OFFICE PROPERTIES INCOME TRUST - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-34364

GOVERNMENT PROPERTIES INCOME TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland		26-4273474
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634

(Address of Principal Executive Offices) (Zip Code)

617-219-1440

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of October 29, 2013: 54,722,468

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

FORM 10-Q

September 30, 2013

INDEX

PART I	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets — September 30, 2013 and December 31, 2012	1

	Condensed Consolidated Statements of Income and Comprehensive Income — Three and Nine Months Ended September 30, 2013 and 2012	2

	Condensed Consolidated Statements of Cash Flows —Nine Months Ended September 30, 2013 and 2012	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	25

	Warning Concerning Forward Looking Statements	26

	Statement Concerning Limited Liability	28

PART II	Other Information

Item 6.	Exhibits	29

	Signatures	30

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

	September 30,			December 31,
	2013			2012
ASSETS
Real estate properties:
Land	$	239,222		$	234,395
Buildings and improvements	1,267,669			1,233,468
	1,506,891			1,467,863
Accumulated depreciation	(179,573		)	(156,661		)
	1,327,318			1,311,202

Assets of discontinued operations	26,207			47,142
Acquired real estate leases, net	131,683			144,402
Cash and cash equivalents	2,697			5,255
Restricted cash	1,590			1,553
Rents receivable, net	31,373			28,882
Deferred leasing costs, net	9,523			7,620
Deferred financing costs, net	4,366			5,718
Other assets, net	18,322			10,360
Total assets	$	1,553,079		$	1,562,134

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	69,000		$	49,500
Unsecured term loan	350,000			350,000
Mortgage notes payable	91,343			93,127
Liabilities of discontinued operations	288			298
Accounts payable and accrued expenses	23,250			18,910
Due to related persons	1,784			3,719
Assumed real estate lease obligations, net	16,952			19,129
Total liabilities	552,617			534,683

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 70,000,000 shares authorized, 54,722,468 and 54,643,888 shares issued and outstanding, respectively	547			547
Additional paid in capital	1,105,676			1,103,982
Cumulative net income	179,189			137,293
Cumulative other comprehensive income	32			99
Cumulative common distributions	(284,982		)	(214,470		)
Total shareholders’ equity	1,000,462			1,027,451
Total liabilities and shareholders’ equity	$	1,553,079		$	1,562,134

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Rental income	$	56,401		$	52,426		$	168,639		$	149,071

Expenses:
Real estate taxes	6,255			5,498			19,060			16,520
Utility expenses	5,355			4,801			13,064			12,035
Other operating expenses	10,169			9,171			29,288			26,667
Depreciation and amortization	14,032			12,537			40,960			35,642
Acquisition related costs	1,562			763			1,701			1,057
General and administrative	2,941			3,529			9,350			9,071
Total expenses	40,314			36,299			113,423			100,992

Operating income	16,087			16,127			55,216			48,079
Interest and other income	10			7			20			21
Interest expense (including net amortization of debt premiums and deferred financing fees of $339, $339, $1,002 and $998, respectively)	(4,176		)	(4,530		)	(12,388		)	(12,649		)
Equity in earnings of an investee	64			115			219			236
Income from continuing operations before income tax benefit (expense)	11,985			11,719			43,067			35,687
Income tax benefit (expense)	36			(30		)	(50		)	(119		)
Income from continuing operations	12,021			11,689			43,017			35,568
Income (loss) from discontinued operations	(10,055		)	67			(1,121		)	1,201
Net income	1,966			11,756			41,896			36,769

Other comprehensive income (loss):
Equity in unrealized loss of an investee	14			35			(67		)	31
Other comprehensive income (loss)	14			35			(67		)	31
Comprehensive income	$	1,980		$	11,791		$	41,829		$	36,800

Weighted average common shares outstanding	54,684			47,108			54,666			47,086

Per common share amounts:
Income from continuing operations	$	0.22		$	0.25		$	0.79		$	0.76
Income (loss) from discontinued operations	$	(0.18	)	$	—		$	(0.02	)	$	0.03
Net income	$	0.04		$	0.25		$	0.77		$	0.78

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

	Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	41,896		$	36,769
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	26,016			23,897
Net amortization of debt premium and deferred financing fees	1,002			998
Straight line rental income	(2,308		)	(2,669		)
Amortization of acquired real estate leases	15,775			14,352
Amortization of deferred leasing costs	1,126			636
Other non-cash expenses	938			1,477
Loss on asset impairment	10,142			—
Net gain on sale of properties	(8,168		)	—
Equity in earnings of an investee	(219		)	(236		)
Change in assets and liabilities:
Restricted cash	(37		)	(453		)
Deferred leasing costs	(3,118		)	(2,123		)
Rents receivable	(483		)	4,863
Other assets	(2,780		)	(1,077		)
Accounts payable and accrued expenses	4,009			2,690
Due to related persons	(1,450		)	3,336
Cash provided by operating activities	82,341			82,460
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and deposits	(35,848		)	(180,976		)
Real estate improvements	(14,924		)	(10,474		)
Proceeds from sale of properties, net	18,319			—
Cash used in investing activities	(32,453		)	(191,450		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage notes payable	(1,434		)	(1,327		)
Borrowings on unsecured revolving credit facility	107,500			173,000
Repayments on unsecured revolving credit facility	(88,000		)	(351,500		)
Proceeds from unsecured term loan	—			350,000
Financing fees	—			(1,964		)
Distributions to common shareholders	(70,512		)	(59,322		)
Cash provided by (used in) financing activities	(52,446		)	108,887
Decrease in cash and cash equivalents	(2,558		)	(103		)
Cash and cash equivalents at beginning of period	5,255			3,272
Cash and cash equivalents at end of period	$	2,697		$	3,169

Supplemental cash flow information:
Interest paid	$	11,386		$	11,787
Income taxes paid	173			167

Non-cash financing activities:
Issuance of common shares	$	1,694		$	1,847

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of Government Properties Income Trust and its subsidiaries, or the Company, we or us, are unaudited. We operate in one business segment: ownership of properties that are primarily leased to government tenants. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012, Items 6, 7 and 15 of which were subsequently amended and restated to make reclassifications to reflect properties we sold in 2013 as discontinued operations (See Note 3) and are included in our Current Report on Form 8-K dated July 12, 2013. We refer in this Quarterly Report to our Annual Report on Form 10-K for the year ended December 31, 2012, as amended and restated in part by our Current Report on Form 8-K dated July 12, 2013, as our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All material intercompany transactions and balances between the Company and its subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

Note 2. Recent Accounting Pronouncements

Effective January 2013, we adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income, or AOCI. This standard did not change the requirements for reporting net income or other comprehensive income. However, it requires disclosure of amounts reclassified out of AOCI in their entirety, by component, on the face of the statement of income and comprehensive income or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This update was effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The implementation of this update did not cause any changes to the disclosures in, or the presentation of, our condensed consolidated financial statements.

Note 3. Real Estate Properties

As of September 30, 2013, we owned 81 properties, excluding three properties classified as discontinued operations, with an undepreciated carrying value of $1,506,891. We generally lease space in our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leases expiring between 2013 and 2033. Certain of our government tenants have the right to terminate their leases before the lease term expires. Our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended September 30, 2013, we entered into 15 leases for 245,446 rentable square feet for a weighted average (by square feet) lease term of 7.8 years and we made commitments for approximately $6,324 of leasing related costs. During the nine months ended September 30, 2013, we entered into 37 leases for 758,491 rentable square feet for a weighted average (by square feet) lease term of 9.1 years and we made commitments for approximately $16,126 of leasing related costs. We have unspent leasing related obligations of approximately $14,808 as of September 30, 2013.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Acquisition Activities

During the nine months ended September 30, 2013, we acquired one office property and one warehouse property for an aggregate purchase price of $30,803, excluding acquisition costs. These acquisitions were accounted for in accordance with the Business Combinations Topic of the FASB Accounting Standards Codification TM. The following allocation of the purchase prices of these acquisitions is based upon preliminary estimates of the estimated fair values of the acquired assets and assumed liabilities and may change based upon the completion of our analysis of acquired in place leases:

			Number						Buildings				Acquired
Acquisition			of	Square	Purchase				and		Acquired		Lease
Date	Location	Type	Properties	Feet	Price(1)		Land		Improvements		Leases		Obligations
Aug-13	Chester, VA	Warehouse	1	228,108	$	12,503	$	1,478	$	9,594	$	1,440	$	(9	)
Aug-13	Bethesda, MD	Office	1	128,645	18,300		3,349		11,152		4,182		(383		)
			2	356,753	$	30,803	$	4,827	$	20,746	$	5,622	$	(392	)

(1) Purchase price excludes acquisition related costs.

