Good morning, and welcome to the Office Properties Income Trust Q4 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kevin Barry, Director of Investor Relations. Please go ahead.
Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are OPI's President and Chief Operating Officer, Chris Bilotto, and Chief Financial Officer and Treasurer, Matt Brown. In just a moment, they will provide details about our business and our performance for the Q4 of 2021, followed by a question-and-answer session with sell-side analysts. First, I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on OPI's beliefs and expectations as of today, Thursday, 17 February 2022, and actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission or SEC, which can be accessed from our website, opireit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements.
In addition, we will be discussing non-GAAP numbers during this call, including normalized funds from operations or normalized FFO, cash available for distribution or CAD, adjusted EBITDA and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income are available in our supplemental operating and financial data package, which also can be found on our website.
In addition, we will be providing guidance on this call, including normalized FFO and cash basis NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I will now turn the call over to Chris.
Thank you, Kevin, and good morning, everyone. Welcome to the Q4 Earnings Call for Office Properties Income Trust. On today's call, I will begin with the headlines from our 2021 results, provide a general overview on what we are seeing in the market, and discuss an update to the progress we are making on our core business strategies before turning it over to Matt to review our financial results in more detail. Yesterday, OPI reported Q4 results that reflect strong leasing momentum, solid financial performance, and steady execution on our capital recycling strategy. Normalized FFO was $1.20 per share, exceeding the high end of our guidance for the quarter.
Leasing volumes exceeded 700,000 sq ft and represents the highest quarterly volume since the beginning of 2020, while tenant utilization across our buildings remained consistent with prior quarters at 40%. We expect utilization will continue to improve as we progress into 2022. However, timing remains uncertain as tenants continue to work through their re-entry plans and give consideration to their space needs to accommodate various working models. Despite these considerations, leases signed during 2021 averaged 9.5 years of term, highlighting the willingness of tenants to consider office space as part of a long-term plan.
Looking back on the past year, we made excellent progress improving our portfolio through the advancements of our core growth strategies, which we feel is a testament to the quality of our assets, relationships with our tenants, and the work done by our real estate and operations teams to elevate our properties to be a landlord of choice. Leasing volume for the year was up 26% over 2020 at 2.5 million sq ft with a weighted average lease term of 9.5 years and a roll-up in rent of 6.3%. This included 846,000 sq ft of new leasing, which is more than three times the volume experienced in 2020 and more than double the new volume achieved in 2019 prior to the pandemic.
We have continued to execute on our capital recycling plans, highlighting our ability to identify and dispose of non-core properties and those where we feel we have maximized value. Since the beginning of 2021, we have sold nine properties for more than $250 million that contained approximately 2.9 million sq ft at an average age of 26 years and an average cap rate of 7.4%. We plan to continue these efforts into 2022 and are currently marketing properties with targeted proceeds of $400 million-$500 million. Proceeds will primarily be used as part of our deleveraging plan. Complementing these efforts, we redeployed proceeds into the acquisition of two core properties in Atlanta and Chicago, adding Google to our roster of top tenants for a combined $550 million.
Launched two highly accretive development projects in Washington, D.C. and Seattle, Washington, which are collectively 32% pre-leased and completed the issuance of $1.1 billion of senior notes in 2021, reducing our cost of debt, increasing average debt maturity, and further highlighting investor confidence in OPI's portfolio. Turning now to the Q4 in more detail. As noted earlier, we maintained strong leasing momentum with 702,000 sq ft of new and renewal leasing. This activity came with a weighted average lease term of six years and a weighted average roll-up in rent of 4%. From an industry perspective, more than 60% of our Q4 activity was driven by tenants and industries representing technology, communications, and manufacturing and transportation uses. Government tenants accounted for approximately one-quarter of our leasing volume during the quarter.
