OFFICE PROPERTIES INCOME TRUST - Quarter Report: 2020 September (Form 10-Q)

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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

☐ 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

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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.

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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.

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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 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.

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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 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.

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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 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.

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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.

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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.

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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, 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

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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

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.

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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.

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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

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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.

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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.

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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

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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 $6,850 for these expenses and costs for the three months ended September 30, 2020 and 2019, respectively, and $18,687 and $20,007 for these expenses and costs for the nine months ended September 30, 2020 and 2019, respectively. We included these amounts in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss).

Note 11. Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. David Blackman, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer of RMR LLC. Mr. Blackman has announced his decision to retire and, therefore, resign as our President and Chief Executive Officer, effective December 31, 2020, and as our Managing Trustee, effective as of June 30, 2021 or such earlier date as his successor Managing Trustee is elected to our Board. In replacement of Mr. Blackman, Christopher J. Bilotto has been appointed as our President and Chief Operating Officer, effective January 1, 2021. Mr. Bilotto currently serves as our Vice President and Chief Operating Officer, and he is an officer and employee of RMR LLC. In addition, each of our other officers is also an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these public companies. Other officers of RMR LLC, including Mr. Blackman and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies.

See Note 9 for further information relating to our awards of common shares to our officers and certain other employees of RMR LLC in September 2020 and our repurchases of common shares from one of our Trustees, our officers, and certain other current and former employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to them. We include amounts recognized as expense for awards of our common shares to our officers and to other RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. For more information regarding our management agreements with RMR LLC, see Note 10.

Leases with RMR LLC. We lease office space to RMR LLC in certain of our properties for RMR LLC’s property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of $282 and $288 for the three months ended September 30, 2020 and 2019, respectively, and $836 and $854 for the nine months ended September 30, 2020 and 2019, respectively.

Affiliates Insurance Company, or AIC. Until its dissolution on February 13, 2020 we, ABP Trust and five other companies to which RMR LLC provides management services owned AIC in equal amounts. We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.

As of September 30, 2020 and December 31, 2019, our investment in AIC had a carrying value of $11 and $298, respectively. These amounts are included in other assets, net in our condensed consolidated balance sheets. In June 2020, we received an additional liquidating distribution of approximately $287 from AIC in connection with its dissolution. We did not recognize any income related to our investment in AIC for the three or nine months ended September 30, 2020, respectively, and we recognized income of $83 and $617 for the three and nine months ended September 30, 2019, respectively. These

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

(unaudited)

amounts are included in equity in net losses of investees in our condensed consolidated statements of comprehensive income (loss). Our other comprehensive loss for the 2019 period includes our proportionate part of unrealized gains (losses) on fixed income securities, which were owned by AIC, related to our investment in AIC.

For more information about these and other such relationships and certain other related person transactions, refer to our 2019 Annual Report.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2019 Annual Report.

OVERVIEW (dollars in thousands, except per share and per square foot data)

We are a real estate investment trust, or REIT, organized under Maryland law. As of September 30, 2020, our wholly owned properties were comprised of 184 properties 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. As of September 30, 2020, our properties are located in 34 states and the District of Columbia and contain approximately 24,909,000 rentable square feet. As of September 30, 2020, our properties were leased to 357 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 5.2 years. The U.S. Government is our largest tenant, representing approximately 25.2% of our annualized rental income as of September 30, 2020. The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of September 30, 2020, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic and, in response to the outbreak, the U.S. Health and Human Services Secretary declared a public health emergency in the United States and many states and municipalities declared public health emergencies. The virus that causes COVID-19 has continued to spread throughout the United States and the world. Various governmental responses attempting to contain and mitigate the spread of the virus have negatively impacted, and continue to negatively impact, the global economy, including the U.S. economy. As a result, most market observers believe the global economy and the U.S. economy are in a recession. States and municipalities across the United States have generally allowed most businesses to re-open and have generally eased certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time, although some states and municipalities have imposed or re-imposed certain restrictions in response to increases in COVID-19 infections experienced since then. Recently, economic data have indicated that the U.S. economy has improved since the lowest periods experienced in March and April 2020, although the U.S. gross domestic product remains below pre-pandemic levels. It is unclear whether the increases in the number of COVID-19 infections will continue or amplify in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy, our tenants or our business.

Our business is focused on leasing office space to primarily single tenants and those with high credit quality characteristics such as government entities. Although, to date, the COVID-19 pandemic has not had a significant impact on our business, we have received requests from some of our tenants for rent assistance. As of October 27, 2020, we have granted temporary rent assistance totaling $2,550 to 19 tenants who represent approximately 3.6% of our annualized rental income as of September 30, 2020. As of September 30, 2020, deferred payments totaling $2,096 were included in rents receivable in our condensed consolidated balance sheet. This assistance generally entails a deferral of, in most cases, one month of rent pursuant to deferred payment plans which require the deferred rent amounts be payable over a 12-month period, certain of which commenced in September 2020. For the quarter ended September 30, 2020, we collected approximately 99% of contractual rent obligations before and after giving effect to such rent deferrals.

We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including:

•our tenants and their ability to withstand the current economic conditions and continue to pay us rent;

•our operations, liquidity and capital needs and resources;

•conducting financial modeling and sensitivity analyses;

•actively communicating with our tenants and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts;

•monitoring applicable states and municipalities to which we lease property and their responses to the COVID-19 pandemic and economic slowdown, including budgetary impacts; and

•monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our tenants to enable us and them to operate through the current economic conditions and enhance our tenants’ ability to pay us rent.

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We believe that our current financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic and perhaps present opportunities for us to strategically deploy our capital. As of October 29, 2020, we had:

•$750,000 of availability under our revolving credit facility;

•no significant debt maturities until 2022; and

•64.7% of our annualized rental income, as of September 30, 2020, derived from investment grade tenants (as described below).

We do not have any employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business and property management agreements with RMR LLC. RMR LLC has implemented enhanced cleaning protocols and social distancing guidelines at its corporate headquarters and its regional offices, as well as business continuity plans to ensure RMR LLC employees remain safe and able to support us and other companies managed by RMR LLC or its subsidiaries, including providing appropriate information technology such as notebook computers, smart phones, computer applications, information technology security applications and technology support.

With respect to our properties, RMR LLC has implemented enhanced cleaning protocols and has taken measures to reduce the possibility of persons gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for spreading of COVID-19 infections. Included among these protocols and measures are the following:

•focusing on sanitizing high touch points in common areas and restrooms;

•shutting down certain building amenities; and

•prudently managing the execution or deferment of tenant work orders to limit RMR LLC staff and tenant interactions at our properties.

All RMR LLC property management and engineering personnel have been trained on COVID-19 precaution procedures. As states and local communities across the country moved to stay at home orders, RMR LLC worked to reduce and optimize our operating costs at our properties by:

•deferring non-emergency work;

•implementing energy reduction protocols for lighting and HVAC systems;

•reducing non-essential building services and staff; and

•reducing the frequency of trash removal.

RMR LLC’s property management teams have also established business continuity plans to ensure operational stability at our properties. As stay at home orders have been lifted or loosened across the United States, RMR LLC has implemented additional procedures at our properties based on recommended guidelines from the U.S. Centers for Disease Control and Prevention and other regulatory agencies. For example:

•installing signage throughout our properties with social distancing reminders;

•making changes to certain building HVAC systems and equipment, including adjusting outdoor air control programs to increase the amount of outside air delivered to interior spaces and to adjust control sequences to maintain space relative humidity in order to help minimize the concentration of the virus;

•flushing domestic water systems to prepare for re-occupancy;

•performing service calls and preventative maintenance after business hours to limit social interactions;

•requiring vendors to follow best practices under COVID-19 pandemic conditions, including providing RMR LLC with documented preventative measures for the vendors’ employees and requiring vendors’ staff to wear appropriate personal protective equipment when working at our properties; and

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•altering cleaning schedules to perform vacuuming at times intended to reduce the potential airborne spread of the virus.

RMR LLC has significantly reduced all non-essential work travel and its regional leadership personnel have not been allowed to work in the same locations at the same time. RMR LLC also requires its employees who work at our properties to use personal protective equipment and business continuity bonus payments have been provided to certain essential workers at our properties. RMR LLC’s regional management offices are currently limiting walk-in visitors and maintain maximum office occupancy limits as required by state and local guidelines, including weekly rotations of employees as needed.

There are extensive uncertainties surrounding the COVID-19 pandemic. These uncertainties include among others:

•the duration and severity of the negative economic impact;

•the strength and sustainability of any economic recovery;

•the timing and process for how federal, state and local governments and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic abates, such as what continuing restrictions and protective measures may remain in place or be added and what restrictions and protective measures may be lifted or reduced in order to foster a return of increased economic activity in the United States; and

•the responses of governments, businesses and the general public to any increased level or rates of COVID-19 infections.

As a result of these uncertainties, we are unable to determine what the ultimate impact will be on our, our tenants’ and other stakeholders’ businesses, operations, financial results and financial position. For further information and risks relating to the COVID-19 pandemic on us and our business, see Part II, Item 1A “Risk Factors,” in this Quarterly Report on Form 10-Q.

