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By clicking “I AGREE”, you indicate that you understand and intend these terms and conditions to be the legal equivalent of a signed, written contract and equally binding, and that you accept such terms and conditions as a condition of viewing any and all Moody’s information that becomes accessible to you (the “Information”). References herein to “Moody’s” include Moody’s Corporation. and each of its subsidiaries and affiliates..

 

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Rating Action:

Moody's downgrades Office Properties' ratings to Ba1, ratings on review for further downgrade

16 Nov 2022

New York, November 16, 2022 -- Moody's Investors Service ("Moody's") has downgraded the senior unsecured rating of Office Properties Income Trust (OPI) to Ba1 from Baa3.  Moody's has also withdrawn OPI's issuer rating and assigned it a CFR of Ba1, placed on review for downgrade and SGL-3 rating.  Moody's also downgraded the senior unsecured rating of Select Income REIT to Ba1 from Baa3.  The ratings of Office Properties Income Trust and Select Income REIT were placed under review for further downgrade.  The ratings downgrades reflect OPI's elevated leverage and challenges it faces as it seeks to execute asset sales and reduce debt levels amidst a challenging transaction environment for commercial office real estate.  The downgrade also considers risks to operating cash flows as OPI faces a large amount of lease expirations in 2023 and 2024.  Moody's review will focus on the REIT's prospects for selling assets and raising capital needed to address 2024 refinancing needs, including the maturity of its unsecured revolver and $350 million bonds that come due.

The following ratings have been downgraded and placed on review for downgrade:

..Issuer: Office Properties Income Trust

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa3; Placed on Review for Downgrade

..Issuer: Select Income REIT

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa3; Placed on Review for Downgrade

The following ratings have been assigned and placed on review for downgrade:

..Issuer: Office Properties Income Trust

......Corporate Family Rating, Assigned Ba1, Placed on Review for Downgrade

The following rating has been assigned:

..Issuer: Office Properties Income Trust

......Speculative Grade Liquidity Rating, Assigned SGL-3

The following ratings have been withdrawn:

..Issuer: Office Properties Income Trust

......Issuer rating, Withdrawn, previously rated Baa3

Outlook Actions:

..Issuer: Office Properties Income Trust

....Outlook, Changed To Ratings Under Review From Negative

..Issuer: Select Income REIT

....Outlook, Changed to Ratings Under Review From Negative

RATINGS RATIONALE

The Ba1 senior unsecured rating reflects OPI's high-quality tenant base which includes a large percentage of investment-grade and government tenants.  OPI also maintains low secured debt levels and a mostly unencumbered property portfolio which enhances financial flexibility as it considers upcoming funding needs.  Liquidity is adequate through 2023 and fixed charge coverage is solid for the existing rating levels and it has modest floating rate debt, although Moody's expects this metric to decline with rising interest rates and revolver usage.

Credit challenges include OPI's elevated leverage and difficult office leasing conditions due to a weak macroeconomic environment and the evolving transition to a hybrid work environment.  Debt reduction will be challenging and depend on the REIT's ability to execute targeted asset sales and leasing activity as it has 28% of leases expiring over the course of 2023 and 2024.  OPI also has some redevelopment risk as it has two projects under construction totaling about $340 million of investment. One of these projects is 54% pre-leased and the other is 28%, which will weigh on cash flows until they are leased and yielding their expected returns.  Moody's also views OPI's external management structure as a credit challenge, creating potentially significant conflicts of interest between investors and management.

OPI's SGL-3 rating reflects the REIT's adequate liquidity as we consider its funding needs over the next two years.  OPI had $630 million of liquidity as of 30-September 2022, including $615 million available on its $750 million unsecured revolver and $14 million cash.  We expect the REIT to use some of this liquidity and rely on its revolver in order to fund $225 million needed to complete its two partially leased redevelopment projects expected to deliver in 2023.  Furthermore, OPI will need to address the maturity of its revolver which has a final maturity in January 2024 in addition to $350 million of bonds that come due in mid-2024.  OPI does have a mostly unencumbered property portfolio that enhances financial flexibility, but there is risk that the REIT places mortgage debt on some of its higher quality assets in order to secure needed capital, thereby reducing the value of assets left for unsecured bondholders.

Moody's review will focus on OPI's prospects for raising capital needed to address upcoming funding needs, including redevelopment spend, the maturity of its revolver and 2024 bond maturity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS  

OPI's ratings would be downgraded if the REIT doesn't take steps to raise capital and demonstrate material progress with respect to its upcoming lease maturities.

An upgrade is unlikely near-term but would reflect Net Debt/EBITDA below 6.25x and sound operating performance as evidenced by same-property occupancy and NOI trends.

Office Properties Income Trust (Nasdaq: OPI) is a REIT focused on owning, operating and leasing properties primarily leased to tenants with high credit quality characteristics. OPI is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2022 and available at https://ratings.moodys.com/api/rmc-documents/393395. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of  the guarantor entity.  Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Lori Marks
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Philip Kibel
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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