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, 2022

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
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 April 27, 2022: 48,425,000

OFFICE PROPERTIES INCOME TRUST

FORM 10-Q

March 31, 2022

INDEX

		Page
PART I.	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — March 31, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended March 31, 2022 and 2021	4
	Condensed Consolidated Statements of Shareholders’ Equity — Three Months Ended March 31, 2022 and 2021	5
	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2022 and 2021	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	30
	Warning Concerning Forward-Looking Statements	30
	Statement Concerning Limited Liability	34
PART II.	Other Information
Item 1A.	Risk Factors	34
Item 6.	Exhibits	34
	Signatures	37

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) 

	March 31, 2022		December 31, 2021
ASSETS
Real estate properties:
Land	$	851,356	$	874,108
Buildings and improvements	3,024,610		3,036,978
Total real estate properties, gross	3,875,966		3,911,086
Accumulated depreciation	(506,098)		(495,912)
Total real estate properties, net	3,369,868		3,415,174
Assets of properties held for sale	57,115		26,598
Investments in unconsolidated joint ventures	35,011		34,838
Acquired real estate leases, net	466,317		505,629
Cash and cash equivalents	97,656		83,026
Restricted cash	1,402		1,489
Rents receivable	106,865		112,886
Deferred leasing costs, net	55,448		53,883
Other assets, net	8,011		8,160
Total assets	$	4,197,693	$	4,241,683
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	—	$	—
Senior unsecured notes, net	2,481,903		2,479,772
Mortgage notes payable, net	97,893		98,178
Liabilities of properties held for sale	626		594
Accounts payable and other liabilities	136,017		142,609
Due to related persons	7,864		6,787
Assumed real estate lease obligations, net	16,308		17,034
Total liabilities	2,740,611		2,744,974
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 200,000,000 shares authorized, 48,425,265 and 48,425,665 shares issued and outstanding, respectively	484		484
Additional paid in capital	2,617,583		2,617,169
Cumulative net income	162,308		175,715
Cumulative common distributions	(1,323,293)		(1,296,659)
Total shareholders’ equity	1,457,082		1,496,709
Total liabilities and shareholders’ equity	$	4,197,693	$	4,241,683

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 COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

(unaudited) 

	Three Months Ended March 31,
	2022		2021
Rental income	$	147,354	$	144,524
Expenses:
Real estate taxes	16,645		16,154
Utility expenses	6,865		6,432
Other operating expenses	27,363		25,439
Depreciation and amortization	60,469		64,087
Loss on impairment of real estate	17,047		7,660
General and administrative	5,706		11,272
Total expenses	134,095		131,044
Gain on sale of real estate	2,149		54,004
Interest and other income	1		5
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,404 and $2,432, respectively)	(27,439)		(28,798)
Income (loss) before income tax expense and equity in net losses of investees	(12,030)		38,691
Income tax expense	(531)		(435)
Equity in net losses of investees	(846)		(396)
Net income (loss)	$	(13,407)	$	37,860
Weighted average common shares outstanding (basic)	48,243		48,161
Weighted average common shares outstanding (diluted)	48,243		48,196
Per common share amounts (basic and diluted):
Net income (loss)	$	(0.28)	$	0.78

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 SHAREHOLDERS’ EQUITY

(dollars in thousands)

(unaudited)

	Number of Shares	Common Shares		Additional Paid In Capital		Cumulative Net Income		Cumulative Common Distributions		Total Shareholders’ Equity
Balance at December 31, 2021	48,425,665	$	484	$	2,617,169	$	175,715	$	(1,296,659)	$	1,496,709
Share grants	—	—		415		—		—		415
Share forfeitures	(400)	—		(1)		—		—		(1)
Net loss	—	—		—		(13,407)		—		(13,407)
Distributions to common shareholders	—	—		—		—		(26,634)		(26,634)
Balance at March 31, 2022	48,425,265	$	484	$	2,617,583	$	162,308	$	(1,323,293)	$	1,457,082

