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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Office Properties Income Trust    OPI

OFFICE PROPERTIES INCOME TRUST

(OPI)
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OFFICE PROPERTIES INCOME TRUST : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/30/2020 | 12:18pm EST
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                                                                  Old Effective
                               Rent Per           New Effective Rent                                          Rent Per           New Effective Rent
                           Square Foot (1)        Per Square Foot (1)        Rentable Square Feet         Square Foot (1)        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):
                                                                                                                                         Annualized
                                 Number of Leases                  Leased                   Percent of            Cumulative            Rental Income         Percent of            Cumulative
         Year (1)                    Expiring             Square Feet Expiring (2)            Total            Percent of Total           Expiring               Total           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:

                                                                                                Annualized          % of Total Annualized
                        Tenant                                 Credit Rating                  Rental Income             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.
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 a purchase price of $15,250, 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.
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.
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 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 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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