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Table of Contents




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-34364
 
OFFICE PROPERTIES INCOME TRUST
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
26-4273474
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634
(Address of Principal Executive Offices)  (Zip Code)
 
617-219-1440
(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name Of Each Exchange On Which Registered
Common Shares of Beneficial Interest
 
OPI
 
The Nasdaq Stock Market LLC
5.875% Senior Notes due 2046
 
OPINI
 
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No
 
Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of April 30, 2020: 48,200,929



Table of Contents



OFFICE PROPERTIES INCOME TRUST

FORM 10-Q

March 31, 2020
 
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on Form 10-Q to “the Company”, “OPI”, “we”, “us” or “our” include Office Properties Income Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.


2

Table of Contents



PART I.    Financial Information 
Item 1.    Financial Statements
OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited) 
 
 
March 31,
 
December 31,
 
 
2020
 
2019
ASSETS
 
 

 
 

Real estate properties:
 
 

 
 

Land
 
$
843,418

 
$
840,550

Buildings and improvements
 
2,672,467

 
2,652,681

Total real estate properties, gross
 
3,515,885

 
3,493,231

Accumulated depreciation
 
(403,229
)
 
(387,656
)
Total real estate properties, net
 
3,112,656

 
3,105,575

Assets of properties held for sale
 

 
70,877

Investments in unconsolidated joint ventures
 
39,429

 
39,756

Acquired real estate leases, net
 
689,512

 
732,382

Cash and cash equivalents
 
29,657

 
93,744

Restricted cash
 
4,349

 
6,952

Rents receivable
 
90,462

 
83,556

Deferred leasing costs, net
 
42,612

 
40,107

Other assets, net
 
20,028

 
20,187

Total assets
 
$
4,028,705

 
$
4,193,136

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Unsecured revolving credit facility
 
$
348,000

 
$

Senior unsecured notes, net
 
1,619,528

 
2,017,379

Mortgage notes payable, net
 
244,252

 
309,946

Liabilities of properties held for sale
 

 
14,693

Accounts payable and other liabilities
 
106,066

 
125,048

Due to related persons
 
7,973

 
7,141

Assumed real estate lease obligations, net
 
12,512

 
13,175

Total liabilities
 
2,338,331

 
2,487,382

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common shares of beneficial interest, $.01 par value: 200,000,000 shares authorized, 48,200,929 and 48,201,941 shares issued and outstanding, respectively
 
482

 
482

Additional paid in capital
 
2,612,777

 
2,612,425

Cumulative net income
 
188,057

 
177,217

Cumulative other comprehensive loss
 
(261
)
 
(200
)
Cumulative common distributions
 
(1,110,681
)
 
(1,084,170
)
Total shareholders’ equity
 
1,690,374

 
1,705,754

Total liabilities and shareholders’ equity
 
$
4,028,705

 
$
4,193,136


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
(amounts in thousands, except per share data)
(unaudited) 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
 
 
 
Rental income 
 
$
149,885

 
$
174,777

 
 
 
 
 
Expenses:
 
 
 
 
Real estate taxes
 
16,807

 
18,392

Utility expenses
 
7,012

 
9,381

Other operating expenses
 
25,880

 
30,136

Depreciation and amortization
 
62,943

 
77,521

Loss on impairment of real estate
 

 
3,204

Acquisition and transaction related costs
 

 
584

General and administrative
 
7,109

 
8,723

Total expenses
 
119,751

 
147,941

 
 
 
 
 
Gain on sale of real estate
 
10,756

 
22,092

Dividend income
 

 
980

Gain on equity securities
 

 
22,128

Interest and other income
 
706

 
248

Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,283 and $2,841, respectively)
 
(27,159
)
 
(37,133
)
Loss on early extinguishment of debt
 
(3,282
)
 
(414
)
Income before income tax expense and equity in net losses of investees
 
11,155

 
34,737

Income tax expense
 
(39
)
 
(483
)
Equity in net losses of investees
 
(276
)
 
(235
)
Net income
 
10,840

 
34,019

Other comprehensive income (loss):
 
 
 
 
Unrealized loss on financial instrument
 
(61
)
 
(98
)
Equity in unrealized gain of investees
 

 
66

Other comprehensive loss
 
(61
)
 
(32
)
Comprehensive income
 
$
10,779

 
$
33,987

 
 
 
 
 
Weighted average common shares outstanding (basic)
 
48,095

 
48,031

Weighted average common shares outstanding (diluted)
 
48,095

 
48,046

 
 
 
 
 
Per common share amounts (basic and diluted):
 
 
 
 
Net income
 
$
0.23

 
$
0.71


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
Other
Comprehensive
Income (Loss)
 
Cumulative
Common
Distributions
 
Total Shareholders’ Equity
Balance at December 31, 2019
48,201,941
 
$
482

 
$
2,612,425

 
$
177,217

 
$
(200
)
 
$
(1,084,170
)
 
$
1,705,754

Share grants

 

 
379

 

 

 

 
379

Share repurchases
(1,012
)
 

