Good morning, everyone, and welcome to the Office Properties Income Trust third quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then 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 touch-tone phone. To withdraw your question, please press Star then two. Please note, this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead, sir.
Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are OPI's President and Chief Executive Officer, Chris Bilotto, and Chief Financial Officer and Treasurer, Brian Donley. In just a moment, they will provide details about our business and our performance for the third quarter of 2023, 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, 1995, and other securities laws. These forward-looking statements are based on OPI's beliefs and expectations as of today, Tuesday, October 31st, 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 OPI's earnings release presentation that we issued last night, which can be found on our website. Finally, we will be providing guidance on this call, including normalized FFO and cash basis NOI.
We are not providing 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. I will now turn the call over to Chris.
Thank you, Kevin, and good morning, everyone. Thank you for joining us today for OPI's third quarter 2023 earnings call. I'd like to start by welcoming Brian Donley, who joined OPI as our Chief Financial Officer and Treasurer on October 1st, and brings more than 25 years of accounting and finance experience in the commercial real estate industry. On our call today, we will cover various trends within the office sector and our portfolio, provide an overview of OPI's initiatives as a standalone company following the termination of the proposed merger with DHC, and provide a summary of our third quarter operating and financial results before we open the call to questions. Turning to highlights, Normalized FFO came in at $2 per share, beating the high end of our guidance range.
We executed 586,000 sq ft of new and renewal leasing, primarily with state government tenants and tenants in real estate, financial, and energy services industries. Portfolio occupancy was approximately 89.9% at quarter- end, a 70 basis points decrease compared to the prior quarter, and largely due to a known downsize of our primary tenant located at 841 1st Street in the DC MSA. We sold one property for $10.5 million, bringing total asset sales to $23.6 million for the year. As we approach the end of the year and look ahead to 2024, we remain focused on OPI's upcoming lease expirations and existing vacancies, along with our maturing credit facility and other debt maturities.
Supporting this, we have an active leasing pipeline of close to 2.8 million sq ft, 650,000 sq ft, or approximately 25% of which is associated with 2024 renewals, and close to 735,000 sq ft of potential absorption in early stages of negotiation. Collectively, pipeline deals include weighted average lease terms ranging from 5-10 years and an overall rent roll-up. More broadly, leasing across the sector remains challenged with elevated vacancy and sublease levels. However, we remain encouraged with efforts supporting return to office mandates across industries, and at OPI, we continue to see an improving outlook with estimated utilization close to 70%.
Year- to- date, we completed more than $177 million of property-level mortgage financing, with plans to continue evaluating similar financing opportunities, which Brian will expand on in more detail. Lastly, while the investment sales market has been slow this year following the steep increase in interest rates, and more specifically, credit on office assets has been especially tight, we are evaluating properties with fundamentals that we believe may have a high probability of execution to ramp up on our capital recycling program. Currently, we are under agreement to sell two buildings reflecting 177,000 sq ft and proceeds of $21.3 million. We have a couple of properties where we are in active conversations with prospective buyers and have plans to bring additional properties to market in the coming months. Turning now to more detail on our third quarter leasing results.
We completed 29 deals for 586,000 sq ft of new and renewal leasing, with an average lease term of 7.4 years and a rent rolldown of 2.7%. Our total volume for the quarter came in above our average rate during the preceding four quarters.... New leasing represented 104,000 sq ft and a roll-up of 1.9% and a weighted average lease term of 9.5 years, and increasing total activity for the year to more than 390,000 sq ft. Concessions and capital commitments declined year-over-year to $5.89 per sq ft per lease year, and slightly below our quarterly average over the past year.
Overall, our portfolio remains well diversified by industry and geography, with a weighted average lease term of approximately 6.5 years, and investment-grade rated tenants representing 64% of annualized rental income. Turning to third quarter leasing transactions. In the Sacramento MSA, we executed three lease renewals across three separate properties occupied by the state of California for a combined 260,000 sq ft, with a weighted average lease term of close to 8 years. In Rockville, Maryland, we renewed and upsized a lease with a private sector energy company for a combined 74,000 sq ft for a lease term of 5.5 years. We also completed a short-term extension and downsize with our tenant in Washington, D.C., previously communicated as a known vacate. This downsize decreased the tenant's annualized revenue contribution from 2.1% to 70 basis points.
