Government Properties Income Trust (GOV) Q4 2018 Earnings Conference Call Transcript

Good morning, and welcome to the Office Properties Income Trust Fourth Quarter 2018 Financial Results Conference Call. All individuals can be in pay attention-most useful mode. (Operator Instructions) Please word, this event is being recorded.

I would now like to turn the convention over to Olivia Snyder, Manager of Investor Relations. Please cross in advance.

Olivia Snyder — Manager of Investor Relations

Thank you, and right morning, each person. Thanks for joining us nowadays. With me on the decision are OPI’s President and Chief Executive Officer, David Blackman; and Chief Financial Officer and Treasurer, Jeff Leer. In just a moment, they’ll provide details about our commercial enterprise and our overall performance for the fourth zone of 2018. We will then open the decision to your questions.

First, I would love to notice that the recording and retransmission of modern conference name are against the law without the previous written consent of the company. Also, observe that today’s convention call includes forward-searching statements within the which means of the Private Securities Litigation Reform Act of 1995 and other securities legal guidelines. These ahead-searching statements are based on OPI’s ideals and expectancies as of today, Thursday, February 28, 2019, and actual effects may also range materially from people who we project. The company undertakes no duty to revise or publicly launch the results of any revision to the ahead-looking statements made in ultra-modern convention name. Additional facts concerning elements that could cause the one’s variations is contained in our filings with the Securities and Exchange Commission, or SEC, which can be accessed from our website, opireit.Com, or the SEC’s website. Investors are counseled not to location undue reliance upon any ahead-looking statements.

Also, we will be discussing non-GAAP numbers at some stage in this call, such as normalized budget from operations, or Normalized FFO, and cash-based internet running income, or coins foundation NOI. A reconciliation of these non-GAAP figures to net earnings and the components to calculate cash available for distribution, or CAD, are available in our supplemental, running and financial facts package, which also can be discovered on our internet site.

And now I will turn the call over to David.

David Blackman — President and Chief Executive Officer

Thank you, Olivia. Good morning. Welcome to the first earnings name for Office Properties Income Trust, that is the fruits of the merger among Government Properties Income Trust and Select Income REIT. On the ultra-modern call, I will provide a top-level view of OPI, and a replace on our capital recycling program earlier than turning the decision over to Jeff Leer to offer a high-level view of financial results.

Before I start, I would love to spotlight that due to the merger last on the final enterprise day of the sector, fourth quarter effects reflect a mixed stability sheet but best GOV’s running results. To assist rectify this, we provided seasoned forma consolidated consequences as if the merger had closed on October 1 rather than December 31 in our earnings release and supplemental disclosure package deal.

Our working strategy for OPI will vary from our operating procedure for GOV and SIR as stand-on my corporations. One fabric distinction will be our plan to actively recycle capital through asset sales at OPI, first to control leverage however ongoing to shape the portfolio. In doing so, we anticipate to lessen the average age of our residences, growth our weighted common closing lease term and to decrease destiny capital necessities.

Another strategy shift may be to awareness of favoring the purchase of first-era buildings. We believe this may increase the probability of tenants renewing rentals, which ought to have an effective impact on OPI’s occupancy and reduce ongoing leasing capital. These two strategies are expected to create lengthy-time period coins go with the flow accretion and make a contribution to maintaining a nicely-included dividend.

Entering 2019, OPI has a broader investment strategy to foster increase and is an organization with accelerated scale and greater diversification. We trust we’ve got decreased danger at OPI by reducing our attention of US authorities tenants, increasing geographic diversification, lengthening our weighted average remaining rent term, developing a more nicely-laddered hire expiration agenda and decreasing our publicity to floating charge debt. We have additionally accelerated the size of our board, including two impartial trustees, which increases the range of girl trustees to 38% and the entire quantity of unbiased trustees to seventy-five %.

On December 31, 2018, OPI’s portfolio consisted of 247 buildings containing 31. Nine million square feet that were 91% fascinated about a weighted common ultimate rent term of five.7 years and an average constructing age of approximately 17 years. 64.9% of our annualized lease is paid via investment-grade rated tenants, which we believe is one of the maximum probabilities of rent paid by investment-grade rated tenants within the office REIT region.

The US government is our biggest tenant, accounting for 25.6% of the annualized lease. This is a reduction from 45.6% premerger, and no different tenant bills for extra than 2.7% of the annualized contract. We have additionally decreased the share of rentals expiring via the quit of 2021 from 47.4% of annualized hire premerger to 27% at the cease of the region.

OPI’s investment strategy will attract attention on workplace houses and markets which have robust financial fundamentals to support growth and could consist of residences leased to the unmarried tenant and multi-tenant houses leased to high credit score first-class tenants like government entities.

Critical standards for acquiring single-tenant houses will encompass the evaluation of how strategic an asset is to the tenant’s commercial enterprise, specializing in company headquarters, build-to-healthy homes and buildings where the tenants have invested significant capital. Single-tenant building acquisitions can even encompass a minimum ultimate hire period of 7 years. Properties leased to authorities tenants will include each single-tenant and multi-tenant homes and will cognizance on companies which have high protection needs or an assignment that is strategic to the building’s place. We count on to collect usually first-era buildings where there’s a relatively excessive possibility of renewing the tenant in location and wherein ongoing capital needs are expected to be highly modest in comparison to older homes.

We are turning to our capital recycling. In addition, to begin with promoting houses to lessen leverage, we plan to have an ongoing capital recycling program of $one hundred million to $300 million annually to form our key portfolio metrics and to control current capital necessities. As a reminder, we recently introduced the completion of the sale of 34 buildings in the metro DC market for gross proceeds of $198.5 million. This completed the disposition plan related to our acquisition of First Potomac Realty Trust in the fourth sector of 2017. In combination, we offered $520 million of homes to finance the purchase permanently.

Today, OPI has 36 buildings in a disposition plan to permanently finance our merger with SIR. Two of those houses are below agreement to promote for about $seventy seven million in gross proceeds, and the stability of the buildings are in various ranges of advertising. In the mixture, we are promoting approximately 5.9 million square ft of homes that we consider will generate extra than $750 million in gross proceeds. Considering our development on this disposition plan for the reason that is completing the merger, we remain confident that OPI will significantly achieve the sale of these houses earlier than announcing second zone earnings. This will role the organization to reenter the acquisition market in the second half of-of 2019 at the same time as persevering with to form the portfolio with a capital recycling application.

In summary, we are excited about the opportunities available to OPI as a more strong company with the grander scale and economic flexibility. We additionally look forward to executing on our capital recycling plan and returning to growth within the 2d 1/2 of 2019.

I will now flip the call over to Jeff to provide a top-level view of financial results.

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