Good morning, and welcome to the Office Properties Income Trust 4th quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the 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 1 on your telephone keypad. To withdraw your question, please press star then 2. 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.
Thanks, Gary. Good morning, everyone. Thank you 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 fourth quarter of 2022, 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. 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, February 16, 2023, 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, 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. Good morning, everyone, and thank you for joining the call today. OPI reported fourth quarter results that reflect strong leasing momentum, solid financial results, and further execution on our capital recycling plans. Amid continued economic uncertainty and challenging office sector fundamentals, we are pleased with our performance advancing on core strategies aimed at enhancing OPI's operating performance. Normalized FFO of $1.13 per share exceeded the high end of our guidance range, and the change in same-property cash basis NOI was in line with our expectations. We completed 705,000 sq ft of leasing activity, primarily with tenant renewals, resulting in our highest quarterly retention activity in 3 years. Our fourth quarter performance caps a year in which we achieved many of the operating targets that we set for OPI.
During 2022, we completed 2.6 million square feet of leasing for a weighted average term of more than nine years and a roll-up in rent of 5.6%, which was in line with the leasing spreads we had projected at the beginning of the year. New leasing included 588,000 square feet, or 23% of our 2022 activity. We sold non-core properties for more than $210 million of aggregate gross proceeds, and total portfolio occupancy increased approximately 110 basis points to 90.6%, trending well above the national o-office market average. Turning to capital recycling, since the beginning of 2022, we sold 21 properties containing 2.4 million square feet for $216.4 million.
Although we started the year with a more aggressive disposition outlook, we are pleased with our ability to close on these transactions during a very tumultuous year for capital markets and office real estate. In 2023, capital recycling will remain a principal strategy for OPI and cater toward ongoing portfolio enhancement opportunities, management of capital requirements, and reducing leverage. We expect macroeconomic uncertainty in CRE financing to continue to weigh on the pace and magnitude of market activity. However, we are presently under agreement to sell two properties for approximately $7.6 million in gross proceeds, and we are in various stages of identifying and marketing additional properties for sale, most likely to transact in the back half of the year.
We ended the year with 160 properties containing 21 million sq ft with a weighted average lease term of 6.6 years. Approximately 63% of our annualized rental income was from investment-grade rated tenants, which we believe is one of the highest such percentages in the office REIT sector. Our balance sheet has nearly $570 million of liquidity, with 92% of our debt at fixed rates, and we have no senior notes maturing until mid-2024. Turning to our fourth quarter leasing results, we entered into new and renewal leases for 705,000 sq ft, which is a 16% increase from the third quarter and a marginal improvement over the prior year.
This activity resulted in a weighted average lease term of 10.1 years and leasing concessions and capital commitments of $8.46 per sq ft per lease year. Weighted average rent spreads for the quarter declined 6.7%, primarily due to a 337,000 sq ft renewal for an 11-year term with a defense contractor located in Northern Virginia. We view this renewal as a strategic win with one of our largest tenant expirations in 2023, and recognition that our campus is part of a longer-term real estate plan for the tenant. Additional highlights are primarily attributed to renewals with 2 GSA tenants, inclusive of a renewal for 110,000 sq ft mission-critical facility in Mississippi for a 20-year term.
Generally speaking, we continue to see higher retention with the GSA agencies and mission-critical facilities, along with willingness to consider longer lease terms. Mission-critical facilities within our portfolio contribute to roughly 11% of our annualized revenue, or just over half of our total US government portfolio. Looking ahead to OPI's upcoming lease expirations, while overall leasing activity has been healthy, we believe 2023 will move at a gradual pace while tenants continue to evaluate real estate needs. We continue to actively manage through proactive re-leasing efforts, along with select alternative use strategies to further diversify our portfolio and to capitalize on compelling value creation opportunities. In 2023, lease expirations represent approximately 11% of our annualized rental income, a 280 basis point decrease from where we stood at the end of Q3.
Annualized revenue for 2023 expirations is comprised of the following. Net known vacates for the year are trending between 5% and 6% of annualized rental income. Nearly 80 basis points represents planned dispositions, the balance of 5%-6% is expected to renew, of which 2.2% has either signed subsequent to year-end or is in advanced stages of lease discussions. We are currently tracking approximately 2.7 million sq ft of activity in our pipeline, with more than 1.1 million sq ft attributable to new leasing and 541,000 sq ft of potential absorption. In light of the activity in our pipeline, combined with our property disposition plans, we are projecting year-end occupancy of 88%-90%. Turning to our developments.