Balance at December 31, 2020	48,318,366	$	483	$	2,615,305	$	183,895	$	(1,190,291)	$	1,609,392
Share grants	—	—		321		—		—		321
Net income	—	—		—		37,860		—		37,860
Distributions to common shareholders	—	—		—		—		(26,575)		(26,575)
Balance at March 31, 2021	48,318,366	$	483	$	2,615,626	$	221,755	$	(1,216,866)	$	1,620,998

`

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

(dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(13,407)	$	37,860
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	24,965		21,629
Net amortization of debt premiums, discounts and issuance costs	2,404		2,432
Amortization of acquired real estate leases	34,079		41,575
Amortization of deferred leasing costs	2,106		1,820
Gain on sale of real estate	(2,149)		(54,004)
Loss on impairment of real estate	17,047		7,660
Straight line rental income	(2,686)		(5,357)
Other non-cash expenses, net	142		49
Equity in net losses of investees	846		396
Change in assets and liabilities:
Rents receivable	5,184		11,320
Deferred leasing costs	(7,082)		(4,826)
Other assets	(341)		(259)
Accounts payable and other liabilities	(11,919)		(9,609)
Due to related persons	1,077		7,256
Net cash provided by operating activities	50,266		57,942
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate improvements	(36,229)		(15,329)
Distributions in excess of earnings from unconsolidated joint ventures	51		153
Contributions to unconsolidated joint ventures	(1,070)		—
Proceeds from sale of properties, net	28,464		129,072
Net cash (used in) provided by investing activities	(8,784)		113,896
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage notes payable	(305)		(643)
Distributions to common shareholders	(26,634)		(26,575)
Net cash used in financing activities	(26,939)		(27,218)
Increase in cash, cash equivalents and restricted cash	14,543		144,620
Cash, cash equivalents and restricted cash at beginning of period	84,515		56,855
Cash, cash equivalents and restricted cash at end of period	$	99,058	$	201,475

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,
	2022		2021
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	28,630	$	36,136
NON-CASH INVESTING ACTIVITIES:
Real estate improvements accrued, not paid	$	25,165	$	9,164
Capitalized interest	$	607	$	50

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,
	2022		2021
Cash and cash equivalents	$	97,656	$	184,462
Restricted cash (1)	1,402		17,013
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	99,058	$	201,475

(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.

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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, 2021, or our 2021 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. 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 of beneficial interest, $.01 per share, or 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. The calculation of basic and diluted earnings per share is as follows:

	Three Months Ended March 31,
	2022		2021
Numerators:
Net income (loss)	$	(13,407)	$	37,860
Income attributable to unvested participating securities	—		(123)
Net income (loss) used in calculating earnings per share	$	(13,407)	$	37,737
Denominators:
Weighted average common shares outstanding - basic	48,243		48,161
Effect of dilutive securities: unvested share awards (1)	—		35
Weighted average common shares outstanding - diluted	48,243		48,196
Net income (loss) per common share - basic	$	(0.28)	$	0.78
Net income (loss) per common share - diluted	$	(0.28)	$	0.78

(1)For the three months ended March 31, 2022, 22 unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive.

Note 3. Real Estate Properties

As of March 31, 2022, our wholly owned properties were comprised of 174 properties containing approximately 22,941,000 rentable square feet, with an undepreciated carrying value of $3,937,509, including $61,543 classified as held for sale. We also had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet. We generally lease space at our properties on a gross lease, modified gross lease or net lease basis pursuant to fixed term contracts expiring between 2022 and 2053. Some of our leases generally require us to pay all or some property operating expenses and to provide all or most property management

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OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

services. During the three months ended March 31, 2022, we entered into 21 leases for approximately 572,000 rentable square feet for a weighted (by rentable square feet) average lease term of 10.7 years and we made commitments for approximately $32,748 of leasing related costs. As of March 31, 2022, we have estimated unspent leasing related obligations of $128,009.

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.