Property Operations

Unless otherwise noted, the data presented in this section excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For more information regarding our two unconsolidated joint ventures, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

As of September 30, 2020, 91.2% of our rentable square feet was leased, compared to 93.3% of our rentable square feet as of September 30, 2019. Occupancy data for our properties as of September 30, 2020 and 2019 was as follows (square feet in thousands):


	All Properties (1)				Comparable Properties (2)
	September 30,				September 30,
	2020		2019		2020		2019
Total properties (3)	184		200		178		178
Total rentable square feet (4)	24,909		27,290		24,451		24,541
Percent leased (5)	91.2	%	93.3	%	92.3	%	93.5	%

(1)Based on properties we owned on September 30, 2020 and 2019, respectively.

(2)Based on properties we owned continuously since January 1, 2019; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(3)Includes one leasable land parcel.

(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.

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The average effective rental rate per square foot for our properties for the three and nine months ended September 30, 2020 and 2019 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Average effective rental rate per square foot (1):
All properties (2)	$	25.85	$	26.49	$	25.89	$	27.21
Comparable properties (3)	$	25.86	$	26.20	$	25.94	$	26.06

(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 September 30, 2020 and 2019, respectively.

(3)Based on properties we owned continuously since July 1, 2019 and January 1, 2019, respectively; 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 and nine months ended September 30, 2020, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):


	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
	Leased	Available for Lease	Total	Leased	Available for Lease	Total
Beginning of period	22,839	2,070	24,909	23,761	1,965	25,726
Changes resulting from:
Acquisition of properties	—	—	—	—	13	13
Disposition of properties	—	—	—	(693)	(42)	(735)
Lease expirations	(715)	715	—	(2,173)	2,173	—
Lease renewals (1)	577	(577)	—	1,649	(1,649)	—
New leases (1)	18	(18)	—	177	(177)	—
Remeasurements (2)	1	(1)	—	(1)	(94)	(95)
End of period	22,720	2,189	24,909	22,720	2,189	24,909

(1)Based on leases entered during the three and nine months ended September 30, 2020.

(2)Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants.

Leases at our properties totaling approximately 715,000 and 2,173,000 rentable square feet expired during the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2020, we entered leases totaling approximately 595,000 and 1,826,000 rentable square feet, respectively, including lease renewals of approximately 577,000 and 1,649,000 rentable square feet, respectively, and new leases of approximately 18,000 and 177,000 rentable square feet, respectively. The weighted (by rentable square feet) average rents were 31.0% and 8.0%, respectively, above prior rents for the same space and the weighted (by rentable square feet) average lease term for new and renewal leases entered during the three and nine months ended September 30, 2020 was 10.6 years and 7.1 years, respectively.

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During the three and nine months ended September 30, 2020, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows (square feet in thousands):


	Three Months Ended September 30, 2020
	New Leases		Renewals		Total
Rentable square feet leased	18		577		595
Tenant leasing costs and concession commitments (1)	$	193	$	6,045	$	6,238
Tenant leasing costs and concession commitments per rentable square foot (1)	$	10.95	$	10.48	$	10.49
Weighted (by square feet) average lease term (years)	4.0		10.8		10.6
Total leasing costs and concession commitments per rentable square foot per year (1)	$	2.77	$	0.97	$	0.99


	Nine Months Ended September 30, 2020
	New Leases		Renewals		Total
Rentable square feet leased	177		1,649		1,826
Tenant leasing costs and concession commitments (1)	$	14,511	$	21,186	$	35,697
Tenant leasing costs and concession commitments per rentable square foot (1)	$	82.21	$	12.85	$	19.56
Weighted (by square feet) average lease term (years)	11.0		6.7		7.1
Total leasing costs and concession commitments per rentable square foot per year (1)	$	7.47	$	1.91	$	2.74

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

During the three and nine months ended September 30, 2020, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and nine months ended September 30, 2020, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands):


	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
	Old Effective Rent Per Square Foot (1)		New Effective Rent Per Square Foot (1)		Rentable Square Feet	Old Effective Rent Per Square Foot (1)		New Effective Rent Per Square Foot (1)		Rentable Square Feet
New leases	$	31.85	$	33.78	73	$	29.95	$	29.94	223
Lease renewals	$	15.50	$	18.24	773	$	26.91	$	28.70	1,621
Total leasing activity	$	16.90	$	31.85	846	$	27.28	$	28.85	1,844

(1)Effective rental rate includes contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excluding lease value amortization.

During the three and nine months ended September 30, 2020 and 2019, amounts capitalized at our properties for tenant improvements, leasing costs, building improvements and development, redevelopment and other activities were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Tenant improvements (1)	$	4,513	$	8,749	$	15,244	$	20,784
Leasing costs (2)	2,679		7,139		10,982		21,224
Building improvements (3)	10,579		11,180		29,814		22,805
Recurring capital expenditures	17,771		27,068		56,040		64,813
Development, redevelopment and other activities (4)	5,521		1,206		11,260		2,391
Total capital expenditures	$	23,292	$	28,274	$	67,300	$	67,204

(1)Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.

(2)Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements.

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

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

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

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As of September 30, 2020, we had leases at our properties totaling approximately 3,780,000 rentable square feet that were scheduled to expire through December 31, 2021. As of October 29, 2020, we expect tenants with leases totaling approximately 2,626,000 rentable square feet that are scheduled to expire through December 31, 2021, to not renew their leases upon expiration and we cannot be sure as to whether other tenants may or may not renew their leases upon expiration. As a result of the COVID-19 pandemic and its economic impact, overall new leasing volume for 2020 has slowed and we expect that trend may continue or remain at a similar level of activity until market conditions meaningfully improve 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 extend, renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. We cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter; also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations.

As of September 30, 2020, our lease expirations by year are as follows (square feet in thousands):


Year (1)	Number of Leases Expiring	Leased Square Feet Expiring (2)	Percent of Total		Cumulative Percent of Total		Annualized Rental Income Expiring		Percent of Total		Cumulative Percent of Total
2020	36	497	2.2	%	2.2	%	$	13,855	2.4	%	2.4	%
2021	61	3,283	14.5	%	16.7	%	59,885		10.3	%	12.7	%
2022	75	1,978	8.7	%	25.4	%	55,426		9.6	%	22.3	%
2023	66	2,410	10.6	%	36.0	%	76,523		13.2	%	35.5	%
2024	57	3,869	17.0	%	53.0	%	101,305		17.5	%	53.0	%
2025	54	2,033	8.9	%	61.9	%	43,664		7.5	%	60.5	%
2026	29	1,703	7.5	%	69.4	%	45,525		7.9	%	68.4	%
2027	31	2,032	8.9	%	78.3	%	52,161		9.0	%	77.4	%
2028	12	872	3.8	%	82.1	%	25,582		4.4	%	81.8	%
2029 and thereafter	53	4,043	17.9	%	100.0	%	104,754		18.2	%	100.0	%
Total	474	22,720	100.0	%			$	578,680	100.0	%

Weighted average remaining lease term (in years)		5.1					5.2

(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 September 30, 2020, tenants occupying approximately 7.5% of our rentable square feet and responsible for approximately 9.2% of our annualized rental income as of September 30, 2020 currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2030 and 2035, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.2%, 1.5%, 2.3%, 1.5%, 1.1%, 2.2%, 1.0%, 0.5%, 1.1%, 0.1% and 0.1% of our rentable square feet, respectively, and contribute an additional approximately 0.2%, 1.6%, 2.4%, 1.7%, 1.7%, 3.9%, 1.3%, 0.7%, 1.4%, 0.2% and 0.1% of our annualized rental income, respectively, as of September 30, 2020. In addition, as of September 30, 2020, 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 5.4% of our rentable square feet and contribute approximately 6.2% of our annualized rental income as of September 30, 2020.

(2)Leased square feet is pursuant to leases existing as of September 30, 2020, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to changes when space is remeasured or reconfigured for new tenants.

We generally will seek to renew or extend the terms of leases in our single tenant properties when they expire. Because of the capital many of the tenants in these properties have invested in the properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties.

We believe that current government budgetary methodology, spending priorities and the current U.S. presidential administration’s views on the size and scope of government employment have resulted in a decrease in government employment. Furthermore, for the past six years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties. This activity has reduced the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to

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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 reduce space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy. Also, our government tenants’ desires to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations have become more prevalent than our past experiences in instances where efforts by government tenants to manage their space utilization require a significant reconfiguration of currently leased space. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals; however, recent activity prior to the outbreak of the COVID-19 pandemic suggested that the government had begun to shift its leasing strategy to include longer term leases and was actively exploring 10 to 20 year lease terms at renewal, in some instances. We believe the reduction in government tenant space utilization and the consolidation of government tenants into government owned real estate is substantially complete; however, these activities may impact us for some time into the future. It is also possible that as a result of the COVID-19 pandemic, government tenants may seek to manage space utilization rates in order to provide greater physical distancing for employees, which may require us to spend significant amounts for tenant improvements. However, the COVID-19 pandemic and its aftermath have had negative impacts on government budgets and resources and it is unclear what the effect of these impacts will be on government demand for leasing office space. Given the significant uncertainties as to the COVID-19 pandemic, its economic impact and its aftermath, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances, including as a result of the COVID-19 pandemic, will be on our financial results for future periods.