In August 2013, we acquired a previously disclosed warehouse property located in Chester, VA with 228,108 rentable square feet. This property is 100% leased to the U.S. Government and occupied by the United States Army. The purchase price was $12,503, excluding acquisition costs.

Also in August 2013, we acquired an office property located in Bethesda, MD with 128,645 rentable square feet. This property is 100% leased to the U.S. Government and occupied by the National Institutes of Health. The purchase price was $18,300, excluding acquisition costs.

In September 2013, we entered an agreement to acquire an office property located in Rancho Cordova, CA with 93,807 rentable square feet. This property is 100% leased to the State of California and occupied by the Department of Consumer Affairs. The contract purchase price is $20,790, excluding acquisition costs.

Also in September 2013, we entered an agreement to acquire four office properties located in Fairfax, VA with a combined total of 170,940 rentable square feet. These properties are 100% leased to eight tenants, of which 51% is leased to the Commonwealth of Virginia and occupied by Northern Virginia Community College. The contract purchase price is $31,500, excluding acquisition costs.

In October 2013, we entered an agreement to acquire an office property located in Montgomery, AL with 49,370 rentable square feet. This property is 100% leased to the U.S. Government and occupied by the Social Security Administration. The contract purchase price is $16,050, excluding acquisition costs.

These pending acquisitions are subject to our satisfactory completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will acquire these properties or that the acquisitions will not be delayed or that the terms will not change.

In December 2012, we acquired a property located in Florence, KY. Pursuant to the terms of the purchase agreement for this property, the seller is entitled to up to $1,800 of additional purchase consideration based upon the property’s 2013 real estate tax assessment. In accounting for this acquisition in 2012, we had estimated the fair value of this additional consideration to be $273. During the three months ended September 30, 2013, we received the 2013 real estate tax assessment for this property and increased the estimated fair value of the additional consideration to $1,231 at September 30, 2013. The $958 increase in the fair value of the additional consideration is included in acquisition related costs in our condensed consolidated income statements for the three months ended September 30, 2013. See Note 7 regarding the fair value of assets and liabilities.

Disposition Activities

In February 2013, we sold an office property located in Oklahoma City, OK with 185,881 rentable square feet and a net book value of $8,069 for $16,300, excluding closing costs, and recognized a gain on sale of $8,198. In March 2013, we sold an office

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

property located in Tucson, AZ with 31,051 rentable square feet and a net book value of $2,080 for $2,189, excluding closing costs, and recognized a loss on sale of $30.

During the three months ended September 30, 2013, we began marketing for sale three office properties located in Phoenix, AZ, San Diego, CA and Falls Church, VA, with a combined total of 356,163 rentable square feet. The aggregate net book value of these properties, after recording a $10,142 loss on asset impairment on two of the three properties during the three months ended September 30, 2013, totaled $25,567 at September 30, 2013. We can provide no assurance that sales of these properties will occur. See Note 7 regarding the fair value of assets and liabilities.

Results of operations for the two properties sold in 2013 and the three properties held for sale at September 30, 2013 are included in discontinued operations in our condensed consolidated balance sheets and condensed consolidated statements of income and comprehensive income. Summarized balance sheet and income statement information for properties in discontinued operations is as follows:

Balance Sheets:

	September 30, 2013		December 31, 2012
Real estate properties	$	25,567	$	46,784
Acquired real estate leases, net	—		82
Rents receivable	517		217
Other assets	123		59
Assets of discontinued operations	$	26,207	$	47,142

Other liabilities	$	288	$	298
Liabilities of discontinued operations	$	288	$	298

Statements of Operations:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Rental income	$	886		$	1,657		$	3,831		$	5,740
Real estate taxes	(123		)	(230		)	(505		)	(690		)
Utility expenses	(112		)	(339		)	(447		)	(810		)
Other operating expenses	(255		)	(394		)	(775		)	(1,076		)
Depreciation and amortization	(241		)	(519		)	(1,025		)	(1,639		)
General and administrative	(68		)	(108		)	(226		)	(324		)
Loss on asset impairment from discontinued operations	(10,142		)	—			(10,142		)	—
Net gain on sale of properties from discontinued operations	—			—			8,168			—
Income (loss) from discontinued operations	$	(10,055	)	$	67		$	(1,121	)	$	1,201

Note 4. Revenue Recognition

Rental income from operating leases is recognized on a straight line basis over the life of lease agreements. We increased rental income to record revenue on a straight line basis by $605 and $1,101 for the three months ended September 30, 2013 and 2012, respectively, and $1,952 and $2,584 for the nine months ended September 30, 2013 and 2012, respectively. Rents receivable include $9,728 and $7,776 of straight line rent receivables at September 30, 2013 and December 31, 2012, respectively.

Note 5. Concentration

Tenant and Credit Concentration

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements with them as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. The U.S. Government, 10 state governments and the United Nations combined were

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

responsible for approximately 93.9% and 93.7% of our annualized rental income, excluding properties classified as discontinued operations, as of September 30, 2013 and 2012, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 71.2% and 70.2% of our annualized rental income, excluding properties classified as discontinued operations, as of September 30, 2013 and 2012, respectively.

Geographic Concentration

At September 30, 2013, our 81 properties, excluding properties classified as discontinued operations, were located in 31 states and the District of Columbia. Properties located in Maryland, California, the District of Columbia, Georgia, New York and Massachusetts were responsible for approximately 13.8%, 11.2%, 10.8%, 9.7%, 8.9% and 6.0% of our annualized rental income as of September 30, 2013, respectively.

Note 6. Indebtedness

At September 30, 2013 and December 31, 2012, our outstanding indebtedness consisted of the following:

	September 30,		December 31,
	2013		2012

Unsecured revolving credit facility, due in 2015	$	69,000	$	49,500
Unsecured term loan, due in 2017	350,000		350,000
Mortgage note payable, 5.73% interest rate, including unamortized premium of $463, due in 2015(1)	48,607		49,274
Mortgage note payable, 6.21% interest rate, due in 2016(1)	24,223		24,441
Mortgage note payable, 7.00% interest rate, including unamortized premium of $782, due in 2019(1)	10,003		10,247
Mortgage note payable, 8.15% interest rate, including unamortized premium of $556, due in 2021(1)	8,510		9,165
	$	510,343	$	492,627

(1) We assumed these mortgages in connection with our acquisitions of certain properties. The stated interest rates for these mortgage debts are the contractually stated rates. We recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value premiums, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.

We have a $550,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is October 19, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date of our revolving credit facility by one year to October 19, 2016. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1,100,000 in certain circumstances. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium, which was 150 basis points as of September 30, 2013. We also pay a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.7% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.7% for both the three and nine months ended September 30, 2013. As of September 30, 2013, we had $69,000 outstanding and $481,000 available under our revolving credit facility.

We have a $350,000 unsecured term loan. Our term loan matures on January 11, 2017, and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium, which was 175 basis points as of September 30, 2013. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2013, the interest rate for the amount outstanding under our term loan was 1.9% and the weighted average interest rate for the amount outstanding under our term loan was 1.9% for both the three and nine months ended September 30, 2013.

Our revolving credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us and the termination

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

of our business management agreement or property management agreement with Reit Management & Research LLC, or RMR. Our revolving credit facility agreement and our term loan agreement also contain a number of covenants, including covenants that restrict our ability to incur debts or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth. We believe we were in compliance with the terms and conditions of our revolving credit facility agreement and our term loan agreement at September 30, 2013.

At September 30, 2013, five of our properties with an aggregate net book value of $120,798 secured four mortgage notes that were assumed in connection with the acquisition of such properties. Our mortgage notes are non-recourse and do not contain any material financial covenants.

