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 September 30, 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
6.375% Senior Notes due 2050	OPINL	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 October 29, 2020: 48,318,366

OFFICE PROPERTIES INCOME TRUST

FORM 10-Q

September 30, 2020

INDEX

		Page
PART I.	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — September 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Shareholders’ Equity — Three and Nine Months Ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	40
	Warning Concerning Forward-Looking Statements	41
	Statement Concerning Limited Liability	45
PART II.	Other Information
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	47
	Signatures	49

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

PART I.    Financial Information 

Item 1.    Financial Statements

OFFICE PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited) 

	September 30,		December 31,
	2020		2019
ASSETS
Real estate properties:
Land	$	840,931	$	840,550
Buildings and improvements	2,685,988		2,652,681
Total real estate properties, gross	3,526,919		3,493,231
Accumulated depreciation	(436,346)		(387,656)
Total real estate properties, net	3,090,573		3,105,575
Assets of properties held for sale	20,716		70,877
Investments in unconsolidated joint ventures	38,533		39,756
Acquired real estate leases, net	604,233		732,382
Cash and cash equivalents	45,035		93,744
Restricted cash	12,604		6,952
Rents receivable	100,363		83,556
Deferred leasing costs, net	44,485		40,107
Other assets, net	16,503		20,187
Total assets	$	3,973,045	$	4,193,136
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	—	$	—
Senior unsecured notes, net	2,031,197		2,017,379
Mortgage notes payable, net	170,244		309,946
Liabilities of properties held for sale	331		14,693
Accounts payable and other liabilities	116,047		125,048
Due to related persons	7,349		7,141
Assumed real estate lease obligations, net	11,205		13,175
Total liabilities	2,336,373		2,487,382
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 200,000,000 shares authorized, 48,318,366 and 48,201,941 shares issued and outstanding, respectively	483		482
Additional paid in capital	2,614,346		2,612,425
Cumulative net income	185,559		177,217
Cumulative other comprehensive loss	—		(200)
Cumulative common distributions	(1,163,716)		(1,084,170)
Total shareholders’ equity	1,636,672		1,705,754
Total liabilities and shareholders’ equity	$	3,973,045	$	4,193,136

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

3

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,
	2020		2019		2020		2019
Rental income	$	145,806	$	167,411	$	441,294	$	518,220
Expenses:
Real estate taxes	16,113		18,824		48,701		55,363
Utility expenses	7,564		9,518		19,777		26,369
Other operating expenses	26,366		30,376		78,033		90,204
Depreciation and amortization	62,227		74,939		189,340		226,373
Loss on impairment of real estate	2,954		8,521		2,954		14,105
Acquisition and transaction related costs	—		—		—		682
General and administrative	7,059		7,990		21,372		25,457
Total expenses	122,283		150,168		360,177		438,553
Gain on sale of real estate	—		11,463		10,822		33,538
Dividend income	—		—		—		1,960
Loss on equity securities, net	—		—		—		(44,007)
Interest and other income	2		358		738		847
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,477, $2,560, $7,162 and $8,264, respectively)	(27,097)		(32,367)		(79,461)		(104,848)
Loss on early extinguishment of debt	—		(284)		(3,839)		(769)
Income (loss) before income tax (expense) benefit and equity in net losses of investees	(3,572)		(3,587)		9,377		(33,612)
Income tax (expense) benefit	54		(156)		(220)		(509)
Equity in net losses of investees	(279)		(196)		(815)		(573)
Net income (loss)	(3,797)		(3,939)		8,342		(34,694)
Other comprehensive income (loss):
Unrealized gain (loss) on financial instrument	85		80		200		(287)
Equity in unrealized gain (loss) of investees	—		(46)		—		91
Other comprehensive income (loss)	85		34		200		(196)
Comprehensive income (loss)	$	(3,712)	$	(3,905)	$	8,542	$	(34,890)
Weighted average common shares outstanding (basic and diluted)	48,132		48,073		48,111		48,051
Per common share amounts (basic and diluted):
Net income (loss)	$	(0.08)	$	(0.08)	$	0.17	$	(0.72)

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

4

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 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
Share grants	28,000	—		1,121		—		—		—		1,121
Share repurchases	(1,129)	—		(30)		—		—		—		(30)
Net current period other comprehensive income	—	—		—		—		176		—		176
Net income	—	—		—		1,299		—		—		1,299
Distributions to common shareholders	—	—		—		—		—		(26,510)		(26,510)
Balance at June 30, 2020	48,227,800	482		2,613,868		189,356		(85)		(1,137,191)		1,666,430
Share grants	108,600	1		864		—		—		—		865
Share forfeitures and repurchases	(18,034)	—		(386)		—		—		—		(386)
Amount reclassified from cumulative other comprehensive loss to net loss	—	—		—		—		85		—		85
Net loss	—	—		—		(3,797)		—		—		(3,797)
Distributions to common shareholders	—	—		—		—		—		(26,525)		(26,525)
Balance at September 30, 2020	48,318,366	$	483	$	2,614,346	$	185,559	$	—	$	(1,163,716)	$	1,636,672

