unsecured senior notes due on February 1, 2025, or the 2025 Notes, are due within one year from the date of issuance of these financial statements. Given the limited alternatives available to us to obtain debt or equity to refinance our maturing debt, the illiquid nature of our real estate assets and our ability to incur additional debt while maintaining compliance with the financial covenants in our existing debt agreements, we are currently in negotiations with certain holders of the 2025 Notes regarding a potential note exchange. However, we are not able to conclude that it is probable that the negotiations will result in an exchange that refinances the 2025 Notes prior to their maturity. If we are unable to consummate a transaction that refinances the 2025 Notes on terms which, in our view, allow us to continue as a going concern, our Board of Trustees may consider a reorganization in a bankruptcy court. As a result of the foregoing, we have concluded that there is substantial doubt about our ability to continue as a going concern for at least one year from the date of issuance of these financial statements, or October 30, 2024. Our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. 9 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Note 2. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, or ASU No. 2023-07, which requires public entities to: (i) provide disclosures of significant segment expenses and other segment items if they are regularly provided to the Chief Operating Decision Maker, or the CODM, and included in each reported measure of segment profit or loss; (ii) provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Accounting Standards Codification 280, Segment Reporting, or ASC 280, in interim periods; and (iii) disclose the CODM’s title and position, as well as an explanation of how the CODM uses the reported measures and other disclosures. Public entities with a single reportable segment must apply all the disclosure requirements of ASU No. 2023-07, as well as all the existing segment disclosures under ASC 280. The amendments in ASU No. 2023-07 are incremental to the requirements in ASC 280 and do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. ASU No. 2023-07 should be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We expect to include additional disclosures in the notes to our condensed consolidated financial statements as a result of the implementation of ASU No. 2023-07; however, these changes are not expected to have a material effect on our condensed consolidated financial statements. Note 3. Per Common Share Amounts We calculate basic earnings per common share using the two class method. We calculate diluted earnings per common share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, together with the related impact on earnings, are considered when calculating diluted earnings per common share. The calculation of basic and diluted earnings per common share is as follows (amounts in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Numerators: Net (loss) income $ ( 58,414 ) $ ( 19,593 ) $ 12,573 $ ( 32,281 ) Income attributable to unvested participating securities ( 2 ) ( 50 ) ( 74 ) ( 232 ) Net (loss) income used in calculating earnings per common share $ ( 58,416 ) $ ( 19,643 ) $ 12,499 $ ( 32,513 ) Denominators: Weighted average common shares outstanding - basic and diluted 51,197 48,403 49,444 48,365 Net (loss) income per common share - basic and diluted $ ( 1.14 ) $ ( 0.41 ) $ 0.25 $ ( 0.67 ) Note 4. Real Estate Properties As of September 30, 2024, our 145 wholly owned properties included approximately 19,543,000 rentable square feet, with an undepreciated carrying value of $ 3,873,075 , including $ 176,465 classified as held for sale. We also had a noncontrolling ownership interest of 51 % in an unconsolidated joint venture that owned two properties containing approximately 346,000 rentable square feet. We generally lease space at our properties on a gross lease, modified gross lease or net lease basis pursuant to fixed term contracts expiring between 2024 and 2053. Some of our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended September 30, 2024, we entered into 14 leases for approximately 987,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.2 years, and we made commitments of $ 65,916 for leasing related costs. During the nine months ended September 30, 2024, we entered into 39 leases for approximately 1,683,000 rentable square feet for a weighted (by rentable square feet) average lease term of 9.1 years and we made commitments for approximately $ 80,875 of leasing related costs. As of September 30, 2024, we had estimated unspent leasing related obligations of $ 100,646 . We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. Impairment indicators may include declining tenant occupancy, lack of progress re-leasing vacant 10 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining useful lives of our long lived assets. If we change our estimate of the remaining useful lives, we allocate the carrying value of the affected assets over their revised remaining useful lives. Disposition Activities During the nine months