Note 7. Fair Value of Assets and Liabilities

Our assets and liabilities at September 30, 2013 include cash and cash equivalents, restricted cash, rents receivable, mortgage notes payable, accounts payable, our revolving credit facility and our term loan, amounts due to related persons, other accrued expenses and security deposits. At September 30, 2013, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements, except as follows:

	Carrying Amount		Fair Value
Mortgage note payable, 5.73% interest rate, including unamortized premium of $463, due in 2015	$	48,607	$	50,095
Mortgage note payable, 6.21% interest rate, due in 2016	24,223		26,361
Mortgage note payable, 7.00% interest rate, including unamortized premium of $782, due in 2019	10,003		10,578
Mortgage note payable, 8.15% interest rate, including unamortized premium of $556, due in 2021	8,510		9,404
	$	91,343	$	96,438

We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

The table below presents certain of our assets and liabilities measured on a non-recurring basis at fair value at September 30, 2013, categorized by the level of inputs used in the valuation of each asset and liability:

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)

Non-Recurring Fair Value Measurements
Properties held for sale(1)	$	14,560	$	—	$	—	$	14,560
Additional purchase consideration(2)	1,231		—		—		1,231

(1) The estimated fair values at September 30, 2013 of the two properties for which a loss on asset impairment was recognized are based upon broker estimates of value less estimated sales costs (Level 3 inputs as defined in the fair value hierarchy under GAAP).

(2) In December 2012, we acquired a property located in Florence, KY. Pursuant to the terms of the purchase agreement for this property, the seller is entitled to up to $1,800 of additional purchase consideration based upon the property’s 2013 real estate tax assessment. In accounting for this acquisition in 2012, we had estimated the fair value (based on Level 3 inputs as defined in the fair value hierarchy under GAAP) of this additional consideration to be $273. During the three months ended September 30, 2013, we received the 2013 real estate tax assessment for this property and increased the estimated fair value (based on Level 3 inputs as defined in the fair value hierarchy under GAAP) of the additional consideration to $1,231 at September 30, 2013. The $958 increase in the fair value of the additional consideration is included in acquisition related costs in our condensed consolidated income statements for the three months ended September 30, 2013.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 8. Shareholders’ Equity

Distributions

On February 22, 2013, we paid a distribution to common shareholders in the amount of $0.43 per share, or $23,497, that was declared on January 10, 2013 and was payable to shareholders of record on January 25, 2013.

On May 24, 2013, we paid a distribution to common shareholders in the amount of $0.43 per share, or $23,505, that was declared on April 10, 2013 and was payable to shareholders of record on April 26, 2013.

On August 23, 2013, we paid a distribution to common shareholders in the amount of $0.43 per share, or $23,510, that was declared on July 10, 2013 and was payable to shareholders of record on July 26, 2013.

On October 9, 2013, we declared a distribution payable to common shareholders of record on October 25, 2013, in the amount of $0.43 per share, or $23,531. We expect to pay this distribution on or about November 22, 2013 using cash on hand and borrowings under our revolving credit facility.

Share Issuances

As further described in Note 9, on March 27, 2013, under the terms of our business management agreement with RMR, we issued 20,230 of our common shares of beneficial interest, $.01 par value per share, or common shares, to RMR in payment of an incentive fee of approximately $485 for services rendered to us by RMR during 2012.

On May 21, 2013, we granted 2,000 of our common shares, valued at $26.60 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees as part of their annual compensation.

On September 13, 2013, pursuant to our equity compensation plan, we granted an aggregate of 48,350 of our common shares to our officers and certain employees of our manager, RMR, valued at $23.61 per share, the closing price of our common shares on the NYSE, on that day.

We have no dilutive securities.

Note 9. Related Person Transactions

We have no employees. Personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations.

Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, which include CommonWealth REIT, or CWH. One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR. Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR. Each of our executive officers is also an officer of RMR. CWH’s executive officers are officers of RMR. Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services. Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies. In addition, officers of RMR serve as officers of those companies.

Pursuant to our business management agreement with RMR, we recognized business management fees of $1,942 and $2,742 for the three months ended September 30, 2013 and 2012, respectively, and $6,924 and $7,001, for the nine months ended September 30, 2013 and 2012, respectively. These amounts are included in general and administrative expenses in our condensed consolidated financial statements. In March 2013, we issued 20,230 of our common shares to RMR for the incentive fee payable to RMR for 2012, in accordance with the terms of our business management agreement.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

In connection with our property management agreement with RMR, we incurred property management and construction supervision fees of $2,179 and $1,829 for the three months ended September 30, 2013 and 2012, respectively, and $5,794 and $5,034 for the nine months ended September 30, 2013 and 2012, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

On September 20, 2013, we and RMR agreed to restructure the base business management and incentive fees payable to RMR under our business management agreement beginning in 2014, as follows:

· The base business management fees we pay to RMR will be calculated on the basis of the lower of: (i) gross historical cost of our real estate assets, as defined, or (ii) our total market capitalization. Market capitalization will include the market value of our common shares, plus the liquidation preference of preferred shares, if any, and the principal amount of debt. The market value of our common shares will be calculated based on the average shares outstanding multiplied by the average closing share price during the period in which the fees are earned.

· 10% of the base business management fees we pay to RMR will be paid in our common shares. The amount of our common shares granted as part of the base business management fee will be calculated based on the average closing share price during the period in which the fees are earned.

· The annual incentive fees which may be earned by RMR will be calculated based upon total returns realized by our common shareholders (i.e., share price appreciation plus dividends) in excess of benchmarks. The benchmarks will be set by our Compensation Committee, which is comprised solely of Independent Trustees, and will be disclosed in our annual meeting proxy statements. Incentive fees will be paid in our common shares which will vest over a multiyear period and will be subject to a “claw back” in the event of certain material restatements of our financial results.

CWH organized us as a 100% owned subsidiary. One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of CWH. Our other Managing Trustee, Mr. Adam Portnoy, is a managing trustee and the President of CWH. RMR provides management services to both us and CWH. In 2009, we completed our initial public offering, or our IPO, pursuant to which we ceased to be a majority owned subsidiary of CWH. In connection with our IPO, we and CWH entered into a transaction agreement that governs our separation from and relationship with CWH. Pursuant to this transaction agreement, among other things, CWH granted us a right of first refusal to acquire any property owned by CWH that CWH determines to divest if the property is then majority leased to a government tenant, which right of first refusal will also apply in the event of an indirect sale of any such properties resulting from a change of control of CWH.

Until March 15, 2013, CWH was our largest shareholder. On March 15, 2013, CWH sold all 9,950,000 of our common shares it owned in a public offering. In connection with this public offering, on March 11, 2013, we entered into a registration agreement with CWH under which CWH agreed to pay all expenses incurred by us relating to the registration and sale of our common shares owned by CWH in the offering, pursuant to which CWH paid us $310. In addition, under the registration agreement, CWH agreed to indemnify us and our officers, Trustees and controlling persons, and we agreed to indemnify CWH, its officers, trustees and controlling persons, against certain liabilities related to the public offering, including liabilities under the Securities Act of 1933, as amended, or the Securities Act; and we and CWH agreed to reimburse payments that the other may make in respect of those liabilities.

We, RMR, CWH and five other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company. All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. As of September 30, 2013, we have invested $5,194 in AIC since we became an equity owner of AIC in 2009. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC. Our investment in AIC had a carrying value of $5,900 and $5,747 as of September 30, 2013 and December 31, 2012, respectively, which amounts are included in other assets on our condensed consolidated balance sheet. We recognized income of $64 and $115 for the three months ended September 30, 2013 and 2012, respectively, and $219 and $236 for the nine months ended September 30, 2013 and 2012, respectively, arising from our investment in AIC. We and

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. This program was modified and extended in June 2013 for a one year term, and we paid a premium, including taxes and fees, of $1,161 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in this program. We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange. We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

Effective July 2013, we, RMR, CWH and four other companies to which RMR provides management services purchased from an unrelated third party insurer a combined directors’ and officers’ liability insurance policy providing $10,000 of aggregate coverage and we also purchased from an unrelated third party insurer a separate directors’ and officers’ liability insurance policy providing $5,000 of coverage. We paid aggregate premiums of approximately $333 for these policies.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and tables should be read in conjunction with the financial statements and notes thereto included in this Quarterly Report on Form 10-Q and in our Annual Report.

OVERVIEW

We are a real estate investment trust, or REIT, organized under Maryland law. As of September 30, 2013, we owned 81 properties, excluding three properties classified as discontinued operations, located in 31 states and the District of Columbia containing approximately 10 million rentable square feet, of which 68.4% was leased to the U.S. Government, 17.9% was leased to 10 state governments, 1.9% was leased to the United Nations, an international intergovernmental organization, 6.4% was leased to various non-governmental organizations and 5.4% was available for lease. The U.S. Government, 10 state governments and the United Nations combined were responsible for 93.9% and 93.7% of our annualized rental income, as defined below, as of September 30, 2013 and 2012, respectively.