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

5

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, 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
Share grants	24,000	—		971		—		—		—		971
Share forfeitures and repurchases	(2,459)	—		(67)		—		—		—		(67)
Net current period other comprehensive loss	—	—		—		—		(198)		—		(198)
Net loss	—	—		—		(64,774)		—		—		(64,774)
Distributions to common shareholders	—	—		—		—		—		(26,450)		(26,450)
Balance at June 30, 2019	48,113,444	481		2,611,570		116,127		(495)		(1,031,197)		1,696,486
Share grants	103,100	1		888		—		—		—		889
Share repurchases	(13,212)	—		(396)		—		—		—		(396)
Net current period other comprehensive income	—	—		—		—		34		—		34
Net loss	—	—		—		(3,939)		—		—		(3,939)
Distributions to common shareholders	—	—		—		—		—		(26,461)		(26,461)
Balance at September 30, 2019	48,203,332	$	482	$	2,612,062	$	112,188	$	(461)	$	(1,057,658)	$	1,666,613

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

6

OFFICE PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	8,342	$	(34,694)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	62,570		68,095
Net amortization of debt premiums, discounts and issuance costs	7,162		8,264
Amortization of acquired real estate leases	126,409		157,108
Amortization of deferred leasing costs	5,208		4,329
Gain on sale of real estate	(10,822)		(33,538)
Loss on impairment of real estate	2,954		14,105
Loss on early extinguishment of debt	2,701		769
Straight line rental income	(12,963)		(19,365)
Other non-cash expenses, net	1,542		1,907
Loss on equity securities, net	—		44,007
Equity in net losses of investees	815		573
Change in assets and liabilities:
Rents receivable	(4,853)		17,185
Deferred leasing costs	(10,722)		(22,759)
Other assets	(860)		(32)
Accounts payable and other liabilities	(11,593)		(30,603)
Due to related persons	208		(27,213)
Net cash provided by operating activities	166,098		148,138
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions	(11,864)		—
Real estate improvements	(55,135)		(39,010)
Distributions in excess of earnings from unconsolidated joint ventures	408		1,973
Distributions in excess of earnings from Affiliates Insurance Company	287		—
Proceeds from sale of properties, net	81,528		572,131
Proceeds from repayment of mortgage note receivable	2,880		—
Proceeds from sale of RMR Inc. common shares, net	—		104,674
Net cash provided by investing activities	18,104		639,768
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage notes payable	(154,734)		(11,001)
Repayment of unsecured term loans	—		(388,000)
Repayment of senior unsecured notes	(400,000)		(350,000)
Proceeds from issuance of senior unsecured notes, net	408,932		—
Borrowings on unsecured revolving credit facility	561,467		420,000
Repayments on unsecured revolving credit facility	(561,467)		(385,000)
Payment of debt issuance costs	(1,477)		—
Repurchase of common shares	(434)		(459)
Distributions to common shareholders	(79,546)		(79,356)
Net cash used in financing activities	(227,259)		(793,816)

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

7

OFFICE PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2020		2019
Decrease in cash, cash equivalents and restricted cash	$	(43,057)	$	(5,910)
Cash, cash equivalents and restricted cash at beginning of period	100,696		38,943
Cash, cash equivalents and restricted cash at end of period	$	57,639	$	33,033

	Nine Months Ended September 30,
	2020		2019
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	83,116	$	114,226
Income taxes paid	$	1,097	$	491

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,
	2020		2019
Cash and cash equivalents	$	45,035	$	29,002
Restricted cash (1)	12,604		4,031
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	57,639	$	33,033

(1)Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our mortgage debts.

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

8

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, 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. Per Common Share Amounts

We calculate basic earnings per common share by dividing net income (loss) by the weighted average number of our common shares outstanding during the period. We calculate diluted earnings per 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 share. For the three and nine months ended September 30, 2020 and 2019, 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 September 30, 2020, our wholly owned properties were comprised of 184 properties with approximately 24,909,000 rentable square feet, with an aggregate undepreciated carrying value of $3,544,937, including $18,018 classified as held for sale, and we had noncontrolling ownership interests in three properties totaling approximately 444,000 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 September 30, 2020, we entered into 17 leases for approximately 595,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.6 years and we made commitments for approximately $6,238 of leasing related costs. During the nine months ended September 30, 2020, we entered into 60 leases for approximately 1,826,000 rentable square feet for a weighted (by rentable square feet) average lease term of 7.1 years and we made commitments for approximately $35,697 of leasing related costs.

As of September 30, 2020, we have estimated unspent leasing related obligations of $61,307. 