We are actively marketing the space and have several proposals out to tenants ranging from 50,000 sq ft-250,000 sq ft, all of which are in early stages of discussion. In July, we received notice from Tyson Foods that it exercised its lease termination option at 400 South Jefferson Street in Chicago, Illinois. The effective termination date is January 2025, and the tenant will pay a fee of approximately $8.6 million. The property underwent a complete redevelopment in 2012 and is within blocks of all major transportation hubs. It offers an abundance of amenities, including training and conference centers, a rooftop terrace, fitness facility, and is LEED Certified. We are currently evaluating a range of options for the property, including leasing or a potential sale.
Looking ahead to OPI's upcoming lease expirations, we are actively engaging with our tenants to renew leases and convert prospects in our pipeline to fill vacancy. Lease gestation periods remain protracted compared to a few years ago, although we are increasingly seeing tenants with large space requirements come to the table well in advance of lease expirations to engage in conversations. During 2023, lease expirations for the remainder of the year represent 5.6% of annualized rental income, of which 3.8% are known vacates, excluding those considered for sale, most of which are with tenants previously communicated within our 2023 retention statistics.
Larger known vacates for Q4 include a state lease in the Boston MSA, representing 90 basis points of annualized revenue, and the GSA vacating three buildings in the Atlanta MSA, reflecting 130 basis points of annualized revenue. We are actively marketing each of the properties for lease with varying levels of activity. In 2024, lease expirations represent approximately 12% of annualized rental income. Currently, we have just over 2% in advanced stages of renewal and are in active conversations with several other expiring tenants. However, we anticipate continued pressure on retention as tenants evaluate their space needs. Turning to our development projects. During the quarter, we completed and delivered to Sonesta, the hotel portion of our Class A mixed-use development at 20 Mass Ave in Washington, D.C.
This project is 55% leased, and we continue to work through varying levels of tour and proposal activity. Earlier this month, we were pleased to have been awarded Best Renovation by the NAIOP DC Maryland chapter for this project. At our life science re-development in Seattle, we continued to advance construction and plan for delivery in phases with final completion anticipated for Q1 2024. The project is 28% pre-leased to Sonoma Biotherapeutics, and we plan to deliver the project with four move-in-ready spec lab suites, serving as a differentiator as tenants evaluate options and timing for move-in. Collectively, for the two projects, we have roughly $88 million in remaining capital spend. We estimate $25 million-$30 million will be spent by the end of Q1 2024, and the balance will be spent as leases are executed through stabilization over the next few years.
I will now turn the call over to Brian to review our financial results.
Thanks, Chris, and good morning, everyone. We reported normalized FFO of $49.4 million or $1.02 per share for the quarter, exceeding the high end of our guidance by a penny per share. This compares to normalized FFO of $53.7 million, or $1.11 per share for the second quarter of 2023. The decrease on a sequential quarter basis was primarily driven by higher interest expense and lower NOI, due primarily to a seasonal increase in utility expense. Same property cash basis NOI decreased 9.2% compared to the third quarter of 2022, and was in line with our guidance range of down 8%-10%. The decrease was mainly driven by tenant expirations and downsizes, elevated free rent levels on new leases, and higher operating costs.
We generated CAD of $0.36 per share during the third quarter, and $1.54 per share on a rolling four-quarter basis. Earlier this month, we declared our regular quarterly distribution of $0.25 per share, which represents a trailing four-quarter CAD payout ratio of 65%, based on our annual dividend rate of $1 per share. Turning to our outlook for Normalized FFO and same-property Cash Basis NOI expectations in the fourth quarter. We expect Normalized FFO to be between $0.96 and $0.98 per share. The decrease from Q3 is made up of several items, most notably increased interest expense and projected increases in operating expenses.