Disposition Activities

During the three months ended March 31, 2022, we sold four properties containing approximately 330,000 rentable square feet for an aggregate sales price of $29,470, excluding closing costs. 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 2022	1	Rockville, MD	129,000	$	6,750	$	(72)
February 2022	2	Chesapeake, VA	172,000	18,945		2,296
March 2022	1	Milwaukee, WI	29,000	3,775		(75)
	4		330,000	$	29,470	$	2,149

(1)Gross sales price is the gross contract price, excluding closing costs.

As of March 31, 2022, we had three properties containing approximately 583,000 rentable square feet classified as held for sale in our condensed consolidated balance sheet. During the three months ended March 31, 2022, we recorded a $2,184 loss on impairment of real estate to adjust the carrying value of one property that was classified as held for sale to its estimated fair value less costs to sell and a $14,863 loss on impairment of real estate to adjust the carrying value of one property that was held and used to its estimated fair value, based on a negotiated sales price with a third-party buyer.

As of April 27, 2022, we have entered into agreements to sell two properties containing approximately 470,000 rentable square feet, including one property that was classified as held for sale as of March 31, 2022, for an aggregate sales price of $38,300, excluding closing costs. These sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.

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, 2022 and December 31, 2021, our investments in unconsolidated joint ventures consisted of the following:

		OPI Carrying Value of Investments at
Joint Venture	OPI Ownership	March 31, 2022		December 31, 2021		Number of Properties	Location	Rentable Square Feet
Prosperity Metro Plaza	51%	$	20,310	$	20,672	2	Fairfax, VA	329,000
1750 H Street, NW	50%	14,701		14,166		1	Washington, D.C.	115,000
Total		$	35,011	$	34,838	3		444,000

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OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

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, 2022 and December 31, 2021 (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, 2022, the aggregate unamortized basis difference of our two unconsolidated joint ventures of $6,855 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 4. Leases

Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term 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 a remote contingency based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis.

We increased rental income to record revenue on a straight line basis by $2,686 and $5,357 for the three months ended March 31, 2022 and 2021, respectively. Rents receivable, excluding properties classified as held for sale, include $85,388 and $82,978 of straight line rent receivables at March 31, 2022 and December 31, 2021, respectively.

We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $22,536 and $18,860 for the three months ended March 31, 2022 and 2021, respectively, of which tenant reimbursements totaled $21,475 and $17,803, respectively.

Note 5. Concentration 

Tenant and Credit 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, 2022, the U.S. government, 11 state governments and four other government tenants combined were responsible for approximately 29.0% of our annualized rental income. As of March 31, 2021, the U.S. government, 11 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 represented approximately 19.4% and 25.9% of our annualized rental income as of March 31, 2022 and 2021, respectively. 

Geographic Concentration 

At March 31, 2022, our 174 wholly owned properties were located in 32 states and the District of Columbia. Properties located in Virginia, California, the District of Columbia, Illinois and Georgia were responsible for approximately 12.1%, 11.1%, 10.0%, 10.0% and 8.4% of our annualized rental income as of March 31, 2022, respectively.

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OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

Note 6. Indebtedness

Our principal debt obligations at March 31, 2022 were: (1) $2,512,000 aggregate outstanding principal amount of senior unsecured notes; and (2) $97,996 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 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, 2022, on the amount outstanding under our revolving credit facility, if any. 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, 2022. Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As of March 31, 2022 and December 31, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.6% and 1.2%, respectively. We did not borrow any funds under our revolving credit facility during the three months ended March 31, 2022 or 2021. As of March 31, 2022 and April 27, 2022, 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, 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, 2022.

At March 31, 2022, three of our properties with an aggregate net book value of $187,129 were encumbered by mortgage notes with an aggregate principal amount of $97,996. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

In April 2022, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $24,863, an annual interest rate of 4.22% and a maturity date in July 2022.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

Note 7. Fair Value of Assets and Liabilities

The following table presents certain of our assets measured at fair value at March 31, 2022, 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
Real estate properties (1)	$	9,800	$	—	$	9,800	$	—
Assets of properties held for sale (2)	$	2,500	$	—	$	—	$	2,500

(1)We recorded an impairment charge of $14,863 to reduce the carrying value of one property in our condensed consolidated balance sheet to its estimated fair value based on a negotiated sales price with a third party buyer (Level 2 inputs as defined in the fair value hierarchy under GAAP). See Note 3 for more information.

