Office Properties Income Trust ($OPI): Exchange Offer, Now What?
Office Properties Income Trust ($OPI): Exchange Offer, Now What?
Updated Views on the Credit Following its Recently Announced Exchange Offer
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In this week’s post, I’ll review and update my latest views on OPI, a name I wrote about in November of last year. You can find the original post below and see my initial thesis played out. Since then, several events have transpired and OPI’s remaining bonds are currently trading at even more distressed levels. In this post, I’ll explain how I think the situation will play out next and where I find the best value, if any. I won’t belabor you with company details (you can read more in my original write-up), so let’s cut straight to the chase.
Situation Overview:
Office Properties Income Trust (“OPI”) is a highly-levered office REIT that is pursuing liability management exercises (“LME”) in hopes that time (and potentially debt discount) will allow it to navigate a “soft landing” in a challenging office CRE environment. Consequently, the REIT has effectively utilized its unencumbered assets to help refinance its near-term unsecured debt maturities with new secured debt backed by a portion of these assets. While the company initially sought to raise $1 billion in new financing to address its entire maturity wall in one go, OPI quickly pivoted to a more incremental approach, opting to chip away at its maturities through a series of smaller transactions.
Early 2024 Refinancing
In January 2024, OPI obtained a new $325 million Revolving Credit Facility (RCF) and a $100 million Term Loan (TL), both due in 2027. These replaced its existing $750 million unsecured RCF. The new RCF and TL were secured by a pool of 19 office properties with reported GAAP LTM NOI of $72 million and a combined undepreciated carrying value of $942 million, representing a loan-to-value (LTV) of 45%. The new RCF/TL also included an equity pledge of the borrower and each subsidiary guarantor owning collateral.
In February 2024, OPI followed this with a $300 million 9.0% Senior Secured Notes offering, providing additional liquidity to address near-term maturities. These new notes were secured and guaranteed by 17 properties (including one leasehold-owned property) with a carrying value of $574 million, along with equity pledges from the subsidiary guarantors. The LTM GAAP NOI for these assets stands at $43 million.
This refinancing resulted in the company’s 2024 notes being taken out at par for a quick gain as I had suggested in my original write-up. However, the rest of the capital structure, which I also suggested avoiding, has not fared as well. The longer-dated maturities have all experienced notable price declines, with the equity down the most at -70% YTD.
Unaddressed 2025 Maturities
While these transactions provided some breathing room, they failed to fully address the company’s $650 million unsecured bond maturity in February 2025. Unsurprisingly, OPI engaged Moelis as a financial advisor to help evaluate options including additional secured financing and asset sales.
Comprehensive Exchange Offer Launched
On May 1, 2024, OPI announced an exchange offering for its 2025, 2026, 2027, and 2031 senior unsecured notes, exchanging up to $610 million of new senior secured notes due 2029. The exchange offer was structured to prioritize the 2025 notes, with the remaining capacity allocated to the 2031, 2027, and 2026 maturities, in that order of priority. The offer remains subject to a number of conditions, including a minimum of 15% or $98 million of its 2025 notes are validly tendered and at least $488 million of the new senior secured notes are issued.
The new notes will be secured by first-priority liens on 19 properties with an “Adjusted Total Assets” value of approximately $722 million, as defined in OPI’s debt agreements, and second-priority liens on 19 additional properties securing OPI’s credit facility, with an Adjusted Total Assets value of approximately $1.0 billion.
However, the new notes have raised concerns regarding the quality and value of the collateral backing them. Despite these company-provided asset values, the properties securing the new notes appear to be of inferior quality compared to those backing OPI’s existing secured debt, with lower occupancy rates, shorter lease terms, and less favorable tenant profiles. We can observe the difference in quality in the Operating Metrics page provided in the company’s latest 1Q’24 earnings presentation (shown below). Given the state of office CRE markets, it’s difficult to pinpoint an exact value on these assets but under some conservative haircutting assumptions (e.g., ~50% haircut), it’s not unrealistic to imagine a scenario where exchanging bondholders are receiving a bond that’s 100% LTV as consideration.
Bondholders Divided
The exchange offer has been set up in a way to divide bondholders and has sparked a flurry of activity as different groups seek to protect their interests. On May 9, Debtwire reported several noteholder groups had formed, each being advised by their own separate counsel/financial advisor. Specifically, a group of 2026-2031 noteholders have banded together. Meanwhile, a 2025 noteholder group has also formed although it finds itself in a relatively strong position due to the exchange offer’s prioritization of its notes. On May 14, the early tender period expired and the company did not provide any update regarding the status of the exchange. The extended expiration date is now set for May 30, when we will learn more about the outcome of the exchange.
Fundamental Outlook Challenged
Complicating matters further is OPI’s strained financial position. The company’s net leverage ratio currently stands at 8.9x LQA Adj. EBITDAre, while its fixed charge coverage ratio sits barely above 1.0x, indicating OPI’s operating performance leaves little room for error. The company has implemented various measures to preserve liquidity, including reducing its dividend to a penny per share and selling non-core assets. However, these actions have provided only temporary relief, and OPI’s unencumbered property portfolio shows signs of stress. As of 1Q’24, the company’s unencumbered properties had an average occupancy rate of 78.6% and a weighted average lease term of just 4.7 years. Moreover, with nearly 22% of its leases on a consolidated basis set to expire by the end of 2025, OPI will need to not only stabilize its rent roll but also navigate a challenging leasing environment.
The key debate now among creditors revolves around the value for the remaining unencumbered assets and how changes will impact debt covenants. The company claims in its latest earnings that it has over $3 billion of unencumbered assets—although nobody in the market really believes this represents FMV.
As the current situation unfolds, existing noteholders will need to weigh the upside/downside of the exchange offer and any subsequent restructuring efforts. The outcome likely hinge on finding a balance between the competing interests of different creditor groups, the company’s ability to execute on its strategic initiatives, and the broader macroeconomic factors impacting the office sector. In the meantime, OPI’s stock and bond prices are likely to remain volatile, reflecting the uncertainty surrounding the company’s future.
Note that as with all my prior write-ups, the following analysis is 100% based on public information only. I am not involved in the capital structure and am NOT aware of the contents of any negotiations between noteholder groups and the company. I have no position whatsoever and this write-up is purely based on my best guess looking outside in. I am not privy to any discussions with holders or advisors involved in the capital structure.
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