We ended the year with investment-grade rated tenants representing approximately 62% of annualized rental revenue. New leasing activity represented just under 40% of our total Q4 activity, consistent with our trend over the past few quarters, and concessions and capital commitments were $2.95 per sq ft per lease year. Same-property occupancy increased to 91.2% during the Q4 , and we ended the quarter with consolidated occupancy of 89.5%, a 50 basis points increase from last quarter. Turning to our Q4 leasing transactions. In Reston, Virginia, the federal government exercised its one-year renewal option for 131,000 sq ft at a roll-up in rent of 3%. We are currently engaged in discussions for a longer-term commitment following the expiration of this renewal in 2023.
As previously communicated, in Sacramento, California, the State of California vacated 129,000 sq ft, effective November 2021, and renewed 29,000 sq ft, reducing the overall contemplated vacancy. This included a lease term of six years and a roll-up in rent of approximately 17%. In terms of new deals, in Chester, Virginia, we executed a lease for 225,000 sq ft with a leading consumer goods manufacturer for a 12-year term and a rent roll-up of 3.9%. Our current leasing pipeline remains robust, with discussions covering more than 3.4 million sq ft, of which 1.5 million sq ft is attributable to new leasing. This is the sixth consecutive quarter where our leasing pipeline has been in excess of three million sq ft, further highlighting strong interest from tenants across our portfolio.
Based on the characteristics of our pipeline, we currently expect to end 2022 with occupancy of 89%-90% and a roll-up in rent of 5%-7%. Now looking ahead to OPI's upcoming lease expirations. 8.5% of our total annualized revenue is rolling in 2022, known vacates representing 4.9% of annualized revenue with a breakdown as follows. F5, representing 2.2% of annualized revenue, will vacate our property in Seattle, Washington in February 2022. Plans for a redevelopment are underway, and we anticipate delivery of a Class A life science and office campus in early 2023. We have had good activity for the different uses and look forward to providing updates in upcoming quarters.
Our tenant located in Centennial, Colorado, representing 168,000 sq ft and 90 basis points as annualized revenue, will vacate in September 2022 following its expiration. We currently have a signed term sheet for 28,000 sq ft and are in discussions with a variety of tenants looking to lease portions of the building. In Plantation, Florida, we previously disclosed that GSA will vacate, which is currently estimated for mid-2022. We are pleased to report that subsequent to quarter end, we signed a lease for the remaining 64,000 sq ft, bringing occupancy to 100% for a 14-year term. Despite these vacancies, we have more than 561,000 sq ft in advanced stages of negotiation and an additional 446,000 sq ft that has been executed since year-end.
Combined, this reflects over 430,000 sq ft of new leasing in advanced stages across the portfolio. Turning to development. In addition to the update provided for our Seattle project, we are on track with our plans to redevelop 20 Mass Ave in Washington, D.C., and deliver in Q1 2023. Newer Class A properties in the greater D.C. market experienced roughly 1.3 million sq ft of net occupancy gains for the year, with tenants focused on flight to quality, but with increased concessions across all classes. As we have discussed on prior calls, the development is currently 54% pre-leased, and we continue to build interest from a variety of prospective tenants across a range of industries, including technology, consulting, services, legal, and related uses.
Finally, we are dedicated to enhancing OPI's corporate sustainability program and continue to advance initiatives that will position the company to thrive over the long term. In 2021, we continued to make progress on our initiatives and garnered industry honors, including ENERGY STAR Partner of the Year for the fourth consecutive year. We ended the year with more than six million sq ft of ENERGY STAR certified, six million sq ft of LEED certified, and five million sq ft of BOMA certified properties in our portfolio. In the year ahead, we plan to increase coverage for all three recognition programs and expand on our sustainability efforts. In summary, 2021 was an active year for leasing and property management as we work to reshape OPI's portfolio and drive sustainable growth in our operating performance and financial results.
We look forward to updating you on our progress and milestones as we continue to execute on our strategy during the year ahead. I will now turn the call over to Matt Brown to provide details on our financial results. Matt?
