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OFFICE PROPERTIES INCOME TRUST - Quarter Report: 2015 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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   No

 

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   No

 

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

 

Accelerated filer

 

 

 

Non-accelerated filer 

 

Smaller reporting company

(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   No

 

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of October 27, 2015:  71,126,308

 

 

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

 

FORM 10-Q

 

September 30, 2015

 

INDEX

 

 

 

 

PART I 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets — September 30, 2015 and December 31, 2014

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2015 and 2014

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows —Nine Months Ended September 30, 2015 and 2014

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4. 

Controls and Procedures

34

 

 

 

 

Warning Concerning Forward Looking Statements

34

 

 

 

 

Statement Concerning Limited Liability

37

 

 

 

PART II 

Other Information

 

 

 

 

Item 1A. 

Risk Factors

38

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 6. 

Exhibits

39

 

 

 

 

Signatures

40

 

 

 

References in this Quarterly Report on Form 10-Q to “GOV”, ”we”, “us” or “our” include Government Properties Income Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

1


 

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,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

 

Land

 

$

253,058

 

$

254,008

 

Buildings and improvements

 

 

1,433,993

 

 

1,428,472

 

    Total real estate properties, gross

 

 

1,687,051

 

 

1,682,480

 

Accumulated depreciation

 

 

(246,191)

 

 

(219,791)

 

    Total real estate properties, net

 

 

1,440,860

 

 

1,462,689

 

 

 

 

 

 

 

 

 

Equity investment in Select Income REIT

 

 

511,872

 

 

680,137

 

Assets of discontinued operations

 

 

12,463

 

 

13,165

 

Assets of property held for sale

 

 

3,079

 

 

32,797

 

Acquired real estate leases, net

 

 

125,898

 

 

150,080

 

Cash and cash equivalents

 

 

11,306

 

 

13,791

 

Restricted cash

 

 

1,330

 

 

2,280

 

Rents receivable, net

 

 

40,923

 

 

36,239

 

Deferred leasing costs, net

 

 

12,616

 

 

11,450

 

Deferred financing costs, net

 

 

10,587

 

 

12,782

 

Other assets, net

 

 

56,104

 

 

12,205

 

Total assets

 

$

2,227,038

 

$

2,427,615

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

114,000

 

$

 —

 

Unsecured term loans

 

 

550,000

 

 

550,000

 

Senior unsecured notes, net of discount

 

 

347,842

 

 

347,423

 

Mortgage notes payable, including premiums

 

 

137,569

 

 

187,694

 

Liabilities of discontinued operations

 

 

95

 

 

150

 

Liabilities of property held for sale

 

 

35

 

 

343

 

Accounts payable and other liabilities

 

 

48,747

 

 

26,471

 

Due to related persons

 

 

1,793

 

 

2,161

 

Assumed real estate lease obligations, net

 

 

13,513

 

 

15,924

 

Total liabilities

 

 

1,213,594

 

 

1,130,166

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 100,000,000 shares

 

 

 

 

 

 

 

    authorized, 71,126,308 and 70,349,227 shares issued and outstanding, respectively

 

 

711

 

 

703

 

Additional paid in capital

 

 

1,472,480

 

 

1,457,631

 

Cumulative net income

 

 

40,825

 

 

248,447

 

Cumulative other comprehensive income (loss)

 

 

(129)

 

 

37

 

Cumulative common distributions

 

 

(500,443)

 

 

(409,369)

 

Total shareholders’ equity

 

 

1,013,444

 

 

1,297,449

 

Total liabilities and shareholders’ equity

 

$

2,227,038

 

$

2,427,615

 

 

See accompanying notes.

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Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

    

 

    

2015

    

2014

    

2015

    

2014

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income 

 

$

62,092

 

$

64,158

 

$

186,864

 

$

186,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,735

 

 

7,027

 

 

22,819

 

 

21,005

 

Utility expenses

 

 

5,194

 

 

5,327

 

 

13,788

 

 

15,072

 

Other operating expenses

 

 

12,281

 

 

11,685

 

 

36,659

 

 

33,586

 

Depreciation and amortization

 

 

17,161

 

 

17,636

 

 

51,675

 

 

49,254

 

Loss on impairment of real estate

 

 

 —

 

 

1,616

 

 

 —

 

 

1,616

 

Acquisition related costs

 

 

270

 

 

110

 

 

459

 

 

1,290

 

General and administrative

 

 

3,714

 

 

4,329

 

 

11,431

 

 

11,537

 

Total expenses

 

 

46,355

 

 

47,730

 

 

136,831

 

 

133,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

15,737

 

 

16,428

 

 

50,033

 

 

53,046

 

Interest and other income

 

 

2

 

 

10

 

 

14

 

 

68

 

Interest expense (including net amortization of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

premiums and discounts and deferred financing fees

 

 

 

 

 

 

 

 

 

 

 

 

 

     of $360,  $373,  $1,020 and $926, respectively)

 

 

(9,137)

 

 

(8,845)

 

 

(27,894)

 

 

(18,530)

 

Gain (loss) on early extinguishment of debt

 

 

34

 

 

(541)

 

 

34

 

 

(541)

 

Loss on issuance of shares by Select Income REIT

 

 

(21)

 

 

(39)

 

 

(42,145)

 

 

(39)

 

Loss on impairment of Select Income REIT investment

 

 

 —

 

 

 —

 

 

(203,297)

 

 

 —

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

and equity in earnings of investees

 

 

6,615

 

 

7,013

 

 

(223,255)

 

 

34,004

 

Income tax benefit (expense)

 

 

13

 

 

(7)

 

 

(49)

 

 

(130)

 

Equity in earnings of investees

 

 

10,294

 

 

4,910

 

 

16,072

 

 

4,931

 

Income (loss) from continuing operations

 

 

16,922

 

 

11,916

 

 

(207,232)

 

 

38,805

 

Income (loss) from discontinued operations

 

 

(11)

 

 

706

 

 

(390)

 

 

3,615

 

Net income (loss)

 

 

16,911

 

 

12,622

 

 

(207,622)

 

 

42,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in unrealized loss of investees

 

 

(355)

 

 

(45)

 

 

(166)

 

 

(3)

 

Other comprehensive loss

 

 

(355)

 

 

(45)

 

 

(166)

 

 

(3)

 

Comprehensive income (loss)

 

$

16,556

 

$

12,577

 

$

(207,788)

 

$

42,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

71,004

 

 

65,481

 

 

70,589

 

 

58,300

 

Weighted average common shares outstanding (diluted)

 

 

71,021

 

 

65,568

 

 

70,589

 

 

58,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations (basic)

 

$

0.24

 

$

0.18

 

$

(2.94)

 

$

0.67

 

Income (loss) from continuing operations (diluted)

 

$

0.24

 

$

0.18

 

$

(2.94)

 

$

0.66

 

Income (loss) from discontinued operations (basic and diluted)

 

$

 —

 

$

0.01

 

$

(0.01)

 

$

0.06

 

Net income (loss) (basic and diluted)

 

$

0.24

 

$

0.19

 

$

(2.94)

 

$

0.73

 

 

See accompanying notes.

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Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2015

    

2014

    

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(207,622)

 

$

42,420

 

 

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

29,115

 

 

28,134

 

 

Net amortization of debt premiums and discounts and deferred financing fees

 

 

1,020

 

 

926

 

 

(Gain) loss on early extinguishment of debt

 

 

(34)

 

 

541

 

 

Straight line rental income

 

 

(2,820)

 

 

(3,346)

 

 

Amortization of acquired real estate leases

 

 

21,771

 

 

20,294

 

 

Amortization of deferred leasing costs

 

 

1,387

 

 

1,505

 

 

Other non-cash expenses

 

 

1,288

 

 

1,719

 

 

Loss on impairment of real estate

 

 

 —

 

 

1,616

 

 

Increase in carrying value of asset held for sale

 

 

 —

 

 

(2,344)

 

 

Net gain on sale of properties

 

 

 —

 

 

(774)

 

 

Equity in earnings of investees

 

 

(16,072)

 

 

(4,931)

 

 

Loss on issuance of shares by Select Income REIT

 

 

42,145

 

 

39

 

 

Loss on impairment of Select Income REIT investment

 

 

203,297

 

 

 —

 

 

Distributions of earnings from Select Income REIT

 

 

18,850

 

 

7,509

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

950

 

 

(612)

 

 

Deferred leasing costs

 

 

(2,408)

 

 

(2,319)

 

 

Rents receivable

 

 

456

 

 

(2,082)

 

 

Other assets

 

 

(865)

 

 

(1,687)

 

 

Accounts payable and accrued expenses

 

 

(1,037)

 

 

6,044

 

 

Due to related persons

 

 

(368)

 

 

(611)

 

 

Net cash provided by operating activities

 

 

89,053

 

 

92,041

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

 —

 

 

(56,351)

 

 

Real estate improvements

 

 

(9,746)

 

 

(13,942)

 

 

Investment in Select Income REIT

 

 

(95,821)

 

 

(689,969)

 

 

Investment in The RMR Group Inc.

 

 

(6,467)

 

 

 —

 

 

Investment in Affiliates Insurance Company

 

 

 —

 

 

(825)

 

 

Distributions in excess of earnings from Select Income REIT

 

 

15,721

 

 

2,811

 

 

Proceeds from sale of properties, net

 

 

30,520

 

 

16,427

 

 

Net cash used in investing activities

 

 

(65,793)

 

 

(741,849)

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayment of mortgage notes payable

 

 

(48,476)

 

 

(1,635)

 

 

Proceeds from issuance of common shares, net

 

 

 —

 

 

349,789

 

 

Proceeds from issuance of senior notes, net of discount

 

 

 —

 

 

347,217

 

 

Proceeds from unsecured term loans

 

 

 —

 

 

500,000

 

 

Repayment of unsecured term loans

 

 

 —

 

 

(500,000)

 

 

Borrowings on unsecured revolving credit facility

 

 

165,000

 

 

314,500

 

 

Repayments on unsecured revolving credit facility

 

 

(51,000)

 

 

(287,000)

 

 

Financing fees

 

 

(21)

 

 

(5,189)

 

 

Repurchase of common shares

 

 

(174)

 

 

 —

 

 

Distributions to common shareholders

 

 

(91,074)

 

 

(70,609)

 

 

Net cash (used in) provided by financing activities

 

 

(25,745)

 

 

647,073

 

 

Decrease in cash and cash equivalents

 

 

(2,485)

 

 

(2,735)

 

 

Cash and cash equivalents at beginning of period

 

 

13,791

 

 

7,663

 

 

Cash and cash equivalents at end of period

 

$

11,306

 

$

4,928

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

30,107

 

$

15,533

 

 

Income taxes paid

 

 

143

 

 

126

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Investment in The RMR Group Inc. paid in common shares

 

$

13,545

 

$

 —

 

 

Real estate acquisition funded with the assumption of mortgage debt

 

$

 —

 

$

(97,524)

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Assumption of mortgage debt

 

$

 —

 

$

97,524

 

 

 

See accompanying notes.

 

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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, us or our, are unaudited. 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, 2014, or 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 intercompany transactions and balances with or among our consolidated 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 these 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, impairment of real estate and equity method investments and the valuation of intangible assets.

 

 

Note 2.    Recent Accounting Pronouncements

 

 

In February 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2015-02, Consolidation.  Among other things, this update changes how an entity determines the primary beneficiary of a variable interest entity.  This update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted.  The implementation of this update is not expected to have a material impact on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU, No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. In August 2015, the FASB clarified the previous ASU and issued ASU No. 2015-15,  Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. These updates are effective for interim and annual reporting periods beginning after December 15, 2015 and require retrospective application. The implementation of these updates is not expected to cause any material changes to our condensed consolidated financial statements other than the reclassification of certain debt issuance costs from assets to contra liabilities on our condensed consolidated balance sheets.  Debt issuance costs related to line of credit arrangements will remain classified as assets in accordance with ASU No. 2015-15. When these updates are adopted, deferred financing costs of $10,587 and $12,782 as of September 30, 2015 and December 31, 2014, respectively, will be reclassified from assets to the related debt obligations on our condensed consolidated balance sheets.   

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While this ASU specifically references contracts with customers, it may also apply to certain other transactions such as the sale of real estate.  In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017We are continuing to evaluate this guidance; however, we do not expect its adoption to have a material impact on our condensed consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from this ASU.

 

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. This update is effective for interim and annual periods beginning after

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Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

December 15, 2015, with early adoption permitted.  The implementation of this update is not expected to have a material impact on our condensed consolidated financial statements.

 

Note 3.    Per Common Share Amounts

 

We calculate basic earnings per common share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. We calculate diluted earnings per common share by using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares and the related impact on earnings, are considered when calculating diluted earnings per share. The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

 

2015

 

2014

 

2015

 

2014

 

Weighted average common shares for basic earnings per share

 

71,004

 

 

65,481

 

 

70,589

 

 

58,300

 

Effect of dilutive securities: unvested share awards

 

17

 

 

87

 

 

 -

 

 

85

 

Weighted average common shares for diluted earnings per share

 

71,021

 

 

65,568

 

 

70,589

 

 

58,385

 

 

 

 

 

Note 4.   Real Estate Properties

 

As of September 30, 2015, we owned 71 properties (91 buildings), with an undepreciated carrying value of $1,690,397,  excluding one property (one building) classified as discontinued operations with an undepreciated carrying value of $12,260. We generally lease space in our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leases expiring between 2015 and 2030. 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, 2015, we entered into 18 leases for 207,256 rentable square feet for a weighted (by rentable square feet) average lease term of 3.3 years and we made commitments for approximately $1,748 of leasing related costs. During the nine months ended September 30, 2015, we entered into 41 leases for 606,357 rentable square feet for a weighted (by rentable square feet) average lease term of 7.9 years and we made commitments for approximately $9,230 of leasing related costs. We have estimated unspent leasing related obligations of $8,629 as of September 30, 2015.

