Yahoo Finance

Yael Duffy

Thank you, Kevin, and good morning. Before we begin, I would like to highlight the steps we have taken in 2024 to address our debt maturities and liquidity constraints. Through a series of transactions, we completed $1.8 billion in secured financing, including exchanging $488 million of new notes during the fourth quarter for $378 million of our outstanding 2025 senior unsecured notes that were coming due in February 2025.
We paid the balance of these notes off last month with $113 million of cash using the proceeds from the sale of 24 properties. Totaling approximately 2.8 million square feet for nearly $200 million in 2024.
As a result of the exchanges and repayments, OPI's 2025 debt maturity was satisfied in its entirety. And OPI's total debt principle was reduced by nearly $200 million as compared to the prior year.
As we look ahead, our net debt maturity is $140 million of senior unsecured notes due in June 2026. To address this maturity and reduce debt coming due in 2027 and 2031, last week, OPI announced that it has commenced additional offers to exchange certain of its outstanding unsecured senior notes for up to $175 million of new senior guaranteed unsecured notes.
Now turning to the quarter. I will start with an overview of our portfolio and market fundamentals, summarize leasing activity for 2024 as well as the fourth quarter, and provide an update on OPI's upcoming lease expirations. I will then turn the call over to Brian to review our financial results.
As of December 31, 2024, OPI's portfolio consisted of 128 properties totaling 17.8 million square feet with a weighted average remaining lease term of 7.4 years. The portfolio generates $428 million of annualized revenue. Down from $513 million a year ago.
Our portfolio is diversified by both industry and geography, with approximately 58% of our revenues coming from investment grade rated tenants or their subsidiaries. Single-tenant properties represent 61% of our square footage and nearly 80% of our properties are in suburban locations.
Recent research and news publications have begun to highlight green shoots within the office sector. The economy remains strong. Employers in both the private sector and the federal government are actively promoting return to office mandates. And there is minimal new supply hitting the market. However, these positive trends have not yet materialized in our portfolio.
In Washington DC, our largest MSA OPI's vacancy is nearly 33%, and leasing conditions remain challenging as competition among landlords continues to put further pressure on net effective rents. As the new Presidential administration begins to implement efficiency measures, the impact on OPI's largest tenant, the GSA, may be a headwind for our portfolio.
Today, the GSA represents 2.4 million square feet, or approximately $70 million of annualized revenue. Of this, approximately 413,000 square feet, or $10.5 million in annualized revenue is within their soft term, which gives the GSA a right to terminate the lease in whole or in part without penalty.
We anticipate and have forecasted that at least one agency, the Department of Safety and Environmental Enforcement, that leases 110,000 square feet, Representing $856,000 in annual revenue may terminate its lease in the second quarter of 2025.
The balance of the leases in soft term are leased to what we believe. But cannot be certain are mission critical agencies with low risk of vacating, such as the Secret Service, Veterans Affairs, Social Security, and the Department of Justice. The essential nature of the work these agencies do and their need to physically occupy our properties has historically provided OPI with stable cash flows, although the Department of Government Efficiency's efforts are broad-based and unpredictable.
Turning to our leasing results. In 2024, our total leasing volume increased more than 20% year over year, driven by renewal activity. We signed 52 leases for more than 2 million square feet at a weighted average lease term of nearly nine years and a rental rate increase of 6.3%. The impact of this activity is an increase of $2.9 million in annualized rental revenue, of which 59% has not yet been realized and will take effect in 2025 or beyond.
However, despite these efforts, OPI's least square footage decreased 2.8 million square feet during 2024, and we finished the year with total portfolio occupancy of 85% and same property occupancy of 89.4%. In the fourth quarter, we executed 13 leases totaling 359,000 square feet at a weighted average lease term of 7.1 years and a 24.3% roll up in rent, representing the strongest quarterly growth in over four years. Leasing activity included a six-year renewal with the AT&T for 191,000 square feet in Plano, Texas at a 25% roll up in rent.
A 13-year expansion and early renewal for 74,000 square feet with a residential services company in Naperville, Illinois at a 36% roll up in rent. And a 14-year renewal with the GSA for 60,000 square feet in Sacramento, California at a 20% roll up in rent.
Concessions and capital commitments of $5.92 per square foot per year declined 10% quarter over quarter. Almost a year ago, we completed the redevelopment of Unison Elliott Bay, a 30,000 square foot life science and office project in Seattle, Washington.
The Seattle market has been burdened by oversupply and minimal demand, with vacancy rates of 30% for lab space and 22% for office space. Though the property was 28% pre-leased prior to its completion, we have seen no tour or proposal activity in recent months.
As such, we are not optimistic about the leasing prospects of this project in 2025 or in the first half of 2026. Looking ahead, 2 million square feet representing $42 million or nearly 10% of OPI's annualized rental income is set to expire in 2025.
As we have long telegraphed, 1.5 million square feet, or $29.3 million of annualized revenue are known vacates. Many of these pending vacancies represent large single-tenant properties which face challenging market conditions and low tenant demand.
Additionally, significant downtime, declining market rents, and increased tenant improvement and concession packages, plus the cost to multi-tenant these properties are likely to put further pressure on OPI's liquidity.
As of December 30, 2024, 522,000 square feet, or $18.1 million of annualized revenue is scheduled to expire in 2026. Down from 1.4 million square feet, or $41 million of annualized revenue compared to a year ago.
Additionally, our current leasing pipeline totals 1.3 million square feet, of which approximately half could result in a mid-single digit roll up in REM. Turning to dispositions, we are under agreement to sell six properties totaling 581,000 square feet for an aggregate sales price of $55 million.
These properties are either vacant or soon to become vacant and located in markets with weak leasing fundamentals. Five of these assets held for sale are unencumbered properties, and one is collateral for our senior secured notes due in 2027.
We expect to complete the majority of these sales by the end of the second quarter. Last month, we launched a marketing campaign to sell our 427,000 square foot mixed-use development at 20 Mass Ave in Washington DC.
Senesta International Hotels operates a 274 key hotel on floors two through six of the property, or 56% of the square footage. We anticipate the likely buyer of this project to be a hotel investor. Effective January 1, 2025, we restructured our agreement with Sonesta to convert the existing lease to a hotel management agreement.
Under this agreement, any earnings OPI may receive from the hotel will now be tied to the revenue and expenses of the hotel's operations. We believe the change from a lease to a more customary hotel management agreement enhances the marketability of the property to hotel investors and improves the valuation compared to having the pre previous lease agreement in place.
Today, no additional properties are being marketed for sale. But we continue to evaluate additional disposition opportunities that could further mitigate occupancy risk in the associated carry costs of vacant properties.
However, if we consider any future sales, we must balance the impact the potential dispositions would have on our liquidity, debt covenants, and operating metrics. I will now turn the call over to Brian.