Thanks, Chris, and good morning, everyone. Normalized FFO for the Q4 was $58.1 million or $1.20 per share, which exceeded our guidance. This compares to normalized FFO of $59.6 million or $1.24 per share for the Q3 of 2021. The decline in normalized FFO on a sequential basis is mainly due to higher interest expense as a result of our Q3 bond offerings that were used to refinance debt nearing maturity and repay all amounts outstanding on our revolving credit facility and Q3 disposition activity. CAD for the Q4 was $42.6 million, or 88 cents per share, resulting in a full year 2021 CAD payout ratio of 69%.
G&A expense for the Q4 was $2.2 million, which includes the reversal of $4.5 million of previously accrued estimated business management incentive fees. Excluding this reversal of fees, G&A expense was $6.7 million, a decrease of approximately 6% compared with the same period last year and the previous quarter. Despite tracking ahead of our peers on a three-year total return basis for most of the year, market volatility in the Q4 adversely impacted OPI's total return relative to the peer group. As a result, no incentive fee was payable under our business management agreement. However, OPI generated a 14% return over the measurement period. Turning to property level results for the quarter.
Same-property cash basis NOI was relatively unchanged compared to the Q4 of 2020 and came in better than our guidance range of -1% to -3%. The improvement over our guidance range was due to operating expenses coming in below forecast levels and a property that went vacant in August 2021 that is classified as held for sale at 31 December and as a result, was removed from the same property set. Turning to our normalized FFO and same-property cash basis NOI expectations. We expect Q1 normalized FFO to be between $1.27 and $1.29 per share. The increase from $1.20 per share reported this quarter is made up of the following.
A net $0.04 increase related to our property in Seattle, including a $0.07 increase from F5's termination fee, partially offset by a $0.03 decrease related to their February expiration. $0.02 related to a termination fee at a property in California, where we have subsequently re-leased the property to a full building user and $0.02 of lower operating expenses forecasted in Q1. This guidance takes into account our planned disposition activity and includes a range of $27 million-$28 million of interest expense and $6.5 million-$6.6 million of G&A expense during the Q1 . We expect same property cash basis NOI to be flat ±100 basis points as compared to the Q1 of 2021. Turning to capital expenditures in the balance sheet.
We spent $16 million on recurring capital during the Q4 , bringing total 2021 recurring capital expenditures to $72.9 million, which was less than our forecasted levels. We also spent $25.3 million on redevelopment capital during the Q4 and $56.2 million for the year, mainly driven by our 20 Mass Ave project. For the full year 2022, we expect our recurring capital level to be elevated as compared to 2021 as a result of strong leasing activity that will create long-term value for OPI. We also expect to see increased redevelopment capital expenditures as our projects at 20 Mass Ave in Seattle continue to progress. As Chris mentioned, 2021 was a busy year on the refinancing front.
In total, we raised over $1 billion of senior notes and used the proceeds to refinance higher rate debt and repay all amounts outstanding on our revolving credit facility. This activity helped finance our strategic acquisitions during 2021, strengthened our balance sheet, increased the weighted average remaining term of our debt, and reduced our weighted average cost of fixed-rate debt. We ended the quarter with more than $830 million of total liquidity. Looking ahead to 2022, as Chris mentioned, we will continue to bring non-core properties to market to further enhance our portfolio composition and strengthen our balance sheet. We expect to dispose of non-core properties under our capital recycling program to repay debt and manage our leverage levels.
We plan to utilize proceeds from this capital recycling program and our current liquidity to repay $25 million of mortgage debt and the $300 million of senior notes that mature in July. Beyond our July notes, we have no senior notes maturing until May 2024. Operator, that concludes our prepared remarks. We're ready to open the call up for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Bryan Maher with B. Riley. Please go ahead.
Good morning, guys. A couple of questions. The Brookhaven properties that were scheduled to be sold down in Georgia, I think it was for $56 million. Apparently that transaction was terminated. Can you share why, and is that gonna be part of the dispositions in 2022? I think you said maybe $400 million-$500 million.