 
(27
)
 

 

 

 
(27
)
Net current period other comprehensive loss

 

 

 

 
(61
)
 

 
(61
)
Net income

 

 

 
10,840

 

 

 
10,840

Distributions to common shareholders

 

 

 

 

 
(26,511
)
 
(26,511
)
Balance at March 31, 2020
48,200,929
 
$
482

 
$
2,612,777

 
$
188,057

 
$
(261
)
 
$
(1,110,681
)
 
$
1,690,374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
48,082,903
 
$
481

 
$
2,609,801

 
$
146,882

 
$
106

 
$
(978,302
)
 
$
1,778,968

Share grants
9,000
 

 
865

 

 

 

 
865

Amount reclassified from cumulative other comprehensive income to net income

 

 

 

 
(371
)
 

 
(371
)
Net current period other comprehensive loss

 

 

 

 
(32
)
 

 
(32
)
Net income

 

 

 
34,019

 

 

 
34,019

Distributions to common shareholders

 

 

 

 

 
(26,445
)
 
(26,445
)
Balance at March 31, 2019
48,091,903
 
$
481

 
$
2,610,666

 
$
180,901

 
$
(297
)
 
$
(1,004,747
)
 
$
1,787,004


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 CASH FLOWS
(dollars in thousands)
(unaudited)
 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
10,840

 
$
34,019

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
20,499

 
23,629

Net amortization of debt premiums, discounts and issuance costs
 
2,283

 
2,841

Amortization of acquired real estate leases
 
42,457

 
53,837

Amortization of deferred leasing costs
 
1,665

 
1,350

Gain on sale of real estate
 
(10,756
)
 
(22,092
)
Loss on impairment of real estate
 

 
3,204

Loss on early extinguishment of debt
 
2,144

 
414

Straight line rental income
 
(5,583
)
 
(6,794
)
Other non-cash expenses, net
 
107

 
593

Gain on equity securities
 

 
(22,128
)
Equity in net losses of investees
 
276

 
235

Change in assets and liabilities:
 
 
 
 
Rents receivable
 
(1,087
)
 
14,390

Deferred leasing costs
 
(4,466
)
 
(7,985
)
Other assets
 
180

 
2,873

Accounts payable and other liabilities
 
(21,790
)
 
(30,387
)
Due to related persons
 
832

 
(29,257
)
Net cash provided by operating activities
 
37,601

 
18,742


 
 

 
 

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(11,864
)
 

Real estate improvements
 
(14,525
)
 
(12,969
)
Distributions in excess of earnings from unconsolidated joint ventures
 
51

 
521

Proceeds from sale of properties, net
 
68,433

 
262,779

Net cash provided by investing activities
 
42,095

 
250,331

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Repayment of mortgage notes payable
 
(67,848
)
 
(8,954
)
Repayment of unsecured term loans
 

 
(153,000
)
Repayment of senior unsecured notes
 
(400,000
)
 

Borrowings on unsecured revolving credit facility
 
418,467

 
85,000

Repayments on unsecured revolving credit facility
 
(70,467
)
 
(180,000
)
Repurchase of common shares
 
(27
)
 

Distributions to common shareholders
 
(26,511
)
 
(26,445
)
Net cash used in financing activities
 
(146,386
)
 
(283,399
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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OFFICE PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(unaudited)

 
 
Three Months Ended March 31,
 
 
2020
 
2019
Decrease in cash, cash equivalents and restricted cash
 
$
(66,690
)
 
$
(14,326
)
Cash, cash equivalents and restricted cash at beginning of period
 
100,696

 
38,943

Cash, cash equivalents and restricted cash at end of period
 
$
34,006

 
$
24,617


 
 
Three Months Ended March 31,
 
 
2020
 
2019
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Interest paid
 
$
37,715

 
$
49,545

Income taxes paid
 
$

 
$
7

 
 
 
 
 
NON-CASH INVESTING ACTIVITIES:
 
 
 
 
Sale of properties
 
$
13,095

 
$

 
 
 
 
 
NON-CASH FINANCING ACTIVITIES:
 
 
 
 
Repayment of mortgage notes payable related to properties sold
 
$
(13,095
)
 
$


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 March 31,
 
 
2020
 
2019
Cash and cash equivalents
 
$
29,657

 
$
20,153

Restricted cash
 
4,349

 
4,464

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
 
$
34,006

 
$
24,617


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)


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, 2019, or our 2019 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.
Note 2. Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective approach. The implementation of this standard did not have a material impact in our condensed consolidated financial statements.
Note 3. Weighted Average Common Shares
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):
 
 
For the Three Months
 
 
Ended March 31,
 
 
2020
 
2019
Weighted average common shares for basic earnings per share
 
48,095

 
48,031

Effect of dilutive securities: unvested share awards
 

 
15

Weighted average common shares for diluted earnings per share (1)
 