(2)We recorded an impairment charge of $2,184 to reduce the carrying value of one property that is classified as held for sale in our condensed consolidated balance sheet to its estimated fair value, less estimated costs to sell of $138, based on third party offers (Level 3 inputs as defined in the fair value hierarchy under GAAP). See Note 3 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 March 31, 2022 and December 31, 2021, 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, 2022				As of December 31, 2021
Financial Instrument	Carrying Value (1)		Fair Value		Carrying Value (1)		Fair Value
Senior unsecured notes, 4.00% interest rate, due in 2022	$	299,731	$	300,537	$	299,500	$	304,148
Senior unsecured notes, 4.25% interest rate, due in 2024	345,152		352,203		344,581		365,449
Senior unsecured notes, 4.50% interest rate, due in 2025	640,232		648,885		639,370		687,749
Senior unsecured notes, 2.650% interest rate, due in 2026	297,370		275,885		297,213		298,502
Senior unsecured notes, 2.400% interest rate, due in 2027	347,000		312,221		346,845		339,764
Senior unsecured notes, 3.450% interest rate, due in 2031	395,852		344,830		395,744		388,458
Senior unsecured notes, 6.375% interest rate, due in 2050	156,566		160,963		156,519		177,098
Mortgage notes payable (2)	97,893		98,249		98,178		100,294
Total	$	2,579,796	$	2,493,773	$	2,577,950	$	2,661,462

(1)Includes unamortized debt premiums, discounts and issuance costs totaling $30,200 and $32,351 as of March 31, 2022 and December 31, 2021, respectively.

(2)In April 2022, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $24,863, an annual interest rate of 4.22% and a maturity date in July 2022.

We estimated the fair values of our senior unsecured notes (except for our senior unsecured notes due 2050) using an average of the bid and ask price of the notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair value of our senior unsecured notes due 2050 based on the closing price on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair values of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates (Level 3 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values.

12

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

Note 8. Shareholders’ Equity

Distributions

During the three months ended March 31, 2022, 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 13, 2022	January 24, 2022	February 17, 2022	$	0.55	$	26,634

On April 14, 2022, we declared a regular quarterly distribution payable to common shareholders of record on April 25, 2022 in the amount of $0.55 per share, or approximately $26,600. We expect to pay this distribution on or about May 19, 2022.

Note 9. Business and Property Management Agreements with RMR

We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations.

Pursuant to our business management agreement with RMR, we recognized net business management fees of $4,710 and $9,474 for the three months ended March 31, 2022 and 2021, respectively. Based on our common share total return, as defined in our business management agreement, as of March 31, 2022, no estimated incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2022. The actual amount of annual incentive fees for 2022, 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, 2022, and will be payable in January 2023. The net business management fees we recognized for the three months ended March 31, 2021 included $5,200 of accrued estimated incentive fees based on our common share total return as of March 31, 2021. We did not incur an incentive fee payable to RMR for the year ended December 31, 2021. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

We and RMR amended our business management agreement effective August 1, 2021 to provide that (i) for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Office REIT Index will be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR and (ii) for periods prior to August 1, 2021, the SNL U.S. REIT Office Index will continue to be used. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Office Index.

Pursuant to our property management agreement with RMR, we recognized aggregate net property management and construction supervision fees of $6,128 and $4,612 for the three months ended March 31, 2022 and 2021, respectively. Of these amounts, for the three months ended March 31, 2022 and 2021, $4,226 and $4,080, respectively, were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $1,902 and $532, respectively, were capitalized as building improvements in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets.