 

Acquisition Activities

 

In August 2015, we terminated two previously disclosed agreements to acquire two office properties  (two buildings) for an aggregate purchase price of $25,950.

 

Disposition Activities – Continuing Operations

 

In February 2015, one of our U.S. Government tenants exercised its option to acquire the office property (one building) it leased from us located in Riverdale, MD with 337,500 rentable square feet.  The sales price was $30,600, excluding closing costs.  We recognized no gain or loss on this sale.

 

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

In May 2015, we began marketing for sale an office property (one building) located in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 as of September 30, 2015.  We can provide no assurance that the sale of this property will occur or what the terms for any such sale would be.  We have classified this property as held for sale as of September 30, 2015.  The results of operations for this property are included in continuing operations in our condensed consolidated financial statements.  Summarized balance sheet information for the property is as follows:

 

 

 

 

 

 

 

 

 

    

September 30,

    

 

 

 

2015

 

 

Real estate properties, net

 

$

3,071

 

 

Rents receivable

 

 

1

 

 

Other assets

 

 

7

 

 

Assets of property held for sale

 

$

3,079

 

 

 

 

 

 

 

 

Other liabilities

 

$

35

 

 

Liabilities of property held for sale

 

$

35

 

 

Disposition Activities – Discontinued Operations

 

In July 2015, we entered into an agreement to sell an office property (one building) located in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at September 30, 2015, for a contract price of $16,500, excluding closing costs.  In September 2015, this agreement was terminated.  We continue to market this property for sale.  We can provide no assurance that the sale of this property will occur or what the terms for any such sale would be.

 

Results of operations for two properties ( two buildings) we sold in February 2014 and September 2014 and the Falls Church, VA property ( one building) disclosed above which was held for sale prior to our adoption of ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, are classified as discontinued operations in our condensed consolidated financial statements. Summarized balance sheet and income statement information for the properties classified as discontinued operations is as follows:

 

Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2015

 

2014

 

Real estate properties, net

 

$

12,260

 

$

12,260

 

Rents receivable

 

 

3

 

 

782

 

Other assets

 

 

200

 

 

123

 

Assets of discontinued operations

 

$

12,463

 

$

13,165

 

 

 

 

 

 

 

 

 

Other liabilities

 

$

95

 

$

150

 

Liabilities of discontinued operations

 

$

95

 

$

150

 

 

Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

    

2015

    

2014

 

2015

    

2014

    

 

Rental income

 

$

28

 

$

166

 

$

86

 

$

1,652

 

 

Real estate taxes

 

 

71

 

 

(100)

 

 

(69)

 

 

(373)

 

 

Utility expenses

 

 

(46)

 

 

(50)

 

 

(124)

 

 

(204)

 

 

Other operating expenses

 

 

(35)

 

 

(41)

 

 

(197)

 

 

(426)

 

 

General and administrative

 

 

(29)

 

 

(43)

 

 

(86)

 

 

(152)

 

 

Increase in carrying value of asset held for sale

 

 

 —

 

 

 —

 

 

 —

 

 

2,344

 

 

Net gain on sale of properties

 

 

 —

 

 

774

 

 

 —

 

 

774

 

 

Income (loss) from discontinued operations

 

$

(11)

 

$

706

 

$

(390)

 

$

3,615

 

 

 

 

 

 

 

 

 

 

 

Note 5.   Revenue Recognition

 

We recognize rental income from operating leases that contain fixed contractual rent changes on a straight line basis over the term of the lease agreements.  Certain of our leases with government tenants provide the tenant the right to terminate before the lease expiration date if its respective legislature or other funding authority does not appropriate the funding necessary for the

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

government tenant to meet its lease obligations.  We have determined the fixed non-cancelable lease term of these leases to be the fully executed term of the lease because we believe the occurrence of early terminations to be remote contingencies based on both our historical experience and our assessment of the likelihood of lease cancellation on a separate lease basis.

 

We increased rental income to record revenue on a straight line basis by $613 and $1,135 for the three months ended September 30, 2015 and 2014, respectively, and $2,820 and $3,378 for the nine months ended September 30, 2015 and 2014, respectively.  Rents receivable include $17,837 and $15,017 of straight line rent receivables at September 30, 2015 and December 31, 2014, respectively.

 

Note 6.   Concentration

 

Tenant and Credit Concentration

 

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements 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, 12 state governments and the United Nations combined were responsible for approximately 92.8% and 93.2% of our annualized rental income, excluding properties classified as discontinued operations, as of September 30, 2015 and 2014, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 67.5% and 69.6% of our annualized rental income, excluding properties classified as discontinued operations, as of September 30, 2015 and 2014, respectively.

 

Geographic Concentration

 

At September 30, 2015, our 71 properties (91 buildings), excluding one property (one building) classified as discontinued operations, were located in 31 states and the District of Columbia.  Properties located in California, Virginia, the District of Columbia, Georgia, New York, Maryland and Massachusetts were responsible for approximately 11.5%, 10.6%, 10.3%, 8.7%, 8.7%, 7.4% and 5.7% of our annualized rental income as of September 30, 2015, respectively.

 

Note 7.   Indebtedness

 

At September 30, 2015 and December 31, 2014, our outstanding indebtedness consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Unsecured revolving credit facility, due in 2019

 

$

114,000

 

$

 —

 

Unsecured term loan, due in 2020

 

 

300,000

 

 

300,000

 

Unsecured term loan, due in 2022

 

 

250,000

 

 

250,000

 

Senior unsecured notes, 3.75% interest rate, including unamortized discounts of $2,158 and $2,577, respectively, due in 2019

 

 

347,842

 

 

347,423

 

Mortgage note payable, 5.55% interest rate, including unamortized premiums of $878 and $2,167, respectively, due in 2016(1)

 

 

83,878

 

 

85,167

 

Mortgage note payable, 6.21% interest rate, due in 2016(1)

 

 

23,586

 

 

23,833

 

Mortgage note payable, 5.88% interest rate, due in 2021(1)

 

 

14,215

 

 

14,374

 

Mortgage note payable, 7.00% interest rate, including unamortized premiums of $504 and $605, respectively, due in 2019(1)

 

 

9,291

 

 

9,563

 

Mortgage note payable, 8.15% interest rate, including unamortized premiums of $317 and $398, respectively, due in 2021(1)

 

 

6,599

 

 

7,339

 

Mortgage note payable, 5.73% interest rate, including unamortized premiums of $0 and $177, respectively, due in 2015(1)(2)

 

 

 —

 

 

47,418

 

 

 

$

1,149,411

 

$

1,085,117

 


(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.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

(2)

This mortgage was repaid, at par, in July 2015.

 

Our $750,000 unsecured revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 31, 2020. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium, which was 125 basis points at September 30, 2015.  We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2015. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2015, the annual interest rate payable on borrowings under our revolving credit facility was 1.4% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.4% and 1.5%, respectively, for the three and nine months ended September 30, 2015 and 1.7% for both the three and nine months ended September 30, 2014. As of September 30, 2015 and October 27, 2015, we had $114,000 and $107,000 outstanding under our revolving credit facility, respectively.

 

Our $300,000 unsecured term loan, which matures on March 31, 2020, is prepayable without penalty at any time. The amount outstanding under our $300,000 term loan bears interest at LIBOR plus a premium, which was 140 basis points at September 30, 2015. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2015, the annual interest rate for the amount outstanding under our $300,000 term loan was 1.6%. The weighted average annual interest rate under our $300,000 term loan was 1.6% for both the three and nine months ended September 30, 2015.

 

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 term loan is repaid prior to November 22, 2015, a prepayment premium of 2.0% of the amount repaid will be payable. If our $250,000 term loan is repaid during the period from November 22, 2015 to November 21, 2016, a prepayment premium of 1.0% of the amount repaid will be payable. Subsequent to November 21, 2016, no prepayment premium will be payable. The amount outstanding under our $250,000 term loan bears interest at LIBOR plus a premium, which was 180 basis points at September 30, 2015.  The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2015, the annual interest rate for the amount outstanding under our $250,000 term loan was 2.0%. The weighted average annual interest rate under our $250,000 term loan was 2.0% for both the three and nine months ended September 30, 2015.

 

Our $750,000 revolving credit facility, our $300,000 term loan and our $250,000 term loan are governed by a credit agreement with a syndicate of institutional lenders that includes a number of features common to all of these credit arrangements. This credit agreement also includes a feature under which the maximum aggregate borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

 

Our $350,000 of 3.75% senior unsecured notes due in 2019 are governed by an indenture and a supplement to the indenture, and require semi-annual payments of interest only through maturity.  The outstanding amount of these notes may be prepaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.

 

Our credit agreement and senior notes indenture and its supplement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC (formerly known as Reit Management & Research LLC), or RMR LLC, ceasing to act as our business manager and property manager. Our senior notes indenture and its supplement and our credit 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 certain financial ratios.  We believe we were in compliance with the terms and conditions of the respective covenants under our senior unsecured notes indenture and its supplement and our credit agreement at September 30, 2015.

 

In July 2015, we repaid, at par, a $47,083 mortgage note bearing interest at 5.73% which was secured by a property ( two buildings) located in Indianapolis, IN. This mortgage was scheduled to mature in October 2015.  As a result of this repayment, we recorded a gain on extinguishment of debt of $34 in the three months ended September 30, 2015, which represented the unamortized debt premium and deferred finance fees related to this note.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

At September 30, 2015, five of our properties (six buildings) with an aggregate net book value of $200,435 secured five mortgage notes that we assumed in connection with the acquisition of such properties. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

 

Note 8.   Fair Value of Assets and Liabilities

 

Our financial instruments include cash and cash equivalents, restricted cash, rents receivable,  mortgage notes payable, accounts payable, senior unsecured notes, an unsecured revolving credit facility, unsecured term loans, amounts due to related persons, other accrued expenses and security deposits. At September 30, 2015 and December 31, 2014, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements due to their short term nature or variable interest rates, except as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015

 

As of December 31, 2014

 

    

Carrying Amount

    

Fair Value

 

Carrying Amount

    

Fair Value

Senior unsecured notes, 3.75% interest rate, due in 2019

 

$

347,842

 

$

358,206

 

$

347,423

 

$

356,129

Mortgage note payable, 5.55% interest rate, due in 2016(1)

 

 

83,878

 

 

83,866

 

 

85,167

 

 

85,171

Mortgage note payable, 6.21% interest rate, due in 2016(1)

 

 

23,586

 

 

24,400

 

 

23,833

 

 

25,394

Mortgage note payable, 5.88% interest rate, due in 2021(1)

 

 

14,215

 

 

14,965

 

 

14,374

 

 

15,249

Mortgage note payable, 7.00% interest rate, due in 2019(1)

 

 

9,291

 

 

9,885

 

 

9,563

 

 

10,275

Mortgage note payable, 8.15% interest rate, due in 2021(1)

 

 

6,599

 

 

7,066

 

 

7,339

 

 

7,956

Mortgage note payable, 5.73% interest rate, due in 2015(1)(2)

 

 

 —

 

 

 —

 

 

47,418

 

 

48,233

 

 

$

485,411

 

$

498,388

 

$

535,117

 

$

548,407

(1)

We assumed these mortgages in connection with our acquisitions of the encumbered 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.

 

(2)

This mortgage was repaid, at par, in July 2015.

 

We estimate the fair value of our senior unsecured notes using an average of the bid and ask price of the notes as of the measurement date (Level 2 inputs as defined in the fair value hierarchy under GAAP). 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.

 

Note 9.   Shareholders’ Equity

 

Distributions

 

On February 26, 2015, we paid a distribution to common shareholders of $0.43 per share, or $30,252.    On May 26, 2015, we paid a distribution to common shareholders of $0.43 per share, or $30,256.    On August 24, 2015, we paid a distribution to common shareholders of $0.43 per share, or $30,566.    On October 12, 2015, we declared a distribution payable to common shareholders of record on October 23, 2015 of $0.43 per share, or $30,584. We expect to pay this distribution on or about November 23, 2015 using cash on hand and borrowings under our revolving credit facility.

 

Share Issuances and Repurchases

 

During the three and nine months ended September 30, 2015, we issued zero and 23,222, respectively, of our common shares to RMR LLC, as part of the business management fee payable by us under our business management agreement with RMR LLC.  See Note 10 for further information regarding this agreement.

 

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

On May 12, 2015, we granted 2,500 of our common shares, valued at $19.75 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees as part of their annual compensation.

 

On June 5, 2015, we issued 700,000 of our common shares in connection with our acquisition of an interest in The RMR Group Inc. (formerly known as Reit Management & Research Inc.), or RMR Inc., as further described in Note 10.  RMR Inc. is the parent company of  RMR LLC, our manager.

 

On September 2, 2015, pursuant to our 2009 Incentive Share Award Plan, we granted an aggregate of 53,100 of our common shares to our officers and certain other employees of our manager, RMR LLC, valued at $15.84 per share, the closing price of our common shares on the NYSE on that day.  On September 24, 2015, we purchased an aggregate of 10,721 of our common shares for $16.12 per share, the closing price of our common shares on the NYSE on that day, from our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares.

 

Note 10.   Related Person Transactions

 

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees, directors or officers of us, RMR Inc. or RMR LLC. For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report and our Current Report on Form 8-K filed with the Securities and Exchange Commission, or SEC, on June 8, 2015.      