48,095

 
48,046


(1)
For the three months ended March 31, 2020, certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive.
Note 4. Real Estate Properties
As of March 31, 2020, our wholly owned properties were comprised of 184 properties with approximately 24.9 million rentable square feet, with an aggregate undepreciated carrying value of $3,515,885 and we had noncontrolling ownership interests in three properties totaling approximately 0.4 million rentable square feet through two unconsolidated joint ventures in which we own 51% and 50% interests. 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 2020 and 2040. 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 March 31, 2020, we entered into 27 leases for 0.6 million rentable square feet for a weighted (by rentable square feet) average lease term of 4.8 years and we made commitments for approximately $12,930 of leasing related costs.
As of March 31, 2020, we have estimated unspent leasing related obligations of $57,348

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OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our long lived assets. 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 the consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.
Acquisition Activities
In February 2020, we acquired a property adjacent to a property we own in Boston, MA for $11,864, including $364 of acquisition related costs. This acquisition was accounted for as an asset acquisition. The purchase price of this acquisition was allocated to land and building in the amounts of $2,618 and $9,246, respectively.
Disposition Activities
During the three months ended March 31, 2020, we sold six properties with a combined 0.7 million rentable square feet for an aggregate sales price of $85,363, excluding closing costs and including the repayment of one mortgage note with an outstanding principal balance of $13,095, an annual interest rate of 5.9% and a maturity date in August 2021. The sales of these properties, as presented in the table below, do not represent significant dispositions individually or in the aggregate nor do they 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.
Date of Sale
 
Number of Properties
 
Location
 
Rentable Square Feet
 
Gross
 Sales Price (1)
 
Gain (Loss) on Sale of Real Estate
January 2020
 
2
 
Stafford, VA
 
64,656
 
$
14,063

 
$
4,704

January 2020
 
1
 
Windsor, CT
 
97,256
 
7,000

 
314

February 2020
 
1
 
Lincolnshire, IL
 
222,717
 
12,000

 
1,176

March 2020
 
1
 
Trenton, NJ
 
267,025
 
30,100

 
(192
)
March 2020
 
1
 
Fairfax, VA
 
83,130
 
22,200

 
4,754

 
 
6
 
 
 
734,784
 
$
85,363

 
$
10,756

(1)
Gross sales price is equal to the gross contract price, includes purchase price adjustments, if any, and excludes closing costs.
Unconsolidated Joint Ventures
We own interests in two joint ventures that own three properties. We account for these investments under the equity method of accounting. As of March 31, 2020 and December 31, 2019, our investments in unconsolidated joint ventures consisted of the following:
 
 
 
 
OPI Carrying Value of Investments at
 
 
 
 
 
 
Joint Venture
 
OPI Ownership
 
March 31,
2020
 
December 31, 2019
 
Number of Properties
 
Location
 
Rentable Square Feet
Prosperity Metro Plaza
 
51%
 
$
22,405

 
$
22,483

 
2
 
Fairfax, VA
 
328,456

1750 H Street, NW
 
50%
 
17,024

 
17,273

 
1
 
Washington, D.C.
 
115,411

Total
 
 
 
$
39,429

 
$
39,756

 
3
 
 
 
443,867


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OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)

The following table provides a summary of the mortgage debt of our two unconsolidated joint ventures:
Joint Venture
 
 Interest Rate (1)
 
Maturity Date
 
Principal Balance at March 31, 2020 and December 31, 2019 (2)
Prosperity Metro Plaza
 
4.09%
 
12/1/2029
 
$
50,000

1750 H Street, NW
 
3.69%
 
8/1/2024
 
32,000

Weighted Average / Total
 
3.93%
 
 
 
$
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 do not own. None of the debt is recourse to us.
At March 31, 2020, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $7,828 is primarily attributable to the difference between the amount we paid to purchase our interest in these joint ventures, including transaction costs, and the historical carrying value of the net assets of these joint ventures. This difference is being amortized over the remaining useful life of the related properties and the resulting amortization expense is included in equity in net losses of investees in our condensed consolidated statements of comprehensive income.
Note 5. Leases
Revenue Recognition. 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 when 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 the lease term. 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 remote contingencies 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 $5,583 and $6,794 for the three months ended March 31, 2020 and 2019, respectively. Rents receivable, excluding properties classified as held for sale, include $60,365 and $54,837 of straight line rent receivables at March 31, 2020 and December 31, 2019, 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 $19,746 and $23,394 for the three months ended March 31, 2020 and 2019, respectively, of which tenant reimbursements totaled $18,622 and $22,124, respectively.
As a result of the COVID-19 pandemic, some of our tenants have requested rent assistance. As of April 28, 2020, we have granted temporary rent assistance totaling $1,403 to 18 of our tenants who represent approximately 2.4% of our annualized rental income, as defined below, as of March 31, 2020, pursuant to a deferred payment plan whereby these tenants will be obligated to pay, in most cases, the deferred rent over a 12-month period beginning in September 2020. These deferred amounts did not impact our 2020 first quarter results.
Right of Use Asset and Lease Liability. For leases where we are the lessee, we are required to record a right of use asset and lease liability for all leases with a term greater than 12 months. As of March 31, 2020, we had one lease that met these criteria where we are the lessee, which expires on January 31, 2021. We sublease a portion of the space, which sublease expires on January 31, 2021. The values of the right of use asset and related liability representing our future obligation under the lease arrangement for which we are the lessee were $1,660 and $1,687, respectively, as of March 31, 2020, and $2,149 and $2,179, respectively, as of December 31, 2019. The right of use asset and related lease liability are included within other assets, net and accounts payable and other liabilities, respectively, within our condensed consolidated balance sheets. Rent expense incurred under the lease, net of sublease revenue, was $446 and $434 for the three months ended March 31, 2020 and 2019, respectively.