As of September 30, 2020, we derive 24.1% of our annualized rental income from our properties located in the metropolitan Washington, D.C. market area, which includes Washington, D.C., Northern Virginia and suburban Maryland. A downturn in economic conditions in this area, including as a result of the COVID-19 pandemic, could result in reduced demand from tenants for our properties or reduce the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased 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 LLC, employs a tenant review process for us. RMR LLC assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR LLC evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. RMR LLC also often uses a third party service to monitor the credit ratings, both actual and implied, of our existing tenants. We consider investment grade tenants to include: (a) investment grade rated tenants; (b) tenants with investment grade rated parent entities that guarantee the tenant’s lease obligations; and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations. As of September 30, 2020, tenants contributing 57.2% 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 7.5% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

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As of September 30, 2020, tenants representing 1% or more of our total annualized rental income were as follows:


	Tenant	Credit Rating	Annualized Rental Income		% of Total Annualized Rental Income
1	U.S. Government	Investment Grade	$	145,953	25.2	%
2	Shook, Hardy & Bacon L.L.P.	Not Rated	19,199		3.3	%
3	State of California	Investment Grade	19,083		3.3	%
4	Bank of America Corporation	Investment Grade	16,520		2.9	%
5	WestRock Company	Investment Grade	12,864		2.2	%
6	F5 Networks, Inc.	Not Rated	12,777		2.2	%
7	Commonwealth of Massachusetts	Investment Grade	11,953		2.1	%
8	CareFirst Inc.	Non Investment Grade	11,684		2.0	%
9	Northrop Grumman Corporation	Investment Grade	11,320		2.0	%
10	Tyson Foods, Inc.	Investment Grade	11,011		1.9	%
11	Micro Focus International plc	Non Investment Grade	8,710		1.5	%
12	CommScope Holding Company Inc	Non Investment Grade	8,097		1.4	%
13	State of Georgia	Investment Grade	7,094		1.2	%
14	PNC Bank	Investment Grade	6,902		1.2	%
15	ServiceNow, Inc.	Investment Grade	6,481		1.1	%
16	Allstate Insurance Co.	Investment Grade	6,473		1.1	%
17	Compass Group plc	Investment Grade	6,399		1.1	%
18	Automatic Data Processing, Inc.	Investment Grade	6,047		1.0	%
19	Church & Dwight Co., Inc.	Investment Grade	6,019		1.0	%
20	Tailored Brands, Inc. (1)	Non Investment Grade	5,898		1.0	%

	Total		$	340,484	58.7	%

(1)On August 2, 2020, Tailored Brands, Inc. filed for Chapter 11 bankruptcy. Although the tenant has paid its post-petition rental obligations due for September and October 2020, the tenant owes its August rental obligations, for which a proof of claim has been filed. On October 27, 2020, Tailored Brands, Inc. filed a plan supplement in connection with its reorganization plan which included assuming its lease obligation with us. However, that does not assure entry of a confirmation order by the bankruptcy court or that the tenant will pay its August 2020 or future rents, or that the tenant will not seek to renegotiate its lease obligation as part of its bankruptcy proceeding.

Acquisition Activities

During the nine months ended September 30, 2020, we acquired a property adjacent to a property we own in Boston, MA for $11,500, excluding acquisition related costs.

For more information about our acquisition activities, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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. In October 2020, we sold a four property business park located in Fairfax, VA containing approximately 171,000 rentable square feet for a sales price of $25,100, excluding closing costs. We sold these properties pursuant to our capital recycling program. Through our capital recycling program, we seek to selectively sell certain properties from time to time to fund future acquisitions and to maintain leverage consistent with our current investment grade ratings with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average lease term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution. Given the current

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economic conditions surrounding the COVID-19 pandemic, we are carefully considering our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.

For more information about our disposition activities, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Financing Activities

In January 2020, we redeemed, at par plus accrued interest, all $400,000 of our 3.60% senior unsecured notes due 2020 using cash on hand, proceeds from property sales and borrowings under our revolving credit facility.

Also 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 using cash on hand and borrowings under our revolving credit facility.

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, which we used to repay amounts outstanding under our revolving credit facility and for general business purposes. 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% using cash on hand and borrowings under our revolving credit facility.

In September 2020, we issued $250,000 of our 4.50% senior unsecured notes due 2025 in an underwritten public offering. These senior unsecured notes are a further issuance of our existing $400,000 of senior unsecured notes due 2025 that were initially issued by 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 senior unsecured 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.

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 September 30, 2020, Compared to Three Months Ended September 30, 2019


									Non-Comparable
									Properties Results
	Comparable Properties Results (1)								Three Months Ended				Consolidated Results
	Three Months Ended September 30,								September 30,				Three Months Ended September 30,
					$		%										$		%
	2020		2019		Change		Change		2020		2019		2020		2019		Change		Change
Rental income	$	144,910	$	149,057	$	(4,147)	(2.8	%)	$	896	$	18,354	$	145,806	$	167,411	$	(21,605)	(12.9	%)
Operating expenses:
Real estate taxes	16,280		16,402		(122)		(0.7	%)	(167)		2,422		16,113		18,824		(2,711)		(14.4	%)
Utility expenses	7,472		8,093		(621)		(7.7	%)	92		1,425		7,564		9,518		(1,954)		(20.5	%)
Other operating expenses	25,855		26,688		(833)		(3.1	%)	511		3,688		26,366		30,376		(4,010)		(13.2	%)
Total operating expenses	49,607		51,183		(1,576)		(3.1	%)	436		7,535		50,043		58,718		(8,675)		(14.8	%)
Property net operating income (2)	$	95,303	$	97,874	$	(2,571)	(2.6	%)	$	460	$	10,819	95,763		108,693		(12,930)		(11.9	%)

Other expenses:
Depreciation and amortization													62,227		74,939		(12,712)		(17.0	%)
Loss on impairment of real estate													2,954		8,521		(5,567)		(65.3	%)

General and administrative													7,059		7,990		(931)		(11.7	%)
Total other expenses													72,240		91,450		(19,210)		(21.0	%)

Gain on sale of real restate													—		11,463		(11,463)		n/m


Interest and other income													2		358		(356)		(99.4	%)
Interest expense													(27,097)		(32,367)		5,270		(16.3	%)
Loss on early extinguishment of debt													—		(284)		284		n/m

Loss before income tax (expense) benefit and equity in net losses of investees													(3,572)		(3,587)		15		(0.4	%)
Income tax (expense) benefit													54		(156)		210		(134.6	%)
Equity in net losses of investees													(279)		(196)		(83)		42.3	%






Net loss													$	(3,797)	$	(3,939)	$	142	(3.6	%)



Weighted average common shares outstanding (basic and diluted)													48,132		48,073		59		0.1	%


Per common share amounts (basic and diluted):
Net loss													$	(0.08)	$	(0.08)	$	—	0.0	%

n/m - not meaningful

(1)Comparable properties consists of 178 properties we owned on September 30, 2020 and which we owned continuously since July 1, 2019 and 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.

(2)Our definition of property net operating income, or Property NOI, and our reconciliation of net income (loss) to Property NOI are included below under the heading “Non-GAAP Financial Measures.”

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended September 30, 2020, compared to the three month period ended September 30, 2019.

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Rental income. The decrease in rental income reflects decreases in rental income of $15,384 as a result of property dispositions, $4,147 related to comparable properties and $2,117 related to a property undergoing significant redevelopment, offset by an increase in rental income of $43 related to acquired properties. The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our comparable properties in the 2020 period, lower reimbursement income due to reductions in expenses that are reimbursable to us by our tenants as a result of the COVID-19 pandemic and resulting decrease in space utilization and increased revenue reserves of $652 in the 2020 period primarily due to two of our tenants that represent approximately 1.17% of our annualized revenue as of September 30, 2020 being unable to pay us rent due to the impact of the COVID-19 pandemic. Rental income includes non-cash straight line rent adjustments totaling $3,912 in the 2020 period and $6,904 in the 2019 period, and amortization of acquired leases and assumed lease obligations totaling $(1,312) in the 2020 period and $(35) in the 2019 period.

Real estate taxes. The decrease in real estate taxes primarily reflects decreases in real estate taxes of $1,979 as a result of property dispositions, $626 for a property undergoing significant redevelopment and $122 for comparable properties, offset by an increase in real estate taxes of $16 related to acquired properties. Real estate taxes for comparable properties decreased primarily due to successful real estate tax appeals for two of our comparable properties in the 2020 period.

Utility expenses. The decrease in utility expenses reflects a decrease in utility expenses of $1,373 as a result of property dispositions and a decrease for comparable properties of $621, offset by an increase in utility expenses of $40 for a property undergoing significant redevelopment. Utility expenses for comparable properties declined primarily due to a decrease in electricity and water usage resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, as well as the implementation of real time energy management programs at certain of our properties in the 2020 period.

Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees. The decrease in other operating expenses primarily reflects a decrease of $3,107 as a result of property dispositions, a decrease of $833 for comparable properties and a decrease of $122 related to a property undergoing significant redevelopment, offset by an increase in other operating expenses of $52 for acquired properties. Other operating expenses for comparable properties decreased primarily due to lower cleaning costs as a result of cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic and lower parking garage maintenance costs at certain of our properties due to lower parking activity resulting from the COVID-19 pandemic.