Acquisition of Interest in our Manager:  On June 5, 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services – Hospitality Properties Trust, or HPT, Select Income REIT, or SIR, and Senior Housing Properties Trust, or SNH, and collectively with HPT and SIR, the Other REITs – participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired an ownership interest in RMR Inc.

 

The Up-C Transaction was completed pursuant to a transaction agreement by and among us, our manager, RMR LLC, its then sole member, Reit Management & Research Trust, or RMR Trust, and RMR Inc. and similar transaction agreements that each Other REIT entered into with RMR LLC, RMR Trust and RMR Inc. RMR Trust is owned by our Managing Trustees, Barry and Adam Portnoy. Pursuant to these transaction agreements: we contributed to RMR Inc. 700,000 of our common shares and $3,917 in cash;  HPT contributed to RMR Inc. 1,490,000 of its common shares and $12,622 in cash; SIR contributed to RMR Inc. 880,000 of its common shares and $15,880 in cash; SNH contributed to RMR Inc. 2,345,000 of its common shares and $13,967 in cash; RMR Trust contributed to RMR Inc. $11,520 in cash, which RMR Inc. contributed to RMR LLC; RMR LLC issued 1,000,000 of its class B membership units to RMR Inc.; RMR Inc. issued 1,541,201 shares of its class A common stock to us, 5,019,121 shares of its class A common stock to HPT, 3,166,891 shares of its class A common stock to SIR, 5,272,787 shares of its class A common stock to SNH and 1,000,000 shares of its class B-1 common stock and 15,000,000 shares of its class B-2 common stock to RMR Trust; RMR Trust delivered 15,000,000 of the 30,000,000 class A membership units of RMR LLC which RMR Trust then owned to RMR Inc.; and RMR Inc. delivered to RMR Trust our common shares, the common shares of the Other REITs and the cash which had been contributed by us and the Other REITs to RMR Inc. 

 

The class A common stock and class B-1 common stock of RMR Inc. share ratably as a single class in dividends and other distributions of RMR Inc. when and if declared by the board of directors of RMR Inc. and have the same rights in a liquidation of RMR Inc. The class B-1 common stock of RMR Inc. is convertible into class A common stock of RMR Inc. on a 1:1 basis. The class A common stock of RMR Inc. has one vote per share. The class B-1 common stock of RMR Inc. has 10 votes per share. The class B-2 common stock of RMR Inc. has no economic interest in RMR Inc., but has 10 votes per share and is paired with the class A membership units of RMR LLC owned by RMR Trust. The class A membership units of RMR LLC owned by RMR Trust are required to be redeemed by RMR LLC upon request by RMR Trust for class A common stock of RMR Inc. on a 1:1 basis, or if RMR Inc. elects, cash. Under the governing documents of RMR Inc., upon the redemption of a class A membership unit of RMR LLC, the class B-2 common stock of RMR Inc. “paired” with an equal number of class A membership units are cancelled for no additional consideration.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

As part of the Up-C Transaction and concurrently with entering the transaction agreements, on June 5, 2015:

 

·

We entered into an amended and restated business management agreement, or the amended business management agreement, with RMR LLC and an amended and restated property management agreement, or the amended property management agreement, with RMR LLC. The amendments made by these agreements are described below in this Note under “Amendment and Restatement of Management Agreements with RMR LLC.” Each Other REIT also entered amended and restated business and property management agreements with RMR LLC which made similar amendments to their management agreements with RMR LLC.

·

We entered into a registration rights agreement with RMR Inc. covering the class A common stock of RMR Inc. that we received in the Up-C Transaction, pursuant to which we received demand and piggyback registration rights, subject to certain limitations. Each Other REIT entered into a similar registration rights agreement with RMR Inc.

We entered into a lock up and registration rights agreement with RMR Trust and Barry and Adam Portnoy pursuant to which RMR Trust and Barry and Adam Portnoy agreed not to transfer the 700,000 of our common shares RMR Trust received in the Up-C Transaction for a period of 10 years and we granted them certain registration rights, subject to certain limited exceptions. Each Other REIT also entered into a similar lock up and registration rights agreement with RMR Trust and Barry and Adam Portnoy.

 

As a result of the Up-C Transaction: RMR LLC became a subsidiary of RMR Inc.; RMR Inc. became the managing member of RMR LLC; through our ownership of class A common stock of RMR Inc., we currently have an indirect 5.0% economic interest in RMR LLC; through their ownership of class A common stock of RMR Inc., HPT, SIR and SNH currently have an indirect 16.2%, 10.2% and 17.0% economic interest in RMR LLC, respectively; and RMR Trust through its ownership of class B-1 common stock of RMR Inc.,  class B-2 common stock of RMR Inc. and class A membership units of RMR LLC currently directly and indirectly has a 51.6% economic interest in RMR LLC and controls 91.4% of the voting power of outstanding capital stock of RMR Inc.

 

Pursuant to the transaction agreements, we and each Other REIT agreed to distribute approximately half of the shares of class A common stock of RMR Inc. received in the Up-C Transaction to our respective shareholders as a special distribution, and RMR Inc. agreed to facilitate this distribution by filing a registration statement with the SEC to register the shares of class A common stock of RMR Inc. to be distributed and by seeking a listing of those shares on a national stock exchange upon the registration statement being declared effective by the SEC.  The distribution of class A common stock of RMR Inc. that we and the Other REITs have agreed to make to our and the Other REITs’ shareholders will be made only after a registration statement, including a prospectus, is declared effective by the SEC.

Amendment and Restatement of Management Agreements with RMR LLC: As part of the Up-C Transaction, on June 5, 2015, we and RMR LLC entered into the amended business management agreement, which amended and restated our previous business management agreement with RMR LLC, and the amended property management agreement, which amended and restated our previous property management agreement with RMR LLC. Our amended business management agreement and amended property management agreement are referred to together in this Note as our amended management agreements. Our amended management agreements were effective as of June 5, 2015.

Our amended management agreements have terms that end on December 31, 2035, and automatically extend on December 31st of each year for an additional year, so that the terms of the agreements thereafter end on the 20th anniversary of the date of the extension. We have the right to terminate each amended management agreement: (i) at any time on 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined therein, (iii) on 60 days’ written notice given within 60 days after the end of any calendar year for a performance reason, as defined therein, and (iv) by written notice during the 12 months following a change of control of RMR LLC, as defined therein. RMR LLC has the right to terminate the amended management agreements for good reason, as defined therein.

If we terminate one or both of our amended management agreements for convenience, or if RMR LLC terminates one or both of our amended management agreements for good reason, we have agreed to pay RMR LLC a termination fee in an amount equal to the sum of the present values of the monthly future fees, as defined therein, for the terminated amended management agreement(s) for the remaining term. If we terminate one or both of our amended management agreements for a performance

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

reason, as defined therein, we have agreed to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years.  We are not required to pay any termination fee if we terminate our amended management agreements for cause or as a result of a change of control of RMR LLC.

Accounting for Investment in RMR Inc.: On June 5, 2015, we acquired 1,541,201 shares of class A common stock of RMR Inc. for $17,462, excluding transaction costs.  We have concluded, for accounting purposes, that the consideration paid for this investment in RMR Inc.’s shares of class A common stock represented a discount to the fair value of these shares.  We account for this investment under the cost method of accounting and have recorded this investment at its estimated fair value of $39,833 as of June 5, 2015 using Level 3 inputs as defined in the fair value hierarchy under GAAP.  As a result, we recorded a liability for the amount by which the estimated fair value exceeded the price we paid for these shares and which amount we are amortizing as described below.  As of September 30, 2015, the unamortized balance of this liability was $22,025 and it is included in accounts payable and other liabilities in our condensed consolidated balance sheet.  Our investment is included in other assets in our condensed consolidated balance sheet and the carrying value of our investment was $42,384, including transaction costs, as of September 30, 2015.  We believe the carrying value of our investment in RMR Inc. as of September 30, 2015 approximates its estimated fair value for accounting purposes.  The liability related to the acquisition of these shares is being amortized on a straight line basis over the 20 year life of the business and property management agreements with RMR LLC as a reduction to business management fees and property management fees, which are included in general and administrative and other operating expenses, respectively, in our condensed consolidated statements of comprehensive income.  Amortization of the liability, included in general and administrative expense and other operating expenses for the three and nine months ended September 30, 2015, totaled $281 and $346, respectively.

 

RMR LLC Management Fees and Reimbursements: We recognized business management fees of $2,438 and $2,643 for the three months ended September 30, 2015 and 2014, respectively, and $7,482 and $7,578 for the nine months ended September 30, 2015 and 2014, respectively.  As of September 30, 2015 and 2014, no incentive fees were estimated to be payable to RMR LLC for 2015 and 2014, respectively.  The business management fees we recognized for the 2015 and 2014 periods are included in general and administrative expenses in our condensed consolidated financial statements.  In accordance with the terms of our previous business management agreement, we issued 19,339 and 27,103 of our common shares to RMR LLC for the nine months ended September 30, 2015 and 2014, respectively, as payment for portions of the base business management fees we recognized for those periods.  Our amended business management agreement requires that 100% of the management fee due to RMR LLC be paid by us in cash.

Pursuant to our property management agreement with RMR LLC, the property management fees, including construction supervision fees, we recognized were $1,930 and $2,095 for the three months ended September 30, 2015 and 2014, respectively, and $5,861 and $6,034 for the nine months ended September 30, 2015 and 2014, respectively. These amounts are included in operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

Pursuant to our previous and amended management agreements with RMR LLC, we are responsible for paying all of the property level operating costs which costs are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC.  The total of those property management related reimbursements paid to RMR LLC for the three months ended September 30, 2015 and 2014 were $3,011 and $2,312 respectively, and $8,478 and $6,332 for the nine months ended September 30, 2015 and 2014, respectively, and these amounts are included in property operating expenses in our condensed consolidated financial statements for these periods.  In addition, we have historically awarded share grants to certain RMR LLC employees under our equity compensation plan and we accrue estimated amounts for such share grants based upon historical practices throughout the year.  In September 2015 and 2014, we made annual share grants to RMR LLC employees of 53,100 and 51,150 of our common shares, respectively.  In September 2015, we purchased 10,721 of our common shares, at the closing price for our common shares on the NYSE on the date of purchase, from certain of our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares.  In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services.  The amounts accrued for share grants to RMR LLC employees and internal audit costs were $292 and $508 for the three months ended September 30, 2015 and 2014, respectively, and $725 and $973 for the nine months ended September 30, 2015 and 2014, respectively, and these amounts are included in our general and administrative expenses for these periods.

 

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Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Leases with RMR LLC: We lease office space to RMR LLC in certain of our properties for its property management offices.  Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of approximately $111 and $14 for the three months ended September 30, 2015 and 2014, respectively, and approximately $278 and $47  for the nine months ended September 30, 2015 and 2014, respectively.

 

SIR:  On February 28, 2015, we entered into a share purchase agreement, or the GOV Purchase Agreement, with Lakewood Capital Partners, LP, or Lakewood, the other persons who are members of a group with Lakewood, or, together with Lakewood, the Lakewood Parties, and, for the purpose of specified sections, SIR, pursuant to which, on March 4, 2015, we acquired 3,418,421 common shares of SIR from Lakewood for a cash purchase price equal to approximately $95,203.  On February 28, 2015, the SIR common shares that we acquired pursuant to the GOV Purchase Agreement represented approximately 3.9% of SIR’s outstanding common shares.  We funded our acquisition of these SIR common shares with cash on hand and borrowings under our revolving credit facility.  As of September 30, 2015, we owned 24,918,421 SIR common shares, or approximately 27.9% of SIR’s total outstanding common shares.

   

The GOV Purchase Agreement contains (i) standstill provisions, pursuant to which the Lakewood Parties agreed not to take certain actions with respect to our securities, or those of SIR, for a 50-year period and (ii) voting provisions, pursuant to which the Lakewood Parties agreed to cause our securities, or those of SIR, that they or any of their affiliates own as of a record date for a meeting of our or SIR’s shareholders to be present and voted at such meeting in favor of all actions recommended by the board of trustees of such company.

   

On February 28, 2015, our Managing Trustees, Messrs. Barry and Adam Portnoy, entered into separate share purchase agreements with the Lakewood Parties, with provisions similar to the GOV Purchase Agreement, including the per share purchase price, pursuant to which, on March 4, 2015, Messrs. Barry Portnoy and Adam Portnoy acquired 107,606 and 87,606 SIR common shares, respectively, from Lakewood and, on March 5, 2015, Messrs. Barry Portnoy and Adam Portnoy acquired 2,429 and 2,429 SIR common shares, respectively, from Mr. William H. Lenehan, one of the Lakewood Parties.  Concurrently with entering into the agreements among us, Messrs. Barry Portnoy and Adam Portnoy and the Lakewood Parties, Lakewood withdrew its nomination of Mr. Lenehan for election to SIR’s board of trustees at SIR’s 2015 annual meeting of shareholders. See Note 11 for further information regarding our investment in SIR.

 

AIC:  As of September 30, 2015, our investment in Affiliates Insurance Company, or AIC, an Indiana insurance company, had a carrying value of $6,926, which amount is included in other assets on our condensed consolidated balance sheet.  We recognized income (loss) of ($24) and $38 related to our investment in AIC for the three months ended September 30, 2015 and 2014, respectively, and $70 and $59 for the nine months ended September 30, 2015 and 2014, respectively.  Our other comprehensive income (loss) includes unrealized gains (losses) on securities held for sale which are owned by AIC of ($72) and ($33)  for the three months ended September 30, 2015 and 2014, respectively, and ($91) and $8 for the nine months ended September 30, 2015 and 2014, respectively.