ended September 30, 2024, we sold seven properties containing approximately 998,000 rentable square feet for an aggregate sales price of $ 84,810 , excluding closing costs. The sales of these properties, as presented in the table below, do not represent a strategic shift in our business. As a result, the results of operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss). Date of Sale Number of Properties Location Rentable Square Feet Gross Sales Price (1) Gain (Loss) on Sale of Real Estate Loss on Impairment of Real Estate March 2024 1 Chicago, IL 248,000 $ 38,500 $ ( 2,448 ) $ — July 2024 1 Malden, MA 126,000 7,800 ( 10 ) 13,973 August 2024 3 Indianapolis, IN 434,000 10,100 729 50,851 September 2024 1 Atlanta, GA 126,000 17,610 8,691 — September 2024 1 San Jose, CA 64,000 10,800 ( 954 ) 819 7 998,000 $ 84,810 $ 6,008 $ 65,643 (1) Gross sales price is the contract price, excluding closing costs. As of September 30, 2024, we had 13 properties classified as held for sale in our condensed consolidated balance sheet that are under agreement to sell for an aggregate sales price of $ 107,802 , excluding closing costs, as summarized below: Date of Sale Agreement Number of Properties Location Rentable Square Feet Gross Sales Price (1) Loss on Impairment of Real Estate May 2024 1 Colorado Springs, CO 156,000 $ 26,164 $ — July 2024 5 Atlanta, GA 378,000 18,100 21,937 August 2024 1 Rocklin, CA 19,000 2,650 — September 2024 1 Kansas City, MO 87,000 8,000 4,370 September 2024 2 Santa Clara, CA 149,000 21,150 11,041 October 2024 2 Tempe, AZ 101,000 10,738 — October 2024 1 Sacramento, CA 338,000 21,000 33,904 13 1,228,000 $ 107,802 $ 71,252 (1) Gross sales price is the contract price, excluding closing costs. We also had four additional properties classified as held for sale in our condensed consolidated balance sheet as of September 30, 2024 and we recorded a $ 22,094 loss on impairment of real estate to adjust the carrying values of two of these properties to their estimated fair values, less costs to sell, during the nine months ended September 30, 2024. The pending sales in the preceding table 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 pricing will not change. See Note 8 for more information regarding our properties held for sale. 11 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) We also recorded a $ 12,017 loss on impairment of real estate to reduce the carrying value of one property that was classified as held for sale to its estimated fair value, less costs to sell as of June 30, 2024. Subsequently, we removed this property from held for sale status due to a change of plan for sale and recorded an additional loss on impairment of $ 2,573 to reduce the carrying value of this property to its estimated fair value as of September 30, 2024. In October 2024, we entered into agreements to sell an additional four properties with approximately 381,000 rentable square feet for an aggregate sales price of $ 11,350 , excluding closing costs. Unconsolidated Joint Ventures As of September 30, 2024, we owned an interest in one joint venture that owned two properties. We accounted for this investment under the equity method of accounting. During the nine months ended September 30, 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 and the non-recourse mortgage lender to this joint venture completed a foreclosure of the property and the joint venture ceased to have an economic interest in the property. We wrote off our full investment in this joint venture as of December 31, 2023 and did not make capital contributions to this joint venture during the nine months ended September 30, 2024. Accordingly, we did not record our proportionate share of operating results of the joint venture for the nine months ended September 30, 2024. As of September 30, 2024 and December 31, 2023, our investments in our unconsolidated joint ventures consisted of the following: OPI Carrying Value of Investments at Joint Venture OPI Ownership September 30, 2024 December 31, 2023 Number of Properties Location Rentable Square Feet Prosperity Metro Plaza 51 % $ 17,552 $ 18,128 2 Fairfax, VA 346,000 1750 H Street, NW 50 % — — 1 Washington, D.C. 125,000 Total $ 17,552 $ 18,128 3 471,000 The following table provides a summary of the mortgage debt of our unconsolidated joint ventures as of September 30, 2024 and December 31, 2023: Joint Venture Interest Rate (1) Maturity Date Principal Balance at September 30, 2024 (2) Principal Balance at December 31, 2023 (2) Prosperity Metro Plaza 4.09 % 12/1/2029 $ 50,000 $ 50,000 1750 H Street, NW 3.69 % 8/1/2027 — 32,000 Weighted Average / Total 3.93 % $ 50,000 $ 82,000 (1) Includes the effect of mark to market purchase accounting. (2) Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interests in the joint ventures we did not own. None of the debt is recourse to us. As of September 30, 2024, the unamortized basis difference of our Prosperity Metro Plaza joint venture of $ 680 was primarily attributable to the difference between the amount we paid to purchase our interest in this joint venture, including transaction costs, and the historical carrying value of the net assets of