Depreciation and amortization. The decrease in depreciation and amortization primarily reflects a decrease for comparable properties of $6,469, a decrease of $5,457 as a result of property dispositions and a decrease of $844 related to a property undergoing significant redevelopment, offset by an increase in depreciation and amortization of $58 for acquired properties. Depreciation and amortization for comparable properties and the property undergoing significant redevelopment declined due to certain leasing related assets becoming fully depreciated in the 2020 period.

Loss on impairment of real estate. We recorded a $2,954 loss on impairment of real estate in the 2020 period to reduce the carrying value of four properties to their estimated fair value less costs to sell. In the 2019 period, we recorded a $6,342 loss on impairment of real estate to reduce the carrying value of eight properties to their estimated fair value less costs to sell and a $2,179 loss on impairment of real estate related to the disposal of one property.

General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The decrease in general and administrative expenses primarily reflects a decrease in business management fees as a result of property sales during 2019 and 2020 and declines in our share price in the 2020 period during the COVID-19 pandemic.

Gain on sale of real estate. We recorded an $11,463 gain on sale of real estate resulting from the sale of two properties in the 2019 period.

Interest and other income. The decrease in interest and other income is primarily due to the payoff of a mortgage note receivable that we received in June 2020 in connection with a property we sold in 2016, as well as the effect of lower cash balances invested in the 2020 period compared to the 2019 period and lower returns on cash invested.

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senior unsecured notes in January 2020 and the repayment of four mortgage notes with an aggregate principal balance of $152,187 during 2020, as well as lower weighted average interest rates on borrowings during the 2020 period compared to the 2019 period, partially offset by an increase in interest expense resulting from the issuance of $162,000 of our 6.375% senior unsecured notes in June and July 2020 and $250,000 of our 4.50% senior unsecured notes in September 2020.

Loss on early extinguishment of debt. Loss on extinguishment of debt in the 2019 period reflects the write-off of unamortized debt issuance costs and discounts associated with repayments of our unsecured term loan and redemption of our senior unsecured notes due 2019.

Income tax (expense) benefit. Income tax (expense) benefit is the result of operating income we earned in certain jurisdictions where we are subject to state income taxes.

Equity in net losses of investees. Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures and, in the 2019 period, our investment in AIC.

Net loss. Net loss decreased in the 2020 period compared to the 2019 period primarily as a result of the changes noted above.

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

Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019


									Non-Comparable
									Properties Results
	Comparable Properties Results (1)								Nine Months Ended				Consolidated Results
	Nine Months Ended September 30,								September 30,				Nine Months Ended September 30,
					$		%										$		%
	2020		2019		Change		Change		2020		2019		2020		2019		Change		Change
Rental income	$	436,764	$	443,510	$	(6,746)	(1.5	%)	$	4,530	$	74,710	$	441,294	$	518,220	$	(76,926)	(14.8	%)
Operating expenses:
Real estate taxes	48,223		48,110		113		0.2	%	478		7,253		48,701		55,363		(6,662)		(12.0	%)
Utility expenses	19,284		22,050		(2,766)		(12.5	%)	493		4,319		19,777		26,369		(6,592)		(25.0	%)
Other operating expenses	76,030		77,177		(1,147)		(1.5	%)	2,003		13,027		78,033		90,204		(12,171)		(13.5	%)
Total operating expenses	143,537		147,337		(3,800)		(2.6	%)	2,974		24,599		146,511		171,936		(25,425)		(14.8	%)
Property NOI (2)	$	293,227	$	296,173	$	(2,946)	(1.0	%)	$	1,556	$	50,111	294,783		346,284		(51,501)		(14.9	%)

Other expenses:
Depreciation and amortization													189,340		226,373		(37,033)		(16.4	%)
Loss on impairment of real estate													2,954		14,105		(11,151)		(79.1	%)
Acquisition and transaction related costs													—		682		(682)		n/m
General and administrative													21,372		25,457		(4,085)		(16.0	%)
Total other expenses													213,666		266,617		(52,951)		(19.9	%)

Gain on sale of real estate													10,822		33,538		(22,716)		(67.7	%)
Dividend income													—		1,960		(1,960)		n/m
Loss on equity securities, net													—		(44,007)		44,007		n/m
Interest and other income													738		847		(109)		(12.9	%)
Interest expense													(79,461)		(104,848)		25,387		(24.2	%)
Loss on early extinguishment of debt													(3,839)		(769)		(3,070)		n/m
Income (loss) before income tax expense and equity in net losses of investees													9,377		(33,612)		42,989		127.9	%
Income tax expense													(220)		(509)		289		(56.8	%)
Equity in net losses of investees													(815)		(573)		(242)		42.2	%




Net income (loss)													$	8,342	$	(34,694)	$	43,036	124.0	%

Weighted average common shares outstanding (basic and diluted)													48,111		48,051		60		0.1	%


Per common share amounts (basic and diluted):


Net income (loss)													$	0.17	$	(0.72)	$	0.89	123.6	%

n/m - not meaningful

(1)Comparable properties consists of 178 properties we owned on September 30, 2020 and which we owned continuously since January 1, 2019 and 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.

(2)Our definition of Property NOI and our reconciliation of net income (loss) to Property NOI are included below under the heading “Non-GAAP Financial Measures.”

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine month period ended September 30, 2020, compared to the nine month period ended September 30, 2019.

Rental income. The decrease in rental income reflects decreases in rental income of $64,054 as a result of property dispositions, $6,746 related to comparable properties and $6,202 related to a property undergoing significant redevelopment, offset by an increase in rental income of $76 related to acquired properties. The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our comparable properties in the 2020 period, termination fee revenue recorded at certain of our comparable properties in the 2019 period, certain below market lease intangibles becoming fully amortized and reductions in reimbursement income due to reductions in expenses that are

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reimbursable to us by our tenants as a result of the COVID-19 pandemic and resulting decrease in space utilization. Rental income includes non-cash straight line rent adjustments totaling $12,963 in the 2020 period and $19,365 in the 2019 period, and amortization of acquired leases and assumed lease obligations totaling $(4,149) in the 2020 period and $(2,628) in the 2019 period.

Real estate taxes. The decrease in real estate taxes primarily reflects a decrease in real estate taxes associated with property dispositions of $6,204 and a decrease in real estate taxes of $609 for a property undergoing significant redevelopment, offset by increases in real estate taxes of $113 for comparable properties and $38 for acquired properties. Real estate taxes for comparable properties increased primarily due to the effect of higher real estate tax rates and valuation assessments for certain of our properties in the 2020 period.

Utility expenses. The decrease in utility expenses reflects a decrease in utility expenses associated with property dispositions of $3,975 and a decrease in utility expenses for comparable properties of $2,766, offset by an increase in utility expenses for a property undergoing significant redevelopment of $149. Utility expenses for comparable properties declined primarily due to a decrease in electricity and water usage resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, as well as the implementation of real time energy management programs at certain of our properties in the 2020 period.

Other operating expenses. The decrease in other operating expenses primarily reflects a decrease in other operating expenses related to property dispositions of $10,718, a decrease of $1,147 for comparable properties and a decrease of $397 related to a property undergoing significant redevelopment, offset by an increase in other operating expenses related to acquired properties of $91. Other operating expenses for comparable properties decreased primarily due to lower cleaning costs resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, lower snow removal costs and lower parking garage maintenance costs due to lower parking activity at certain of our properties resulting from the COVID-19 pandemic, partially offset by higher insurance costs in the 2020 period.

Depreciation and amortization. The decrease in depreciation and amortization primarily reflects a decrease related to property dispositions of $21,653, a decrease for comparable properties of $12,903 and a decrease related to a property undergoing significant redevelopment of $2,618, offset by an increase related to acquired properties of $141. Depreciation and amortization for comparable properties and the property undergoing significant redevelopment declined due to certain leasing related assets becoming fully depreciated in the 2020 period.

Loss on impairment of real estate. We recorded a $2,954 loss on impairment of real estate in the 2020 period to reduce the carrying value of four properties to their estimated fair value less costs to sell. In the 2019 period, we recorded an $11,479 loss on impairment of real estate to reduce the carrying value of ten properties to their estimated fair value less costs to sell and $2,626 of losses on impairment of real estate related to the sale of 35 properties.

Acquisition and transaction related costs. Acquisition and transaction related costs in the 2019 period consists of post-merger activity costs incurred in 2019 in connection with our acquisition of SIR on December 31, 2018 in a merger transaction and other related transactions.

General and administrative. The decrease in general and administrative expenses primarily reflects a decrease in business management fees mostly as a result of property sales during 2019 and 2020 and lower legal expenses.

Gain on sale of real estate. We recorded a $10,822 net gain on sale of real estate resulting from the sale of six properties during the 2020 period. We recorded a $33,538 gain on sale of real estate resulting from the sale of three properties during the 2019 period.

Dividend income. Dividend income in the 2019 period consists of distributions received in connection with our former investment in RMR Inc. that we sold on July 1, 2019.

Loss on equity securities, net. Loss on equity securities, net represents a realized loss in the 2019 period from the sale of our 2.8 million shares of class A common stock of RMR Inc. on July 1, 2019.