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

9

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

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.

In August 2020, we terminated a previously disclosed agreement to acquire an office property in Denver, CO for a purchase price of $38,100.

In October 2020, we entered into an agreement to acquire three properties containing approximately 194,000 square feet adjacent to properties we own in an office park in Brookhaven, GA for $15,250, excluding acquisition related costs.

Disposition Activities

During the nine months ended September 30, 2020, we sold six properties with a combined 734,784 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 (loss).

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		4,820
	6		734,784	$	85,363	$	10,822

(1)Gross sales price is equal to the gross contract price, includes purchase price adjustments, if any, and excludes closing costs.

As of September 30, 2020, we had four properties with an aggregate undepreciated carrying value of $18,018 under agreement to sell for a sales price of $25,100, excluding closing costs. These properties were classified as held for sale in our condensed consolidated balance sheet as of September 30, 2020. We recorded a $2,954 loss on impairment of real estate during the three months ended September 30, 2020 to adjust the carrying value of these properties to their estimated fair value less costs to sell. The operating results of these properties are included in continuing operations in our condensed consolidated statements of comprehensive income (loss). The sale of these properties was completed in October 2020.

10

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

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 September 30, 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	September 30, 2020		December 31, 2019		Number of Properties	Location	Rentable Square Feet
Prosperity Metro Plaza	51%	$	22,080	$	22,483	2	Fairfax, VA	328,655
1750 H Street, NW	50%	16,453		17,273		1	Washington, D.C.	115,411
Total		$	38,533	$	39,756	3		444,066

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 September 30, 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 September 30, 2020, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $7,584 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 (loss).

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 $3,912 and $6,904 for the three months ended September 30, 2020 and 2019, respectively, and $12,963 and $19,365 for the nine months ended September 30, 2020 and 2019, respectively. Rents receivable, excluding properties classified as held for sale, include $66,499 and $54,837 of straight line rent receivables at September 30, 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 $18,606 and $56,654 for the three and nine months ended September 30, 2020, respectively, of which tenant reimbursements totaled $17,495 and $53,346, respectively. For the three and nine months ended September 30, 2019, such payments totaled $23,092 and $69,182, respectively, of which tenant reimbursements totaled $21,914 and $65,577, respectively.

11

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

As a result of the COVID-19 pandemic, some of our tenants have requested rent assistance. As of October 27, 2020, we have granted temporary rent assistance totaling $2,550 to 19 of our tenants who represent approximately 3.6% of our annualized rental income, as defined below, as of September 30, 2020, pursuant to deferred payment plans. These tenants are obligated to pay, in most cases, the deferred rent over a 12-month period, certain of which commenced in September 2020. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as or less than the original lease. Because the deferred rent amounts referenced above will be repaid, the cash flows from the respective leases are substantially the same as before the rent deferrals. The deferred amounts did not impact our operating results for the three and nine months ended September 30, 2020. As of September 30, 2020, deferred payments totaling $2,096 are included in rents receivable in our condensed consolidated balance sheet.

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 an initial term greater than 12 months. As of September 30, 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 $670 and $689, respectively, as of September 30, 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 $409 and $411 for the three months ended September 30, 2020 and 2019, respectively, and $1,301 and $1,226 for the nine months ended September 30, 2020 and 2019, respectively.

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 September 30, 2020, the U.S. Government, 11 state governments and two other government tenants combined were responsible for approximately 35.6% of our annualized rental income. As of September 30, 2019, the U.S. Government, 13 state governments and three other government tenants combined were responsible for approximately 36.3% of our annualized rental income. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 25.2% and 25.8% of our annualized rental income as of September 30, 2020 and 2019, respectively. 

Geographic Concentration 

At September 30, 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%, 10.9%, 8.3% and 6.6% of our annualized rental income as of September 30, 2020, respectively.

Note 7. Indebtedness

Our principal debt obligations at September 30, 2020 were: (1) $2,072,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $171,475 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 September 30, 2020, on the amount outstanding under our revolving credit facility. We also pay a facility fee on

12

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2020. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2020 and December 31, 2019, the annual interest rate payable on borrowings under our revolving credit facility was 1.2% and 2.7%, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.2% and 3.3% for the three months ended September 30, 2020 and 2019, respectively, and 2.0% and 3.4% for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and October 29, 2020, we had no amounts outstanding under our revolving credit facility and $750,000 available for borrowing.

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 September 30, 2020.

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 nine months ended September 30, 2020, to write off unamortized discounts.

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 nine months ended September 30, 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 nine months ended September 30, 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. As a result of the prepayment of this mortgage note, we recognized a gain on early extinguishment of debt of $163 during the nine months ended September 30, 2020, from the write off of unamortized premiums.