We expect same-property cash basis NOI to be down 11%-13% as compared to the fourth quarter of 2022, mainly driven by elevated free rent in the current year period and certain tenant vacancies and downsizes. Turning to the balance sheet, our total outstanding debt at quarter end had a weighted average interest rate of 4.4% and a weighted average maturity of 4.5 years. Our upcoming debt maturities include our $750 million revolving credit facility, which matures at the end of January 2024, and $350 million of unsecured senior notes due in May 2024.
Regarding the revolving credit facility, we ended the quarter with $200 million outstanding, and we are currently in active discussions with our banking group regarding entering into a new credit facility prior to year-end. However, it is too early to comment on any specific terms. During the third quarter, we closed on two mortgage loans with an aggregate principal balance of $69.2 million. The net proceeds from these mortgage loans were used to repay amounts outstanding under OPI's revolving credit facility. The challenging capital market conditions and limited financing options available for Office Properties, we have demonstrated our ability to efficiently execute CMBS financing. To date, we've closed more than $177 million in interest-only mortgage financings at a weighted average interest rate of 7.8% and a weighted average term of 6.4 years.
These mortgages reflect an implied capitalization rate based on aggregate appraised value below 7% and a loan-to-value of approximately 51%. As we look to address the $350 million of senior notes due in May 2024, we're exploring additional property-level secured financing options, including additional CMBS, and as Chris mentioned, asset sale opportunities to raise cash. Over 90% of our $4 billion portfolio by gross book value are unencumbered assets that we can look to for possible strategies to manage our debt maturities. Turning to our investing activities. During the quarter, we sold one property for $10.5 million and have raised disposition proceeds of $23.6 million year- to- date. We spent $24.2 million on recurring capital and $28.3 million on redevelopment capital during the third quarter.
For the fourth quarter, we expect recurring capital of $25 million-$35 million and redevelopment capital of approximately $15 million-$20 million. That concludes our prepared remarks. Operator, we're ready to open up the call 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're using the 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. Our first question comes from Brian Maher with B. Riley Securities. Please go ahead.
Thank you, and good morning, and I apologize in advance if you already said some of these things. We had a little bit of technical difficulties here. On the property taxes, we noticed it was noticeably lower than prior quarter and our estimate. I think it was somewhere in the 14s. Is there anything particular going on there? Is it related to asset sales? Can you give us any color on that for our modeling purposes?
Sure, Brian. Good morning, and thanks for the question. Yeah, there's a one-time item in Q3 related to 20 Mass Ave. There was a multiyear tax appeal that was successful, that was recorded this quarter. So that really won't recur in Q4. It was just really isolated to Q3.
Okay, that's helpful. And then on asset sales, are you in the market, you know, actively marketing with brokers assets to sell? You know, how many is that? Is it just a couple? Is it a half dozen, dozen? And what do you think the prospects are over the next kind of, let's say, 3-9 months?
Yeah, Brian, we're not actively in the market. We do have, as I mentioned in the prepared remarks, a few buildings that we're in dialogue with. But as far as a broader campaign, it's something we're evaluating now. And so I think that, you know, there's a strong likelihood that we'll be out in the market in Q4 with additional assets. And the profile of those assets are going to range. I think we've seen some success with selling assets that have some level of vacancies or are vacant, and I can see some of those being candidates of what could transact. And then we're going to look at other assets that are more stabilized in nature and kind of test out the market to kind of see where the opportunities reside.
And so, you know, we're working through that, and we'll have kind of a more distinct list of assets to consider and discuss as we get into Q4.
Okay. And then shifting to your, your financing. I, I know you've done $177 million over the past few months. It seemed like when I looked at the assets online, that those were kind of down the fairway type of properties of yours, you know, nothing high end, nothing low end, just kind of down the fairway. What's the thought process now for the next, you know, 3, 6, 12 months to address the maturities? Is it just to kind of chip away at that type of debt, similar to what you've just done? And, and how deep do you think you can do on a quarterly basis? Is it $100 million, $150 million, $200 million?