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OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)

Note 6. Concentration 
Tenant Concentration 
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. As of March 31, 2020, the U.S. Government, 10 state governments and two other government tenants combined were responsible for approximately 34.6% of our annualized rental income. As of March 31, 2019, the U.S. Government, 13 state governments and three other government tenants combined were responsible for approximately 35.9% of our annualized rental income. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 25.0% and 25.8% of our annualized rental income as of March 31, 2020 and 2019, respectively. 
Geographic Concentration 
At March 31, 2020, our 184 wholly owned properties were located in 34 states and the District of Columbia. Properties located in Virginia, California, the District of Columbia, Texas and Maryland were responsible for 15.2%, 12.1%, 11.0%, 8.2% and 6.4% of our annualized rental income as of March 31, 2020, respectively.
Note 7. Indebtedness
Our principal debt obligations at March 31, 2020 were: (1) $348,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) $1,660,000 aggregate outstanding principal amount of senior unsecured notes; and (3) $245,266 aggregate outstanding principal amount of mortgage notes.
Our $750,000 revolving credit facility is governed by a credit agreement, or our credit agreement, with a syndicate of institutional lenders that includes a feature under which the maximum aggregate borrowing availability may be increased to up to $1,950,000 in certain circumstances.
Our $750,000 revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by two additional six month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at March 31, 2020, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at March 31, 2020. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of March 31, 2020 and December 31, 2019, the annual interest rate payable on borrowings under our revolving credit facility was 1.8% and 2.7%, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 2.6% and 3.5% for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and April 30, 2020, we had $348,000 and $355,000, respectively, outstanding under our revolving credit facility, and $402,000 and $395,000, respectively, available for borrowing under our revolving credit facility.
In January 2020, we redeemed, at par plus accrued interest, all $400,000 of our 3.60% senior unsecured notes due 2020. As a result of the redemption of our 3.60% senior unsecured notes due 2020, we recognized a loss on early extinguishment of debt of $61 during the three months ended March 31, 2020, to write off unamortized discounts.
Our credit agreement and senior unsecured 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 LLC, ceasing to act as our business and property manager. Our credit agreement and senior unsecured 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 make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indentures and their supplements at March 31, 2020.

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OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)

In March 2020, in connection with the sale of one property, we prepaid, at a premium plus accrued interest, a mortgage note secured by that property with an outstanding principal balance of $13,095, an annual interest rate of 5.9% and a maturity date in August 2021, which was classified in liabilities of properties held for sale in our condensed consolidated balance sheet as of December 31, 2019. As a result of the prepayment of this mortgage note, we recognized a loss on early extinguishment of debt of $508 during the three months ended March 31, 2020, from a prepayment penalty and the write off of unamortized debt issuance costs.
In March 2020, we prepaid, at a premium plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $66,780, an annual interest rate of 4.0% and a maturity date in September 2030. As a result of the prepayment of this mortgage note, we recognized a loss on early extinguishment of debt of $2,713 during the three months ended March 31, 2020, from a prepayment penalty and the write off of unamortized discounts.
In April 2020, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $32,677, an annual interest rate of 5.7% and a maturity date in July 2020.
At March 31, 2020, nine of our consolidated properties with an aggregate net book value of $495,229 were encumbered by mortgage notes with an aggregate principal amount of $245,266. 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
Our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, a mortgage note receivable, accounts payable, a revolving credit facility, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At March 31, 2020 and December 31, 2019, 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 March 31, 2020
 
As of December 31, 2019
Financial Instrument
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
 
Fair Value
Senior unsecured notes, 3.60% interest rate, due in 2020
 
$

 
$

 
$
399,934

 
$
400,048

Senior unsecured notes, 4.00% interest rate, due in 2022
 
297,887

 
294,464

 
297,657

 
306,096

Senior unsecured notes, 4.15% interest rate, due in 2022
 
298,059

 
292,616

 
297,795

 
307,221

Senior unsecured notes, 4.25% interest rate, due in 2024
 
340,588

 
337,227

 
340,018

 
364,602

Senior unsecured notes, 4.50% interest rate, due in 2025
 
381,987

 
361,020

 
381,055

 
419,578

Senior unsecured notes, 5.875% interest rate, due in 2046
 
301,007

 
248,000

 
300,920

 
322,028

Mortgage notes payable (2)
 