Interest and other income. The decrease in interest and other income is primarily due to the effect of lower cash balances invested in the 2020 period compared to the 2019 period, lower returns on cash invested and the payoff of a mortgage note receivable that we received in June 2020 in connection with a property we sold in 2016, partially offset by a settlement we received resulting from a dispute with a vendor.

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Interest expense. The decrease in interest expense is primarily due to lower average outstanding debt balances in the 2020 period resulting from debt repayment activity in 2019 and 2020, including the repayment of our term loans during 2019, the redemption of all $350,000 of our 3.75% senior unsecured notes in July 2019, the redemption of all $400,000 of our 3.60% senior unsecured notes in January 2020 and the repayment of four mortgage notes with an aggregate principal balance of $152,187 in 2020, as well as lower weighted average interest rates on borrowings during the 2020 period compared to the 2019 period, partially offset by an increase in interest expense resulting from the issuance of $162,000 of our 6.375% senior unsecured notes in June and July 2020 and $250,000 of our 4.50% senior unsecured notes in September 2020.

Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of $3,839 in the 2020 period from prepayment fees incurred and the write off of unamortized discounts, premiums and debt issuance costs associated with the prepayment of three mortgage notes and a loss on the settlement of a mortgage note receivable related to a property sold in 2016. We recorded a loss on early extinguishment of debt of $769 in the 2019 period from the write off of unamortized debt issuance costs and discounts associated with the repayments of our term loans and redemption of our senior unsecured notes due 2019.

Income tax expense. The decrease in income tax expense reflects lower operating income in certain jurisdictions in the 2020 period where we are subject to state income taxes.

Equity in net losses of investees. Equity in net losses of investees represents our proportionate share of earnings and losses from our investments in two unconsolidated joint ventures and, in the 2019 period, our investment in AIC.

Net income (loss). Our net income (loss) and net income (loss) per basic and diluted common share increased in the 2020 period compared to the 2019 period primarily as a result of the changes noted above.

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Non-GAAP Financial Measures

We present certain “non-GAAP financial measures” within the meaning of applicable rules of the Securities and Exchange Commission, or SEC, including Property NOI, funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of Property NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.

Property Net Operating Income

The calculation of Property NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. We calculate Property NOI as shown below. We define Property NOI as income from our rental of real estate less our property operating expenses. Property NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use Property NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate Property NOI differently than we do.

The following table presents the reconciliation of net income (loss) to Property NOI for the three and nine months ended September 30, 2020 and 2019.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

Net income (loss)	$	(3,797)	$	(3,939)	$	8,342	$	(34,694)




Equity in net losses of investees	279		196		815		573
Income tax expense (benefit)	(54)		156		220		509
Income (loss) before income tax expense (benefit) and equity in net losses of investees	(3,572)		(3,587)		9,377		(33,612)
Loss on early extinguishment of debt	—		284		3,839		769
Interest expense	27,097		32,367		79,461		104,848
Interest and other income	(2)		(358)		(738)		(847)
Loss on equity securities, net	—		—		—		44,007
Dividend income	—		—		—		(1,960)
Gain on sale of real estate	—		(11,463)		(10,822)		(33,538)

General and administrative	7,059		7,990		21,372		25,457
Acquisition and transaction related costs	—		—		—		682
Loss on impairment of real estate	2,954		8,521		2,954		14,105
Depreciation and amortization	62,227		74,939		189,340		226,373
Property NOI	$	95,763	$	108,693	$	294,783	$	346,284

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Funds From Operations and Normalized Funds From Operations

We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets, any gain or loss on sale of real estate and equity securities, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

The following table presents the reconciliation of net income (loss) to FFO and Normalized FFO for the three and nine months ended September 30, 2020 and 2019.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	(3,797)	$	(3,939)	$	8,342	$	(34,694)
Add (less): Depreciation and amortization:
Consolidated properties	62,227		74,939		189,340		226,373
Unconsolidated joint venture properties	1,244		1,397		3,722		4,558

Loss on impairment of real estate	2,954		8,521		2,954		14,105


Gain on sale of real estate	—		(11,463)		(10,822)		(33,538)
Loss on equity securities, net	—		—		—		44,007
FFO	62,628		69,455		193,536		220,811
Add (less): Acquisition and transaction related costs	—		—		—		682

Loss on early extinguishment of debt	—		284		3,839		769





Normalized FFO	$	62,628	$	69,739	$	197,375	$	222,262

FFO per common share (basic and diluted)	$	1.30	$	1.44	$	4.02	$	4.60

Normalized FFO per common share (basic and diluted)	$	1.30	$	1.45	$	4.10	$	4.63

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollar amounts in thousands)

Our principal sources of funds to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate from our properties, net proceeds from property sales and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:

•our ability to collect rent from our tenants;

•our ability to maintain or increase the occupancy of, and the rental rates at, our properties;

•our ability to control operating and capital expenses at our properties;

•our ability to successfully sell properties that we market for sale; and

•our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating expenses and capital expenses.

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With $750,000 available under our revolving credit facility as of October 29, 2020 and no significant debt maturities until 2022, we believe that we are well positioned to weather the present disruptions facing the real estate industry and the economy generally. As a result of the COVID-19 pandemic, we have received requests from some of our tenants for rent assistance. As of October 27, 2020, we have granted temporary rent assistance totaling $2,550 to 19 tenants who represent approximately 3.6% of our annualized rental income as of September 30, 2020. This assistance generally entails a deferral of, in most cases, one month of rent pursuant to deferred payment plans which require the deferred rent amounts be payable over a 12-month period, certain of which commenced in September 2020. Our liquidity has been temporarily impacted by these rent deferrals with $2,096 of granted rent deferrals for the period of April 2020 through September 2020, until these deferrals begin to become obligated to be repaid. In addition, we also anticipate that our general and administrative expenses may continue to be reduced because of the lower fees we will pay to our manager as a result of the decline in our share price since the COVID-19 pandemic began. Although some of our tenants have sought temporary rent assistance, we remain focused on proactive dialogues with our existing tenants and overall tenant retention. Also, we believe we will benefit from the approximately 64.7% of our annualized rental income as of September 30, 2020 paid by investment grade tenants, the majority of which is made up of government tenants, and the diversity of our tenant base, both geographically and by industry, which may help mitigate the economic impact of the COVID-19 pandemic.

On October 15, 2020, we announced a regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year), maintaining our previous distribution rate. At this time, we continue to expect that the quarterly distribution rate will remain unchanged. We determine our distribution payout ratio with consideration for our expected capital expenditures as well as cash flows from operations and debt obligations.

In early 2020, we completed our previously announced disposition program and transitioned to a capital recycling program through which we expect to accretively grow our property portfolio. Pursuant to our capital recycling program, we plan to sell certain properties from time to time to fund future acquisitions and to maintain leverage consistent with our current investment grade ratings with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution. During the nine months ended September 30, 2020, we sold six properties for $85,363, excluding closing costs. In October 2020, we sold a four property business park located in Fairfax, VA containing approximately 171,000 rentable square feet for a sales price of $25,100, excluding closing costs. Also in October 2020, we entered into an agreement to acquire three properties adjacent to properties we own in an office park in Brookhaven, GA for $15,250, excluding acquisition related costs. Given the current economic conditions, we are carefully considering our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.

Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.

Our changes in cash flows for the nine months ended September 30, 2020 compared to the same period in 2019 were as follows: (i) cash flows provided by operating activities increased from $148,138 in the 2019 period to $166,098 in the 2020 period; (ii) cash flows provided by investing activities decreased from $639,768 in the 2019 period to $18,104 in the 2020 period; and (iii) cash flows used in financing activities decreased from $793,816 in the 2019 period to $227,259 in the 2020 period.

The increase in cash provided by operating activities for the 2020 period as compared to the 2019 period was a result of favorable changes in working capital in the 2020 period compared to the 2019 period. The decrease in cash provided by investing activities in the 2020 period as compared to the 2019 period is primarily due to lower cash proceeds received from our sales of properties in the 2020 period compared to the 2019 period, the sale of 2.8 million shares of Class A common stock of RMR Inc. in the 2019 period and higher real estate acquisition and improvement activities in the 2020 period. The decrease in cash used in financing activities in the 2020 period as compared to the 2019 period is primarily due to the issuance of $162,000 of our 6.375% senior unsecured notes due 2050 and $250,000 of our 4.50% senior unsecured notes due 2025 in the 2020 period and a decrease in net debt repayment activity, due to repayments of our unsecured term loans and net repayment activity on our revolving credit facility using cash on hand and proceeds from sales of properties in the 2019 period compared to increased borrowings under our revolving credit facility in the 2020 period in order to facilitate the repayment of other debts, including the redemption of all $400,000 of our 3.60% senior unsecured notes in January 2020 and the repayment of $152,187 of mortgage debt.

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Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share and per square foot amounts)

In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 revolving credit facility. 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 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, the annual interest rate payable on borrowings under our revolving credit facility was 1.2%. 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 includes a feature under which the maximum borrowing availability may be increased to up to $1,950,000 in certain circumstances.

Our credit agreement provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under our $750,000 revolving credit facility only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.