Property Operations

As of September 30, 2013, excluding properties classified as discontinued operations, 94.6% of our rentable square feet were leased, compared to 93.5% of our rentable square feet as of September 30, 2012. Occupancy data for our properties as of September 30, 2013 and 2012 is as follows (square feet in thousands):

					Comparable
	All Properties(1)				Properties(2)
	September 30,				September 30,
	2013		2012		2013		2012
Total properties (end of period)	81		77		66		66
Total square feet	10,001		9,396		8,378		8,378
Percent leased(3)	94.6	%	93.5	%	93.5	%	92.7	%

(1) Based on properties we owned on September 30, 2013 and excludes properties classified as discontinued operations.

(2) Based on properties we owned on September 30, 2013 and which we owned continuously since January 1, 2012, and excludes properties classified as discontinued operations. Our comparable properties increased from 55 properties at September 30, 2012 as a result of 16 acquisitions we completed during the year ended December 31, 2011, the sale of two properties during the nine months ended September 30, 2013 and the reclassification of three properties to discontinued operations during the nine months ended September 30, 2013.

(3) Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.

The average annualized effective rental rate per square foot for our properties for the periods ended September 30, 2013 and 2012 are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Average annualized effective rental rate per square foot:(1)
All properties(2)	$	24.82	$	25.01	$	24.61	$	25.12
Comparable properties(3)	$	25.48	$	25.14	$	25.27	$	25.38

(1) Average annualized effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified.

(2) Based on properties we owned on September 30, 2013 and excludes properties classified as discontinued operations.

(3) Based on properties we owned on September 30, 2013 and which we owned continuously since January 1, 2012, and excludes properties classified as discontinued operations.

Table of Contents

We currently believe that U.S. property leasing market conditions are slowly improving, but remain weak in many U.S. markets. Our historical experience, including that of our predecessor, CWH, with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. We believe that current budgetary pressures may cause increased demand for leased space by government tenants, as opposed to new buildings built on behalf of government tenants. However, these same increased budgetary pressures upon the U.S. Government and state governments could also result in a decrease in government employment, an increase in space utilization rates by government tenants or consolidation of operations into government owned properties, thereby reducing the need for government leased space. Accordingly, we are unable to reasonably project what the financial impact of market conditions or changing government financial circumstances will be on our financial results for future periods.

As of September 30, 2013, excluding properties classified as discontinued operations, we had leases totaling 543,713 rentable square feet that were scheduled to expire through September 30, 2014. Based upon current market conditions and tenant negotiations for leases scheduled to expire through September 30, 2014, we expect that rental rates we are likely to achieve on new or renewed leases will, in the aggregate and on a weighted (by annualized revenues) average basis, be flat to slightly higher than the rates currently being paid, thereby generally resulting in higher revenue from the same space absent a decrease in occupancies. However, we cannot provide assurance that the rental rates we expect will occur or that we will not experience material declines in our rental income due to vacancies upon lease expirations. Prevailing market conditions and government tenants’ needs near the time our leases expire will generally determine lease renewals and rental rates for space in our properties; and market conditions and government tenants’ needs are generally beyond our control. As of September 30, 2013, lease expirations at our properties, excluding properties classified as discontinued operations, by year are as follows (square feet and dollars in thousands):

							Annualized
	Number of	Expirations of			Cumulative		Rental				Cumulative
	Tenants	Occupied Square	Percent		Percent		Income		Percent		Percent
Year(1)	Expiring	Feet(2)	of Total		of Total		Expiring(3)		of Total		of Total
2013	24	305	3.2	%	3.2	%	$	8,644	3.9	%	3.9	%
2014	32	289	3.1	%	6.3	%	5,893		2.6	%	6.5	%
2015	37	1,288	13.6	%	19.9	%	29,642		13.3	%	19.8	%
2016	37	849	9.0	%	28.9	%	27,950		12.5	%	32.3	%
2017	32	620	6.6	%	35.5	%	12,712		5.7	%	38.0	%
2018	31	1,061	11.2	%	46.7	%	28,154		12.6	%	50.6	%
2019	17	1,293	13.7	%	60.4	%	30,194		13.5	%	64.1	%
2020	16	1,021	10.8	%	71.2	%	23,832		10.7	%	74.8	%
2021	10	848	9.0	%	80.2	%	16,307		7.3	%	82.1	%
2022 and thereafter	23	1,884	19.8	%	100.0	%	39,621		17.9	%	100.0	%
Total	259	9,458	100.0	%			$	222,949	100.0	%

Weighted average remaining lease term (in years)		5.7					5.4

(1) The year of lease expiration is pursuant to current contract terms. Some government tenants have the right to vacate their space before the stated expirations of their leases. As of September 30, 2013, government tenants occupying approximately 7.8% of our rentable square feet and responsible for approximately 6.0% of our annualized rental income as of September 30, 2013 have currently exercisable rights to terminate their leases before the stated expirations. Also in 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2023, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.3%, 4.0%, 5.6%, 6.6%, 2.7%, 1.1%, 3.6%, 1.6% and 1.5% of our rentable square feet, respectively, and contribute an additional approximately 0.3%, 4.6%, 3.3%, 9.6%, 3.6%, 1.4%, 4.2%, 1.6% and 1.3% of our annualized rental income, respectively, as of September 30, 2013. In addition, as of September 30, 2013, 12 of our state government tenants have currently exercisable rights to terminate their leases if these states do not appropriate rent in their respective annual budgets. These 12 tenants occupy approximately 7.6% of our rentable square feet and contribute approximately 7.6% of our annualized rental income as of September 30, 2013.

(2) Occupied square feet is pursuant to leases existing as of September 30, 2013, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any.

(3) Annualized rental income is the annualized contractual base rents from our tenants pursuant to our lease agreements as of September 30, 2013, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

Table of Contents

Acquisition and Disposition Activities (dollar amounts in thousands)

During the nine months ended September 30, 2013, we acquired two properties for an aggregate purchase price of $30,803, excluding acquisition costs. We acquired these properties at capitalization rates of 8.3% and 10.7%, with a weighted (by purchase price) average capitalization rate of 9.7%. We calculate the capitalization rate for property acquisitions as the ratio of (x) annual straight line rental income, excluding the impact of above and below market lease amortization, based on leases then in effect at the acquisition date, less estimated annual property operating expenses as of the date of acquisition, excluding depreciation and amortization expense, to (y) the acquisition purchase price, including assumed debt, if any, and excluding acquisition costs. For more information about these acquisitions, please see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In September and October 2013, we entered into agreements to acquire six properties for an aggregate purchase price of $99,143 excluding acquisition costs. We cannot provide assurance that we will acquire these properties or that the acquisitions will not be delayed or that the terms will not change. For more information about these agreements, please see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants; however, we cannot provide assurance that we will reach any agreement to acquire any such properties, or that if we do reach any such agreement, that we will complete the acquisitions.

In February 2013, we sold an office property located in Oklahoma City, OK with 185,881 rentable square feet for $16,300, excluding closing costs, and recognized a gain on sale of $8,198. In March 2013, we sold an office property located in Tucson, AZ with 31,051 rentable square feet for $2,189, excluding closing costs, and recognized a loss on sale of $30.

As of September 30, 2013, we are marketing for sale three office properties located in Phoenix, AZ, San Diego, CA and Falls Church, VA, with a combined 356,163 rentable square feet. The aggregate net book value, net of a $10,142 loss on asset impairment recorded in the three months ended September 30, 2013, totaled $25,567 at September 30, 2013. We can provide no assurance that sales of these properties will occur.

We do not currently plan to dispose of any of our other properties; however, we may on occasion offer for sale additional properties. Future changes in market conditions, property performance, our expectation regarding lease renewals or our plans with regard to particular properties may change our disposition strategy.