 

In June 2015, we and the other shareholders of AIC renewed our participation in an insurance program arranged by AIC.  In connection with that renewal, we purchased a three year combined property insurance policy providing $500,000 of coverage annually with the premium to be paid annually and a one year combined policy providing terrorism coverage of $200,000 for our properties which policies were arranged by AIC.  We paid aggregate annual premiums, including taxes and fees, of approximately $1,277 in connection with these policies for the policy year ending June 30, 2016, and this amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

 

Directors’ and Officers’ Liability Insurance:  In August 2015, we extended through September 2017 our combined directors' and officers' insurance policy with RMR LLC and five other companies managed by RMR LLC that provides $10,000 in aggregate primary coverage.  At that time, we also extended through September 2016 our separate additional directors' and officers' liability insurance policies that provide $20,000 of aggregate excess coverage plus $5,000 of excess non-indemnifiable coverage.  The total premium payable by us for these extensions was approximately $338.

 

 

14


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 11.   Equity Investment in Select Income REIT

 

As described in Note 10, as of September 30, 2015, we owned 24,918,421, or approximately 27.9%, of the then outstanding SIR common shares.  SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties. 

 

We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2015, we recorded $8,425 and $18,850 of equity in the earnings of SIR, respectively.

 

During the three and nine months ended September 30, 2015, SIR issued 45,389 and 29,414,279 common shares, respectively.  We recognized a loss on issuance of shares by SIR of $21 and $42,145, respectively, during the three and nine months ended September 30, 2015 as a result of the per share issuance price of these SIR common shares being below the then average per share carrying value of our SIR common shares.

 

We periodically evaluate our equity investment in SIR for possible indicators of other than temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. These indicators may include the length of time and the extent to which the market value of our investment is below our carrying value, the financial condition of SIR, our intent and ability to be a long term holder of the investment and other considerations. If the decline in fair value is judged to be other than temporary, we record an impairment charge to adjust the basis of the investment to its estimated fair value.  In performing our periodic evaluation of other than temporary impairment of our investment in SIR during the second quarter of 2015, we determined, based on the length of time and the extent to which the market value of our SIR investment was below our carrying value, that the decline in fair value was other than temporary.  Accordingly, we recorded a $203,297 loss on impairment to reduce the carrying value of our SIR investment to its estimated fair value during the second quarter of 2015.  We estimated fair value using the closing price of SIR common shares on the NYSE as of June 30, 2015.

 

The cost of our investments in SIR exceeded our proportionate share of SIR’s total shareholders’ equity book value on their dates of acquisition by an aggregate of $166,272. As required under GAAP, we were amortizing this difference to equity in earnings of investees over the average remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of the respective dates of our acquisition.  This amortization decreased our equity in the earnings of SIR by zero and $4,742 for the three and nine months ended September 30, 2015, respectively, and $2,637 for both the three and nine months ended September 30, 2014.  Recording the loss on impairment noted above resulted in the carrying value of our SIR investment to be less than our proportionate share of SIR’s total shareholders’ book equity as of June 30, 2015.  As a result, the previous basis difference was eliminated and we are currently amortizing a basis difference of ($95,035) to earnings over the estimated remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of June 30, 2015.  This amortization increased our equity in the earnings of SIR by $1,893 for both the three and nine months ended September 30, 2015.

 

During the three and nine months ended September 30, 2015, we received cash distributions from SIR totaling $12,459 and $34,571, respectively, and $10,320 for both the three and nine months ended September 30, 2014.

 

The following summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2015, or the SIR Quarterly Report, includes the results of operations for periods prior to July 9, 2014 (the date on which we acquired our initial interest in SIR). References in our financial statements to the SIR Quarterly Report are included as references to the source of the data only, and the information in the SIR Quarterly Report is not incorporated by reference into our financial statements.

 

15


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

2015

 

2014

Real estate properties, net

 

$

3,894,684

 

$

1,772,510

Properties held for sale

 

 

67,250

 

 

 -

Acquired real estate leases, net

 

 

558,027

 

 

120,700

Cash and cash equivalents

 

 

25,247

 

 

13,504

Rents receivable, net

 

 

91,506

 

 

68,385

Other assets, net

 

 

124,933

 

 

18,132

Total assets

 

$

4,761,647

 

$

1,993,231

 

 

 

 

 

 

 

Revolving credit facility

 

$

305,000

 

$

77,000

Term loan

 

 

350,000

 

 

350,000

Senior notes

 

 

1,435,095

 

 

 -

Mortgage notes payable

 

 

286,945

 

 

18,816

Assumed real estate lease obligations, net

 

 

92,536

 

 

26,475

Other liabilities

 

 

119,267

 

 

40,493

Noncontrolling interest

 

 

3,270

 

 

 -

Shareholders' equity

 

 

2,169,534

 

 

1,480,447

Total liabilities and shareholders' equity

 

$

4,761,647

 

$

1,993,231

 

Condensed Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

2015

 

2014

Rental income

 

$

94,745

 

$

48,523

 

$

267,389

 

$

142,051

Tenant reimbursements and other income

 

 

17,197

 

 

8,177

 

 

46,182

 

 

24,234

  Total revenues

 

 

111,942

 

 

56,700

 

 

313,571

 

 

166,285

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

21,184

 

 

10,282

 

 

57,368

 

 

30,246

Depreciation and amortization

 

 

33,070

 

 

10,653

 

 

90,179

 

 

30,442

Acquisition related costs

 

 

402

 

 

5,365

 

 

21,720

 

 

5,739

General and administrative

 

 

6,328

 

 

3,749

 

 

19,488

 

 

11,123

  Total expenses

 

 

60,984

 

 

30,049

 

 

188,755

 

 

77,550

Operating income

 

 

50,958

 

 

26,651

 

 

124,816

 

 

88,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(20,034)

 

 

(3,033)

 

 

(53,710)

 

 

(10,025)

Gain (loss) on early extinguishment of debt

 

 

 —

 

 

 —

 

 

(6,845)

 

 

243

Income before income tax expense and equity in earnings (losses) of an investee

 

 

30,924

 

 

23,618

 

 

64,261

 

 

78,953

Income tax expense

 

 

(98)

 

 

(30)

 

 

(324)

 

 

(120)

Equity in earnings (losses) of an investee

 

 

(25)

 

 

38

 

 

70

 

 

59

Gain on sale of property

 

 

 -

 

 

116

 

 

 -

 

 

116

Net income

 

 

30,801

 

 

23,742

 

 

64,007

 

 

79,008

Net income allocated to noncontrolling interest

 

 

(46)

 

 

 -

 

 

(135)

 

 

 -

Net income attributed to SIR

 

$

30,755

 

$

23,742

 

$

63,872

 

$

79,008

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

89,267

 

 

59,857

 

 

85,827

 

 

54,642

Weighted average common shares outstanding (diluted)

 

 

89,274

 

 

59,910

 

 

85,837

 

 

54,688

Basic net income attributed to SIR per common share

 

$

0.34

 

$

0.40

 

$

0.74

 

$

1.45

Diluted net income attributed to SIR per common share

 

$

0.34

 

$

0.40

 

$

0.74

 

$

1.44

 

 

16


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

Note 12.   Segment Information

 

We operate in two separate reportable business segments: ownership of properties that are primarily leased to government tenants and our equity method investment in SIR.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2015

 

 

Investment

 

Investment

 

 

 

 

 

 

 

    

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Rental income 

 

$

62,092

 

$

 —

 

$

 —

 

$

62,092

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,735

 

 

 —

 

 

 —

 

 

7,735

Utility expenses

 

 

5,194

 

 

 —

 

 

 —

 

 

5,194

Other operating expenses

 

 

12,281

 

 

 —

 

 

 —

 

 

12,281

Depreciation and amortization

 

 

17,161

 

 

 —

 

 

 —

 

 

17,161

Acquisition related costs

 

 

270

 

 

 —

 

 

 —

 

 

270

General and administrative

 

 

 —

 

 

 —

 

 

3,714

 

 

3,714

Total expenses

 

 

42,641

 

 

 —

 

 

3,714

 

 

46,355

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

19,451

 

 

 —

 

 

(3,714)

 

 

15,737

Interest and other income

 

 

 —

 

 

 —

 

 

2

 

 

2

Interest expense

 

 

(1,727)

 

 

 —

 

 

(7,410)

 

 

(9,137)

Gain on early extinguishment of debt

 

 

34

 

 

 —

 

 

 —

 

 

34

Loss on issuance of shares by SIR

 

 

 —

 

 

(21)

 

 

 —

 

 

(21)

Income (loss) from continuing operations before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

  equity in earnings (losses) of investees

 

 

17,758

 

 

(21)

 

 

(11,122)

 

 

6,615

Income tax benefit

 

 

 —

 

 

 —

 

 

13

 

 

13

Equity in earnings (losses) of investees

 

 

 —

 

 

10,318

 

 

(24)

 

 

10,294

Income (loss) from continuing operations

 

 

17,758

 

 

10,297

 

 

(11,133)

 

 

16,922

Loss from discontinued operations

 

 

(11)

 

 

 —

 

 

 —

 

 

(11)

Net income (loss)

 

$

17,747

 

$

10,297

 

$

(11,133)

 

$

16,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2015

 

 

Investment

 

Investment

 

 

 

 

 

 

 

    

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Rental income 

 

$

186,864

 

$

 —

 

$

 —

 

$

186,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

22,819

 

 

 —

 

 

 —

 

 

22,819

Utility expenses

 

 

13,788

 

 

 —

 

 

 —

 

 

13,788

Other operating expenses

 

 

36,659

 

 

 —

 

 

 —

 

 

36,659

Depreciation and amortization

 

 

51,675

 

 

 —

 

 

 —

 

 

51,675

Acquisition related costs

 

 

459

 

 

 —

 

 

 —

 

 

459

General and administrative

 

 

 —

 

 

 —

 

 

11,431

 

 

11,431

Total expenses

 

 

125,400

 

 

 —

 

 

11,431

 

 

136,831

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

61,464

 

 

 —

 

 

(11,431)

 

 

50,033

Interest and other income

 

 

 —

 

 

 —

 

 

14

 

 

14

Interest expense

 

 

(21,618)

 

 

 —

 

 

(6,276)

 

 

(27,894)

Gain on early extinguishment of debt

 

 

34

 

 

 —

 

 

 —

 

 

34

Loss on issuance of shares by SIR

 

 

 —

 

 

(42,145)

 

 

 —

 

 

(42,145)

Loss on impairment of SIR investment

 

 

 —

 

 

(203,297)

 

 

 —

 

 

(203,297)

Income (loss) from continuing operations before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

  equity in earnings of investees

 

 

39,880

 

 

(245,442)

 

 

(17,693)

 

 

(223,255)

Income tax expense

 

 

 —

 

 

 —

 

 

(49)

 

 

(49)

Equity in earnings of investees

 

 

 —

 

 

16,002

 

 

70

 

 

16,072

Income (loss) from continuing operations

 

 

39,880

 

 

(229,440)

 

 

(17,672)

 

 

(207,232)

Loss from discontinued operations

 

 

(390)

 

 

 —

 

 

 —

 

 

(390)

Net income (loss)

 

$

39,490

 

$

(229,440)

 

$

(17,672)

 

$

(207,622)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015

 

 

Investment

 

Investment

 

 

 

 

 

 

 

 

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Total Assets

 

$

1,643,834

 

$

511,872

 

$

71,332

 

$

2,227,038

 

 

17


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2014

 

 

Investment

 

Investment

 

 

 

 

 

 

 

    

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Rental income 

 

$

64,158

 

$

 —

 

$

 —

 

$

64,158

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,027

 

 

 —

 

 

 —

 

 

7,027

Utility expenses

 

 

5,327

 

 

 —

 

 

 —

 

 

5,327

Other operating expenses

 

 

11,685

 

 

 —

 

 

 —

 

 

11,685

Depreciation and amortization

 

 

17,636

 

 

 —

 

 

 —

 

 

17,636

Loss on impairment of real estate

 

 

1,616

 

 

 —

 

 

 —

 

 

1,616

Acquisition related costs

 

 

110

 

 

 —

 

 

 —

 

 

110

General and administrative

 

 

 —

 

 

 —

 

 

4,329

 

 

4,329

Total expenses

 

 

43,401

 

 

 —

 

 

4,329

 

 

47,730

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

20,757

 

 

 —

 

 

(4,329)

 

 

16,428

Interest and other income

 

 

 —

 

 

 —

 

 

10

 

 

10

Interest expense

 

 

(2,326)

 

 

 —

 

 

(6,519)

 

 

(8,845)

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

(541)

 

 

(541)

Loss on issuance of shares by SIR

 

 

 —

 

 

(39)

 

 

 —

 

 

(39)

Income (loss) from continuing operations before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

  equity in earnings of investees

 

 

18,431

 

 

(39)

 

 

(11,379)

 

 

7,013

Income tax expense

 

 

 —

 

 

 —

 

 

(7)

 

 

(7)

Equity in earnings of investees

 

 

 —

 

 

4,872

 

 

38

 

 

4,910

Income (loss) from continuing operations

 

 

18,431

 

 

4,833

 

 

(11,348)

 

 

11,916

Income from discontinued operations

 

 

706

 

 

 —

 

 

 —

 

 

706

Net income (loss)

 

$

19,137

 

$

4,833

 

$

(11,348)

 

$

12,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2014

 

 

Investment

 

Investment

 

 

 

 

 

 

 

    

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Rental income 

 