Yeah, sure, Bryan, this is Chris. I think first and foremost with Brookhaven, you know, those properties or that campus was not originally contemplated as our capital recycling program. We got an offer or a direct offer off market for the portfolio, which we felt like was a good offer under the circumstances and kind of went down the path of evaluating that for disposition. I think at the end, as they started to kind of work through their business plan, at least what their focus was for the asset. They ultimately determined that they wanted to pivot and go in another direction. I think for us, you know, it's a win either way in the sense that that campus is 100% occupied to the government now.
I think overall, we like Atlanta and kind of, you know, look forward to seeing that what we can do long term with that asset.
Okay. When we think about the $400 million-$500 million in asset sales potentially for 2022, can you give us some general characteristics of what those properties are? Kind of who occupies them and, you know, maybe some of the locations big picture.
Yeah, I mean, I would first kind of caveat it by, you know, it's really asset specific as far as kind of the program. This isn't necessarily a focus on a certain geography. While there may be clusters, it's solely based on kind of our view on the asset and kind of where we are in the life cycle of owning that asset. I think to kind of touch on your questions, I mean, we have a handful of properties within kind of the D.C. MSA, you know, kind of more notably, within kind of Virginia or Maryland. And then from there, it really kind of branches out into just various markets, you know, including a couple assets being evaluated in the greater Phoenix area.
kind of some, you know, other locations that are just kind of more one-offs where we have assets and we think we've maximized value or kind of want to transition in another direction, so.
Okay. You touched upon, I think Matt gave us some numbers on CapEx, but really didn't lay out in specificity 2022, you know, maybe scope and how it flows through the quarters, especially with D.C. and Seattle. Can you give us any more color on how to think about that for modeling purposes this year?
Sure. On the recurring capital side, you know, where we sit today, we probably think recurring capital is around $100 million ± $10 million. What I will say to add to that, you know, when we gave CapEx guidance for 2021 at the beginning of the year, we thought we were gonna be at $85 million, and we ended up at $73 million. So a lot of that is dependent on the timing and leases materializing. But that's kind of where we are today, and we'll provide updates on recurring capital as we go throughout the year. On the redevelopment side, you know, 20 Mass Ave will continue to progress, and we'll really start seeing capital spend on our Seattle project starting in March.
We're probably looking at about $200 million in total in 2022 for those two projects combined.
Okay, great. Just last for me, you have a lot of liquidity, you know, over $800 million, even factoring in, you know, the notes, the $300 million and the $25 million mortgage I think you're gonna pay off this year. That leaves $500 plus you're gonna be selling some assets. You know, what are you seeing on the acquisition front? I mean, is there stuff out there that is attractive at decent cap rates that, you know, you're actually putting in offers on? I mean, how should we be thinking about that component of the business?
I would say that, I mean, we're looking at, you know, all activity that's out there. I think there's kind of varying levels of interest with product types. I think, you know, just kind of given what our focus has been in 2022, you know, coming off the acquisition of Chicago and Atlanta last year, I think we're gonna find ourselves being net sellers, you know, for the course of 2022 and potentially, you know, with some acquisitions as part of that. Our focus this year is gonna be largely around the disposition plan as part of the deleveraging. It's gonna be focused on leasing, and I think we've talked about and highlighted kind of some of the results and the positive momentum there.
Certainly around these re-developments and bringing them online in Q1 2023.
Great. Thank you. That's all for me.
As a reminder, if you have a question, please press star then one to be joined into the question queue. The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Hey, just going back to sort of the opening comments about the 40% sort of utilization from on the office side. Maybe can you talk about number one, what you're hearing from tenants? What are they saying? What are their timelines? What are the constraints, if any, to getting that up higher? Then the second question was, when we think about expenses, how do we think about those trends as you get that utilization up to 40, 60, 70, 80, should we expect expenses to tick up as well, or how should we think about that? Thanks.