244,252

 
254,619

 
323,074

 
331,675

Total
 
$
1,863,780


$
1,787,946


$
2,340,453

 
$
2,451,248


(1)
Includes unamortized debt premiums, discounts and issuance costs totaling $41,486 and $45,756 as of March 31, 2020 and December 31, 2019, respectively.
(2)
Balance as of December 31, 2019 includes one mortgage note with a carrying value of $13,128 net of unamortized issuance costs totaling $38 which is classified in liabilities of properties held for sale in our condensed consolidated balance sheet. This mortgage note was secured by a property in Fairfax, VA that was sold in March 2020. The mortgage note was repaid at closing.
We estimated the fair value of our senior unsecured notes (except for our senior unsecured notes due 2046) 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 2046 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 value may differ materially from the actual fair value.

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OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)

Note 9. Shareholders’ Equity
Share Purchases
On January 9, 2020 and March 13, 2020, we purchased an aggregate of 410 and 602 of our common shares, respectively, valued at $32.89 and $22.65 per share, respectively, the closing prices of our common shares on Nasdaq on those days, from certain former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions
During the three months ended March 31, 2020, we declared and paid a regular quarterly distribution to common shareholders as follows:
Declaration Date
 
Record Date
 
Paid Date
 
Distribution Per Common Share
 
Total Distribution
January 16, 2020
 
January 27, 2020
 
February 20, 2020
 
$
0.55

 
$
26,511

On April 2, 2020, we declared a regular quarterly distribution to common shareholders of record on April 13, 2020 of $0.55 per share, or approximately $26,500. We expect to pay this distribution on or about May 21, 2020.
Note 10. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC 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 LLC, we recognized net business management fees of $4,699 and $5,722 for the three months ended March 31, 2020 and 2019, respectively. Based on our common share total return, as defined in our business management agreement, as of March 31, 2020 and 2019, no estimated incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2020 or 2019. The actual amount of annual incentive fees for 2020, if any, will be based on our common share total return, as defined in our business management agreement, for the three year period ending December 31, 2020, and will be payable in 2021. We did not incur an incentive fee payable to RMR LLC for the year ended December 31, 2019. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income.  
Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $5,064 and $5,449 for the three months ended March 31, 2020 and 2019, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC’s centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function and as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $5,991 and $6,624 for these expenses and costs for the three months ended March 31, 2020 and 2019, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income.
Note 11. Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and

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Table of Contents
OFFICE PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)

some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. David Blackman, our other Managing Trustee and President and Chief Executive Officer, also serves as an executive officer of RMR LLC, and each of our other officers is also an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these public companies. Other officers of RMR LLC, including Mr. Blackman and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. 
Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. For more information regarding our management agreements with RMR LLC, see Note 10.
Leases with RMR LLC. We lease office space to RMR LLC in certain of our properties for RMR LLC’s property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of $280 and $279 for the three months ended March 31, 2020 and 2019, respectively.
Affiliates Insurance Company, or AIC. Until its dissolution on February 13, 2020 we, ABP Trust and five other companies to which RMR LLC provides management services owned AIC in equal amounts. We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.
As of March 31, 2020 and December 31, 2019, our investment in AIC had a carrying value of $298. These amounts are included in other assets, net in our condensed consolidated balance sheets. We did not recognize any income related to our investment in AIC for the three months ended March 31, 2020 and recognized income of $404 for the three months ended March 31, 2019, which is presented as equity in net losses of investees in our condensed consolidated statements of comprehensive income. Our other comprehensive loss for the 2019 period includes our proportionate part of unrealized gains (losses) on fixed income securities, which are owned by AIC, related to our investment in AIC.
For more information about these and other such relationships and certain other related person transactions, refer to our 2019 Annual Report.

14

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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 2019 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, 2020, our wholly owned properties were comprised of 184 properties and we had noncontrolling ownership interests in three properties totaling 0.4 million rentable square feet through two unconsolidated joint ventures in which we own 51% and 50% interests. As of March 31, 2020, our properties are located in 34 states and the District of Columbia and contain approximately 24.9 million rentable square feet. As of March 31, 2020, our properties were leased to 359 different tenants, with a weighted average remaining lease term (based on annualized rental income) of approximately 5.6 years. The U.S. Government is our largest tenant, representing approximately 25.0% of our annualized rental income as of March 31, 2020. 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, 2020, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic and, in response to the outbreak, the U.S. Health and Human Services Secretary declared a public health emergency in the United States and many states and municipalities declared public health emergencies. The COVID-19 virus has continued to spread throughout the United States and the world. Various governmental responses in an attempt to contain and mitigate the spread of the COVID-19 virus have negatively impacted, and continue to negatively impact, the global economy, including the U.S. economy. As a result, most market observers believe the global economy will be in a recession. Our business is focused on leasing office space to primarily single tenants and those with high credit quality characteristics such as government entities. Although the COVID-19 pandemic did not have a significant impact on our business during the three months ended March 31, 2020, we have received requests from some of our tenants for rent assistance. As of April 28, 2020, we have granted temporary rent assistance totaling $1,403 to 18 tenants who represent 2.4% of our annualized rental income as of March 31, 2020. This assistance generally entails a deferral of, in most cases, one month of rent until September 2020 when the deferred rent amounts will begin to be payable over a 12-month period.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including:
our tenants and their ability to withstand the current economic conditions and continue to pay us rent;
our operations, liquidity and capital needs and resources;
conducting financial modeling and sensitivity analyses;
actively communicating with our tenants and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts;
monitoring applicable states and municipalities to which we lease property and their responses to the COVID-19 pandemic and economic slowdown, including budgetary impacts; and
monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our tenants to enable us and them to operate through the current economic conditions and enhance our tenants’ ability to pay us rent.
We believe that our current financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic and perhaps present opportunities for us to strategically deploy our capital. As of April 30, 2020, we had:
$395,000 of availability under our revolving credit facility;
only approximately $40,000 of debt maturities until 2022; and
62.2% of our annualized rental income, as of March 31, 2020, derived from investment grade tenants (as described below).