this joint venture. The difference is being amortized over the remaining useful life of the related property and the resulting amortization expense is included in equity in net losses of investees in our condensed consolidated statements of comprehensive income (loss). Note 5. Leases Our leases provide for base rent payments and, in addition, may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term once we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining 12 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) the lease term. Allowances for bad debts are recognized as a direct reduction of rental income. In certain circumstances, some leases provide the tenant with the right to terminate if the legislature or other funding authority does not appropriate the funding necessary for the tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the full term of the lease because we believe the occurrence of early terminations to be a remote contingency based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis. We increased rental income to record revenue on a straight line basis by $ 8,854 and $ 8,691 for the three months ended September 30, 2024 and 2023, respectively, and $ 23,796 and $ 17,120 for the nine months ended September 30, 2024 and 2023, respectively. Rents receivable, excluding properties classified as held for sale, included $ 134,218 and $ 112,440 of straight line rent receivables at September 30, 2024 and December 31, 2023, respectively. We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $ 22,291 and $ 65,120 for the three and nine months ended September 30, 2024, respectively, of which tenant reimbursements totaled $ 21,271 and $ 61,667 , respectively. For the three and nine months ended September 30, 2023, such payments totaled $ 21,067 and $ 64,627 , respectively, of which tenant reimbursements totaled $ 19,722 and $ 60,641 , respectively. Note 6. Concentration Tenant and Credit Concentration As of September 30, 2024 and 2023, the U.S. government and certain state and other government tenants combined were responsible for approximately 24.5 % and 28.1 %, respectively, of our annualized rental income. The U.S. government is our largest tenant by annualized rental income and represented approximately 16.6 % and 20.0 % of our annualized rental income as of September 30, 2024 and 2023, respectively. We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. Geographic Concentration As of September 30, 2024, our 145 wholly owned properties were located in 30 states and the District of Columbia. Properties located in Virginia, California, District of Columbia, Illinois and Georgia were responsible for approximately 12.4 %, 10.6 %, 10.6 %, 9.7 % and 9.7 % of our annualized rental income as of September 30, 2024, respectively. Note 7. Indebtedness Our principal debt obligations as of September 30, 2024 were: (1) $ 200,000 of outstanding borrowings under our $ 325,000 secured revolving credit facility; (2) $ 100,000 outstanding principal amount under our secured term loan; (3) $ 1,855,910 aggregate outstanding principal amount of senior notes and (4) $ 177,320 aggregate outstanding principal amount of mortgage notes. In January 2024, we entered into an amended and restated credit agreement, or our credit agreement, governing a new $ 325,000 secured revolving credit facility and a $ 100,000 secured term loan. Our credit agreement replaced our prior revolving credit facility, which had a maturity date of January 31, 2024. As collateral for all loans and other obligations under our credit agreement, certain of our subsidiaries pledged all of their respective equity interests in certain of our direct and indirect property owning subsidiaries, and our pledged subsidiaries provided first mortgage liens on 19 properties that had a gross book value of real estate assets of $ 1,012,536 as of September 30, 2024. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayments on borrowings under our credit agreement 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. 13 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Interest payable on borrowings under our credit agreement is at a rate of the secured overnight financing rate, or 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 September 30, 2024. As of September 30, 2024, we had $ 200,000 , outstanding under our revolving credit facility, $ 100,000 outstanding under our term loan and $ 125,000 available for borrowing under our revolving credit facility. In October 2024, we borrowed $ 125,000 under our revolving credit facility to preserve financial flexibility. As of October 29, 2024, we had fully drawn our $ 325,000 revolving credit facility and $ 100,000 was outstanding under our term loan. As of September 30, 2024, the annual interest rate payable on borrowings under our credit agreement was 8.4 %. The weighted average annual interest rate for borrowings under our credit agreement for the three and nine months ended September 30, 2024 was 8.9 %. We were required to pay interest at a rate of SOFR plus a premium, which was 145 basis points per annum as of September 30, 2023, on the amount outstanding under our prior revolving credit facility, as well as a facility fee on the total amount of lending commitments, which was 30 basis points per annum. The weighted average annual interest rate for borrowings under our prior revolving credit facility for the three and nine months ended September 30, 2023 was 6.8 % and 6.4 %, respectively. Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders. Our credit agreement and senior notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR, ceasing to act as our business and property manager. Our credit agreement and senior notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to increase our distribution rate above the current level of $ 0.01 per common share per quarter. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior notes indentures and their supplements at September 30, 2024. Senior Secured Notes Issuance In February 2024, we issued $ 300,000 of 9.000 % senior secured notes due 2029, or the 2029 Notes. The aggregate net proceeds from the offering of the 2029 Notes were $ 270,712 , 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 $ 619,467 as of September 30, 2024. The 2029 Notes require semi-annual payments of interest only and are prepayable, at par plus accrued interest, after March 31, 2028. Senior Unsecured Notes Redemption In March 2024, we redeemed, at par plus accrued interest, all $ 350,000 of our 4.25 % senior unsecured notes due 2024. As a result of this redemption, we recorded a loss on early extinguishment of debt of $ 425 during the nine months ended September 30, 2024, which represented the unamortized discounts related to these notes. Senior Notes Exchanges In June 2024, we exchanged $ 567,429 of new 9.000 % senior secured notes, or the New 2029 Notes, for an aggregate $ 865,219 of our outstanding unsecured senior notes, or the Existing Notes, and such transaction, the Senior Note Exchange, as follows: Existing Notes Exchanged Aggregate Principal Amount of Existing Notes Accepted for Exchange Aggregate Principal Amount of New Notes Delivered Existing 4.50 % 2025 Notes $ 150,846 $ 141,411 Existing 2.650 % 2026 Notes 159,512 114,803 Existing 2.400 % 2027 Notes 269,216 164,162 Existing 3.450 % 2031 Notes 285,645 147,053 Total $ 865,219 $ 567,429 14 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) The New 2029 Notes are fully and unconditionally guaranteed on a joint, several and senior secured basis by certain of our subsidiaries and are secured by first mortgage liens on 19 properties with a gross book value of real estate assets of $ 716,969 as of September 30, 2024 and second mortgage liens on the 19 properties securing our credit agreement. The New 2029 Notes require semi-annual payments of interest only and are prepayable, at par plus accrued interest, after June 3, 2028. During the nine months ended September 30, 2024, we recorded a gain on early extinguishment of debt of $ 225,210 as a result of the Senior Note Exchange. During the three and nine months ended September 30, 2024, in a series of exchange transactions, we exchanged an aggregate principal amount of $ 8,300 of the 2025 Notes for an aggregate 3,184,432 of our common shares at a weighted average price of $ 2.34 per share. During the nine months ended September 30, 2024, we recorded a gain on early extinguishment of debt of $ 852 as a result of these exchanges. In October 2024, in a series of exchange transactions, we exchanged an additional aggregate principal amount of $ 34,154 of the 2025 Notes for $ 42,570 of new 9.0 % senior secured notes due 2029 on substantially similar terms as the New 2029 Notes and an aggregate 1,870,238 of our common shares. The gains we realized on early extinguishment of debt are considered cancellation of debt income, or CODI, for income tax purposes and part of our REIT taxable income. We currently do not expect that any special distribution will be required to maintain our qualification for taxation as a real estate investment trust, or REIT, as a result of generating CODI in 2024. However, this assertion is based on our expectation that we will complete additional dispositions that will result in additional losses on sale of real estate in 2024. If these sales are not completed, we will be taxed at regular corporate income tax rates on any undistributed REIT taxable income. As of September 30, 2024, seven of our properties with an aggregate gross book value of real estate assets of $ 304,961 were encumbered by mortgage notes with an aggregate principal amount of $ 177,320 . Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants. Note 8. Fair Value of Assets and Liabilities The following table presents certain of our assets measured at fair value at September 30, 2024, categorized by level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: Fair Value at Reporting Date Using Description Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Non-recurring Fair Value Measurements Assets Real estate properties (1) $ 4,170 $ — $ — $ 4,170 Assets of properties held for sale (2) $ 94,545 $ — $ 94,545 $ — (1) We recorded an impairment charge of $ 14,590 to reduce the carrying value of one property that was classified as held for sale as of June 30, 2024 and subsequently removed from held for stale status to its estimated fair value based on third party offers (Level 3 inputs as defined in the fair value hierarchy under GAAP). (2) We recorded an impairment charge of $ 93,346 to reduce the carrying values of 11 properties that are classified as held for sale in our condensed consolidated balance sheet to their estimated fair values less estimated costs to sell of $ 2,282 , based on negotiated sales prices with third party buyers (Level 2 inputs as defined in the fair value hierarchy under GAAP). See Note 4 for more information. 