Table of Contents

RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012

										Acquired Properties Results(2)
	Comparable Properties Results (1)									Three Months Ended				Consolidated Results
	Three Months Ended September 30,									September 30,				Three Months Ended September 30,
					$			%												$			%
	2013		2012		Change			Change		2013		2012		2013			2012			Change			Change

Rental income	$	50,185	$	50,001	$	184		0.4	%	$	6,216	$	2,425	$	56,401		$	52,426		$	3,975		7.6	%
Operating expenses:
Real estate taxes	5,752		5,260		492			9.4	%	503		238		6,255			5,498			757			13.8	%
Utility expenses	4,768		4,613		155			3.4	%	587		188		5,355			4,801			554			11.5	%
Other operating expenses	9,131		8,908		223			2.5	%	1,038		263		10,169			9,171			998			10.9	%
Total operating expenses	19,651		18,781		870			4.6	%	2,128		689		21,779			19,470			2,309			11.9	%
Net operating income(3)	$	30,534	$	31,220	$	(686	)	(2.2	)%	$	4,088	$	1,736	34,622			32,956			1,666			5.1	%

Other expenses
Depreciation and amortization														14,032			12,537			1,495			11.9	%
Acquisition related costs														1,562			763			799			104.7	%
General and administrative														2,941			3,529			(588		)	(16.7	)%
Total other expenses														18,535			16,829			1,706			10.1	%
Operating income														16,087			16,127			(40		)	(0.2	)%
Interest and other income														10			7			3			42.9	%
Interest expense (including net amortization of debt premiums and deferred financing fees of $339 and $339, respectively)														(4,176		)	(4,530		)	354			(7.8	)%
Equity in earnings of an investee														64			115			(51		)	(44.3	)%
Income from continuing operations before income tax benefit (expense)														11,985			11,719			266			2.3	%
Income tax benefit (expense)														36			(30		)	66			(220.0	)%
Net income from continuing operations														12,021			11,689			332			2.8	%
Net income (loss) from discontinued operations														(10,055		)	67			(10,122		)	nm
Net income														$	1,966		$	11,756		$	(9,790	)	(83.3	)%

Weighted average common shares outstanding														54,684			47,108			7,576			16.1	%

Net income from continuing operations per common share														$	0.22		$	0.25		$	(0.03	)	(12.0	)%
Net income from discontinued operations per common share														$	(0.18	)	$	—		$	(0.18	)	nm
Net income per common share														$	0.04		$	0.25		$	(0.21	)	(84.0	)%

Calculation of Funds From Operations and Normalized Funds From Operations(4)

Net income														$	1,966		$	11,756
Plus: Depreciation and amortization from continuing operations														14,032			12,537
Plus: Depreciation and amortization from discontinued operations														242			519
Plus: Loss on asset impairment from discontinued operations														10,142			—
Funds from operations														26,382			24,812
Acquisition related costs														1,562			763
Normalized funds from operations														$	27,944		$	25,575

Funds from operations per common share														$	0.48		$	0.53
Normalized funds from operations per common share														$	0.51		$	0.54

(1)	Comparable properties consist of 69 properties we owned on September 30, 2013 and which we owned continuously since July 1, 2012 and exclude properties classified as discontinued operations.

(2)	Acquired properties consist of the 12 and eight (which eight are included in the previously referenced 12) properties we owned on September 30, 2013 and 2012, respectively, which we acquired during the period from July 1, 2012 to September 30, 2013.

(3)	We calculate net operating income, or NOI, as shown above. We define NOI as income from our real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI internally to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties’ results of operations. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as an indicator of our financial performance or liquidity, nor is this

Table of Contents

		measure necessarily indicative of sufficient cash flow to fund all of our needs. We believe that NOI may facilitate an understanding of our consolidated historical operating results. This measure should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our Condensed Consolidated Statements of Income and Comprehensive Income and Condensed Consolidated Statements of Cash Flows. Other real estate investment trusts, or REITs, and real estate companies may calculate NOI differently than we do.

(4)		We calculate funds from operations, or FFO, and Normalized FFO as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, plus real estate depreciation and amortization, excluding loss on impairment of real estate assets and any gain or loss on sale of properties, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we exclude acquisition related costs. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, operating income and cash flow from operating activities. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and between us and other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our status as a REIT, limitations in our revolving credit facility and term loan agreements, the availability of debt and equity capital to us, our expectation of our future capital requirements and operating performance, and our expected needs and availability of cash to pay our obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. We believe that FFO and Normalized FFO may facilitate an understanding of our consolidated historical operating results. These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our Condensed Consolidated Statements of Income and Condensed Comprehensive Income and Consolidated Statements of Cash Flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.

We refer to the 69 properties we owned on September 30, 2013 and which we have owned continuously since July 1, 2012, excluding properties classified as discontinued operations, as comparable properties. We refer to the 12 and eight (which eight are included in the previously referenced 12) properties that we owned as of September 30, 2013 and 2012, respectively, which we purchased during the period from July 1, 2012 to September 30, 2013 as acquired properties. Our condensed consolidated income statement for the three months ended September 30, 2013 includes the operating results of 10 acquired properties for the entire period and two acquired properties for less than the entire period, as we purchased those 10 properties prior to July 1, 2013 and we purchased those two properties during that period. Our condensed consolidated income statement for the three months ended September 30, 2012 includes the operating results of eight acquired properties for less than the entire period, as those properties were purchased during that period.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended September 30, 2013, compared to the three month period ended September 30, 2012.

Rental income. The increase in rental income reflects the effects of acquired properties and a slight increase in rental income for comparable properties. Rental income for acquired properties increased $1,587 from properties acquired after September 30, 2012 and $2,204 from properties acquired during the 2012 period. Rental income for comparable properties increased $184 primarily due to increases in base rental income and real estate tax expense reimbursement income, partially offset by lower operating expense reimbursement income and a decrease in straight line rent adjustments. Rental income includes non-cash straight line rent adjustments totaling $605 in the 2013 period and $1,101 in the 2012 period and amortization of acquired leases and assumed lease obligations totaling ($354) in the 2013 period and ($587) in the 2012 period.

Real estate taxes. The increase in real estate taxes reflects the effects of acquired properties and an increase in real estate taxes for comparable properties. Real estate taxes for acquired properties increased $109 from properties acquired after September 30, 2012 and $156 from properties acquired during the 2012 period. Real estate taxes for comparable properties increased $492 due primarily to the effect of higher tax assessments at certain of our properties.

Utility expenses. The increase in utility expenses reflects the effects of acquired properties and an increase in utility expenses for comparable properties. Utility expenses for acquired properties increased $170 from properties acquired after September 30, 2012 and $229 from properties acquired during the 2012 period. Utility expenses at comparable properties increased $155 primarily due to warmer than normal temperatures experienced in certain parts of the United States during the 2013 period.

Table of Contents

Other operating expenses. Other operating expenses consist of property management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating our properties. The increase in other operating expenses reflects the effects of acquired properties and an increase in expenses for comparable properties. Other operating expenses for acquired properties increased $254 from properties acquired after September 30, 2012 and $521 from properties acquired during the 2012 period. Other operating expenses at comparable properties increased $223 primarily as a result of increases in insurance expense and repair and maintenance costs at certain of our properties.

Depreciation and amortization. The increase in depreciation and amortization reflects the effect of property acquisitions and improvements made to certain of our properties since July 1, 2012. Depreciation and amortization increased $525 from properties acquired after September 30, 2012 and $908 from properties acquired during the 2012 period. Depreciation and amortization at comparable properties increased $62 due primarily to improvements made to certain of our properties after September 30, 2012, partially offset by certain depreciable leasing related assets becoming fully depreciated in 2012 and 2013.

Acquisition related costs. Acquisition related costs in the 2013 period include a $958 increase in the estimated fair value of additional consideration related to one of our 2012 acquisitions (see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q) and, in both the 2013 and 2012 periods, legal and due diligence costs incurred in connection with our acquisition activity.

General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement with RMR, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The decrease in general and administrative expenses primarily reflects the decrease in amounts due under our business management agreement during the 2013 period due to lower accrued estimated amounts for incentive management fees.

Interest and other income. Interest and other income is essentially unchanged in 2013 compared to the same period in 2012.

Interest expense. The decrease in interest expense reflects a lower average outstanding debt balance during the 2013 period compared to the 2012 period combined with a lower weighted average interest rate in 2013.

Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

Income tax benefit (expense). The decrease in income tax expense is primarily the result of an adjustment to decrease accrued income taxes during the three months ended September 30, 2013, due to a decrease in our estimated 2013 state income tax liability during that period.

Income (loss) from discontinued operations. Income (loss) from discontinued operations reflects operating results of two properties sold during the three months ended March 31, 2013 and three properties held for sale as of September 30, 2013. Income (loss) from discontinued operations for the three months ended September 30, 2013 includes a $10,142 loss on asset impairment.

Net income. Our net income decreased as a result of the changes noted above. On a per share basis, net income decreased as a result of our issuance of common shares pursuant to a public offering in 2012.