$

186,406

 

$

 —

 

$

 —

 

$

186,406

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

21,005

 

 

 —

 

 

 —

 

 

21,005

Utility expenses

 

 

15,072

 

 

 —

 

 

 —

 

 

15,072

Other operating expenses

 

 

33,586

 

 

 —

 

 

 —

 

 

33,586

Depreciation and amortization

 

 

49,254

 

 

 —

 

 

 —

 

 

49,254

Loss on impairment of real estate

 

 

1,616

 

 

 —

 

 

 —

 

 

1,616

Acquisition related costs

 

 

1,070

 

 

 —

 

 

220

 

 

1,290

General and administrative

 

 

 —

 

 

 —

 

 

11,537

 

 

11,537

Total expenses

 

 

121,603

 

 

 —

 

 

11,757

 

 

133,360

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

64,803

 

 

 —

 

 

(11,757)

 

 

53,046

Interest and other income

 

 

 —

 

 

 —

 

 

68

 

 

68

Interest expense

 

 

(13,029)

 

 

 —

 

 

(5,501)

 

 

(18,530)

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

(541)

 

 

(541)

Loss on issuance of shares by SIR

 

 

 —

 

 

(39)

 

 

 —

 

 

(39)

Income (loss) from continuing operations before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

  equity in earnings of investees

 

 

51,774

 

 

(39)

 

 

(17,731)

 

 

34,004

Income tax expense

 

 

 —

 

 

 —

 

 

(130)

 

 

(130)

Equity in earnings of investees

 

 

 —

 

 

4,872

 

 

59

 

 

4,931

Income (loss) from continuing operations

 

 

51,774

 

 

4,833

 

 

(17,802)

 

 

38,805

Income from discontinued operations

 

 

3,615

 

 

 —

 

 

 —

 

 

3,615

Net income (loss)

 

$

55,389

 

 

4,833

 

$

(17,802)

 

$

42,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

Investment

 

Investment

 

 

 

 

 

 

 

 

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Total Assets

 

$

1,714,130

 

$

680,137

 

$

33,348

 

$

2,427,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The following information should be read in conjunction with our financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2014, or our Annual Report.

 

OVERVIEW

 

We are a real estate investment trust, or REIT, organized under Maryland law. As of September 30, 2015, we owned 71 properties (91 buildings), excluding one property (one building) classified as discontinued operations.  Our properties are located in 31 states and the District of Columbia and contain approximately 10.7 million rentable square feet, of which 63.4% was leased to the U.S. Government, 20.2% was leased to 12 state governments, 1.7% was leased to the United Nations, an international intergovernmental organization, 8.2% was leased to various non-governmental organizations and 6.5% was available for lease as of September 30, 2015. The U.S. Government, 12 state governments and the United Nations combined were responsible for 92.8% and 93.2% of our annualized rental income, as defined below, as of September 30, 2015 and 2014, respectively.

 

As of September 30, 2015, we also owned 24,918,421 common shares, or approximately 27.9% of the outstanding common shares, of Select Income REIT, or SIR. SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties.  See Notes 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our investment in SIR. We account for our investment in SIR under the equity method.

 

Property Operations

 

As of September 30, 2015, excluding one property (one building) classified as discontinued operations, 93.5% of our rentable square feet was leased, compared to 95.4% of our rentable square feet as of September 30, 2014.  Occupancy data for our properties as of September 30, 2015 and 2014 is as follows (square feet in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable

 

 

 

 

 

All Properties(1)

 

 

Properties(2)

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

2015

 

2014

 

 

2015

 

2014

 

 

Total properties

 

 

71

 

72

 

 

67

 

67

 

 

Total buildings

 

 

91

 

92

 

 

86

 

86

 

 

Total square feet(3)

 

 

10,701

 

11,037

 

 

9,971

 

9,969

 

 

Percent leased(3)(4)

 

 

93.5%

 

95.4%

 

 

93.1%

 

95.0%

 


(1)

Based on properties we owned on September 30, 2015 and September 30, 2014, respectively,  and excludes one property (one building) classified as discontinued operations.

(2)

Based on properties we owned on September 30, 2015 and which we owned continuously since January 1, 2014, and excludes one property (one building) classified as discontinued operations.  Our comparable properties increased from 63 properties (79 buildings) at September 30, 2014 as a result of our acquisition of five properties (eight buildings) during the year ended December 31, 2013 and the sale of one property (one building) from continuing operations during the nine months ended September 30, 2015.

(3)

Subject to modest changes when space is re-measured or re-configured for tenants.

(4)

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 three and nine months ended September 30, 2015 and 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

2015

 

2014

 

2015

 

2014

 

 

Average annualized effective rental rate per square foot(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  All properties(2)

 

$

24.97

 

$

24.68

 

$

24.72

 

$

24.74

 

 

  Comparable properties(3)

 

$

25.00

 

$

24.42

 

$

24.51

 

$

24.31

 


(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. Excludes one property (one building) classified as discontinued operations.

(2)

Based on properties we owned on September 30, 2015 and excludes one property (one building) classified as discontinued operations.

(3)

Based on properties we owned on September 30, 2015 and which we owned continuously since July 1, 2014 and January 1, 2014, respectively, and excludes one property (one building) classified as discontinued operations.

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During the three and nine months ended September 30, 2015 changes in rentable square feet leased and available for lease at our properties, excluding one property (one building) classified as discontinued operations, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

Available

 

 

 

 

 

Available

 

 

 

 

 

 

Leased

 

for Lease

 

Total

 

Leased

 

for Lease

 

Total

 

 

Beginning of period

 

10,091,890

 

607,474

 

10,699,364

 

10,473,975

 

562,768

 

11,036,743

 

 

Changes resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disposition of a property

 

 —

 

 —

 

 —

 

(337,500)

 

 —

 

(337,500)

 

 

Lease expirations

 

(294,010)

 

294,010

 

 —

 

(737,696)

 

737,696

 

 —

 

 

Lease renewals(1)

 

176,366

 

(176,366)

 

 —

 

527,465

 

(527,465)

 

 —

 

 

New leases(1)

 

30,890

 

(30,890)

 

 —

 

78,892

 

(78,892)

 

 —

 

 

Remeasurements(2)

 

 —

 

1,600

 

1,600

 

 —

 

1,721

 

1,721

 

 

End of period

 

10,005,136

 

695,828

 

10,700,964

 

10,005,136

 

695,828

 

10,700,964

 


(1)

Based on leases entered into during the three and nine months ended September 30, 2015, respectively.

(2)

Subject to modest changes when space is re-measured or re-configured for tenants.

 

Leases at our properties, excluding one property (one building) classified as discontinued operations, totaling 294,010 and 737,696 rentable square feet expired during the three and nine months ended September 30, 2015, respectively.  During the three and nine months ended September 30, 2015, we entered into leases totaling 207,256 and 606,357  rentable square feet, respectively, which includes lease renewals of 176,366 and 527,465 rentable square feet, respectively.  The weighted (by rentable square feet) average rental rates for leases of 154,945 and 437,381 rentable square feet entered into with government tenants during the three and nine months ended September 30, 2015 increased by 17.4% and 5.4%, respectively, when compared to the weighted (by rentable square feet) average prior rents for the same space. The weighted (by rentable square feet) average rental rates for leases of 52,311 and 168,976 rentable square feet entered into with non-government tenants during the three and nine months ended September 30, 2015 increased by 0.6% and decreased by 1.3%, respectively, when compared to the weighted (by rentable square feet) average rental rates previously charged for the same space.

 

During the three and nine months ended September 30, 2015, changes in effective rental rates per square foot achieved for new leases and lease renewals that commenced during the three and nine months ended September 30, 2015, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

 

 

 

    

Old Effective

    

New Effective

    

    

    

Old Effective

    

New Effective

    

    

 

 

 

 

Rent Per

 

Rent Per

 

Rentable

 

Rent Per

 

Rent Per

 

Rentable

 

 

 

 

Square Foot(1)

 

Square Foot(1)

 

Square Feet

 

Square Foot(1)

 

Square Foot(1)

 

Square Feet

 

 

New leases

 

$

19.93

 

$

20.96

 

3,975

 

$

24.15

 

$

19.61

 

56,002

 

 

Lease renewals

 

$

14.81

 

$

16.81

 

161,788

 

$

18.81

 

$

19.49

 

560,240

 

 

Total leasing activity

 

$

14.94

 

$

16.91

 

165,763

 

$

19.30

 

$

19.50

 

616,242

 


(1)

Effective rental rate includes contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excluding lease value amortization.

 

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During the three and nine months ended September 30, 2015, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Government

    

Non-Government

    

    

 

Three Months Ended September 30, 2015

 

Leases

 

Leases

 

Total

Rentable square feet leased during the period

 

 

154,945

 

 

52,311

 

 

207,256

Tenant leasing costs and concession commitments(1)  (in thousands)

 

$

150

 

$

1,598

 

$

1,748

Tenant leasing costs and concession commitments per rentable square foot(1)

 

$

0.96

 

$

30.55

 

$

8.43

Weighted (by square feet) average lease term (years)

 

 

2.4

 

 

6.0

 

 

3.3

Total leasing costs and concession commitments per rentable square foot per year(1)

 

$

0.40

 

$

5.10

 

$

2.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

    

Non-Government

    

    

Nine Months Ended September 30, 2015

 

 

Leases

 

Leases

Total

Rentable square feet leased during the period

 

 

437,381

 

 

168,976

 

 

606,357

Tenant leasing costs and concession commitments(1)  (in thousands)

 

$

4,385

 

$

4,845

 

$

9,230

Tenant leasing costs and concession commitments per rentable square foot(1)

 

$

10.03

 

$

28.67

 

$

15.22

Weighted (by square feet) average lease term (years)

 

 

8.2

 

 

6.8

 

 

7.9

Total leasing costs and concession commitments per rentable square foot per year(1)

 

$

1.22

 

$

4.19

 

$

1.94

(1)

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

 

During the three and nine months ended September 30, 2015 and 2014, 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 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

 

 

2015

 

2014

 

2015

 

2014

 

 

Tenant improvements(1)

 

$

2,213

 

$

1,861

 

$

5,039

 

$

5,386

 

 

Leasing costs(2)

 

$

439

 

$

437

 

$

2,876

 

$

1,439

 

 

Building improvements(3)

 

$

2,210

 

$

2,788

 

$

4,151

 

$

5,783

 

 

Development, redevelopment and other activities(4)

 

$

946

 

$

168

 

$

1,167

 

$

1,169

 


(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.

 

We believe that current government budgetary pressures may cause an increased demand for leased space by government tenants, as opposed to governments acquiring buildings or constructing new buildingsHowever, these same budgetary pressures may also result in a decrease in government employment, government tenants improving their space utilization or consolidation into existing government owned properties, thereby reducing the demand for government leased space. Our historical experience 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. However, relocation may become more prevalent if efforts by government tenants to improve their space utilization require significant reconfiguration of currently 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, 2015, excluding one property (one building) classified as discontinued operations, we had leases totaling 799,794 rentable square feet that were scheduled to expire through September 30, 2016. As of October 28, 2015, tenants with leases totaling 155,996 rentable square feet, that are scheduled to expire through September 30, 2016, have notified us that they do not plan to renew their leases upon expiration and we can provide no assurance as to whether additional tenants may or may not renew their leases upon expiration. Based upon current market conditions and tenant negotiations for leases scheduled to expire through September 30, 2016, we expect that the rental rates we are likely to achieve on new or renewed leases for space under expiring leases through September 30, 2016 will, in the aggregate and on a weighted (by annualized revenues) average basis, be slightly lower than the rates currently being paid, thereby generally resulting in lower revenue from the same space. However, we can provide no 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 at the time we negotiate and conclude leases will generally determine rental rates and demand for leased space in our

21


 

Table of Contents

properties; and market conditions and government tenants' needs are beyond our control.  As of September 30, 2015, lease expirations at our properties, excluding one property (one building) classified as discontinued operations, by year are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Expirations

 

 

 

 

 

Annualized

 

 

 

 

 

 

 

 

of

 

of Leased

 

 

 

Cumulative

 

Rental

 

 

 

Cumulative

 

 

 

 

Tenants

 

Square

 

Percent

 

Percent

 

Income

 

Percent

 

Percent

 

 

Year(1)

 

Expiring

 

Feet(2)

 

of Total

 

of Total

 

Expiring(3)

 

of Total

 

of Total

 

 

2015

 

14

 

185,047

 

1.8%

 

1.8%

 

$

4,264

 

1.8%

 

1.8%

 

 

2016

 

42

 

1,041,824

 

10.4%

 

12.2%

 

 

35,633

 

14.8%

 

16.6%

 

 

2017

 

40

 

801,246

 

8.0%

 

20.2%

 

 

15,941

 

6.6%

 

23.2%

 

 

2018

 

40

 

1,161,801

 

11.6%

 

31.8%

 

 

32,056

 

13.3%

 

36.5%

 

 

2019

 

33

 

1,856,044

 

18.6%

 

50.4%

 

 

46,757

 

19.4%

 

55.9%

 

 

2020

 

33

 

1,325,513

 

13.2%

 

63.6%

 

 

30,976

 

12.9%

 

68.8%

 

 

2021

 

16

 

873,659

 

8.7%

 

72.3%

 

 

17,049

 

7.1%

 

75.9%

 

 

2022

 

11

 

693,583

 

6.9%

 

79.2%

 

 

14,857

 

6.2%

 

82.1%

 

 

2023

 

13

 

544,551

 

5.4%

 

84.6%

 

 

12,600

 

5.2%

 

87.3%

 

 

2024 and thereafter

 

24

 

1,521,868

 

15.4%

 

100.0%

 

 

30,276

 

12.7%

 

100.0%

 

 

Total

 

266

 

10,005,136

 

100.0%

 

 

 

$

240,409

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term (in years)

 

4.8

 

 

 

 

 

 

4.5

 

 

 

 

 


(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, 2015, government tenants occupying approximately 7.3% of our rentable square feet and responsible for approximately 6.8% of our annualized rental income as of September 30, 2015 have currently exercisable rights to terminate their leases before the stated terms of their leases expire. Also in 2015, 2016, 2017, 2018, 2019, 2020, 2022 and 2023, early termination rights become exercisable by other tenants who currently occupy an additional approximately 2.4%, 6.2%, 3.2%, 1.3%, 4.7%, 3.0%, 2.1% and 1.4% of our rentable square feet, respectively, and contribute an additional approximately 0.7%, 5.7%, 2.6%, 1.4%, 5.2%, 2.9%, 1.5% and 1.2% of our annualized rental income, respectively, as of September 30, 2015. In addition, as of September 30, 2015, 14 of our government tenants have currently exercisable rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 14 tenants occupy approximately 14.7% of our rentable square feet and contribute approximately 15.4% of our annualized rental income as of September 30, 2015.