15 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, accounts payable, a revolving credit facility, a term loan, senior notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At September 30, 2024 and December 31, 2023, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows: As of September 30, 2024 As of December 31, 2023 Financial Instrument Carrying Value (1) Fair Value Carrying Value (1) Fair Value Senior unsecured notes, 4.250 % interest rate, due in 2024 (2) $ — $ — $ 349,144 $ 331,510 Senior unsecured notes, 4.500 % interest rate, due in 2025 489,726 429,286 646,266 510,445 Senior unsecured notes, 2.650 % interest rate, due in 2026 139,421 89,317 298,464 185,934 Senior unsecured notes, 2.400 % interest rate, due in 2027 80,450 43,264 348,086 196,147 Senior secured notes, 9.000 % interest rate, due in 2029 (3) 274,279 293,649 — — Senior secured notes, 9.000 % interest rate, due in 2029 (4) 596,760 484,840 — — Senior unsecured notes, 3.450 % interest rate, due in 2031 113,480 46,506 396,614 199,060 Senior unsecured notes, 6.375 % interest rate, due in 2050 157,048 95,256 156,904 83,916 Mortgage notes payable 172,676 183,250 172,131 179,813 Total $ 2,023,840 $ 1,665,368 $ 2,367,609 $ 1,686,825 (1) Includes net unamortized debt premiums, discounts and issuance costs totaling $ 9,390 and $ 21,711 as of September 30, 2024 and December 31, 2023, respectively. (2) These senior notes were redeemed in March 2024. (3) These senior notes were issued in February 2024. (4) These senior notes were issued in June 2024. We estimated the fair values of our senior notes (except for our senior unsecured notes due 2050) using an average of the bid and ask price of the notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair value of our senior unsecured notes due 2050 based on the closing price on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair values of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates (Level 3 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values. Note 9. Shareholders’ Equity Share Issuances In connection with the Senior Note Exchange, we entered into a support agreement with certain holders of our Existing Notes, or the Supporting Noteholders, pursuant to which, on June 21, 2024, in exchange for the Supporting Noteholders tendering their Existing Notes, we issued 1,406,952 of our common shares, valued at $ 2.26 per share, the closing price of our common shares on Nasdaq on that day, to the Supporting Noteholders. See Note 7 for information regarding the additional share issuances we have made as part of exchanges for the 2025 Notes. Share Awards On June 13, 2024, in accordance with our Trustee compensation agreements, we awarded to each of our nine Trustees 11,627 of our common shares, valued at $ 2.15 per share, the closing price of our common shares on Nasdaq on that day. On September 11, 2024, we awarded under our equity compensation plan an aggregate of 544,555 of our common shares, valued at $ 2.13 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR. 16 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) Share Purchases During the three and nine months ended September 30, 2024, we purchased an aggregate 76,642 and 85,016 of our common shares, respectively, valued at a weighted average share price of $ 2.22 and $ 2.25 , respectively, from our officers and certain other current and former officers and employees of RMR, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We withheld and purchased these common shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date. Distributions During the nine months ended September 30, 2024, we declared and paid regular quarterly distributions to common shareholders as follows: Declaration Date Record Date Paid Date Distributions Per Common Share Total Distributions January 11, 2024 January 22, 2024 February 15, 2024 $ 0.01 $ 487 April 11, 2024 April 22, 2024 May 15, 2024 0.01 488 July 11, 2024 July 22, 2024 August 15, 2024 0.01 502 $ 0.03 $ 1,477 On October 16, 2024, we declared a regular quarterly distribution payable to common shareholders of record on October 28, 2024 in the amount of $ 0.01 per share, or approximately $ 555 . We expect to pay this distribution on or about November 14, 2024. Note 10. Business and Property Management Agreements with RMR We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations. Pursuant to our business management agreement with RMR, we recognized net business management fees of $ 3,052 and $ 9,919 for the three and nine months ended September 30, 2024, respectively, and $ 3,637 and $ 11,180 for the three and nine months ended September 30, 2023, respectively. Based on our common share total return, as defined in our business management agreement, as of September 30, 2024, no estimated incentive fees are included in the net business management fees we recognized for the three and nine months ended September 30, 2024. The actual amount of annual incentive fees for 2024, if any, will be based on our common share total return for the three year period ending December 31, 2024, and will be payable in January 2025. We did no t incur an incentive fee payable to RMR for the year ended December 31, 2023. