Office Properties Income Trust, owner of more than 17 million square feet of office space, has filed for Chapter 11 bankruptcy protection in a rare move from a publicly traded U.S. real estate investment trust specializing in that property type.
The Newton, Massachusetts-based REIT filed voluntary petitions in U.S. Bankruptcy Court for the Southern District of Texas after reaching a restructuring agreement with certain senior noteholders.
The deal is designed to slash the REIT's debt load from $2.4 billion to $1.3 billion through the conversion of about $1 billion in existing notes to equity, according to a Securities and Exchange Commission filing. Leases signed with the U.S. government represent a large portion of its income.
The bankruptcy breaks a decades-long streak of stability among publicly traded office REITs, while signaling deeper distress among some players in the sector still reeling from the residual impacts wrought by the pandemic.
Chapter 11 cases had been unknown to the office REIT sector until now. The most recent REITs to file for bankruptcy were retail focused: CBL & Associates in 2020, Pennsylvania REIT in 2020 and 2023, and Washington Prime Group in 2021.
David Auerbach, chief investment officer of Hoya Capital Real Estate, said he believes Office Properties' situation is an outlier in the office REIT arena and not a forerunner of things to come.
The REIT "is in a completely different world than the other guys with their bonds in severe distress," Auerbach, who doesn't have ties to Office Properties, told CoStar News in an email.
Office Properties faces approximately $280 million in debt maturities next year and reported having just $90 million in liquidity as of the end of the second quarter. The company reported that its debt covenants restrict refinancing or new debt issuance.
"Following a thorough review of strategies to address [Office Properties'] funded debt obligations, we are pleased to have reached an agreement with certain noteholders that will meaningfully strengthen [Office Properties'] balance sheet by reducing leverage, lowering debt service obligations and simplifying its capital structure," Yael Duffy, president and chief operating officer of the REIT, said in a statement.
Duffy added that he does not expect any disruptions to its business or properties, managed by The RMR Group.
Neither Office Properties nor RMR immediately responded to requests for additional comment from CoStar News.
The have and have-nots
Office Properties' bankruptcy casts a spotlight on the deepening bifurcation unfolding across the national office market in which both properties and the landlords behind them are operating in two opposing realities.
On one end of the spectrum, the spike in vacancy rates seen during the pandemic has finally plateaued and, in some markets, is beginning to trend downward.
Widespread demand for top-tier office space has helped bolster positions among landlords such as BXP, Kilroy Realty, Hudson Pacific Properties and Cousins Properties at the forefront of the market's broadening recovery. Occupancy rates for premier office properties are substantially higher than rates reported across older, less desirable counterparts.
Yet the recovery taking hold in some markets has yet to deliver lifelines to landlords struggling with depressed occupancy rates and worsening financial outlooks.
Interest in aging buildings with fewer amenities, less desirable locations or some combination of lackluster appeal has plummeted. What's more, distressed debt or cash flow issues also hamper the ability to invest in property upgrades, finish-out work or add amenities, all of which help property owners compete in cities that are still contending with depressed demand and leasing activity.
Equity Commonwealth, for example, began liquidating its assets last year following pressure from activist investors to return a pile of cash to shareholders. In the months since, the former landlord has finalized a number of deals — many of which have closed at steep losses — in its effort to completely offload its portfolio of office properties, delist from the New York Stock Exchange and begin the SEC deregistration process.
Other major REITs including Franklin Street Properties have reported a five-year streak of widening losses. The Wakefield, Massachusetts-based landlord has been scrambling to sell off some assets and refinance existing debt in an attempt to shore up its financial position. The company this week reported its portfolio leased rate had fallen below 69%, down from the 70.3% rate it had in late 2024.
To be clear, many landlords facing an uphill battle in rebuilding lost occupancy are far from bankruptcy or any liquidation moves. Many have been able to negotiate with lenders for better terms, while others are holding out hope that an improving office market dynamic will begin to trickle down to their respective portfolios and circumstances.
"Nationally, the overall office sector continues to face headwinds from capital markets volatility and evolving workplace dynamics, but we have recently seen some encouraging signs of stabilization and return-to-office trends in many cities across the United States," CEO George Carter told analysts on Franklin Street's recent earnings call.
Debt defaults, sinking stock price
For Office Properties, the bankruptcy filing triggered additional loan defaults across its entire debt stack, including $177.3 million in mortgage debt tied to some of its properties, according to its SEC filing.
As part of its bankruptcy, the REIT and debtholders agreed to a restructuring arrangement that needs bankruptcy court approval. The agreement equitizes about $1 billion in senior secured notes due September 2029.
In addition, the REIT reported securing a commitment for $125 million in debtor-in-possession financing to fund operations during bankruptcy proceedings.
Investors in the REIT's stock have seen their share values erode sharply in the past year. Vanguard Index Funds reported owning 2.38 million shares valued at $589,000 as of June 30. That value was down 88% from $4,865,000 a year earlier.
The restructuring agreement also contemplates a new management arrangement with RMR for an initial term of five years.
Office Properties owns 124 buildings across 29 states and Washington, D.C. Investment-grade tenants generate 59% of revenues, with the U.S. government representing 17.1% of annualized income, the SEC filing said.
Same-property occupancy stood at 85.2% as of June 30, the company reported. Annualized revenue dropped $85 million, or 18%, to $398 million year over year.
The REIT also noted it expects to lose 742,000 square feet of tenancy, representing $11.2 million in annualized revenue, from non-renewals through 2026.