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We do not have any employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business and property management agreements with RMR LLC. RMR LLC has implemented enhanced cleaning protocols and social distancing guidelines at its corporate headquarters and its regional offices, as well as business continuity plans to ensure RMR LLC employees remain safe and able to support us and other companies managed by RMR LLC, including providing appropriate information technology such as notebook computers, smart phones, computer applications, information technology security applications and technology support.
With respect to our properties, RMR LLC has implemented enhanced cleaning protocols and has taken measures to reduce the possibility of persons gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for spreading of COVID-19 infections. Included among these protocols and measures are the following:
focusing on sanitizing high touch points in common areas and restrooms;
shutting down certain building amenities; and
prudently managing the execution or deferment of tenant work orders to limit RMR LLC staff and tenant interactions at our properties.
All RMR LLC property management and engineering personnel have been trained on COVID-19 precaution procedures. As states and local communities across the country have moved to shelter in place orders, RMR LLC has worked to reduce and optimize our operating costs at our properties by:
deferring non-emergency work;
implementing energy reduction protocols for lighting and HVAC systems;
reducing non-essential building services and staff; and
reducing the frequency of trash removal.
RMR LLC’s property management teams have also established business continuity plans to ensure operational stability at our properties. RMR LLC has suspended all non-essential work travel, its regional leadership personnel have not been allowed to work in the same locations at the same time, and RMR LLC requires its employees who work at our properties to use personal protective equipment and business continuity bonus pay is provided to those individuals.
There are extensive uncertainties surrounding the COVID-19 pandemic. These uncertainties include among others:
the duration and severity of the economic impact;
the strength and sustainability of any economic recovery;
the timing and process for how the government and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic abates, such as what continuing restrictions and protective measures may remain in place or be added and what restrictions and protective measures may be lifted or reduced in order to foster a return of increased economic activity in the United States; and
whether, following a recommencing of more normal level of economic activities, the United States or other countries experience “second waves” of COVID-19 infection outbreaks and, if so, the responses of governments, businesses and the general public to those events.
As a result of these uncertainties, we are unable to determine what the ultimate impact will be on us and our tenants’ and other stakeholders’ businesses, operations, financial results and financial position. For further information and risks relating to the COVID-19 pandemic on us and our business, see Part II, Item 1A “Risk Factors,” in this Quarterly Report on Form 10-Q.

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Property Operations
Unless otherwise noted, the data presented in this section excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For more information regarding our two unconsolidated joint ventures, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
As of March 31, 2020, 91.5% of our rentable square feet was leased, compared to 89.6% of our rentable square feet as of March 31, 2019. Occupancy data for our properties as of March 31, 2020 and 2019 was as follows (square feet in thousands):
 
 
All Properties (1)
 
Comparable Properties (2)
 
 
March 31,
 
March 31,
 
 
2020
 
2019
 
2020
 
2019
Total properties (3)
 
184

 
212

 
182

 
182

Total rentable square feet (4)
 
24,906

 
30,134

 
24,619

 
24,711

Percent leased (5)
 
91.5
%
 
89.6
%
 
92.6
%
 
93.2
%

(1)
Based on properties we owned on March 31, 2020 and 2019, respectively.
(2)
Based on properties we owned continuously since January 1, 2019; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.
(3)
Includes one leasable land parcel as of March 31, 2020 and two leasable land parcels as of March 31, 2019.
(4)
Subject to changes when space is remeasured or reconfigured for tenants.
(5)
Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.
The average effective rental rate per square foot for our properties for the three months ended March 31, 2020 and 2019 are as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Average effective rental rate per square foot (1):
 
 
 
 
  All properties (2)
 
$
26.03

 
$
25.96

  Comparable properties (3)
 
$
26.09

 
$
26.09


(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, 2020 and 2019, respectively.
(3)
Based on properties we owned continuously since January 1, 2019; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.
During the three months ended March 31, 2020, 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, 2020
 
 
Leased
 
Available for Lease
 
Total
Beginning of period
 
23,761

 
1,965

 
25,726

Changes resulting from:
 


 


 
 

Acquisition of properties
 

 
13

 
13

Disposition of properties
 
(693
)
 
(42
)
 
(735
)
Lease expirations
 
(868
)
 
868

 

Lease renewals (1)
 
508

 
(508
)
 

New leases (1)
 
81

 
(81
)
 

Remeasurements (2)
 

 
(98
)
 
(98
)
End of period
 
22,789

 
2,117

 
24,906


(1)
Based on leases entered during the three months ended March 31, 2020.
(2)
Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants.