I'll touch on the utilization. I think, you know, that 40% is kind of consistent with what we talked about last quarter. I would say the driver of that is kind of given the fact that we were into the holidays, and with the current variant and kind of the unknowns around that, I think it really kind of tempered expectations for re-entry. I think kind of, you know, our view is that we've kind of thought that re-entry would continue to kind of tick up into the summer and then kind of be more elevated towards the end of the year. I would say that that's probably a likely scenario today. You know, I think tenants, you know, are amenable to re-entry.
I think in many ways they have the office open with a little bit more flexibility around a requirement for employees to be in the office. Then there's other variables such as mask mandates and others that we're seeing lifted that might kind of be another catalyst for re-entry. I would say there's a few variables driving that in addition to kind of a tight labor market and I think where people are trying to kind of balance certain expectations on both sides. Nonetheless, I think it's reasonable to assume we'll see some movement with re-entry in the upcoming quarters.
Yeah, on the expense side, we are forecasting an increase in expenses in 2022, and there's really three major drivers associated with that. One is utilization, as Chris was just talking about. Second is the impact on inflation, where we will see some pressure there. Then third, on a previous quarter call, we talked about a lease restructure at a property in Utah that was a triple net lease previously, and now we've taken on management of that, so we're gonna see expenses increase for that. However, we will get some recovery of those expenses for that third piece.
Great. That's all my questions. Thank you.
The next question comes from Jason P. Idoine with RBC Capital Markets. Please go ahead.
Yeah, I wanted to get back to the capital spend. You said recurring CapEx will be about $100 million in 2022. I'm trying to tie that together with the lease expiration schedule. Could you just touch on maybe why that's increasing versus 2020? It looks like there's a higher percentage of leases expiring in 2020. Kind of tie those two things together. Then also, how should we think about it going forward just 'cause in 2023 and 2024, the expiration schedule really ticks up?
Yeah, I think the level of about $100 million in 2022 is driven by the 8.5% of leases expiring this year, as well as certain conversations we're having with tenants for early renewals that could push us into 2022. So that's really what's driving the increase in 2022 levels. And then additionally, as we look to 2023 and 2024, it's really early to predict that, but I would say, you know, using $100 million for now for those future years is probably reasonable, given we continue to see, you know, the vacancies or the expirations in 2023 and 2024.
Okay. Then the leasing pipeline ticked slightly lower. Now, understand that, you know, you guys didn't sign a higher number of leases during the quarter, so that obviously could be part of it. Also just looking at, you know, potentially some of these leases in 2022 and 2023 with the expiration schedule ticking higher, how should we think about that pipeline falling? Is that more from just the leases that were in that pipeline being signed or just not enough demand to back up leases when they are signed?
No, I think it's really just conversion, right? You know, I think when we're talking about, you know, that pipeline, you know, it wasn't a material drop from Q3 to Q4. I think it's kind of a bit of ebb and flow. I would think that as we continue to kind of convert these leases and more specifically, you know, we have about 900,000 sq ft of potential new absorption in that pipeline. If you know, as a portion of that is to materialize and we you know, our occupancy across the portfolio continues to tick up, I would imagine in some way that pipeline can kind of dip a little bit more specifically around new leasing.
Given as we progress in the year and kind of start to get into 2023 with the role we have there, it might be a little bit more elevated on the renewal side. You know, we've been, you know, kind of north of, you know, three million sq ft for six quarters now, and it's kind of been a little bit of ebb and flow as we've transacted. I think that that really kind of coalesces with the results that you're seeing, where the conversion is starting to kind of come into play.
Yeah. Okay. Thanks, Chris.
This concludes our question and answer session. I would like to turn the conference back over to Chris Bilotto, Chief Operating Officer, for any closing remarks.
Thank you for joining us today, and we look forward to speaking with you again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.