In January 2020, we redeemed, at par plus accrued interest, all $400,000 of our 3.60% senior unsecured notes that had a maturity date in February 2020 using cash on hand, proceeds from property sales and borrowings under our revolving credit facility.

In March 2020, in connection with the sale of one property in Fairfax, VA, 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.

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 for an additional $12,000 of these notes. The aggregate net proceeds of this offering were $156,186, after underwriters’ discounts and offering expenses. We used the aggregate net proceeds from this offering to repay amounts outstanding under our revolving credit facility and for general business purposes. 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 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 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.

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As of September 30, 2020, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows:


Year	Debt Maturities
2020	$	632
2021	1,541
2022	625,518
2023	143,784
2024	350,000
2025 and thereafter	1,122,000
Total	$	2,243,475

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our $171,475 in mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of September 30, 2020, we have estimated unspent leasing related obligations of $61,307.

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from property sales, incurrences or assumptions of mortgage debt and net proceeds from offerings of debt or equity securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives. Such alternatives may include incurring term debt, issuing debt or equity securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention. For instance, it is uncertain what the duration and severity of the current economic impact resulting from the COVID-19 pandemic will be. A protracted and extensive economic recession may cause a decline in financing availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.

During the nine months ended September 30, 2020, we paid quarterly distributions to our common shareholders totaling $79,546 using cash on hand and borrowings under our revolving credit facility. On October 15, 2020, we declared a regular quarterly distribution payable 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 using cash on hand and borrowings under our revolving credit facility. For more information regarding the distributions we paid during 2020, see Note 9 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Off Balance Sheet Arrangements (dollars in thousands)

We own 51% and 50% interests in two unconsolidated joint ventures which own three properties. The properties owned by these joint ventures are encumbered by an aggregate $82,000 principal amount of mortgage indebtedness. We do not control the activities that are most significant to these joint ventures and, as a result, we account for our investments in these joint ventures under the equity method of accounting. For more information on the financial condition and results of operations of these joint ventures, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Other than these joint ventures, as of September 30, 2020, we had no off balance sheet arrangements that

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have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants (dollars in thousands)

Our principal debt obligations at September 30, 2020 consisted of an aggregate outstanding principal balance of $2,072,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $171,475, that were assumed in connection with certain of our acquisitions. Also, the three properties owned by two joint ventures in which we own 51% and 50% interests secure two additional mortgage notes. Our publicly issued senior unsecured notes are governed by indentures and their supplements. Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding 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 RMR LLC ceasing to act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances. As of September 30, 2020, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants.

Neither our credit agreement nor our senior unsecured notes indentures and their supplements contain provisions for acceleration which could be triggered by our credit ratings. However, under our credit agreement our highest senior credit rating is used to determine the fees and interest rates we pay. Accordingly, if that credit rating is downgraded, our interest expense and related costs under our credit agreement would increase.

Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances).

Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc. and others related to them. For example: we have no employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business and property management agreements with RMR LLC; RMR Inc. is the managing member of RMR LLC; Adam Portnoy, the Chair of our Board of Trustees and one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC; David Blackman, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer and employee of RMR LLC; and each of our other officers is also an officer and employee of RMR LLC. We have relationships and historical and continuing transactions with other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc. and some of our Trustees and officers serve as trustees, directors or officers of these companies.

For more information about these and other such relationships and related person transactions, see Notes 10 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2019 Annual Report, our definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 2019 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our business and property management agreements with RMR LLC, are available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands, except per share data)

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2019. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

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Fixed Rate Debt

At September 30, 2020, our outstanding fixed rate debt consisted of the following:


Debt	Principal Balance (1)		Annual Interest Rate (1)	Annual Interest Expense (1)		Maturity	Interest Payments Due


Senior unsecured notes	$	300,000	4.150%	$	12,450	2022	Semi-annually
Senior unsecured notes	300,000		4.000%	12,000		2022	Semi-annually
Senior unsecured notes	350,000		4.250%	14,875		2024	Semi-annually
Senior unsecured notes	650,000		4.500%	29,250		2025	Semi-annually
Senior unsecured notes	310,000		5.875%	18,213		2046	Quarterly
Senior unsecured notes	162,000		6.375%	10,328		2050	Quarterly

Mortgage note (one property in Lakewood, CO)	694		8.150%	57		2021	Monthly

Mortgage note (one property in Washington, D.C.)	25,986		4.220%	1,097		2022	Monthly
Mortgage note (three properties in Seattle, WA)	71,000		3.550%	2,521		2023	Monthly
Mortgage note (one property in Chicago, IL)	50,000		3.700%	1,850		2023	Monthly
Mortgage note (one property in Washington, D.C.)	23,795		4.800%	1,142		2023	Monthly

Total	$	2,243,475		$	103,783

(1)The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. For more information, see Notes 7 and 8 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our senior unsecured notes require semi-annual or quarterly interest payments through maturity. Our mortgages generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $22,435.

Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at September 30, 2020, and discounted cash flow analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate one percentage point increase in interest rates would change the fair value of those obligations by approximately $108,276.

Some of our fixed rate secured debt arrangements allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.

At September 30, 2020, we owned 51% and 50% interests in two joint venture arrangements which own three properties that are secured by fixed rate debt consisting of the following mortgage notes:


Debt	Our JV Ownership Interest	Principal Balance (1)(2)		Annual Interest Rate (1)	Annual Interest Expense (1)		Maturity	Interest Payments Due
Mortgage note (two properties in Fairfax, VA)	51%	$	50,000	4.09%	$	2,045	2029	Monthly
Mortgage note (one property in Washington, D.C.)	50%	32,000		3.69%	1,181		2024	Monthly
Total		$	82,000		$	3,226

(1)The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, the joint ventures’ recorded interest expense may differ from these amounts because of market conditions at the time they incurred the debt.

(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.

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Floating Rate Debt

At September 30, 2020, we had no outstanding floating rate debt. Our $750,000 revolving credit facility matures on January 31, 2023 and, subject to the payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity by two six month periods. No principal repayments are required under our revolving credit facility prior to maturity, and we can borrow, repay and reborrow funds available under our revolving credit facility, subject to conditions, at any time without penalty.

Borrowings under our $750,000 revolving credit facility are in U.S. dollars and require interest to be paid at a rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR, and to changes in our credit ratings. In addition, upon renewal or refinancing of our revolving credit facility, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.

The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2020 if we were fully drawn on our revolving credit facility:


	Impact of an Increase in Interest Rates
	Annual Interest Rate (1)		Outstanding Debt		Total Interest Expense Per Year		Annual Earnings Per Share Impact (2)
At September 30, 2020	1.2	%	$	750,000	$	9,000	$	0.19
One percentage point increase	2.2	%	$	750,000	$	16,500	$	0.34

(1)Based on LIBOR plus a premium, which was 110 basis points per annum, at September 30, 2020.

(2)Based on the weighted average shares outstanding (diluted) for the nine months ended September 30, 2020.

The foregoing table shows the impact of an immediate increase in floating interest rates as of September 30, 2020. If interest rates were to increase gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility or our other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.

LIBOR Phase Out

LIBOR is currently expected to be phased out in 2021. We are required to pay interest on borrowings under our revolving credit facility at a floating rate based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our revolving credit facility would be revised as provided under our credit agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Warning Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:

•The duration and severity of the economic impact resulting from the COVID-19 pandemic and its impact on us and our tenants,

•The likelihood and extent to which our tenants will be negatively impacted by the COVID-19 pandemic and its aftermath and will be able and willing to pay us rent,

•Our expectations about the financial strength of our tenants,

•Our expectations that the diversity and other characteristics of our property portfolio and our financial resources will result in our ability to successfully withstand the current economic conditions,

•Our sales and acquisitions of properties,

•Our ability to compete for acquisitions and tenancies effectively,

•The likelihood that our tenants will pay rent or be negatively affected by cyclical economic conditions or government budget constraints,

•The likelihood that our tenants will renew or extend their leases and not exercise early termination options pursuant to their leases or that we will obtain replacement tenants on terms as favorable to us as our prior leases,

•The likelihood that our rents will increase when we renew or extend our leases or enter new leases,

•The expectation that, as a result of the COVID-19 pandemic, leasing activity may continue to slow,

•Our belief that we are in a position to opportunistically recycle and deploy capital,

•Our ability to pay distributions to our shareholders and to increase the amount of such distributions,

•Our expectations regarding our future financial performance including FFO, Normalized FFO, Property NOI, and cash basis NOI,

•Our policies and plans regarding investments, financings and dispositions,

•Our expectations regarding occupancy at our properties,

•The future availability of borrowings under our revolving credit facility,

•Our expectation that there will be opportunities for us to acquire, and that we will acquire, additional properties primarily leased to single tenants and tenants with high credit quality characteristics like government entities,

•Our expectations regarding demand for leased space,

•Our expectations regarding capital expenditures,

•Our ability to raise debt or equity capital,

•Our ability to pay interest on and principal of our debt,

•Our ability to appropriately balance our use of debt and equity capital,

•Our ability to successfully execute our capital recycling program,

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•Our ability to maintain sufficient liquidity during the duration of the COVID-19 pandemic and resulting economic downturn,

•Our credit ratings,

•Our expectation that we benefit from our relationships with RMR LLC and RMR Inc.,

•The credit qualities of our tenants,

•Our qualification for taxation as a REIT,

•Changes in federal or state tax laws, and

•Other matters.

Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO, Normalized FFO, Property NOI, cash flows, liquidity and prospects include, but are not limited to:

•The impact of conditions in the economy, including the COVID-19 pandemic and its aftermath, and the capital markets on us and our tenants,

•Competition within the real estate industry, particularly in those markets in which our properties are located,

•The impact of changes in the real estate needs and financial conditions of our tenants,

•Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,

•The impact of any U.S. government shutdown on our ability to collect rents or pay our operating expenses, debt obligations and distributions to shareholders on a timely basis,

•Actual and potential conflicts of interest with our related parties, including our Managing Trustees, RMR LLC, RMR Inc., and others affiliated with them,

•Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes, and

•Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control.

For example:

•Our ability to make future distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our receipt of rent from our tenants, our future earnings, the capital costs we incur to lease our properties and our working capital requirements. We may be unable to pay our debt obligations or to maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,

•Our ability to grow our business and increase our distributions depends in large part upon our ability to buy properties and lease them for rents, less their property operating costs, that exceed our capital costs. We may be unable to identify properties that we want to acquire, and we may fail to reach agreement with the sellers and complete the purchases of any properties we want to acquire. In addition, any properties we may acquire may not provide us with rents less property operating costs that exceed our capital costs or achieve our expected returns,

•We may fail to maintain, or we may elect to change, our target payout ratio for distributions to shareholders of 75% of cash available for distribution or our distribution rate. Further, our Board of Trustees considers many factors when setting distribution rates including our historical and projected income, Normalized FFO, cash available for distribution, the then current and expected needs and availability of cash to pay our obligations and fund our investments, distributions which may be required to be paid to maintain our qualification for taxation as a REIT and

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other factors deemed relevant by our Board of Trustees. Accordingly, future distribution rates may be increased or decreased and there is no assurance as to the rate at which future distributions will be paid,

•We plan to selectively sell certain properties from time to time to fund future acquisitions and to strategically update, rebalance and reposition our investment portfolio, which we refer to as our capital recycling program. We cannot be sure we will sell any of these properties or what the terms of any sales may be nor that we will acquire replacement properties that improve our asset quality or our ability to increase our distributions to shareholders,

•We may not succeed in maintaining our leverage consistent with our current investment grade ratings or levels that the market or credit rating agencies believe are appropriate,

•Some of our tenants may not renew expiring leases, and we may be unable to obtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties,

•Some government tenants may exercise their rights to vacate their space before the stated expirations of their leases, and we may be unable to obtain new tenants to maintain the historical occupancy rates of, or rents from, our properties,

•Rents that we can charge at our properties may decline upon renewals or expirations because of changing market conditions or otherwise,

•Leasing for some of our properties depends on a single tenant and we may be adversely affected by the bankruptcy, insolvency, a downturn of business or a lease termination of a single tenant,

•Our belief that there is a likelihood that tenants may renew or extend our leases prior to their expirations whenever they have made significant investments in the leased properties, or because those properties may be of strategic importance to them, may not be realized,

•Overall new leasing volume may decrease more than we currently expect. In addition, if the COVID-19 pandemic and the current economic conditions continue for an extended period or worsen, our tenants may become unable to pay rent or they may elect to not renew their leases with us. Further, some of our government leases provide the tenant with certain rights to terminate their lease early. Budgetary and other fiscal pressures may result in some governmental tenants terminating their leases early or not renewing their leases. In addition, the COVID-19 pandemic has caused changes in workplace practices, including increased remote work arrangements. To the extent those practices become permanent or increased, leasing demand for office space may decline. As a result of these factors, our tenant retention levels could decline,

•Our belief that we are well positioned to opportunistically recycle and deploy capital may not be realized. We may fail to identify and execute on opportunities to deploy capital and any deployment of capital we may make may not result in the returns that we expect,

•Our belief that the reduction in government tenant space utilization and the consolidation of government tenants into government owned real estate is substantially complete may prove misplaced if these prior trends continue or do not moderate to the extent we expect, including in response to the COVID-19 pandemic and its aftermath,

•Our perception that recent activity prior to the outbreak of the COVID-19 pandemic suggested that the government had begun to shift its leasing strategy to include longer term leases and that the government was actively exploring 10 to 20 year lease terms at renewal, in some instances, may mistakenly imply that these activities are indicative of a trend or broader change in government leasing strategy or practices that will recommence after the COVID-19 pandemic ends. Further, even if such a trend or change were to recommence, that trend or change may not be sustained by the government,

•Contingencies in our acquisition and sale agreements may not be satisfied and any expected acquisitions and sales and any related lease arrangements we expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change,

•We expect to pursue accretively growing our property portfolio. However, we may not succeed in making acquisitions that are accretive and future acquisitions could be dilutive,

•The competitive advantages we believe we have may not in fact exist or provide us with the advantages we expect. We may fail to maintain any of these advantages or our competition may obtain or increase their competitive advantages relative to us,

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•We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital,

•Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions that we may be unable to satisfy,

•Actual costs under our revolving credit facility will be higher than LIBOR plus a premium because of fees and expenses associated with such debt,

•The interest rates payable under our floating rate debt obligations depend upon our credit ratings. If our credit ratings are downgraded, our borrowing costs will increase,

•Our ability to access debt capital and the cost of our debt capital will depend in part on our credit ratings. If our credit ratings are downgraded, we may not be able to access debt capital or the debt capital we can access may be expensive,

•We may be unable to repay our debt obligations when they become due,

•The maximum borrowing availability under our revolving credit facility may be increased to up to $1.95 billion in certain circumstances; however, increasing the maximum borrowing availability under our revolving credit facility is subject to our obtaining additional commitments from lenders, which may not occur,

•We have the option to extend the maturity date of our revolving credit facility upon payment of a fee and meeting other conditions; however, the applicable conditions may not be met,

•We may incur significant costs to prepare a property for a tenant, particularly for single tenant properties,

•We may spend more for capital expenditures than we currently expect,

•We may fail to obtain development rights or entitlements that we may seek for development and other projects we may wish to conduct at our properties,

•Our existing joint venture arrangements and any other joint venture arrangements that we may enter may not be successful,

•We believe that we are well positioned to weather the present disruptions of the COVID-19 pandemic facing the real estate industry and the economy generally. However, the full extent of the future impact of the COVID-19 pandemic is unknown and we may not realize similar or better operating results in the future,

•We believe that the near term impact of the COVID-19 pandemic to us will not be material due to the strength of our tenant base. However, if the COVID-19 pandemic and the current economic conditions continue for an extended period of time or worsen, our tenants may be significantly adversely impacted, which may result in those tenants seeking relief from their rent obligations, their inability to pay rent, the termination of their leases or our tenants not renewing their leases or renewing their leases for less space. Therefore, the impact we experience in the near term may be worse than we currently expect and our results of operations and financial position may be negatively affected,

•We have granted requests to some of our tenants to defer payments over, in most cases, a 12-month period, certain of which commenced in September 2020. However, current market and economic conditions may deteriorate further and the rent assistance granted by us may not be sufficient to ensure that tenants will be able to meet their rent payment obligations under their leases with us, which may result in an increase in tenant defaults and terminations,

•One of our tenants that represents 1.0% of our annualized rental income as of September 30, 2020 has filed for Chapter 11 bankruptcy. Although the tenant has paid its post-petition rental obligations due for September and October 2020, the tenant owes its August rental obligations, for which a proof of claim has been filed. The tenant has not filed to reject its lease obligation with us, but that does not assure the tenant will pay its August 2020 or future rents or that the tenant will not file to reject its lease obligation and/or seek to renegotiate its lease obligation as part of its bankruptcy proceeding,

•The business and property management agreements between us and RMR LLC have continuing 20 year terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms,

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•We believe that our relationships with our related parties, including RMR LLC, RMR Inc., and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and

•It is difficult to accurately estimate leasing related obligations and costs of development and tenant improvement costs. Our unspent leasing related obligations and development costs may cost more and may take longer to complete than we currently expect, and we may incur increased amounts for these and similar purposes in the future.

Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as the COVID-19 pandemic and its aftermath, changes in our tenants’ needs for leased space, the ability of the U.S. government to approve spending bills to fund the U.S. government’s obligations, acts of terrorism, natural disasters or changes in capital markets or the economy generally.

The information contained elsewhere in this Quarterly Report on Form 10-Q and our 2019 Annual Report or in our other filings with the SEC, including under the caption “Risk Factors”, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.

You should not place undue reliance upon our forward-looking statements.

Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

Statement Concerning Limited Liability

The amended and restated declaration of trust establishing Office Properties Income Trust, dated June 8, 2009, as amended, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Office Properties Income Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Office Properties Income Trust. All persons dealing with Office Properties Income Trust in any way shall look only to the assets of Office Properties Income Trust for the payment of any sum or the performance of any obligation.

Part II. Other Information

Item 1A. Risk Factors

Our business faces many risks, a number of which are described under the caption “Risk Factors” in our 2019 Annual Report. The COVID-19 pandemic may subject us to additional risks that are described below. The risks described in our 2019 Annual Report and below may not be the only risks we face. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our 2019 Annual Report or described below occurs, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our 2019 Annual Report and below, and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.