We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR’s centralized accounting personnel, our share of RMR’s costs for providing our internal audit function and as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR. We reimbursed RMR $5,966 and $6,052 for these expenses and costs for the three months ended March 31, 2022 and 2021, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss).

13

OFFICE PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR. Jennifer Clark, our other Managing Trustee and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR and an officer of ABP Trust. Our other officers are also officers and employees of RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR or its subsidiaries provide management services. Mr. Portnoy serves as chair of the boards and as a managing director or managing trustee of these public companies. Other officers of RMR, including Ms. Clark, serve as managing trustees, managing directors or officers of certain of these companies.

Our Manager, RMR. We have two agreements with RMR to provide management services to us. See Note 9 for more information regarding our management agreements with RMR.

Leases with RMR. We lease office space to RMR in certain of our properties for RMR’s property management offices. Pursuant to our lease agreements with RMR, we recognized rental income from RMR for leased office space of $284 and $288 for the three months ended March 31, 2022 and 2021, respectively.

Sonesta. In June 2021, we entered into a 30-year lease agreement with a subsidiary of Sonesta International Hotels Corporation, or Sonesta, in connection with the redevelopment of an office property we own in Washington, D.C. as a mixed-use property. Sonesta’s lease is for the planned full-service hotel component of the property that will include approximately 230,000 rentable square feet, which represents approximately 54% of the total square feet upon completion of the redevelopment. The term of the lease commences upon our delivery of the completed hotel, which we estimate to occur in the first quarter of 2023. Sonesta has two options to extend the term for 10 years each. Pursuant to the lease agreement, Sonesta will pay us annual base rent of approximately $6,436 beginning 18 months after the lease commences. The annual base rent will increase by 10% every five years throughout the term. Sonesta is also obligated to pay its pro rata share of the operating costs for the building. We estimate that the total cost to build the hotel space will be approximately $66,000. Mr. Portnoy is a director and controlling shareholder of Sonesta and Ms. Clark is also a director of Sonesta.

For more information about these and other such relationships and certain other related person transactions, refer to our 2021 Annual Report.

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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 2021 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, 2022, our wholly owned properties were comprised of 174 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet. As of March 31, 2022, our properties are located in 32 states and the District of Columbia and contain approximately 22,941,000 rentable square feet. As of March 31, 2022, our properties were leased to 298 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.1 years. The U.S. government is our largest tenant, representing approximately 19.4% of our annualized rental income as of March 31, 2022. 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, 2022, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including the U.S. economy. Many of the restrictions that had been imposed in the United States during the pandemic have since been lifted and commercial activity in the United States generally has increasingly returned to pre-pandemic practices and operations. We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. To date, the COVID-19 pandemic has not had a significant adverse impact on our business and we continue to believe that our 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.

The ultimate adverse impact of the COVID-19 pandemic is highly uncertain and subject to change. As a result, we do not yet know the full extent of potential impacts on our business and operations, our tenants’ businesses and operations or the global economy as a whole. For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1A, “Risk Factors”, of our 2021 Annual Report.

Property Operations

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of March 31, 2022 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Occupancy data for our properties as of March 31, 2022 and 2021 was as follows (square feet in thousands):

	All Properties (1)				Comparable Properties (2)
	March 31,				March 31,
	2022		2021		2022		2021
Total properties (3)	174		180		163		163
Total rentable square feet (4)	22,941		24,568		20,503		20,497
Percent leased (5)	88.8	%	90.8	%	91.2	%	91.7	%

(1)Based on properties we owned on March 31, 2022 and 2021, respectively.

(2)Based on properties we owned continuously since January 1, 2021; 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.

(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.

15

The average effective rental rate per square foot for our properties for the three months ended March 31, 2022 and 2021 are as follows:

	Three Months Ended March 31,
	2022		2021
Average effective rental rate per square foot (1):
All properties (2)	$	29.40	$	25.95
Comparable properties (3)	$	27.24	$	26.97

(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, 2022 and 2021, respectively.