 

(2)

Leased square feet is pursuant to leases existing as of September 30, 2015, 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.  Square feet measurements are subject to modest changes when space is re-measured or re-configured for new tenants.

 

(3)

Annualized rental income is calculated using the annualized contractual base rents from our tenants pursuant to our lease agreements as of September 30, 2015, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

 

Acquisition and Disposition Activities (dollar amounts in thousands)

 

In August 2015, we terminated two previously disclosed agreements to acquire two office properties (two buildings) for an aggregate purchase price of $25,950. 

 

In February 2015, one of our U.S. Government tenants exercised its option to acquire the office property (one building) it leased from us located in Riverdale, MD with 337,500 rentable square feet. The sales price was $30,600, excluding closing costs. 

 

In May 2015, we began marketing for sale an office property (one building) located in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 as of September 30, 2015. 

 

In July 2015, we entered into an agreement to sell an office property (one building) located in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at September 30, 2015, for a contract price of $16,500, excluding closing costs.  In September 2015, this agreement was terminated.  We continue to market this property for sale

 

We can provide no assurance that we will sell the properties we are marketing for sale or what the terms of any such sale would be.

 

22


 

Table of Contents

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 assure that we will reach any agreement to acquire such properties, or that if we do reach any such agreement, that we will complete any acquisitions. Although we have not identified other properties for disposition, we expect to periodically identify properties for sale based on future changes in market conditions, changes in property performance, our expectation regarding lease renewals or our plans with regard to particular properties. Our plans for particular properties and other strategic considerations may cause us to change our acquisition and disposition strategies, and we may do so at any time and without shareholder approval.

 

On March 4, 2015, we acquired 3,418,421 SIR common shares for a cash purchase price equal to $95,203, before acquisition related costs.

 

On June 5, 2015, we acquired 1,541,201 shares of class A common stock of The RMR Group Inc. (formerly known as Reit Management & Research Inc.), or RMR Inc., for $17,462, excluding transaction costs. As payment for the RMR Inc. shares, we issued 700,000 of our common shares valued at $13,545 and paid the remainder of the purchase price in cash. Through our acquisition of the RMR Inc. shares, we indirectly acquired an economic ownership of 5.0% of our manager, The RMR Group LLC (formerly known as Reit Management & Research LLC), or RMR LLC.  We have agreed to distribute approximately half of the RMR Inc. shares we acquired to our shareholders as a special distribution (excluding shares we may receive as a shareholder of SIR, which we currently intend to retain), and RMR Inc. agreed to facilitate this distribution by filing a registration statement with the SEC to register those shares to be distributed and by seeking a listing of those shares on a national stock exchange.  We will not distribute our RMR Inc. shares until such a registration statement is declared effective by the SEC.

 

For more information about these transactions, see Notes 9, 10, and 11 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which are incorporated herein by reference.

 

 

 

 

 

 

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Table of Contents

 

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

 

Three Months Ended September 30, 2015, Compared to Three Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired Property Results(2)

 

Disposed Property Results(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable Properties Results(1)

 

Three Months Ended

 

Three Months Ended

 

Consolidated Results

 

 

 

Three Months Ended September 30,

 

September 30,

 

September 30,

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

$

 

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

%  

 

 

    

2015

    

2014

    

 

Change

    

Change

    

2015

    

2014

    

2015

    

2014

 

2015

    

2014

    

 

Change

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

61,763

 

$

61,639

 

$

124

 

0.2

%  

$

329

 

$

79

 

$

 —

 

$

2,440

 

$

62,092

 

$

64,158

 

$

(2,066)

 

(3.2)

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,658

 

 

6,661

 

 

997

 

15.0

%  

 

77

 

 

9

 

 

 —

 

 

357

 

 

7,735

 

 

7,027

 

 

708

 

10.1

%

Utility expenses

 

 

5,186

 

 

5,094

 

 

92

 

1.8

%

 

8

 

 

1

 

 

 —

 

 

232

 

 

5,194

 

 

5,327

 

 

(133)

 

(2.5)

%

Other operating expenses

 

 

12,254

 

 

11,228

 

 

1,026

 

9.1

%  

 

27

 

 

3

 

 

 —

 

 

454

 

 

12,281

 

 

11,685

 

 

596

 

5.1

%

Total operating expenses

 

 

25,098

 

 

22,983

 

 

2,115

 

9.2

%  

 

112

 

 

13

 

 

 —

 

 

1,043

 

 

25,210

 

 

24,039

 

 

1,171

 

4.9

%

Net operating income(4)

 

$

36,665

 

$

38,656

 

$

(1,991)

 

(5.2)

%  

$

217

 

$

66

 

$

 —

 

$

1,397

 

 

36,882

 

 

40,119

 

 

(3,237)

 

(8.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,161

 

 

17,636

 

 

(475)

 

(2.7)

%

Loss on impairment of real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

1,616

 

 

(1,616)

 

nm

 

Acquisition related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

270

 

 

110

 

 

160

 

145.5

%

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,714

 

 

4,329

 

 

(615)

 

(14.2)

%

Total other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,145

 

 

23,691

 

 

(2,546)

 

(10.7)

%

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,737

 

 

16,428

 

 

(691)

 

(4.2)

%

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

10

 

 

(8)

 

(80.0)

%

Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $360 and $373, respectively)

 

 

(9,137)

 

 

(8,845)

 

 

(292)

 

3.3

%

Gain (loss) on early extinguishment of debt

 

 

 

 

 

 

 

 

34

 

 

(541)

 

 

575

 

nm

 

Loss on issuance of shares by SIR

 

 

(21)

 

 

(39)

 

 

18

 

(46.2)

%

Income from continuing operations before income taxes and equity in earnings of investees

 

 

6,615

 

 

7,013

 

 

(398)

 

(5.7)

%

Income tax benefit (expense)

 

 

13

 

 

(7)

 

 

20

 

nm

 

Equity in earnings of investees

 

 

10,294

 

 

4,910

 

 

5,384

 

109.7

%

Income from continuing operations

 

 

16,922

 

 

11,916

 

 

5,006

 

42.0

%

Income (loss) from discontinued operations

 

 

(11)

 

 

706

 

 

(717)

 

nm

 

Net income

 

$

16,911

 

$

12,622

 

$

4,289

 

34.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

71,004

 

 

65,481

 

 

5,523

 

8.4

%

Weighted average common shares outstanding (diluted)

 

 

71,021

 

 

65,568

 

 

5,453

 

8.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts (basic and diluted):

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.24

 

$

0.18

 

$

0.06

 

33.3

%

Income (loss) from discontinued operations

 

$

 —

 

$

0.01

 

$

(0.01)

 

nm

 

Net income

 

$

0.24

 

$

0.19

 

$

0.05

 

26.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of Funds From Operations and Normalized Funds From Operations(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

16,911

 

$

12,622

 

 

 

 

 

 

Plus: Depreciation and amortization

 

 

 

 

 

 

 

 

17,161

 

 

17,636

 

 

 

 

 

 

Plus: Loss on impairment of real estate

 

 

 

 

 

 

 

 

 —

 

 

1,616

 

 

 

 

 

 

Plus: FFO attributable to SIR investment

 

 

 

 

 

 

 

 

17,780

 

 

11,230

 

 

 

 

 

 

Less: Equity in earnings  from SIR

 

 

 

 

 

 

 

 

(10,318)

 

 

(4,872)

 

 

 

 

 

 

Less: Net gain on sale of properties from discontinued operations

 

 

 

 

 

 

 

 

 —

 

 

(774)

 

 

 

 

 

 

Funds from operations

 

 

 

 

 

 

 

 

41,534

 

 

37,458

 

 

 

 

 

 

Plus: Acquisition related costs

 

 

 

 

 

 

 

 

270

 

 

110

 

 

 

 

 

 

Plus: Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

 —

 

 

541

 

 

 

 

 

 

Plus: Loss on issuance of shares by SIR

 

 

 

 

 

 

 

 

21

 

 

39

 

 

 

 

 

 

Plus: Normalized FFO attributable to SIR investment

 

 

 

 

 

 

 

 

17,892

 

 

12,874

 

 

 

 

 

 

Less: FFO attributable to SIR investment

 

 

 

 

 

 

 

 

(17,780)

 

 

(11,230)

 

 

 

 

 

 

Less: Gain on early extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34)

 

 

 —

 

 

 

 

 

 

Normalized funds from operations

 

 

 

 

 

 

 

$

41,903

 

$

39,792

 

 

 

 

 

 

Funds from operations per common share (basic and diluted)

 

 

 

 

 

 

 

$

0.58

 

$

0.57

 

 

 

 

 

 

Normalized funds from operations per common share (basic and diluted)

 

 

 

 

 

 

 

$

0.59

 

$

0.61

 

 

 

 

 

 

 


(1)

Comparable properties consist of 70 properties (90 buildings) we owned on September 30, 2015 and which we owned continuously since July 1, 2014, and excludes one property (one building) classified as discontinued operations.

 

(2)

Acquired property consists of one property (one building) we owned on September 30, 2015, which we acquired during the period from July 1, 2014 to September 30, 2015.

 

(3)

Disposed property consists of one property (one building) we sold during the nine months ended September 30, 2015 that was not classified as discontinued operations.

 

(4)

The calculation of net operating income, or NOI, excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. We calculate NOI, as shown above. We define NOI as income from our rental of 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 (loss) because it may help both investors and management to understand the operations of our properties. We use NOI 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 generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to net income (loss), 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 measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income (loss), operating income and cash flow from operating activities as presented in our condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows. Other real estate companies and REITs may calculate NOI differently than we do.

 

24


 

Table of Contents

(5)

We calculate funds from operations, or FFO and normalized funds from operations, or 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 (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization and the difference between FFO attributable to an equity investment and equity in earnings of an equity investee but excluding impairment charges on real estate assets, carrying value adjustments of real estate assets held for sale, 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 include the difference between FFO and Normalized FFO attributable to our equity investment in SIR, we include estimated business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP and we exclude acquisition related costs, gains or losses on early extinguishment of debt, loss on impairment of SIR investment and losses on issuance of shares by SIR. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income (loss), 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 with 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 credit facility and term loan agreement and public debt covenants, the availability of debt and equity capital, our expectation of our future capital requirements and operating performance, our receipt of distributions from SIR 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 (loss), 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. These measures should be considered in conjunction with net income (loss), operating income and cash flow from operating activities as presented in our condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

 

We refer to the 70 properties (90 buildings) we owned on September 30, 2015 and which we have owned continuously since July 1, 2014, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the property  (one building) that we owned as of September 30, 2015, which we acquired during the period from July 1, 2014 to September 30, 2015, as the acquired property. We refer to the property (one building) that we sold during the period from July 1, 2014 to September 30, 2015 that was not classified as discontinued operations, as the disposed property.

 

Our condensed consolidated statements of comprehensive income for the three months ended September 30, 2015 include the operating results of the acquired property for the entire period, as we acquired this property prior to July 1, 2015 and excludes the operating results of the disposed property for the entire period, as that property was sold prior to July 1, 2015.  Our condensed consolidated statements of comprehensive income for the three months ended September 30, 2014 include the operating results of the acquired property for less than the entire period, as we acquired that property during that period, and the disposed property for the entire period, as we sold that property after 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, 2015, compared to the three month period ended September 30, 2014.

 

Rental income. The decrease in rental income reflects the net effect of acquired and disposed properties and a modest increase in rental income for comparable properties. Rental income from the acquired property increased $250. Rental income from the disposed property declined $2,440.  Rental income for comparable properties increased $124 due primarily to rental increases at certain of our properties partially offset by a decrease in occupied space at certain of our properties in the 2015 period.  Rental income includes non-cash straight line rent adjustments totaling $613 in the 2015 period and $1,135 in the 2014 period, and amortization of acquired leases and assumed lease obligations totaling ($298) in the 2015 period and ($225) in the 2014 period.

 

Real estate taxes. The increase in real estate taxes reflects the net effect of acquired and disposed properties and an increase in real estate taxes for comparable properties. Real estate taxes from the acquired property increased $68.  Real estate taxes from the disposed property declined $357. Real estate taxes for comparable properties increased $997 due primarily to the effect of higher tax assessments at certain of our properties in the 2015 period.

