Market participants are debating the actual value of Office Properties Income Trust’s (OPI) real estate as the REIT comes under pressure to handle upcoming debt maturities at a time of great turmoil in the commercial real estate market, said several sector advisors and sellsiders.

The listed REIT is under the gun to figure out how to refinance its USD 650m 4.5% senior unsecured notes due next February and USD 650m of unsecured debt due in 2026 and 2027. OPI told investors in February it had engaged Moelis to evaluate options to address the maturities.

Investors expect OPI to handle the notes via a distressed exchange, rather than tapping the market to issue senior secured notes like it did earlier this year when it refinanced a 2024 unsecured note maturity. Financial advisors have started talking with creditors in an effort to organize the unsecured noteholders, said two sources familiar with matter.

In a sign of OPI’s distress, the 2025 notes recently traded at 83.76 on Tuesday, while the 2.65% USD 300m due in 2026 and 2.4% USD 250m in 2027 traded in the 50s, according to MarketAxess. Since COVID-19 hit in March 2020, OPI shares have declined from over USD 34 to trade below USD 2 on Wednesday, giving the REIT a USD 96m market cap.

The office rental market has been struggling with shrinking demand amid the secular shift to remote and hybrid working schedules post COVID. Office vacancy rates nationwide are predicted to reach near 20% in 2024, up from 12.1% at the end of 2019, according to CBRE. OPI’s occupancy is forecasted to drop to 79.9% this year, from 92.4% in 2019.

The issuer’s EBITDA is forecasted to decline 17% this year to USD 277m from USD 334m in 2023, and further deteriorate in 2025 and 2026, according to a REIT analyst report. The analyst forecasts funds available for distribution will come in just above zero this year and turn negative in the coming years.

On a free cash flow basis, OPI is expected to generate USD 34m in cash this year, based on USD 286m 2024 EBITDA, USD 120m of capital expenditures and USD 132m of interest expense, said another of the sellsiders.

Valuation guesswork

OPI executives telegraphed during the company’s Q4 earnings call last month that the REIT has over USD 3bn in unencumbered assets available for debt leverage, a claim met with varying degrees of skepticism by analysts and investors. Concerns linger over the fair value of the assets, exacerbated by scarce office property transactions and substantial discounts on properties hitting the market.

The key debate among creditors now revolves around the value for the remaining unencumbered assets and how changes to the asset base will impact debt covenants.

Some market participants estimate the value of OPI’s unencumbered assets at roughly USD 1bn, while others caution that OPI’s usable collateral might be valued as low as USD 500m to USD 700m – insufficient to cover the 2025 maturity after considering an LTV discount of approximately 60%, according to a sellside analyst and a sector advisor. A handful of buysiders said they believe OPI has sufficient assets to cover the 2025 maturity.

“It’s difficult to know how to value office properties now,” said the sector advisor. The challenge arises in part due to misleading information on tenant vacancies, said a second sector advisor. He noted that actual vacancies in general are higher than reported and there can be surprises when subleases end.

For OPI, 2024 could be a watershed year as 1.9m of square footage, or two thirds of its expiring leases this year, will not be renewed, representing 10.5% of annualized rental income, according to the company.

“An office building without stable tenants is hardly worth anything other than the land value,” said one investor in commercial real estate. “Even if the creditors end up taking those assets, the only thing they can repurpose them into is probably a prison.”

As valuations get opaque, the selection of assets will be pivotal in negotiation between creditors and the company regarding an exchange into senior secured notes, said a third sector advisor. OPI may have to allow the creditors to select the properties used to secure additional financing, potentially allowing creditors to have more control over how  the assets are operated.

To secure a new revolving credit facility in January, OPI pledged 19 properties with a gross carrying value of USD 942m to line up a new USD 325m secured revolving credit facility and USD 100m secured term loan. The REIT pledged another 17 properties with an undepreciated value of USD 500m to issue USD 300m 9% senior secured notes due 2029.

Overall, OPI reports that its 151 properties have an undepreciated carrying value of USD 4.06bn, according to SEC filings. Only seven of its fully owned properties with a carrying value of USD 226m have mortgages.

Searching for cash

Alternative to an exchange, the REIT analyst report estimates OPI would have to raise USD 600m in cash from asset sales and secured debt issuance to repay the 2025 maturity and remain in compliance with covenants on the revolving credit facility. The REIT had USD 12m of cash and USD 193m of availability under the revolver at the end of 2023.

OPI may need to sell some of its better assets, which would put itself in an even more precarious position to address its 2026 and 2027 maturities, unless the office market “significantly improves,” said the first sector advisor.

Disposals could also risk tripping covenants, a sellsider said. Maintenance covenants require OPI to ensure total unencumbered assets exceed 150% of unsecured debt. Pro-forma of the asset pledges for the revolver and senior secured notes, the ratio stood at 180%, down from 210% a year prior.

The urgency of the situation might attract non-conventional lenders from the private credit space, who would be willing to take on extra risk and lend more aggressively at a higher LTV, said a restructuring attorney.

“It would take a lender who believes in the eventual recovery of the office rental market,” said the lawyer. “And they will lend more money and hope to take the assets in a bankruptcy.”

In its 10-K filing last month, OPI said it was evaluating “market-based alternatives to obtain debt financing” to cover the 2025 debt maturity. “Based on the significant number of unencumbered properties in our portfolio, our successful history of obtaining new debt financings and our current financing metrics, we believe it is probable that we can obtain new debt financing that will allow us to satisfy the 2025 unsecured notes as they become due,” the REIT said in the filing.

OPI did not return requests for comment.