OPI currently has two redevelopment projects underway that we expect will enhance our competitive positioning in the market and provide significant value creation and growth opportunities. Our redevelopment at Twenty Mass Ave in Washington, D.C. is on track to deliver during the second quarter of 2023. The property is currently 54% pre-leased to an anchor tenant, the Royal Sonesta, and we anticipate an opening date to take place at the end of the second quarter. In Seattle, Washington, we continue to advance construction. Our timing for completion has been moved out to Q4 2023, given supply chain impacts for delivery of certain equipment. The delay mostly defers the timing of a potential lease to start of our spec suites. We anticipate our anchor lab tenant leasing 28% of the project will continue to commence in Q4, as originally planned.
We're off to a good start with pre-leasing at both projects and maintain our outlook for lease-up to stabilization of 18-24 months following delivery. Our development leasing pipeline includes more than 170,000 sq ft of active proposals across the two projects. Total cost of stabilization are $377 million, of which $197 million or 52% has been spent through year-end 2022. We anticipate between $125 million and to $135 million, or up to 36%, will be spent in 2023, with the balance incurred with future year lease-up. Upon stabilization, estimated stabilized yields for Washington, D.C. are 8%-10%, and for Seattle are 10%-12%.
In conclusion, despite these achievements, tenants' broader view on office needs and plans for re-entry remain in a period of transition. Industry utilization continues to improve at a very gradual pace across most markets, currently trending near 50% and consistent with what we are expecting across our national portfolio. We continue to experience gradual improvement supporting tenant decisions within our portfolio, as highlighted with our leasing results or known vacates, concerns of an economic recession, head count reductions, along with cost containment measures continue to weigh on office fundamentals. Heading into 2023, we take comfort in the many initiatives undertaken over the past several years to position OPI as a landlord of choice when managing through transitionary periods. Representative examples include enhancements to our overall portfolio with our capital recycling program and major redevelopments.
Our focus on providing an exceptional experience through our property management and engineering teams. Our many sustainability initiatives, including the company's recognition as a gold-level Green Lease Leader, and steps taken to strengthen our balance sheet. We believe these and other factors will benefit OPI as we continue to navigate the headwinds facing the office sector. I will now turn the call over to Matt to review our financial results.
Thanks, Chris. Good morning, everyone. Normalized FFO for the fourth quarter was $54.5 million or $1.13 per share, $0.03 above the high end of our guidance range. This compares to Normalized FFO of $53.8 million or $1.11 per share for the third quarter. The sequential quarter increase was primarily driven by lower G&A and interest expense. I'd like to highlight that OPI's fourth quarter income statement includes a decrease in expense reimbursements included in rental income and real estate tax expense of approximately $8.1 million and $8.2 million respectively, related to a favorable real estate tax assessment received during the quarter for a property located in Chicago that OPI acquired in June 2021.
G&A expense for the fourth quarter was $5.8 million as compared to $6.6 million for the third quarter and $6.7 million adjusted for the reversal of previously accrued incentive fees in Q4 2021. The sequential quarter decline was driven by Q3 share grants and a reduction in our business management fee as our share price has declined, illustrating the fee structure alignment between RMR and OPI shareholders. Same property cash basis NOI decreased 1.4% compared to the fourth quarter of 2021, in line with our guidance range. The decrease was mainly driven by higher levels of free rent related to leasing activity over the past year and higher operating expenses. Turning to our outlook for normalized FFO and same property cash basis NOI expectations in the first quarter of 2023.
We expect Normalized FFO to be between $1.10 and $1.12 per share. This guidance includes a range of $5.7 million-$5.8 million of G&A expense. Adjusted for the real estate tax and related impact on tenant reimbursement income in the fourth quarter noted previously, our estimated first quarter run rate for rental income is approximately $133.5 million, and real estate tax expense is approximately $16 million. We expect same property cash basis NOI to be down 2%-4% as compared to the first quarter of 2022, mainly driven by increased operating expenses as a result of higher utilization levels and continued inflationary pressure. Turning to the balance sheet.
At quarter end, our outstanding debt had a weighted average interest rate of 4% and a weighted average maturity over 5 years. With 92% of our debt at fixed rates, we remain well insulated from the rising cost of debt capital in today's environment. Our only variable rate debt is our revolving credit facility, and as Chris mentioned, OPI has no senior notes due until mid 2024. In November, we exercised our first option to extend our credit facility by 6 months until the end of July 2023, and we have one remaining option to extend the maturity date to January 2024. We plan to pay off our only remaining mortgage debt at its June 2023 maturity date, which has a $50 million principal balance at a 3.7% interest rate. This will leave OPI with a fully unencumbered balance sheet.