It's a great question, you know, part of our prepared remarks is that we're looking at a couple of different options, including asset sales and additional secured financings. You know, we're gonna solve for the $350 with a combination of those items. So it's tough to really pinpoint since we're not really in the market of how much that could be asset sales versus secured financing. You know, secured financing, property-level debt, really depends on the asset and how much you could raise. You know, some of the larger, nicer stuff that we would have put financing on could raise bigger swaps than, you know, some of the smaller ones.
So, you know, we're looking at a couple of different things here and, you know, you know, we're looking to address those main maturities and obviously the revolving credit facility all in the coming months.
Yeah, and to that comment, I suspect you could probably take down a decent slug if you were to put the Insight Global headquarters in Perimeter in Atlanta or Google's Midwest headquarters in Chicago, you know, out for lending to the tune of, you know, a couple few hundred million dollars right there. Would that be reasonable to expect?
Yeah, I think those are all candidates and profile of buildings where we have optionality, and I think the bench is, you know, obviously deeper than that. But yes, I mean, I think that kind of just highlights, you know, just some of the nicer assets we have across the portfolio and, and kind of showcases optionality as we look to take down tranches for different purposes.
Okay, thank you. That's all for me.
Again, as a reminder, if you have a question, please press Star then One to be joined into the queue. Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Hey, good morning, guys. It's Tim Eiman for Ronald. Just a, you know, question on the CapEx remaining for the two development projects you guys have. I think it's about $90 million. Maybe just a further breakdown there in terms of what percentage of that $90 million relates to TIs and, you know, dependent on, you know, getting those buildings leased up versus, you know, what percentage of the $90 million actually relates to just building the building out?
Yeah. So, a couple things. So we have through, I would say, Q1 2024, we're estimating $25 million-$30 million of remaining capital spend across the two projects with, you know, the lion's share for Seattle, given the fact that that's, you know, still being completed. And within that number includes the TI allowance for Sonoma Biotherapeutics. So really, that $25 million-$30 million is a combination of construction, capital, and TI allowance. And so, you know, once you get through that, you know, kind of the delta remaining from the $90 million, that'll be spent, primarily all as leasing capital over the next few years, as we stabilize the asset.
Got it. Yeah. So not all, not all related to building the building out. Some of it's, you know, not discretionary, but, you know, it's not, it's not all. It doesn't all have to kind of come in at once. Is that, is that kind of fair to say?
Yeah, that's one... It is. The $25 million-$30 million is committed capital, and then, you know, through Q1 2024, and the balance is, you know, kind of variable based on getting leases done.
Got it. Okay. And then, you know, congrats, Brian, on the, on the new position. Maybe just one for you. You know, appreciate, you're not gonna go further into plans with the revolver, but just, you know, as you think about modeling, from here on out, if that does become a secured revolver, just where does that put you guys from an unencumbered asset to unsecured debt, covenant position? And then maybe just, you know, talk about, you know, further room for encumbering assets as we head into 2024, if that does become a secured revolver.
Yeah, it's a great question. I mean, the secured revolver is definitely something, you know, that could be on the table as we look forward. You know, our unencumbered asset ratio is, you know, over 200% today, and, you know, the minimum is 150% under our bond indentures. So, you know, if we do put collateral against the new facility, again, that's one possible outcome. Obviously, that will, you know, put a little bit of pressure on that, but we have plenty of cushion to deal with it in size the revolver appropriately. So again, I can't really get into specifics, given where we are in discussions, so I'm just gonna leave it at that for now.
Got it. Thank you, guys.
Thank you.
As we have no further questions, this concludes our question and answer session. I would now like to turn the conference back over to Chris Bilotto for any closing remarks.
Yep. Thank you for joining the call today. We look forward to seeing many of you at the Nareit in the upcoming weeks.
The conference is now concluded. Thank you for attending today's presentation. You may all now disconnect.