 

Utility expenses. The decrease in utility expenses reflects the net effect of acquired and disposed properties and an increase in utility expenses for comparable properties. Utility expenses from the acquired property increased $7.  Utility expenses from the disposed property declined $232.  Utility expenses at comparable properties increased $92 primarily due to higher electricity usage at certain of our properties during the 2015 period.

 

Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties, and property management fees, net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above (see Note 10 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding this liability).  The increase in other operating expenses reflects the net effect of acquired and disposed properties and an increase in expenses for comparable properties. Other operating expenses from the acquired property increased $24.  Other operating expenses from the disposed property declined $454.  Other operating expenses at comparable properties increased $1,026 primarily as a result of repair and maintenance costs and property insurance expense increases at certain of our properties during the 2015 period.

 

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Table of Contents

Depreciation and amortization. The decrease in depreciation and amortization reflects the net effect of property acquisitions and dispositions, the effect of certain assets becoming fully depreciated, and improvements made to certain of our properties since July 1, 2014. Depreciation and amortization from the acquired property increased $89.  Depreciation and amortization from the disposed property declined $513Depreciation and amortization at comparable properties declined $51 due primarily to certain depreciable leasing related assets becoming fully depreciated in 2014 and 2015, partially offset by depreciation and amortization of improvements made to certain of our properties after July 1, 2014.

 

Loss on impairment of real estate. Loss on asset impairment relates to the adjustment to reduce the carrying value of one property (one building) classified as held for sale during the 2014 period to estimated fair value less costs to sell.

 

Acquisition related costs. Acquisition related costs in both the 2015 and 2014 periods include legal and due diligence costs incurred in connection with our property acquisitions and other investment activity.

 

General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement,  net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above (see Note 10 to the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report), 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 professional service costs during the 2015 period.

 

Interest and other income. The decrease in interest and other income is primarily the result of a smaller amount of investable cash in the 2015 period compared to the 2014 period.

 

Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on those borrowings during the 2015 period compared to the 2014 period.

 

Gain (loss) on early extinguishment of debt.  We recorded a $34 gain on early extinguishment of debt in the 2015 period in connection with the repayment of a mortgage note.  We recorded a $541 loss on early extinguishment of debt in the 2014 period in connection with the repayment of a $500,000 term loan.

 

Loss on issuance of shares by SIR. Loss on issuance of shares by SIR is a result of the issuance of common shares by SIR at prices below our then per share carrying value of our SIR common shares.

 

Income tax benefit (expense).  The change in income tax benefit (expense) reflects a decrease in our accrued state income tax liability during the 2015 period due to lower estimated operating income in certain jurisdictions in 2015.

 

Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and Affiliates Insurance Company, or AIC, and amortization of the difference between the basis of our SIR investment and our proportionate share of SIR’s total shareholders’ equity book value.

 

Income (loss) from discontinued operations. Income (loss) from discontinued operations reflects operating results for one property (one building) sold during the 2014 period and one property (one building) included in discontinued operations and held for sale as of September 30, 2015. 

 

Net income. Our net income increased in the 2015 period compared to the 2014 period as a result of the changes noted above.

 

 

26


 

Table of Contents

Nine Months Ended September 30, 2015, Compared to Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired Properties Results(2)

 

Disposed Property Results(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable Properties Results(1)

 

Nine Months Ended

 

Nine Months Ended

 

Consolidated Results

 

 

 

Nine Months Ended September 30,

 

September 30,

 

September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

$

 

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

%  

 

 

    

2015

    

2014

    

 

Change

    

Change

    

2015

    

2014

    

2015

    

2014

 

2015

    

2014

    

 

Change

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

170,948

 

$

172,494

 

$

(1,546)

 

(0.9)

%  

$

14,383

 

$

6,545

 

$

1,533

 

$

7,367

 

$

186,864

 

$

186,406

 

$

458

 

0.2

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

21,038

 

 

19,476

 

 

1,562

 

8.0

%  

 

1,579

 

 

470

 

 

202

 

 

1,059

 

 

22,819

 

 

21,005

 

 

1,814

 

8.6

%

Utility expenses

 

 

13,398

 

 

14,237

 

 

(839)

 

(5.9)

%

 

292

 

 

165

 

 

98

 

 

670

 

 

13,788

 

 

15,072

 

 

(1,284)

 

(8.5)

%

Other operating expenses

 

 

33,863

 

 

31,565

 

 

2,298

 

7.3

%  

 

2,454

 

 

838

 

 

342

 

 

1,183

 

 

36,659

 

 

33,586

 

 

3,073

 

9.1

%

Total operating expenses

 

 

68,299

 

 

65,278

 

 

3,021

 

4.6

%  

 

4,325

 

 

1,473

 

 

642

 

 

2,912

 

 

73,266

 

 

69,663

 

 

3,603

 

5.2

%

Net operating income(4)

 

$

102,649

 

$

107,216

 

$

(4,567)

 

(4.3)

%  

$

10,058

 

$

5,072

 

$

891

 

$

4,455

 

 

113,598

 

 

116,743

 

 

(3,145)

 

(2.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,675

 

 

49,254

 

 

2,421

 

4.9

%

Loss on impairment of real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

1,616

 

 

(1,616)

 

nm

 

Acquisition related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

459

 

 

1,290

 

 

(831)

 

(64.4)

%

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,431

 

 

11,537

 

 

(106)

 

(0.9)

%

Total other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,565

 

 

63,697

 

 

(132)

 

(0.2)

%

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,033

 

 

53,046

 

 

(3,013)

 

(5.7)

%

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

68

 

 

(54)

 

(79.4)

%

Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $1,020 and $926, respectively)

 

 

(27,894)

 

 

(18,530)

 

 

(9,364)

 

50.5

%

Gain (loss) on early extinguishment of debt

 

 

 

 

 

 

 

 

34

 

 

(541)

 

 

575

 

nm

 

Loss on issuance of shares by SIR

 

 

(42,145)

 

 

(39)

 

 

(42,106)

 

nm

 

Loss on impairment of SIR investment

 

 

(203,297)

 

 

 —

 

 

(203,297)

 

nm

 

Income (loss) from continuing operations before income taxes and equity in earnings of investees

 

 

(223,255)

 

 

34,004

 

 

(257,259)

 

(756.6)

%

Income tax expense

 

 

(49)

 

 

(130)

 

 

81

 

(62.3)

%

Equity in earnings of investees

 

 

16,072

 

 

4,931

 

 

11,141

 

225.9

%

Income (loss) from continuing operations

 

 

(207,232)

 

 

38,805

 

 

(246,037)

 

(634.0)

%

Income (loss) from discontinued operations

 

 

(390)

 

 

3,615

 

 

(4,005)

 

nm

 

Net income (loss)

 

$

(207,622)

 

$

42,420

 

$

(250,042)

 

(589.4)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

70,589

 

 

58,300

 

 

12,289

 

21.1

%

Weighted average common shares outstanding (diluted)

 

 

70,589

 

 

58,385

 

 

12,204

 

20.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts (basic and diluted):

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations (basic)

 

$

(2.94)

 

$

0.67

 

$

(3.61)

 

nm

 

  Income (loss) from continuing operations (diluted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(2.94)

 

$

0.66

 

$

(3.60)

 

nm

 

Income (loss) from discontinued operations

 

$

(0.01)

 

$

0.06

 

$

(0.07)

 

nm

 

Net income (loss)

 

$

(2.94)

 

$

0.73

 

$

(3.67)

 

nm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of Funds From Operations and Normalized Funds From Operations(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(207,622)

 

$

42,420

 

 

 

 

 

 

Plus: Depreciation and amortization

 

 

 

 

 

 

 

 

51,675

 

 

49,254

 

 

 

 

 

 

Plus: Loss on impairment of real estate

 

 

 

 

 

 

 

 

 —

 

 

1,616

 

 

 

 

 

 

Plus: FFO attributable to SIR investment

 

 

 

 

 

 

 

 

43,961

 

 

11,230

 

 

 

 

 

 

Less: Equity in earnings  from SIR

 

 

 

 

 

 

 

 

(16,002)

 

 

(4,872)

 

 

 

 

 

 

Less: Increase in carrying value of asset held for sale

 

 

 

 

 

 

 

 

 —

 

 

(2,344)

 

 

 

 

 

 

Less: Net gain on sale of properties from discontinued operations

 

 

 

 

 

 

 

 

 —

 

 

(774)

 

 

 

 

 

 

Funds from operations

 

 

 

 

 

 

 

 

(127,988)

 

 

96,530

 

 

 

 

 

 

Plus: Acquisition related costs

 

 

 

 

 

 

 

 

459

 

 

1,290

 

 

 

 

 

 

Plus: Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

 —

 

 

541

 

 

 

 

 

 

Plus: Loss on issuance of shares by SIR

 

 

 

 

 

 

 

 

42,145

 

 

39

 

 

 

 

 

 

Plus: Loss on impairment of SIR investment

 

 

 

 

 

 

 

 

203,297

 

 

 —

 

 

 

 

 

 

Plus: Normalized FFO attributable to SIR investment

 

 

 

 

 

 

 

 

51,177

 

 

12,874

 

 

 

 

 

 

Less: FFO attributable to SIR investment

 

 

 

 

 

 

 

 

(43,961)

 

 

(11,230)

 

 

 

 

 

 

Less: Gain on early extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34)

 

 

 —

 

 

 

 

 

 

Normalized funds from operations

 

 

 

 

 

 

 

$

125,095

 

$

100,044

 

 

 

 

 

 

Funds from operations per common share (basic)

 

 

 

 

 

 

 

$

(1.81)

 

$

1.66

 

 

 

 

 

 

Funds from operations per common share (diluted)

 

 

 

 

 

 

 

$

(1.81)

 

$

1.65

 

 

 

 

 

 

Normalized funds from operations per common share (basic and diluted)

 

 

 

 

 

 

 

$

1.77

 

$

1.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Comparable properties consist of 67 properties (86 buildings) we owned on September 30, 2015 and which we owned continuously since January 1, 2014, and excludes one property (one building) classified as discontinued operations.

 

(2)

Acquired properties consist of four properties (five buildings) we owned on September 30, 2015, which we acquired during the period from January 1, 2014 to September 30, 2015.

 

(3)

Disposed property consists of one property (one building) we sold during the period from January 1, 2015 to September 30, 2015.

 

(4)

See footnote (4) on page 24 for a definition of NOI.

 

(5)

See footnote (5) on page 24 for a definition of FFO and Normalized FFO.

 

 

We refer to the 67 properties (86 buildings) we owned on September 30, 2015 and which we have owned continuously since January 1, 2014, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the four properties (five buildings) that we owned as of September 30, 2015, which we acquired during the period from January 1, 2014 to September 30, 2015, as acquired properties. We refer to the property (one building) that we sold during the period from January 1, 2014 to September 30, 2015 that was not classified as discontinued operations, as the disposed property.

 

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Our condensed consolidated statements of comprehensive income for the nine months ended September 30, 2015 include the operating results of the acquired properties for the entire period, as we acquired those properties prior to January 1, 2015, and the disposed property for less than the entire period, as that property was sold during the 2015 period. Our condensed consolidated statements of comprehensive income for the nine months ended September 30, 2014 include the operating results of the acquired properties for less than the entire period, as we acquired those properties during that period, and the disposed property for the entire period, as we sold that property after 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, 2015, compared to the nine month period ended September 30, 2014.

 

Rental income. The increase in rental income reflects the net effect of acquired and disposed properties offset by a decrease in rental income for comparable properties.  Rental income from the acquired properties increased $7,838. Rental income from the disposed property declined $5,834.   Rental income for comparable properties declined $1,546 due primarily to decreases in occupied space at certain of our properties in the 2015 period. Rental income includes non-cash straight line rent adjustments totaling $2,820 in the 2015 period and $3,378 in the 2014 period, and amortization of acquired leases and assumed lease obligations totaling ($862) in the 2015 period and ($630) in the 2014 period.

 

Real estate taxes. The increase in real estate taxes reflects the net effect of acquired and disposed properties and an increase in real estate taxes for comparable properties. Real estate taxes from the acquired properties increased $1,109.  Real estate taxes from the disposed property declined $857.  Real estate taxes for comparable properties increased $1,562 due primarily to the effect of higher tax assessments at certain of our properties in the 2015 period.

 

Utility expenses. The decrease in utility expenses primarily reflects the net effect of acquired and disposed properties  and a decrease in utility expenses for comparable properties. Utility expenses from the acquired properties increased $127.  Utility expense from the disposed property declined $572.  Utility expenses at comparable properties declined $839 due primarily to colder than normal temperatures experienced in certain parts of the United States during the winter of 2014.

 

Other operating expenses. The increase in other operating expenses reflects the net effect of acquired and disposed properties and an increase in expenses for comparable properties. Other operating expenses from the acquired properties increased $1,616.  Other operating expenses from the disposed property declined $841.  Other operating expenses at comparable properties increased $2,298 primarily as a result of increases in repair and maintenance costs at certain of our properties during the 2015 period and a reduction of property management fees from amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above (see Note 10 to the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report).

 

Depreciation and amortization. The increase in depreciation and amortization reflects the net effect of property acquisitions and dispositions and improvements made to certain of our properties since January 1, 2014. Depreciation and amortization from the acquired properties increased $4,288.  Depreciation and amortization from the disposed property declined $2,029.  Depreciation and amortization at comparable properties increased $162, due primarily to depreciation and amortization of improvements made to certain of our properties after January 1, 2014, partially offset by certain depreciable leasing related assets becoming fully depreciated in 2014 and 2015.

 

Loss on impairment of real estate.  Loss on asset impairment relates to the adjustment to reduce the carrying value of one property (one building) classified as held for sale during the 2014 period to estimated fair value less costs to sell.