We ended the quarter with $567 million of total liquidity, including $555 million of availability under our credit facility. Turning to our investing activities. Since the beginning of the fourth quarter, we sold 5 properties for $20.5 million and are currently under agreements to sell 2 properties for an aggregate sales price of $7.6 million, including a vacant property with 107,000 sq ft. We spent $42.1 million on recurring capital during the fourth quarter, bringing our full-year recurring capital spend to $100 million, in line with our 2022 guidance. Our redevelopment capital totaled $44.5 million during the fourth quarter and $159 million for the full year.
Looking ahead to 2023, our recurring CapEx guidance remains unchanged at $100 million. Our redevelopment CapEx guidance is expected to approximate $150 million. In January, we declared our regular quarterly dividend of $0.55 per share, resulting in a Normalized FFO payout ratio of 49% and a rolling four-quarter CAD payout ratio of 84%. Operator, that concludes our prepared remarks. We're ready to open the call up for questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Bryan Maher with B. Riley Securities. Please go ahead.
Thank you. Good morning, Chris and Matt. Couple of quick questions from me. Can you talk a little bit more about the capital recycling plan? I mean, we know what you've sold and have under LOI in the first quarter. What's the outlook for 2023 to sell? Maybe also the counter to that, what, if anything, are you looking to buy in a year where we're hearing there could be opportunities as owners have problems refinancing debt?
Yeah. Bryan, this is Christopher. Thank you for the question. I guess a couple things. I think currently where we stand today, you know, we're more focused on our business plan, which is the leasing of vacancy, you know, wrapping up these redevelopments and then continuing through capital recycling with a bigger focus on selling assets to just kind of manage leverage levels and to kind of fund other capital initiatives. I think that's where we sit today. With regard to capital recycling and kind of the disposition focus, you know, it's gonna be somewhat muted in 2023. I think there's a lot of uncertainty around just kind of capital markets and financing, which is gonna, you know, weigh on, you know, our ability to transact.
If you kind of look back at 2022 and kind of selling north of $200 million, I think we would view that as a successful year in kind of, you know, showing some, you know, opportunity to transact in what was also, I think, a challenging market for capital markets. I think where we're selling assets, or have been, they're smaller in deal size. Perhaps that's opened up kind of more window for owner users and other groups, which is part of the reason why I think we ended the year where we did. To put kind of a number to 2023 is difficult.
I mean, you know, our plan over the last several years was to always, you know, focus on kind of that $100 million-$300 million in activity as part of kind of a longer term strategy. I think we'd like to see that, but I would be a little bit cautious to say that we'll get there. I mean, I think in addition to the $7.6 million we've talked about, we have about another $15 million in the market. We're working through business plans now and kind of, you know, identifying other opportunities that we think might be ripe to bring to the market. Anything on that front is gonna happen more towards the back half of the year.
Okay. I think in your prepared comments, it was hard keeping up. You mentioned, I think 5%-6% known vacates in 2023, maybe I have that wrong, and 80 basis points of that was to be sold. Maybe you can clarify that. If those numbers are the case, what are you looking at prospect-wise for the balance of the known vacates? Are any of those properties, you know, really likely to be re-leased, or are they on the fence to be sold? Maybe a little bit more color there.
I think when you think about the known vacates, that's 5%-6%. I think it's probably best to kind of wind back the clock a little bit and put ourselves kind of at last quarter. you know, now that we've renewed the 336,000 sq ft with a larger tenant, that's kind of come out of the denominator. You're seeing kind of a larger spread on known vacates, just given that we have less annualized revenue expiring because we've been able to successfully secure renewals. Barring any, you know, disposition or leasing with some of those other known vacates, we would expect that that number is gonna continue to increase as those expirations near, which are mostly in the back half of the year as well.
you know, there is various levels of activity on some of those known vacates. I think, you know, some examples, we've talked about, the building in Washington, D.C., representing about just over 2% of our annualized revenue. you know, the tenant there, was on the fence about whether or not they'd stay. It looks like they're gonna renew, but downsize. That'll, you know, once that transact, that'll kind of, you know, reduce, or open up some additional vacancy. Then we have, a project in Boston where the tenant's gonna leave or is expected to leave midyear. I would say that there's, you know, some activity there, but nothing, you know, far enough along to speak to. It really depends.
you know, we have 10% vacancy across the portfolio. you know, there's gonna be ebb and flow about whether or not we see, you know, leasing on the known vacates or kind of augmenting that over towards some of the vacancy. I think in general, we would expect to see leasing on both fronts. I think just as another kind of anecdotal piece, we have, I think, close to 200,000 sq ft in advanced discussions of new leasing, some of which may hit this quarter. I think that'll be kind of a path towards addressing, you know, or kind of countering some vacancy, and again, with some activity around some of these known vacates.