Table of Contents

Nine Months Ended September 30, 2013, Compared to the Nine Months Ended September 30, 2012

										Acquired Properties Results(2)
	Comparable Properties Results (1)									Nine Months Ended				Consolidated Results
	Nine Months Ended September 30,									September 30,				Nine Months Ended September 30,
					$			%												$			%
	2013		2012		Change			Change		2013		2012		2013			2012			Change			Change

Rental income	$	148,099	$	145,651	$	2,448		1.7	%	$	20,540	$	3,420	$	168,639		$	149,071		$	19,568		13.1	%
Operating expenses:
Real estate taxes	17,370		16,185		1,185			7.3	%	1,690		335		19,060			16,520			2,540			15.4	%
Utility expenses	11,589		11,847		(258		)	(2.2	)%	1,475		188		13,064			12,035			1,029			8.6	%
Other operating expenses	25,975		26,252		(277		)	(1.1	)%	3,313		415		29,288			26,667			2,621			9.8	%
Total operating expenses	54,934		54,284		650			1.2	%	6,478		938		61,412			55,222			6,190			11.2	%
Net operating income(3)	$	93,165	$	91,367	$	1,798		2.0	%	$	14,062	$	2,482	107,227			93,849			13,378			14.3	%

Other expenses
Depreciation and amortization														40,960			35,642			5,318			14.9	%
Acquisition related costs														1,701			1,057			644			60.9	%
General and administrative														9,350			9,071			279			3.1	%
Total other expenses														52,011			45,770			6,241			13.6	%
Operating income														55,216			48,079			7,137			14.8	%
Interest and other income														20			21			(1		)	(4.8	)%
Interest expense (including net amortization of debt premiums and deferred financing fees of $1,002 and $998, respectively)														(12,388		)	(12,649		)	261			(2.1	)%
Equity in earnings of an investee														219			236			(17		)	(7.2	)%
Income from continuing operations before income tax expense														43,067			35,687			7,380			20.7	%
Income tax expense														(50		)	(119		)	69			(58.0	)%
Net income from continuing operations														43,017			35,568			7,449			20.9	%
Income (loss) from discontinued operations														(1,121		)	1,201			(2,322		)	(193.3	)%
Net income														$	41,896		$	36,769		$	5,127		13.9	%

Weighted average common shares outstanding														54,666			47,086			7,580			16.1	%

Net income from continuing operations per common share														$	0.79		$	0.76		$	0.03		3.9	%
Net income from discontinued operations per common share														(0.02		)	0.03			(0.05		)	(166.7	)%
Net income per common share														$	0.77		$	0.78		$	(0.01	)	(1.3	)%

Calculation of Funds From Operations and Normalized Funds From Operations(4)

Net income														$	41,896		$	36,769
Plus: Depreciation and amortization from continuing operations														40,960			35,642
Plus: Depreciation and amortization from discontinued operations														1,026			1,639
Plus: Loss on asset impairment from discontinued operations														10,142			—
Less: Net gain on sale of properties from discontinued operations														(8,168		)	—
Funds from operations														85,856			74,050
Acquisition related costs														1,701			1,057
Normalized funds from operations														$	87,557		$	75,107

Funds from operations per common share														$	1.57		$	1.57
Normalized funds from operations per common share														$	1.60		$	1.60

(1)	Comparable properties consist of 66 properties we owned on September 30, 2013 and which we owned continuously since January 1, 2012 and exclude properties classified as discontinued operations.

(2)	Acquired properties consist of the 15 and 11 (which 11 are included in the previously referenced 15) properties we owned on September 30, 2013 and 2012, respectively, which we acquired during the period from January 1, 2012 to September 30, 2013.

(3)	See footnote (3) on page 15 for the definition of NOI.

(4)	See footnote (4) on page 16 for the definition of FFO and Normalized FFO.

We refer to the 66 properties we owned on September 30, 2013 and which we have owned continuously since January 1, 2012, excluding properties classified as discontinued operations, as comparable properties. We refer to the 15 and 11 (which 11 are included in the previously referenced 15) properties that we owned as of September 30, 2013 and 2012, respectively, which we purchased during the period from January 1, 2012 to September 30, 2013 as acquired properties. Our condensed consolidated income statement for the nine months ended September 30, 2013 includes the operating results of 13 acquired properties for the entire period and two acquired properties for less than the entire period, as we purchased those 13 properties prior to January 1, 2013 and we purchased those two properties during that period. Our condensed consolidated income statement for the nine months ended

Table of Contents

September 30, 2012 includes the operating results of 11 acquired properties for less than the entire period, as those properties were purchased during that period.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine month period ended September 30, 2013, compared to the nine month period ended September 30, 2012.

Rental income. The increase in rental income reflects the effects of acquired properties and an increase in rental income for comparable properties. Rental income for acquired properties increased $3,721 from properties acquired after September 30, 2012 and $13,399 from properties acquired during the 2012 period. Rental income for comparable properties increased $2,448 primarily due to increases in base rental income and real estate tax expense reimbursement income at certain of our properties. Rental income includes non-cash straight line rent adjustments totaling $1,952 in the 2013 period and $2,584 in the 2012 period and amortization of acquired leases and assumed lease obligations totaling ($900) in the 2013 period and ($1,823) in the 2012 period.

Real estate taxes. The increase in real estate taxes reflects the effects of acquired properties and an increase in real estate taxes for comparable properties. Real estate taxes for acquired properties increased $186 from properties acquired after September 30, 2012 and $1,169 from properties acquired during the 2012 period. Real estate taxes for comparable properties increased $1,185 due to the effect of higher tax assessments at certain of our properties.

Utility expenses. The increase in utility expenses reflects the effects of acquired properties, partially offset by lower utility expenses for comparable properties. Utility expenses for acquired properties increased $387 from properties acquired after September 30, 2012 and $900 from properties acquired during the 2012 period. Utility expenses at comparable properties declined $258 primarily due to lower utility rates at certain of our properties, partially offset by an increase in usage at certain of our properties due to warmer than normal temperatures experienced in certain parts of the United States during the three months ended September 30, 2013.

Other operating expenses. The increase in other operating expenses reflects the effects of acquired properties, partially offset by lower expenses for comparable properties. Other operating expenses for acquired properties increased $595 from properties acquired after September 30, 2012 and $2,303 from properties acquired during the 2012 period. Other operating expenses at comparable properties declined $277 as a result of decreases in repair and maintenance costs at certain of our properties, partially offset by increased snow removal expenses at certain of our properties.

Depreciation and amortization. The increase in depreciation and amortization reflects the effect of property acquisitions and improvements made to certain of our properties since January 1, 2012. Depreciation and amortization increased $1,174 from properties acquired after September 30, 2012 and $4,587 from properties acquired during the 2012 period. Depreciation and amortization at comparable properties decreased $443 due primarily to certain of our depreciable leasing related assets becoming fully depreciated in 2012 and 2013.

General and administrative. The increase in general and administrative expenses primarily reflects the increase in business management fees due to our property acquisitions since January 1, 2012.

Interest and other income. Interest and other income is essentially unchanged between periods.

Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

Income tax expense. The decrease in income tax expense is primarily due to a decrease in our estimated 2013 state income tax liability when compared to our estimated 2012 state income tax liability.

Income (loss) from discontinued operations. Income from discontinued operations reflects operating results of two properties sold during the three months ended March 31, 2013 and three properties held for sale as of September 30, 2013. Income (loss) from

Table of Contents

discontinued operations for the nine months ended September 30, 2013 includes a $10,142 write down to estimated fair value for two of the three properties we classified as held for sale as of September 30, 2013 and a net gain of $8,168 realized from the sale of two properties in the 2013 period.

Net income. Our net income increased as a result of the changes noted above. On a per share basis, net income decreased as a result of our issuance of common shares pursuant to a public offering in 2012.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollar amounts in thousands)

Our principal source of funds to meet operating expenses and pay distributions on our common shares is rental income from our properties. We believe that our operating cash flow will be sufficient to pay our operating expenses, debt service and distributions on our common shares for the next 12 months and the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon our ability to:

· maintain or increase the occupancy of, and the rental rates at, our properties;

· control operating cost increases at our properties; and

· purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital.

We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows. Our future purchases of properties which generate positive cash flow cannot be accurately projected because such purchases depend upon available opportunities which come to our attention and upon our ability to successfully acquire such properties.

Our changes in cash flows for the nine months ended September 30, 2013 compared to the same period in 2012 were as follows: (i) cash provided by operating activities is essentially unchanged; (ii) cash used in investing activities decreased from $191,450 in 2012 to $32,453 in 2013; and (iii) cash provided by (used in) financing activities decreased from $108,887 in 2012 to ($52,446) in 2013.