(3)Based on properties we owned continuously since January 1, 2021; 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, 2022, 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, 2022
	Leased	Available for Lease	Total
Beginning of period	20,817	2,454	23,271
Changes resulting from:
Disposition of properties	(163)	(167)	(330)
Lease expirations	(853)	853	—
Lease renewals (1)	336	(336)	—
New leases (1)	236	(236)	—
End of period	20,373	2,568	22,941

(1)Based on leases entered during the three months ended March 31, 2022.

Leases at our properties totaling approximately 853,000 rentable square feet expired during the three months ended March 31, 2022. During the three months ended March 31, 2022, we entered into new and renewal leases as summarized in the following table (square feet in thousands):

	Three Months Ended March 31, 2022
	New Leases			Renewals			Total
Rentable square feet leased	236			336			572
Weighted average rental rate change (by rentable square feet)	6.7		%	3.8		%	5.1		%
Tenant leasing costs and concession commitments (1)	$	26,855		$	5,893		$	32,748
Tenant leasing costs and concession commitments per rentable square foot (1)	$	113.66		$	17.56		$	57.26
Weighted (by square feet) average lease term (years)	10.4			10.9			10.7
Total leasing costs and concession commitments per rentable square foot per year (1)	$	10.94		$	1.61		$	5.36

(1)Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.

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During the three months ended March 31, 2022, 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, 2022, 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, 2022
	Old Effective Rent Per Square Foot (1)		New Effective Rent Per Square Foot (1)		Rentable Square Feet
New leases	$	8.47	$	7.86	252
Lease renewals	$	27.43	$	29.08	492
Total leasing activity	$	21.00	$	21.89	744

(1)Effective rental rates include 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 exclude lease value amortization.

During the three months ended March 31, 2022 and 2021, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows:

	Three Months Ended March 31,
	2022		2021
Lease related costs (1)	$	8,664	$	6,970
Building improvements (2)	2,783		4,526
Recurring capital expenditures	11,447		11,496
Development, redevelopment and other activities (3)	37,524		4,906
Total capital expenditures	$	48,971	$	16,402

(1)Lease related costs generally include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and other tenant inducements.

(2)Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.

(3)Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue.

In addition to the capital expenditures described above, we contributed $1,070 to one of our unconsolidated joint ventures during the three months ended March 31, 2022. Also, as of March 31, 2022, we have estimated unspent leasing related obligations of $128,009, of which we expect to spend $78,134 over the next 12 months.

As of March 31, 2022, we had leases at our properties totaling approximately 1,482,000 rentable square feet that were scheduled to expire through March 31, 2023. As of April 27, 2022, we expect tenants with leases totaling approximately 543,000 rentable square feet that are scheduled to expire through March 31, 2023, to not renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration. As a result of the COVID-19 pandemic, its economic impact and the uncertainty of whether certain market practices and trends in response to the pandemic will be sustained or increased, overall leasing activity has been volatile and may remain so until office property market conditions meaningfully improve and stabilize for a sustained period. However, we remain focused on proactive dialogues with our existing tenants and overall tenant retention. 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 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 or lower rents upon lease renewal or reletting. Additionally, we may incur significant costs to renew our leases with current tenants or lease our properties to new tenants.

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As of March 31, 2022, 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
2022	53	1,167	5.7	%	5.7	%	$	28,607	5.0	%	5.0	%
2023	63	2,531	12.4	%	18.1	%	82,679		14.5	%	19.5	%
2024	55	3,232	15.9	%	34.0	%	85,660		15.0	%	34.5	%
2025	48	2,122	10.4	%	44.4	%	45,395		7.9	%	42.4	%
2026	39	1,831	9.0	%	53.4	%	48,635		8.5	%	50.9	%
2027	33	1,926	9.5	%	62.9	%	50,265		8.8	%	59.7	%
2028	17	1,288	6.3	%	69.2	%	50,050		8.7	%	68.4	%
2029	20	1,038	5.1	%	74.3	%	30,196		5.3	%	73.7	%
2030	14	520	2.6	%	76.9	%	15,562		2.7	%	76.4	%
2031 and thereafter	50	4,718	23.1	%	100.0	%	134,980		23.6	%	100.0	%
Total	392	20,373	100.0	%			$	572,029	100.0	%
Weighted average remaining lease term (in years)		5.9					6.1