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). Pursuant to our property management agreement with RMR, we recognized aggregate net property management and construction supervision fees of $ 3,712 and $ 12,675 for the three and nine months ended September 30, 2024, respectively, and $ 5,465 and $ 17,947 for the three and nine months ended September 30, 2023, respectively. Of these amounts, for the three and nine months ended September 30, 2024, $ 3,234 and $ 10,391 , respectively, were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 478 and $ 2,284 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. For the three and nine months ended September 30, 2023, $ 3,718 and $ 11,252 , respectively, were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,747 and $ 6,695 , respectively, were capitalized as building improvements in our condensed consolidated balance sheet. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets. We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR’s centralized accounting personnel, our share of RMR’s costs for providing our internal audit function and as otherwise agreed. Our property level 17 Table of Contents OFFICE PROPERTIES INCOME TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) (unaudited) operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR. We reimbursed RMR $ 6,734 and $ 19,702 for these expenses and costs for the three and nine months ended September 30, 2024, respectively, and $ 6,331 and $ 19,295 for the three and nine months ended September 30, 2023, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). Management Agreement Between Our Joint Venture and RMR . RMR provides management services to our unconsolidated joint venture. We are not obligated to pay management fees to RMR under our management agreement with RMR for the services it provides regarding the joint venture. The joint venture pays management fees directly to RMR. Note 11. Related Person Transactions We have relationships and historical and continuing transactions with RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR. Jennifer Clark, our other Managing Trustee, is a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR and an officer of ABP Trust. Each of our officers is also an officer and employee of RMR. Some of our Independent Trustees also serve as independent trustees of other public companies to which RMR or its subsidiaries provide management services. Mr. Portnoy serves as chair of the boards and as a managing trustee of these public companies. Other officers of RMR, including Ms. Clark, serve as managing trustees or officers of certain of these companies. Our Manager, RMR. We have two agreements with RMR to provide management services to us. RMR also provides management services to our unconsolidated joint venture. See Note 10 for more information regarding our and our unconsolidated joint venture’s management agreement with RMR. Leases with RMR. We lease office space to RMR in certain of our properties for RMR’s property management offices. Pursuant to our lease agreements with RMR, we recognized rental income from RMR for leased office space of $ 193 and $ 592 for the three and nine months ended September 30, 2024, respectively, and $ 205 and $ 671 for the three and nine months ended September 30, 2023, respectively. Sonesta . We lease 240,000 rentable square feet of a mixed-use property in Washington, D.C. to a subsidiary of Sonesta International Hotels Corporation, or Sonesta. Our lease with Sonesta commenced in August 2023 and expires in 2053 and Sonesta has two options to extend the term for 10 years each. The lease was amended in September 2024 to expand the premises by 5,900 rentable square feet. Pursuant to the amended lease agreement, Sonesta will pay us annual base rent of approximately $ 6,724 beginning February 2025. The annual base rent will increase by 10 % every five years throughout the term. Sonesta is also obligated to pay its pro rata share of the operating costs for the property. We recognized rental income of $ 3,119 and $ 8,989 during the three and nine months ended September 30, 2024, respectively, under our lease with Sonesta. Mr. Portnoy is a director and controlling shareholder of Sonesta and Ms. Clark is a director of Sonesta. Another officer and employee of RMR is a director and president and chief executive officer of Sonesta. For more information about these and other such relationships and certain other related person transactions, refer to our 2023 Annual Report. 18 Table of Contents