Cash provided by operating activities for the nine month period ended September 30, 2013 as compared to the corresponding prior year period primarily reflects increased use of our working capital, offset by increased operating cash flow from our acquisitions of properties after January 1, 2012. The decrease in cash used in investing activities for the nine month period ended September 30, 2013 as compared to the corresponding prior year period was due primarily to the acquisition of two properties during the 2013 period versus our acquisition of eight properties during the 2012 period and net proceeds received from our sale of two properties during the 2013 period. The change in cash provided by (used in) financing activities for the nine month period ended September 30, 2013 as compared to the corresponding prior year period was due primarily to higher net borrowings during the 2012 period to fund acquisitions combined with an increase in distributions paid to common shareholders during the 2013 period.

Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share and per square foot amounts)

In order to fund acquisitions and to meet cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain a $550,000 unsecured revolving credit facility with a group of institutional lenders. The maturity date of our revolving credit facility is October 19, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date of our revolving credit facility by one year to October 19, 2016. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased up to $1,100,000 in certain circumstances. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium, which was 150 basis points as of September 30, 2013. We also pay a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of September 30, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.7%, and the weighted average interest rate for borrowings under our revolving credit facility was 1.7% for both the three and nine months ended September 30, 2013. As of

Table of Contents

both September 30, 2013 and October 29, 2013, we had $69,000 outstanding under our revolving credit facility and $481,000 available to borrow under our revolving credit facility.

We also have a $350,000 unsecured term loan which matures on January 11, 2017 and is prepayable without penalty at any time. The amount outstanding under our term loan bears interest at LIBOR plus a premium, which was 175 basis points as of September 30, 2013. The interest rate premium is subject to adjustment based upon changes to our credit ratings. We used the net proceeds of our term loan to repay amounts outstanding under our revolving credit facility and to fund general business activities. As of September 30, 2013, the interest rate for the amount outstanding under our term loan was 1.9% and the weighted average interest rate for the amount outstanding under our term loan was 1.9%, for both the three and nine months ended September 30, 2013.

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from our property sales and net proceeds from offerings of equity or debt securities to fund our future operations, capital expenditures, distributions to our shareholders and any future property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturity date of our revolving credit facility or our other debts approach, we intend to explore alternatives for repaying or refinancing such amounts. Such alternatives may include incurring additional term debt, issuing new equity securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. Although we cannot provide assurance that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

Our ability to obtain, and the costs of, our future financings will depend primarily on market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities, but we cannot provide assurance that we will be able to successfully carry out this intention.

On February 22, 2013, we paid a $0.43, or $23,497, per share distribution to our common shareholders. On May 24, 2013 we paid a $0.43, or $23,505, per share distribution to our common shareholders. On August 23, 2013, we paid a $0.43, or $23,510, per share distribution to our common shareholders. We funded these distributions using cash on hand and borrowings under our revolving credit facility. On October 9, 2013, we declared a distribution payable to common shareholders of record on October 25, 2013, in the amount of $0.43 per share, or $23,531. We expect to pay this distribution on or about November 22, 2013 using cash on hand and borrowings under our revolving credit facility.

During the three and nine months ended September 30, 2013 and 2012, amounts capitalized at our properties, excluding properties classified as discontinued operations, for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Tenant improvements(1)	$	3,783	$	1,927	$	6,182	$	2,447
Leasing costs(2)	$	891	$	2,446	$	3,016	$	3,257
Building improvements(3)	$	1,812	$	752	$	3,743	$	1,535
Development, redevelopment and other activities(4)	$	4,503	$	2,195	$	5,629	$	3,787

(1) Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.

(2) Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements.

(3) Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.

(4) Development, redevelopment and other activities generally include (i) major capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property, and (ii) major capital expenditure projects that reposition a property or result in new sources of revenue.

Leases at our properties, excluding properties classified as discontinued operations, totaling 224,436 and 684,415 rentable square feet, respectively, expired during the three and nine months ended September 30, 2013. During the three and nine months

Table of Contents

ended September 30, 2013, we entered into leases totaling 245,446 and 758,491 rentable square feet, respectively. The weighted (by rentable square feet) average rental rates for leases of 219,594 and 687,484 rentable square feet, respectively, entered into with government tenants during the three and nine months ended September 30, 2013 increased by 12.5% and 12.9%, respectively, when compared to the weighted (by rentable square feet) average prior rents for the same space or, in the case of space acquired vacant, market rental rates for similar space in the building at the date of acquisition. The weighted (by rentable square feet) average rental rates for leases of 25,852 and 71,007 rentable square feet, respectively, entered into with non-government tenants during the three and nine months ended September 30, 2013 decreased by 7.2% and increased by 12.6%, respectively, when compared to the weighted (by rentable square feet) average rental rates previously charged for the same space or, in the case of space acquired vacant, market rental rates for similar space in the building at the date of acquisition.

During the three months ended September 30, 2013, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties, excluding properties classified as discontinued operations, were as follows:

	Government		Non-Government
	Leases		Leases		Total
Rentable square feet leased during the period	219,594		25,852		245,446
Tenant leasing costs and concession commitments(1)	$	5,457	$	867	$	6,324
Tenant leasing costs and concession commitments per rentable square foot(1)	$	24.85	$	33.54	$	25.77
Weighted average lease term (years)	8.1		5.6		7.8
Total leasing costs and concession commitments per rentable square foot per year(1)	$	3.06	$	6.01	$	3.28

(1)	Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.

Off Balance Sheet Arrangements

As of September 30, 2013, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants (dollars in thousands)

Our principal debt obligations at September 30, 2013 were outstanding borrowings under our $550,000 revolving credit facility, our $350,000 term loan and four secured mortgage loans assumed in connection with certain of our acquisitions. Our mortgage loans are non-recourse and do not contain any material financial covenants. Our revolving credit facility agreement and our term loan agreement contain a number of covenants which restrict our ability to incur debts in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and generally require us to maintain certain financial ratios. Our revolving credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default or upon a change of control of us, including the termination of our business management agreement or property management agreement with RMR. We believe we were in compliance with all of our covenants under our revolving credit facility agreement and our term loan agreement at September 30, 2013.

Our revolving credit facility agreement and our term loan agreement contain cross default provisions, which are generally triggered upon default of any of our other debts of at least $25,000 or more that are recourse debts and to any other debts of $50,000 or more that are non-recourse debts.

Related Person Transactions (dollars in thousands)

We have relationships and historical and continuing transactions with our Trustees, our executive officers, RMR, CWH, AIC and other companies to which RMR provides management services and others affiliated with them. For example, we have no employees and personnel and various services we require to operate our business are provided to us by RMR pursuant to management agreements; and RMR is owned by our Managing Trustees. Also, as a further example, we have relationships with other companies to which RMR provides management services and which have trustees, directors and officers who are also trustees, directors or officers of ours or RMR, including CWH, which is our former parent and from which we have previously acquired properties that are majority

Table of Contents

leased to government tenants; and we, RMR, CWH and five other companies to which RMR provides management services each currently own 12.5% of AIC, and we and the other shareholders of AIC have property insurance in place providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. For further information about these and other such relationships and related person transactions, please see Note 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report on Form 10-Q, including “Warning Concerning Forward Looking Statements” in Part I, and our Annual Report, our definitive Proxy Statement for the Annual Meeting of Shareholders held on May 21, 2013, or our Proxy Statement, our Current Report on Form 8-K dated September 20, 2013, and our other filings with the Securities and Exchange Commission, or SEC, including Note 5 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships. Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov. Copies of certain of our agreements with these related parties, including our business management agreement and property management agreement with RMR, various agreements we have entered with CWH and our shareholders agreement with AIC and its shareholders, are publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

We believe that our agreements with RMR, CWH and AIC are on commercially reasonable terms. We also believe that our relationships with RMR, CWH and AIC and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands)

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2012. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

At September 30, 2013, our outstanding fixed rate debt consisted of the following:

			Annual		Annual			Interest
	Principal		Interest		Interest			Payments
Debt	Balance(1)		Rate(1)		Expense(1)		Maturity	Due
Mortgage	$	48,144	5.73	%	$	2,797	2015	Monthly
Mortgage	24,223		6.21	%	1,525		2016	Monthly
Mortgage	9,221		7.00	%	645		2019	Monthly
Mortgage	7,954		8.15	%	648		2021	Monthly
	$	89,542			$	5,616

(1) The principal balances and interest rates are the amounts determined pursuant to the contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed these debts. For more information, see Notes 6 and 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our mortgages require principal and interest payments through maturity pursuant to amortization schedules. Because these debts bear interest at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are 100 basis points higher or lower than shown above, our per annum interest cost would increase or decrease, respectively, by approximately $905.