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Leases at our properties totaling approximately 0.9 million rentable square feet expired during the three months ended March 31, 2020. During the three months ended March 31, 2020, we entered leases totaling approximately 0.6 million rentable square feet, including lease renewals of approximately 0.5 million rentable square feet and new leases of approximately 0.1 million rentable square feet. The weighted (by rentable square feet) average rents were 4.1% above prior rents for the same space and the weighted (by rentable square feet) average lease term for new and renewal leases entered during the three months ended March 31, 2020 was 4.8 years.
During the three months ended March 31, 2020, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows (square feet in thousands):
 
 
Three Months Ended March 31, 2020
 
 
New Leases
 
Renewals
 
Total
Rentable square feet leased
 
81

 
508

 
589

Tenant leasing costs and concession commitments (1) 
 
$
6,160

 
$
6,770

 
$
12,930

Tenant leasing costs and concession commitments per rentable square foot (1)
 
$
75.98

 
$
13.32

 
$
21.94

Weighted (by square feet) average lease term (years)
 
10.8

 
3.8

 
4.8

Total leasing costs and concession commitments per rentable square foot per year (1)
 
$
7.04

 
$
3.49

 
$
4.60

(1)
Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.
During the three months ended March 31, 2020, 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, 2020, 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, 2020
 
 
Old Effective Rent Per Square Foot (1)
 
New Effective Rent Per Square Foot (1)
 
Rentable Square Feet
New leases
 
$
28.13

 
$
26.95

 
100

Lease renewals
 
$
39.71

 
$
40.92

 
568

Total leasing activity
 
$
37.98

 
$
38.83

 
668

(1)
Effective rental rate includes 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 excluding lease value amortization.
During the three months ended March 31, 2020 and 2019, amounts capitalized at our properties for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Tenant improvements (1)
 
$
2,967

 
$
4,912

Leasing costs (2)
 
4,146

 
7,325

Building improvements (3)
 
9,230

 
4,308

Recurring capital expenditures
 
16,343

 
16,545

Development, redevelopment and other activities (4)
 
3,161

 
226

Total capital expenditures
 
$
19,504

 
$
16,771

(1)
Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.
(2)
Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements.
(3)
Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.
(4)
Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue.
As of March 31, 2020, we have estimated unspent leasing related obligations of $57,348.
As of March 31, 2020, we had leases at our properties totaling approximately 1.1 million rentable square feet that were scheduled to expire through December 31, 2020. As of April 30, 2020, tenants with leases totaling approximately 0.2 million

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rentable square feet that are scheduled to expire through December 31, 2020, have notified us that they do not plan to renew their leases upon expiration and we cannot be sure as to whether other tenants may or may not renew their leases upon expiration. As a result of the COVID-19 pandemic and the current economic impact, leasing activity has slowed in the 2020 second quarter to date and we expect that slowing may continue until market conditions improve. However, we also believe that these conditions may result in our overall tenant retention levels increasing. Prevailing market conditions and government and other 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, and market conditions and our tenants’ needs are beyond our control. Whenever we extend, 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 which 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.
As of March 31, 2020, our lease expirations by year are 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
2020
 
56

 
1,083

 
4.8
%
 
4.8
%
 
$
27,541

 
4.7
%
 
4.7
%
2021
 
58

 
2,050

 
9.0
%
 
13.8
%
 
58,503

 
10.1
%
 
14.8
%
2022
 
79

 
2,147

 
9.4
%
 
23.2
%
 
60,941

 
10.5
%
 
25.3
%
2023
 
63

 
2,528

 
11.1
%
 
34.3
%
 
68,662

 
11.8
%
 
37.1
%
2024
 
54

 
3,674

 
16.1
%
 
50.4
%
 
97,273

 
16.7
%
 
53.8
%
2025
 
49

 
2,018

 
8.9
%
 
59.3
%
 
43,531

 
7.5
%
 
61.3
%
2026
 
29

 
1,710

 
7.5
%
 
66.8
%
 
45,728

 
7.9
%
 
69.2
%
2027
 
28

 
1,855

 
8.1
%
 
74.9
%
 
46,984

 
8.1
%
 
77.3
%
2028
 
12

 
872

 
3.8
%
 
78.7
%
 
25,568

 
4.4
%
 
81.7
%
2029 and thereafter
 
46

 
4,851

 
21.3
%
 
100.0
%
 
106,992

 
18.3
%
 
100.0
%
Total
 
474

 
22,788

 
100.0
%
 
 
 