In June 2020, we issued $150,000 of our 6.375% senior unsecured notes due 2050 in an underwritten public offering. In connection with this offering, we granted the underwriters a 30 day option to purchase up to an additional $22,500 aggregate principal amount of these notes. In July 2020, the underwriters partially exercised this option to purchase an additional $12,000 of these notes. The aggregate net proceeds from this offering were $156,186, after underwriters’ discounts and offering expenses. These notes require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after June 23, 2025.

In August 2020, we repaid at maturity, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $39,635 and an annual interest rate of 2.2%.

In September 2020, we issued $250,000 of our 4.50% senior unsecured notes due 2025 in an underwritten public offering. These notes are a further issuance of our existing $400,000 of senior unsecured notes due 2025 that were initially issued by Select Income REIT, or SIR, in February 2015, which we assumed in connection with our acquisition of SIR in a merger transaction on December 31, 2018. The public offering price of these notes was 101.414% of the principal amount, raising net proceeds of $251,269, after underwriters’ discounts and estimated offering expenses. These notes require semi-annual payments of interest only through maturity.

13

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

At September 30, 2020, seven of our properties with an aggregate net book value of $307,837 were encumbered by mortgage notes with an aggregate principal amount of $171,475. 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, 2020, categorized by the 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
Assets of properties held for sale(1)	$	21,446	$	—	$	21,446	$	—

(1)We recorded impairment charges of $2,954 to reduce the carrying value of four properties that are classified as held for sale in our condensed consolidated balance sheet to their estimated fair value, less costs to sell of $786, based upon a negotiated sale price with a third party buyer (a Level 2 input as defined in the fair value hierarchy under GAAP). See Note 4 for more information.

In addition to the assets described in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents 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 September 30, 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 September 30, 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 (2)	$	—	$	—	$	399,934	$	400,048
Senior unsecured notes, 4.00% interest rate, due in 2022	298,348		304,746		297,657		306,096
Senior unsecured notes, 4.15% interest rate, due in 2022	298,589		303,359		297,795		307,221
Senior unsecured notes, 4.25% interest rate, due in 2024	341,729		352,331		340,018		364,602
Senior unsecured notes, 4.50% interest rate, due in 2025 (3)	635,114		659,029		381,055		419,578
Senior unsecured notes, 5.785% interest rate, due in 2046	301,178		310,124		300,920		322,028
Senior unsecured notes, 6.375% interest rate, due in 2050 (4)	156,239		165,758		—		—
Mortgage notes payable (5)	170,244		174,567		323,074		331,675
Total	$	2,201,441	$	2,269,914	$	2,340,453	$	2,451,248

(1)Includes unamortized debt premiums, discounts and issuance costs totaling $42,034 and $45,756 as of September 30, 2020 and December 31, 2019, respectively.

(2)These senior unsecured notes were redeemed in January 2020.

(3)An additional $250,000 of these senior unsecured notes were issued in September 2020.

(4)$150,000 of these senior unsecured notes were issued in June 2020. In July 2020, we issued an additional $12,000 of these senior unsecured notes in connection with the underwriters partial exercise of their option to purchase additional notes.

(5)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 and 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 2046 and 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 value may differ materially from the actual fair value.

14

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

Note 9. Shareholders’ Equity

Share Awards

On May 27, 2020, in accordance with our Trustee compensation arrangements, we awarded to each of our eight Trustees 3,500 of our common shares, valued at $26.61 per share, the closing price of our common shares on Nasdaq on that day.

On September 17, 2020, we awarded under our equity compensation plan an aggregate of 108,600 of our common shares, valued at $23.04 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC.

Share Purchases

During the three and nine months ended September 30, 2020, we purchased an aggregate of 17,448 and 19,589 of our common shares, respectively, valued at weighted average share prices of $21.61 and $22.15 per share, respectively, from one of our Trustees, our officers and certain other current and 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 nine months ended September 30, 2020, 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 16, 2020	January 27, 2020	February 20, 2020	$	0.55	$	26,511
April 2, 2020	April 13, 2020	May 21, 2020	0.55		26,510
July 16, 2020	July 27, 2020	August 20, 2020	0.55		26,525
			$	1.65	$	79,546

On October 15, 2020, we declared a regular quarterly distribution to common shareholders of record on October 26, 2020 of $0.55 per share, or approximately $26,600. We expect to pay this distribution on or about November 19, 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 $4,236 and $5,159 for the three months ended September 30, 2020 and 2019, respectively, and $13,237 and $16,203 for the nine months ended September 30, 2020 and 2019, respectively. Based on our common share total return, as defined in our business management agreement, as of September 30, 2020 and 2019, no estimated incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 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 (loss).

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $5,189 and $5,622 for the three months ended September 30, 2020 and 2019, respectively, and $15,381 and $16,605 for the nine months ended September 30, 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

15

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

expenses incurred to provide management services to us, except for the applicable 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 $6,437 and $