Changes in market interest rates would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at September 30, 2013, and discounted cash flow analysis through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate 100 basis point increase in interest rates would decrease the fair value of those obligations by approximately $2,066, and a hypothetical immediate 100 basis point decrease in interest rates would increase the fair value of those obligations by approximately $2,390.

Each of our fixed rate secured debt arrangements allows us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined in the respective debt documents, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.

At September 30, 2013, our floating rate debt consisted of $69,000 outstanding under our $550,000 unsecured revolving credit facility and our $350,000 unsecured term loan. Our revolving credit facility matures in October 2015, and subject to our meeting certain conditions, including our payment of an extension fee, we have the option to extend the stated maturity by one year to October 2016. No principal repayments are required under our revolving credit facility or term loan prior to maturity, and prepayments under our revolving credit facility may be made, and redrawn subject to conditions, at any time without penalty. Borrowings under our revolving credit facility and term loan are in U.S. dollars and bear interest at a rate of LIBOR plus a premium that is subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. There have been recent governmental inquiries regarding the setting of LIBOR, which may result in changes to the process that could have the effect of increasing LIBOR. In addition, upon renewal or refinancing of our revolving credit facility or our term loan, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit risk. Generally, a change in interest rates generally would not affect the value of our floating rate debt but would affect our operating results.

Table of Contents

The following table presents the impact a 100 basis point increase in interest rates would have on our floating rate interest expense as of September 30, 2013:

	Impact of Changes in Interest Rates
			Outstanding		Total Interest		Annual Earnings
	Interest Rate(1)		Debt		Expense Per Year		Per Share Impact(2)

At September 30, 2013	1.9	%	$	419,000	$	8,029	$	0.15
100 bps increase	2.9	%	$	419,000	$	12,277	$	0.22

(1) Weighted based on the respective interest rates and outstanding borrowings under our credit agreement and term loan as of September 30, 2013.

(2) Based on the weighted average shares outstanding for the nine months ended September 30, 2013.

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2013 if we were fully drawn on our revolving credit facility and our term loan remained outstanding:

	Impact of Changes in Interest Rates
			Outstanding		Total Interest		Annual Earnings
	Interest Rate(1)		Debt		Expense Per Year		Per Share Impact(2)

At September 30, 2013	1.8	%	$	900,000	$	16,243	$	0.30
100 bps increase	2.8	%	$	900,000	$	25,368	$	0.46

(1) Weighted based on the respective interest rates and outstanding borrowings under our credit agreement and term loan as of September 30, 2013 assuming we were fully drawn.

(2) Based on the weighted average shares outstanding for the nine months ended September 30, 2013.

The foregoing tables show the impact of an immediate change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility, our term loan or other floating rate debt.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934, as amended, Rules 13a-15 and 15d-15. Based upon that evaluation, our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

· OUR ACQUISITIONS AND SALES OF PROPERTIES,

· OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,

· THE CREDIT QUALITY OF OUR TENANTS,

· THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT, RENEW LEASES, ENTER INTO NEW LEASES, NOT EXERCISE EARLY TERMINATION OPTIONS PURSUANT TO THEIR LEASES OR BE AFFECTED BY CYCLICAL ECONOMIC CONDITIONS,

· OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,

· OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,

· OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS,

· THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,

· OUR TAX STATUS AS A REIT,

· OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,

· OUR EXPECTATION THAT THERE WILL BE OPPORTUNITIES FOR US TO ACQUIRE, AND THAT WE WILL ACQUIRE, ADDITIONAL PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS,

· OUR EXPECTATION THAT THERE MAY BE AN INCREASE IN DEMAND FOR LEASED SPACE BY THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,

· OUR EXPECTATION THAT WE WILL BENEFIT FINANCIALLY BY PARTICIPATING IN AIC WITH RMR AND COMPANIES TO WHICH RMR PROVIDES MANAGEMENT SERVICES, AND

· OTHER MATTERS.

OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

· THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,

· COMPETITION WITHIN THE REAL ESTATE INDUSTRY, PARTICULARLY WITH RESPECT TO THOSE MARKETS IN WHICH OUR TENANTS ARE LOCATED,

· THE IMPACT OF CHANGES IN THE REAL ESTATE NEEDS AND FINANCIAL CONDITIONS OF THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,

Table of Contents

· COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,

· ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, RMR AND THEIR RELATED PERSONS AND ENTITIES,

· LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES, AND

· ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.

FOR EXAMPLE:

· CONTINGENCIES IN OUR PENDING AND FUTURE ACQUISITION AGREEMENTS AND OUR FUTURE SALES AGREEMENTS MAY NOT BE SATISFIED AND COULD RESULT IN SUCH ACQUISITIONS AND SALES NOT OCCURRING OR BEING DELAYED, OR COULD RESULT IN THE TERMS OF THE TRANSACTIONS CHANGING. ALSO, WE MAY SELL PROPERTIES HELD FOR SALE AT AMOUNTS THAT ARE LESS THAN THEIR CURRENT CARRYING VALUE,

· OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS AND THE CAPITAL COSTS WE INCUR TO LEASE OUR PROPERTIES. WE MAY BE UNABLE TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS, AND FUTURE DISTRIBUTIONS MAY BE SUSPENDED,

· OUR ABILITY TO GROW OUR BUSINESS AND INCREASE OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND LEASE THEM FOR RENTS, LESS PROPERTY OPERATING EXPENSES, THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING OR LEASE TERMS FOR NEW PROPERTIES,

· SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,

· SOME GOVERNMENT TENANTS MAY EXERCISE THEIR RIGHT TO VACATE THEIR SPACE BEFORE THE STATED EXPIRATION OF THEIR LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,

· RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,

· CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CREDIT FACILITY CONDITIONS,

· ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH OUR REVOLVING CREDIT FACILITY,

· INCREASING THE MAXIMUM BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY AND OUR TERM LOAN IS SUBJECT TO OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,

· WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE, AND

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE BELIEVE THAT OUR CONTINUING RELATIONSHIPS WITH RMR, AIC AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE.

Table of Contents

THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS CHANGES IN GOVERNMENT TENANTS’ NEEDS FOR LEASED SPACE, NATURAL DISASTERS OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q OR IN OUR ANNUAL REPORT, INCLUDING UNDER THE CAPTION “RISK FACTORS” OR INCORPORATED THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

STATEMENT CONCERNING LIMITED LIABILITY

THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING GOVERNMENT PROPERTIES INCOME TRUST, DATED JUNE 8, 2009, AS AMENDED, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF GOVERNMENT PROPERTIES INCOME TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, GOVERNMENT PROPERTIES INCOME TRUST. ALL PERSONS DEALING WITH GOVERNMENT PROPERTIES INCOME TRUST IN ANY WAY SHALL LOOK ONLY TO THE ASSETS OF GOVERNMENT PROPERTIES INCOME TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

Table of Contents

Part II. Other Information

Item 6. Exhibits

3.1		Composite Copy of Amended and Restated Declaration of Trust, dated June 8, 2009, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)

3.2		Amended and Restated Bylaws of the Company, adopted February 21, 2012. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.)

4.1		Form of Common Share Certificate. (Incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-11/A, File No. 333-157455.)

10.1		Overview of Restructuring of Business Management Agreement with Reit Management & Research LLC dated September 20, 2013. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 20, 2013.)

10.2		Second Amendment to Credit Agreement, dated as of August 27, 2013, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions party thereto. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 27, 2013).

10.3		First Amendment to Term Loan Agreement, dated as of August 27, 2013, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions party thereto. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 27, 2013).

10.4		Form of Restricted Share Agreement. (Filed herewith.)

31.1		Rule 13a-14(a) Certification. (Filed herewith.)

31.2		Rule 13a-14(a) Certification. (Filed herewith.)

31.3		Rule 13a-14(a) Certification. (Filed herewith.)

31.4		Rule 13a-14(a) Certification. (Filed herewith.)

32.1		Section 1350 Certification. (Furnished herewith.)

101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GOVERNMENT PROPERTIES INCOME TRUST


	By:	/s/ David M. Blackman
		David M. Blackman
		President and Chief Operating Officer
		Dated: October 29, 2013


	By:	/s/ Mark L. Kleifges
		Mark L. Kleifges
		Treasurer and Chief Financial Officer
		(principal financial and accounting officer)
		Dated: October 29, 2013