Okay. Thanks for that. Just really quick, last from me. If memory serves me, you have cobbled together, I think, an entire city block in downtown Boston, for possible redevelopment. Is there any update there?
On the redevelopment side, there's not. I mean, I think that it's a great site. You know, I think long term, you know, I think we're optimistic about options there. You know, in Boston in general, it's just a very lengthy process to, you know, work through potential development. I think where we sit today, it's still something, you know, we're focused on, but, you know, nothing to really speak to, as far as progress. I think to complement that, it's not a scenario in the near term where we would see any real significant capital spend, in support of that project.
Okay. Thank you.
Again, if you have a question, please press star 1. Please stand by as we poll for questions. The next question is a follow-up from Bryan Maher with B. Riley Securities. Please go ahead.
Well, I guess if there's no questions, I'll throw in one more. When it comes to your dialogue with existing tenants when their properties are coming up for renewal, can you give a little color on how those are going when it relates to the fact that they might think that they have a little leverage with, you know, the whole work from home scenario and the macro environment versus your argument that, hey, we have inflationary costs that we need to pass through. Can you give us a little color on how those progress?
Yeah. I think it's a couple things. I think for tenants who find that it's important to control their space or the building, so let's just use single tenants or single building occupied by single tenants, for example. In that particular case, I think it's really just a function of market because in most cases, if the tenant wants to control the space, you know, it's hard to negotiate, you know, something other than, you know, a downside because we all know they don't wanna give back space. Really, this is a function of just overall space needs. I don't know that there's a scenario where there's more leverage. I mean, I think clearly we wanna be in a position where we can retain a tenant.
You know, we're gonna, you know, focus on what our market deals and at the same time recognize that there's a significant amount of value in retention versus the alternative. With either a downsize or vacancy. Some of that, you know, comes in the form of concessions. You know, we can potentially maintain face rates, but we're seeing, you know, inflated free rent or other types of concessions to kind of support those needs. I think that's reflected in some of, kind of the impact with our capital spend related to leasing that, you know, that has trended over the last several quarters. I think the shorter answer is, you know, more about, you know, less about just true leverage and more about just being creative to make it a win-win situation.
Okay. Maybe lastly, when it comes to the D.C. and Seattle redevelopments, and I know you have the anchor tenants, you know, in each of those two projects, but can you give us a little more color on, you know, what the other discussions are for other tenants to fill out those space?
You know, as we noted, we have about 170,000 sq ft of activity across those two buildings. You know, about 40% of that is for Twenty Mass Ave, and the balance is for Seattle. I'd say for Twenty Mass Ave, you know, there on the positive, there's been kind of a good influx of tour activity, which is expected given the project is nearing completion. It's, it's just, it's easier to kind of walk through that and see the opportunity from a tenant's perspective. There's nothing far enough along to speak to as far as, you know, when or if those will transact.
I think in general, that activity is more catered towards, you know, tech tenants, law firms, nonprofits, and similar type agencies, which is, I think, generally consistent in with what we see in D.C. For Seattle, it's twofold. I think that, you know, with the anchor tenant, you know, there's potential upside for them to take down additional space in the lab building. The activity that we have today at that project is mostly geared towards the office side of the project. Just as a reminder, two of the three buildings are lab, and the third is office. Really that's a function of on the second lab office, these are gonna be spec suites. You know, more move-in ready for smaller tenants, kind of partial floor or full floor tenants.
Those conversations typically come later, closer to delivery, given that the tenants themselves just kind of have a near-term need. We did see a flurry of activity. I think it's somewhat muted, on that side, you know, given kind of we've pushed out our delivery date, but we would expect that there'll be more to talk about on specific spec suite lab opportunity in the upcoming quarters. Right now, that activity is catered towards the office building.
Great. Thanks, Chris.
This concludes our question and answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks.
Well, thank you for joining us today and your interest in OPI, and we look forward to speaking with you again soon.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.