Brian Donley

Thank you, Yael, and good morning. For the fourth quarter, we reported normalized FFO of $20.9 million or $0.36 per share for the quarter, which came in a penny above our guidance range as a result of the impact and timing of our dispositions.
This compares to normalized FFO $22.1 million for $0.43 per share for the third quarter of 2024. Decrease on a sequential quarter basis was driven by higher interest expense, partially offset by an increase in NOI.
Same property cash basis in I was $60.9 million representing an increase of 4.9% compared to the fourth quarter of 2023, beating our expectations for the quarter due to lower operating expenses at our comparable properties and the sale of certain vacant properties.
Turning to our outlook for the first quarter of 2025, we expect normalized FFO to be between $0.08 and $0.10 per share for Q1.
The decrease sequentially from Q4 is primarily driven by lower NOI as a result of asset sales, tenant vacancies, and increased interest expense. Our current estimated quarterly interest expense run rate is approximately $52 million consisting of $41 million of cash interest expense and $11 million of non-cash amortization of financing costs, discounts, and premiums. This guidance does not include any potential impact on the debt exchange offer we launched last week.
We expect the same property cash bases in the wide to decrease 8% to 10% as compared to the first quarter of 2024. Driven by tenant vacancies and an increase of free rent from recent leasing activity. The COI guide does not include any potential changes to our same store portfolio.
Turning to our investing activities, we spent $36.1 million on capital expenditures during the fourth quarter. And our 2025 full year CapEx guidance is expected to be a total spend of approximately $80 million comprised of $18 million of building capital and $62 million of leasing capital.
During the fourth quarter, we sold 17 properties with 1.8 million square feet for proceeds of about $114.5 million. At quarter end we had five properties with a carrying value of $32 million classified as held for sale.
We took an $8 million impairment charge during the quarter to write down the carrying value of one of these properties. As of today, we have six properties under agreement for sale for $55 million including five of the properties classified to sell for sale.
Turning to the balance sheet, in mid December, we completed a private debt exchange of $340 million of outstanding 4.5% senior unsecured notes due in 2025 for $445 million of new 3.25% senior secured notes due 2027 and 11.5 million common shares.
In January, we used the proceeds from asset dispositions to repay our remaining unsecured notes due in 2025. I would also like to highlight that we've enhanced our disclosures and provided additional visibility into our property, securing our various debt transactions with our earnings within our earnings presentation posted to our website.
Our total liquidity today is $113 million of cash. We are currently projecting to burn $60 million to $70 million of cash from operations in 2025, including capital expenditures. Given our liquidity position, financial covenant constraints under our debt agreements, and debt principal repayments coming due in 2026, we have limited options to address our upcoming debt maturities, and we do not believe that those options include cash repayments or debt for equity exchanges.
OPI's next maturity consists of approximately $140 million of senior unsecured notes due June 2026, which we are looking to address with the debt exchange offer we announced last week of up to $175 million of new 8% senior priority guaranteed unsecured notes.
Under the offer, priority will be given to holders of OPI's 2.65% senior notes due in 2026. The offer is subject to a number of conditions including that a minimum of 75% or $105 million of our existing 2026 notes participate in the exchange.
Under the debt exchange we completed in the fourth quarter, our new $445 million of 3.25% senior secured notes due in 2027 require a quarterly principal amortization of $6.5 million and a principal payment of $125 million by March 2026.
We're currently projecting asset sales, including the potential sale of 20 Mass Ave in Washington DC, which serves as collateral to the 2027 notes, will be our source of liquidity to make this payment.
We look forward to providing updates about our progress in the future. As Kevin highlighted earlier, now that OPI is debt exchange offer period is open, we will not be taking any questions on our call today.
Thank you for joining us. This concludes our conference call.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.