The COVID-19 pandemic has resulted in a global economic recession that may materially adversely impact our business, operations, financial results and liquidity.

The viral disease outbreak known as COVID-19 has been declared a pandemic by the World Health Organization and in response to the outbreak, the U.S. Health and Human Services Secretary has declared a public health emergency in the United States and many states and municipalities have declared public health emergencies. The COVID-19 pandemic has had a devastating impact on the global economy, including the U.S. economy. As a result, most market observers believe the global economy and the U.S. economy are in a recession.

Economic downturns and recessions in the United States have historically negatively impacted the commercial office real estate market, including by causing increased tenant defaults, decreased occupancies and reduced rental rates. We expect that the current economic conditions may have similar negative impacts on our business and that the extent of those negative consequences will depend to a large extent on the duration and depth of the economic downturn in the United States and the strength and sustainability of any economic recovery that may follow.

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While we have not yet experienced a material adverse impact on our occupancy resulting from the COVID-19 pandemic as of the date of this Quarterly Report on Form 10-Q, if the outbreak continues to weaken national, regional and local economies, it could negatively impact our occupancy levels and result in significant tenant defaults in the payment of rent owed to us. Although, as of September 30, 2020, 35.6% of our total annualized rental income was from leases with governmental agencies, including 25.2% of our total annualized rental income from leases with the U.S. federal government, the balance of our rents comes from nongovernmental tenants. Further, as of September 30, 2020, tenants occupying approximately 7.5% of our rentable square feet and responsible for approximately 9.2% of our annualized rental income as of September 30, 2020 currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, during the fourth quarter of 2020 and in 2021 and 2022, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.2%, 1.5% and 2.3% of our rentable square feet, respectively, and contribute an additional approximately 0.2%, 1.6% and 2.4% of our annualized rental income, respectively, as of September 30, 2020. In addition, as of September 30, 2020, 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 5.4% of our rentable square feet and contribute approximately 6.2% of our annualized rental income as of September 30, 2020. Additionally, we conduct leasing activities at our properties. Reductions in the ability and willingness of prospective tenants to visit our properties due to the COVID-19 outbreak, or the extent to which federal, state and municipal orders limit our manager’s employees visiting our properties, could have an impact on our leasing activity which could reduce rental income and tenant reimbursements and other income produced by our properties. We have experienced a slowdown in our leasing activity thus far in 2020 due to the COVID-19 pandemic and expect this slowdown may continue until market conditions improve for a sustained period. Concerns relating to such an outbreak could also cause on-site personnel not to report for work at our properties, which could adversely affect the management of our properties.

We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact. Potential consequences of the current unprecedented measures taken in response to the spread of the virus that causes COVID-19, and current market disruptions and volatility affecting us include, but are not limited to:

•sudden and/or severe declines in the market price of our common shares;

•possible significant declines in the value of our properties;

•our inability to accurately or reliably value our portfolio;

•our inability to comply with financial covenants contained in our debt agreements that could result in our defaulting under such agreements;

•our need to reduce or eliminate the distributions we pay to our shareholders and our need to maintain such reduction or elimination for an extended period of time;

•our failure to pay interest and principal when due under our outstanding debt, which may result in the acceleration of payment for our outstanding debt and our possible loss of our revolving credit facility;

•our inability to access debt and equity capital on attractive terms, or at all;

•increased risk of default or bankruptcy of our tenants;

•increased risk of our tenants being unable to weather an extended cessation of normal economic activity and thereby impairing their ability to continue functioning as a going concern;

•downgrades of our credit ratings by nationally recognized credit rating agencies;

•our inability to sell properties we may identify for sale due to a general decline in business activity and demand for real estate transactions and, as a result, our inability to redeploy our capital into investments we believe are more beneficial to us;

•our inability to make improvements to our properties due to a construction moratorium or decrease in available construction workers or construction activity, including required inspectors and governmental personnel for permitting and other requirements, or due to a need for us to maintain our liquidity; and

•reduced economic demand resulting from mass employee layoffs or furloughs in response to governmental action taken to slow the spread of the virus that causes COVID-19, which could impact the continued viability of our tenants and the demand for office space at our properties.

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Further, the extent and strength of any economic recovery after the COVID-19 pandemic ends or otherwise, are uncertain and subject to various factors and conditions. Our business, operations and financial position may continue to be negatively impacted after the COVID-19 pandemic ends and may remain at depressed levels compared to prior to the outbreak of the COVID-19 pandemic and those conditions may continue for an extended period.

The COVID-19 pandemic may have significant impacts on workplace practices and those changes could be detrimental to our business.

Temporary closures of businesses and stay in place orders and the resulting remote working arrangements for nonessential personnel in response to the COVID-19 pandemic may result in long-term changed work practices that could negatively impact us and our business. For example, the increased adoption of and familiarity with remote work practices could result in decreased demand for office space. If so, our business, operating results, financial condition and prospects may be materially adversely impacted.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended September 30, 2020:

Maximum

Total Number of

Approximate Dollar

Shares Purchased

Value of Shares that

Number of

as Part of Publicly

May Yet Be Purchased

Average Price

Announced Plans

Under the Plans or

Calendar Month

Purchased (1)

Paid per Share

or Programs

Programs

September 2020

17,448

21.61

—

Total

17,448

21.61

—

(1)These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of our officers and officers and employees of RMR LLC in connection with awards of our common shares and the vesting of those and prior awards of common shares to them. We withheld and purchased these shares at their fair market values based upon the trading prices of our common shares at the close of trading on Nasdaq on the purchase dates.

Item 6. Exhibits


Exhibit Number			Description
3.1			Composite Copy of Amended and Restated Declaration of Trust, dated June 8, 2009, as amended to date. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.)

3.2			Amended and Restated Bylaws of the Company, adopted March 27, 2019. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 28, 2019.)

4.1			Form of Common Share Certificate. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed on March 1, 2019.)

4.2			Indenture, dated as of August 18, 2014, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 18, 2014.)

4.3			Supplemental Indenture No. 2, dated as of May 26, 2016, between the Company and U.S. Bank National Association, relating to the Company’s 5.875% Senior Notes due 2046, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 26, 2016.)

4.4			Authentication Order, dated as of June 22, 2016, from the Company to U.S. Bank National Association, relating to the Company’s 5.875% Senior Notes due 2046. (Incorporated by reference to the Company’s Registration Statement on Form 8-A filed on June 30, 2016.)

4.5			Indenture, dated as of July 20, 2017, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 21, 2017.)

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4.6			First Supplemental Indenture, dated as of July 20, 2017, between the Company and U.S. Bank National Association, relating to the Company’s 4.000% Senior Notes due 2022, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 21, 2017.)

4.7			Second Supplemental Indenture, dated as of June 23, 2020, between the Company and U.S. Bank National Association, relating to the Company’s 6.375% Senior Notes due 2050, including form thereof. (Incorporated by reference to the Company’s Registration Statement on Form 8-A filed on June 23, 2020.)

4.8			Indenture, dated as of February 3, 2015, between the Company (as successor to Select Income REIT) and U.S. Bank National Association. (Incorporated by reference to Select Income REIT’s Current Report on Form 8-K filed on February 3, 2015.)

4.9			First Supplemental Indenture, dated as of February 3, 2015, between the Company (as successor to Select Income REIT) and U.S. Bank National Association, including the forms of 4.15% Senior Notes due 2022 and 4.50% Senior Notes due 2025. (Incorporated by reference to Select Income REIT’s Current Report on Form 8-K filed on February 3, 2015.)

4.10			Second Supplemental Indenture, dated as of May 15, 2017, between the Company (as successor to Select Income REIT) and U.S. Bank National Association, including the form of 4.250% Senior Notes due 2024. (Incorporated by reference to Select Income REIT’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed by Select Income REIT on July 25, 2017.)

4.11			Third Supplemental Indenture, dated as of December 31, 2018, among Select Income REIT, the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 31, 2018.)

4.12			Authentication Order, dated as of September 24, 2020, from the Company to U.S. Bank National association, relating to the Company’s 4.50% Senior Notes due 2025. (Filed herewith.)

4.13			Registration Rights and Lock-Up Agreement, dated as of June 5, 2015, among the Company, ABP Trust (f/k/a Reit Management & Research Trust) and Adam D. Portnoy. (Incorporated by reference to the Company’s Current Report on Form 8‑K filed on June 8, 2015.)

10.1			Form of Share Award Agreement. (Filed herewith.)

31.1			Rule 13a-14(a) Certification. (Filed herewith.)

31.2			Rule 13a-14(a) Certification. (Filed herewith.)

32.1			Section 1350 Certification. (Furnished herewith.)

101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			XBRL Taxonomy Extension Schema Document. (Filed herewith.)
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
101.LAB			XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
104			Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			OFFICE PROPERTIES INCOME TRUST


			By:			/s/ David M. Blackman
						David M. Blackman
						President and Chief Executive Officer
						Dated: October 30, 2020

			By:			/s/ Matthew C. Brown
						Matthew C. Brown
						Chief Financial Officer and Treasurer
						(principal financial officer and principal accounting officer)
						Dated: October 30, 2020