$
581,723

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average remaining lease term (in years)
 
5.9
 
 
 
 
 
5.6
 
 
 
 

(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, 2020, tenants occupying approximately 11.0% of our rentable square feet and responsible for approximately 7.9% of our annualized rental income as of March 31, 2020 currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2030 and 2035, early termination rights become exercisable by other tenants who currently occupy an additional approximately 3.2%, 1.3%, 2.3%, 0.7%, 1.0%, 2.2%, 1.0%, 0.5%, 1.1%, 0.1% and 0.1% of our rentable square feet, respectively, and contribute an additional approximately 4.0%, 1.4%, 2.4%, 0.9%, 1.6%, 3.8%, 1.3%, 0.7%, 1.2%, 0.2% and 0.1% of our annualized rental income, respectively, as of March 31, 2020. In addition, as of March 31, 2020, pursuant to leases with 13 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 13 tenants occupy approximately 5.2% of our rentable square feet and contribute approximately 5.5% of our annualized rental income as of March 31, 2020.
(2)
Leased square feet is pursuant to leases existing as of March 31, 2020, 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 in our single tenant properties when they expire. Because of the capital many of the tenants in these properties have invested in the properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties.
We believe that current government budgetary methodology, spending priorities and the current U.S. presidential administration’s views on the size and scope of government employment have resulted in a decrease in government employment. Furthermore, for the past six years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties. This activity has reduced the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result

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from relocating their operations. However, efforts to reduce space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy. Also, our government tenants’ desires to reconfigure leased office space to reduce utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations have become more prevalent than our past experiences in instances where efforts by government tenants to reduce their space utilization require a significant reconfiguration of currently leased space. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals; however, recent activity prior to the outbreak of the COVID-19 pandemic suggested that the government had begun to shift its leasing strategy to include longer term leases and was actively exploring 10 to 20 year lease terms at renewal, in some instances. We believe the reduction in government tenant space utilization and the consolidation of government tenants into government owned real estate is substantially complete; however, these activities may impact us for some time into the future. It is also possible that as a result of the COVID-19 pandemic, government tenants may seek to increase space utilization rates in order to provide greater physical distancing for employees. Given the significant uncertainties as to the COVID-19 pandemic, its economic impact and its aftermath, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances, including as a result of the COVID-19 pandemic, will be on our financial results for future periods.
As of March 31, 2020, we derive 24.3% 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. A downturn in economic conditions in this area, including as a result of the COVID-19 pandemic, could result in reduced demand from tenants for our properties or reduce the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased space by the U.S. Government 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 when our leases expire.
Our manager, RMR LLC, employs a tenant review process for us. RMR LLC assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR LLC 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. RMR LLC also often uses a third party service to monitor the credit ratings, both actual and implied, of our existing tenants. 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, 2020, tenants contributing 52.6% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 9.6% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).


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As of March 31, 2020, tenants representing 1% or more of our total annualized rental income were as follows:
 
Tenant
 
Credit Rating
 
Annualized Rental Income
 
% of Total Annualized Rental Income
1

U.S. Government
 
Investment Grade
 
$
145,675

 
25.0
%
2

Shook, Hardy & Bacon L.L.P.
 
Not Rated
 
19,199

 
3.3
%
3

State of California
 
Investment Grade
 
19,125

 
3.3
%
4

Bank of America Corporation
 
Investment Grade
 
16,467

 
2.8
%
5

WestRock Company
 
Investment Grade
 
12,864

 
2.2
%
6

F5 Networks, Inc.
 
Not Rated
 
12,777

 
2.2
%
7

CareFirst Inc.
 
Non Investment Grade
 
11,684

 
2.0
%
8

Northrop Grumman Corporation
 
Investment Grade
 
11,320

 
1.9
%
9

Tyson Foods, Inc.
 
Investment Grade
 
11,011

 
1.9
%
10

Technicolor SA
 
Non Investment Grade
 
10,034

 
1.7
%
11

Commonwealth of Massachusetts
 
Investment Grade
 
9,769

 
1.7
%
12

Micro Focus International plc
 
Non Investment Grade
 
8,710

 
1.5
%
13

CommScope Holding Company Inc
 
Non Investment Grade
 
8,097

 
1.4
%
14

State of Georgia
 
Investment Grade
 
7,173

 
1.2
%
15

PNC Bank
 
Investment Grade
 
6,902

 
1.2
%
16

ServiceNow, Inc.
 
Not Rated
 
6,481

 
1.1
%
17

Allstate Insurance Co.
 
Investment Grade
 
6,472

 
1.1
%
18

Compass Group plc
 
Investment Grade
 
6,398

 
1.1
%
19

Automatic Data Processing, Inc.
 
Investment Grade
 
6,047

 
1.0
%
20

Church & Dwight Co., Inc.
 
Investment Grade
 
6,019

 
1.0
%
21

Tailored Brands, Inc.
 
Non Investment Grade
 
5,898

 
1.0