(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, 2022, tenants occupying approximately 4.2% of our rentable square feet and responsible for approximately 4.6% of our annualized rental income as of March 31, 2022 currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2035, 2037 and 2040, early termination rights become exercisable by other tenants who currently occupy an additional approximately 1.1%, 2.9%, 2.6%, 3.9%, 1.2%, 0.7%, 1.2%, 0.5%, 0.7%, 0.1%, 0.4%, 0.1% and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 1.2%, 4.0%, 2.9%, 7.6%, 1.5%, 1.2%, 1.4%, 1.0%, 0.8%, 0.1%, 0.5%, 0.2% and 0.4% of our annualized rental income, respectively, as of March 31, 2022. In addition, as of March 31, 2022, pursuant to leases with 14 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 14 tenants occupy approximately 6.0% of our rentable square feet and contribute approximately 6.8% of our annualized rental income as of March 31, 2022.

(2)Leased square feet is pursuant to leases existing as of March 31, 2022, 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 at properties with tenants when they expire. Because of the capital many of our single tenants have invested in the properties they lease from us and because many of these properties appear to be of strategic importance to such tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire. However, recent shifts in workplace practices, including as a result of the COVID-19 pandemic, have resulted in a significant increase in alternative work arrangements, including work from home practices. It is uncertain to what extent and how long work from home arrangements may continue, or if other hybrid work arrangements will continue or increase. Despite these shifts in workplace practices, our recent leasing activity and negotiations for vacant or expiring space may suggest that there is an improving demand environment for office space. However, if these arrangements continue or increase, our tenants may not seek to renew or extend their leases when they expire, or may seek to renew their leases for less space than they currently occupy. If we are unable to extend or renew our leases, or we renew leases for reduced space, it may be time consuming and expensive to relet some of these properties.

We believe that recent government budgetary and spending priorities and enhancements in technology have resulted in a decrease in government office use for employees. Furthermore, over the past several 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 from relocating their operations. However, efforts to manage 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’ desire to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations are often more prevalent in those circumstances. 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, activity prior to the outbreak of the COVID-19 pandemic suggested that the U.S. 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. However, the COVID-19

18

pandemic and its aftermath have had negative impacts on government budgets and resources. Although there have been indications that certain of those impacts may not have been as negative as originally expected, it is unclear what the effect of these impacts will be on government demand for leasing office space. Given the significant uncertainties, including as to the COVID-19 pandemic and its economic impact and the extent to which certain market trends, such as work from home practices, may continue or increase, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods.

As of March 31, 2022, we derive 22.2% 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 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 office 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, employs a tenant review process for us. RMR assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR 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. 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, 2022, 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 11.0% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

19

As of March 31, 2022, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands):

	Tenant	Credit Rating	Sq. Ft.	% of Leased Sq. Ft.		Annualized Rental Income		% of Total Annualized Rental Income
1	U.S. Government	Investment Grade	4,100	20.1	%	$	110,949	19.4	%
2	Alphabet Inc. (Google)	Investment Grade	386	1.9	%	23,713		4.1	%
3	Shook, Hardy & Bacon L.L.P.	Not Rated	596	2.9	%	19,187		3.4	%
4	IG Investments Holdings LLC	Not Rated	333	1.6	%	15,991		2.8	%
5	Bank of America Corporation	Investment Grade	577	2.8	%	15,766		2.8	%
6	State of California	Investment Grade	523	2.6	%	15,696		2.7	%
7	Commonwealth of Massachusetts	Investment Grade	311	1.5	%	12,260		2.1	%
8	CareFirst Inc.	Not Rated	207	1.0	%	11,498		2.0	%
9	Northrop Grumman Corporation	Investment Grade	337	1.7	%	11,465		2.0	%
10	Tyson Foods, Inc.	Investment Grade	248	1.2	%	11,042		1.9	%
11	Sonesta International Hotels Corporation (1)	Not Rated	230	1.1	%	10,745		1.9	%
12	CommScope Holding Company Inc	Non Investment Grade	228	1.1	%	9,370		1.6	%
13	State of Georgia	Investment Grade	308	1.5	%	7,383		1.3	%
14	PNC Bank	Investment Grade	441	2.2	%	6,924		1.2	%
15	Micro Focus International plc	Non Investment Grade	215	1.1	%	6,905		1.2	%
16	Compass Group plc	Investment Grade	267	1.3	%	6,703		1.2	%
17	ServiceNow, Inc.	Investment Grade	149	0.7	%	6,637		1.2	%
18	Allstate Insurance Co.	Investment Grade	468	2.3	%	6,479		1.1	%
19	Automatic Data Processing, Inc.	Investment Grade	289	1.4	%	6,087		1.1	%
20	Church & Dwight Co., Inc.	Investment Grade	250	1.2	%	6,037		1.1	%
	Total		10,463	51.2	%	$	320,837	56.1	%

(1)In June 2021, we entered into a 30-year lease with Sonesta. The lease relates to the redevelopment of a property we own in Washington, D.C to a mixed use and Sonesta's lease relates to the planned hotel component of the property. The term of the lease commences upon our delivery of the completed hotel, which is estimated to occur in the first quarter of 2023. For more information about our lease with Sonesta, see Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

Disposition Activities

During the three months ended March 31, 2022, we sold four properties containing approximately 330,000 rentable square feet for an aggregate sales price of $29,470, excluding closing costs.

We continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing for sale more than 30 properties containing over 3,000,000 rentable square feet. As of April 27, 2022, we have entered into agreements to sell two properties containing approximately 470,000 rentable square feet, including one property that was classified as held for sale as of March 31, 2022, for an aggregate sales price of $38,300, excluding closing costs. These sales are expected to occur before the end of the second quarter of 2022. However, these sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.

For more information about our disposition activities, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Financing Activities

In April 2022, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $24,863, an annual interest rate of 4.22% and a maturity date in July 2022 using cash on hand.

Segment Information

We operate in one business segment: ownership of real estate properties.

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RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021

	Comparable Properties Results (1)  Three Months Ended March 31,								Non-Comparable  Properties Results Three Months Ended March 31,				Consolidated Results Three Months Ended March 31,
	2022		2021		$ Change		% Change		2022		2021		2022		2021		$ Change		% Change
Rental income	$	125,387	$	125,994	$	(607)	(0.5	%)	$	21,967	$	18,530	$	147,354	$	144,524	$	2,830	2.0	%
Operating expenses:
Real estate taxes	13,653		13,914		(261)		(1.9	%)	2,992		2,240		16,645		16,154		491		3.0	%
Utility expenses	6,143		5,677		466		8.2	%	722		755		6,865		6,432		433		6.7	%
Other operating expenses	23,641		22,192		1,449		6.5	%	3,722		3,247		27,363		25,439		1,924		7.6	%
Total operating expenses	43,437		41,783		1,654		4.0	%	7,436		6,242		50,873		48,025		2,848		5.9	%
Net operating income (2)	$	81,950	$	84,211	$	(2,261)	(2.7	%)	$	14,531	$	12,288	96,481		96,499		(18)		n/m
Other expenses:
Depreciation and amortization													60,469		64,087		(3,618)		(5.6	%)
Loss on impairment of real estate													17,047		7,660		9,387		122.5	%
General and administrative													5,706		11,272		(5,566)		(49.4	%)
Total other expenses													83,222		83,019		203		0.2	%
Gain on sale of real restate													2,149		54,004		(51,855)		(96.0	%)
Interest and other income													1		5		(4)		(80.0