 

Acquisition related costs. Acquisition related costs in both the 2015 and 2014 periods include legal and due diligence costs incurred in connection with our property acquisitions and other investment activity.

 

General and administrative. The decrease in general and administrative expenses primarily reflects higher audit, insurance and other administrative costs in the 2014 period, partially offset by an increase in net business management fees recognized in amounts due under our business management agreement as a result of our net property acquisitions since January 1, 2014 net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above (see Note 10 to the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report).

 

Interest and other income. The decrease in interest and other income is primarily the result of a smaller amount of investable cash in the 2015 period compared to the 2014 period.

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Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on those borrowings during the 2015 period compared to the 2014 period.

 

Gain (loss) on early extinguishment of debt.  We recorded a $34 gain on early extinguishment of debt in the 2015 period in connection with the repayment of a mortgage note.  We recorded a $541 loss on early extinguishment of debt in the 2014 period in connection with the repayment of a $500,000 term loan.

 

Loss on issuance of shares by SIR. Loss on issuance of shares by SIR is a result of  the issuance of common shares by SIR during the 2015 period at prices below our then per share carrying value of our SIR common shares.

 

Loss on impairment of SIR investment. We recorded a $203,297 loss on impairment in the 2015 period to reduce the carrying value of our SIR investment to its estimated fair value.

 

Income tax expense. The decrease in income tax expense reflects lower operating income in certain jurisdictions in the 2015 period compared to the 2014 period.

 

Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and AIC, and amortization of the difference between the basis of our SIR investment and our proportionate share of SIR’s total shareholders’ equity book value.

 

Income (loss) from discontinued operations. Income (loss) from discontinued operations reflects operating results of two properties (two buildings) sold during the 2014 period, and one property (one building) included in discontinued operations and held for sale as of September 30, 2015. Income (loss) from discontinued operations for the 2014 period includes a $2,344 increase in the carrying value of one property (one building) included in discontinued operations and a $774 gain from the sale of one property (one building) included in discontinued operations.

 

Net income (loss). We experienced a net loss in the 2015 period compared to net income in the 2014 period as a result of the changes noted above. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our Operating Liquidity and Resources (dollar amounts in thousands)

 

Our principal source of funds to meet operating and capital expenses and debt service obligations and pay distributions on our common shares is the operating cash flow we generate from the rental income from our properties and the distributions we receive from our investment in SIR. We believe that our operating cash flow will be sufficient to meet our operating and capital expenses and debt service obligations and pay distributions on our common shares for the next 12 months and for 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;

 

· our ability to control operating cost increases at our properties;

 

·

our ability to purchase additional properties which produce cash flows from operations in excess of our  cost of acquisition capital and property operating expenses; and

 

· our receipt of distributions from our investment in SIR.

 

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

 

Our changes in cash flows for the nine months ended September 30, 2015 compared to the same period in 2014 were as follows: (i) cash provided by operating activities decreased from $92,041 in 2014 to $89,053 in 2015; (ii) cash used in investing activities decreased from $741,849 in 2014 to $65,793 in 2015; and (iii) cash flow from financing activities changed from $647,073 of cash provided by financing activities in 2014 to $25,745 cash used in financing activities in 2015.

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The decrease in cash provided by operating activities for the nine month period ended September 30, 2015 as compared to the corresponding prior year period primarily reflects increased payments for interest on borrowings and a decrease in property NOI the 2015 period,  partially offset by an increase in distributions received from our investment in SIR common shares in the 2015 periodThe decrease in cash used in investing activities for the nine month period ended September 30, 2015 as compared to the corresponding prior year period was due primarily to our acquisition of approximately 21.5 million SIR common shares in the 2014 period. The change in cash (used in) provided by financing activities for the nine months period ended September 30, 2015 as compared to the corresponding prior year period was due primarily to a common equity offering and an unsecured senior debt issuance during the 2014 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 $750,000 revolving credit facility.  The maturity date of our revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 31, 2020. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium, which was 125 basis points at September 30, 2015.  We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2015. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow and repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of September 30, 2015, the annual interest rate payable on borrowings under our revolving credit facility was 1.4%. As of September 30, 2015 and October 27, 2015, we had $114,000 and $107,000, respectively, outstanding and $636,000 and $643,000, respectively, available to borrow under our revolving credit facility.

 

Our $750,000 revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders, which also governs our two unsecured term loans:

 

·

Our $300,000 unsecured term loan, which matures on March 31, 2020, is prepayable without penalty at any time. The amount outstanding under our $300,000 term loan bears interest at LIBOR plus a premium, which was 140 basis points at September 30, 2015. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2015, the annual interest rate for the amount outstanding under our $300,000 term loan was 1.6%.

·

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 term loan is repaid prior to November 22, 2015, a prepayment premium of 2.0% of the amount repaid would be payable. If our $250,000 term loan is repaid during the period from November 22, 2015 to November 21, 2016, a prepayment premium of 1.0% of the amount repaid would be payable. Subsequent to November 21, 2016, no prepayment premium would be payable. The amount outstanding under our $250,000 term loan bears interest at LIBOR plus a premium, which was 180 basis points at September 30, 2015. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2015, the annual interest rate for the amount outstanding under our $250,000 term loan was 2.0%.

Our credit agreement also includes a feature under which the maximum borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

 

Our $350,000 of 3.75% senior unsecured notes are due 2019 and require semi-annual payment of interest only.

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates.  Our $135,870 in mortgage debt generally requires monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of September 30, 2015, we have estimated unspent leasing related obligations of $8,629Our debt maturities (other than our revolving credit facility) are as follows: $429 in 2015, $107,933 in 2016, $1,549 in 2017, $1,671 in 2018, $359,440 in 2019 and $564,848 thereafter.    

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from our property sales, distributions received from our investment in SIR, assumption of mortgage debt and net proceeds from offerings of equity or debt securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions.

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When significant amounts are outstanding under our revolving credit facility or the maturity date of our revolving credit facility, term loans, 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 equity or debt securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may also elect to place new mortgages on properties we own as a source of financing. 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 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 26, 2015, we paid a distribution to common shareholders of $0.43 per share, or approximately  $30,252On May 26, 2015, we paid a distribution to common shareholders of $0.43 per share, or approximately $30,256.  On August 24, 2015, we paid a distribution to common shareholders of $0.43 per share, or $30,566.    We funded these distributions using cash on hand and borrowings under our revolving credit facility. On October 12, 2015, we declared a distribution payable to common shareholders of record on October 23, 2015 of $0.43 per share, or approximately  $30,584. We expect to pay this distribution on or about November 23, 2015 using cash on hand and borrowings under our revolving credit facility. 

 

In July 2015, we repaid, at par, a $47,083 mortgage note bearing interest at 5.73% which was secured by a property (two buildings) located in Indianapolis, IN with cash on hand and borrowings under our revolving credit facility. This mortgage was scheduled to mature in October 2015.

 

Off Balance Sheet Arrangements

 

As of September 30, 2015, 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, 2015 consist of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan, our $250,000 unsecured term loan, $350,000 of publicly issued senior unsecured notes and five secured mortgage loans that were assumed in connection with certain of our acquisitions. Our publicly issued senior unsecured notes are governed by an indenture.  Our senior notes indenture and its supplement and our credit agreement for our revolving credit facility and our two term loans provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager and property manager. Our senior notes indenture and its supplement and our credit agreement also contain a number of covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and require us to maintain various financial ratios. Our mortgage loans are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants.  As of September 30, 2015, we believe we were in compliance with the terms and conditions of our respective covenants under our senior notes indenture and its supplement and our credit agreement.

Neither our credit agreement nor our senior unsecured notes indenture and its supplement contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement our highest senior unsecured debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded by certain credit rating agencies, our interest expense and related costs under our credit agreement would increase.

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Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indenture and its supplement contain cross default provisions to any other debts of more than $25,000.

Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc. and others related to them. We also have relationships and historical and continuing transactions with other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc. For further information about these and other such relationships and related person transactions, please see Note 10 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, our Annual Report, our definitive Proxy Statement for our 2015 Annual Meeting of Shareholders, our Current Report on Form 8-K filed with the SEC on June 8, 2015 and our other filings with the SEC. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these related person transactions and relationships. Our filings with the SEC are available at the SEC’s website at www.sec.gov. Copies of certain of our agreements with these related parties are publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov.

We believe that our agreements with related persons are on commercially reasonable terms. We also believe that our relationships with such related persons and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its affiliates provide management services.

 

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, 2014. 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, 2015, 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

Senior notes

 

$

350,000

 

3.75

%  

$

13,307

 

2019

 

Semi-annually

Mortgage

 

 

83,000

 

5.55

%  

 

4,670

 

2016

 

Monthly

Mortgage

 

 

23,586

 

6.21

%  

 

1,485

 

2016

 

Monthly

Mortgage

 

 

14,215

 

5.88

%  

 

847

 

2021

 

Monthly

Mortgage

 

 

8,787

 

7.00

%  

 

624

 

2019

 

Monthly

Mortgage

 

 

6,282

 

8.15

%  

 

519

 

2021

 

Monthly

 

 

$

485,870

 

 

 

$

21,452

 

 

 

 


(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 issued or assumed these debts.  For more information, see Notes 7 and 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Our senior notes require semi-annual interest payments through maturity. Our mortgages generally 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 $4,924.

 

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, 2015, 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 change in interest rates would change the fair value of those obligations by approximately $10,624.

 

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Some of our fixed rate secured debt arrangements allow 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, 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, 2015, our floating rate debt consisted of $114,000 outstanding under our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan and our $250,000 unsecured term loan. Our revolving credit facility matures in January 2019, 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 January 2020. No principal repayments are required under our revolving credit facility or our term loans prior to maturity, and repayments under our revolving credit facility may be made, and redrawn subject to conditions, at any time without penalty. Our $300,000 unsecured term loan matures on March 31, 2020. Our $250,000 unsecured term loan matures on March 31, 2022. Amounts outstanding under our unsecured term loans may be repaid at any time, but after they are repaid amounts may not be redrawn. Our $300,000 unsecured term loan may be repaid without penalty at any time. If our $250,000 unsecured term loan is repaid prior to November 22, 2015, a prepayment premium of 2.0% of the amount repaid would be incurred. If our $250,000 unsecured term loan is repaid during the period from November 22, 2015 to November 21, 2016, a prepayment premium of 1.0% of the amount repaid would be incurred.  Subsequent to November 21, 2016, no prepayment premium would be incurred.

 

Borrowings under our revolving credit facility and term loans are in U.S. dollars and bear interest at a rate of LIBOR plus premiums that are 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. In addition, upon renewal or refinancing of our revolving credit facility or term loans, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.

 

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, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

 

1.7

%  

$

664,000

 

$

11,445

 

$

0.16

100 bps increase

 

2.7

%  

$

664,000

 

$

18,177

 

$

0.26

(1)

Weighted based on the respective interest rates and outstanding borrowings under our revolving credit facility and term loans as of September 30, 2015.  

(2)

Based on the weighted average shares outstanding (diluted) for the nine months ended September 30, 2015.

 

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, 2015 if we were fully drawn on our revolving credit facility and our term loans 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, 2015

 

1.6

%  

$

1,300,000

 

$

21,089

 

$

0.30

100 bps increase

 

2.6

%  

$

1,300,000

 

$

34,269

 

$

0.49

(1)

Weighted based on the respective interest rates and outstanding borrowings under our revolving credit facility (assuming fully drawn) and our term loans as of September 30, 2015

(2)

Based on the weighted average shares outstanding (diluted) for the nine months ended September 30, 2015.

 

The foregoing tables show the impact of an immediate change in floating interest rates as of September 30, 2015. 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 loans or our other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.

 

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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, our President and Chief Operating Officer and our 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, our President and Chief Operating Officer and our 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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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 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 OR GOVERNMENT BUDGET CONSTRAINTS,

 

·

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

 

·

OUR EXPECTATION THAT WE WILL BENEFIT FINANCIALLY FROM OUR OWNERSHIP INTEREST IN SIR,

 

·

OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS,

 

·

THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,

 

·

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 EXPECTATIONS REGARDING DEMAND FOR LEASED SPACE BY THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,

 

·

OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,

 

·

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

 

·

OUR ABILITY TO APPROPRIATELY BALANCE OUR DEBT AND EQUITY CAPITAL,

 

·

OUR CREDIT RATINGS,

 

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·

OUR EXPECTATION THAT WE WILL BENEFIT FROM OUR OWNERSHIP OF RMR INC.,

 

·

OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AIC AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,

 

·

THE CREDIT QUALITIES OF OUR TENANTS,

 

·

OUR TAX STATUS AS A REIT,

 

·

OUR EXPECTED DISTRIBUTION OF RMR INC. CLASS A COMMON STOCK TO OUR SHAREHOLDERS, 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 BASIS 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 PROPERTIES ARE LOCATED AND WITH RESPECT TO GOVERNMENT LEASED PROPERTIES,

 

·

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

 

·

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 LLC, RMR INC., SIR, AIC 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:

 

·

OUR ABILITY TO MAKE PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS AND TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, THE CAPITAL COSTS WE INCUR TO LEASE OUR PROPERTIES AND OUR RECEIPT OF DISTRIBUTIONS FROM SIR.  WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS OR TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS ON OUR COMMON SHARES AND FUTURE DISTRIBUTIONS MAY BE REDUCED OR ELIMINATED,

 

·

OUR ABILITY TO GROW OUR BUSINESS AND INCREASE DISTRIBUTIONS TO OUR SHAREHOLDERS 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,

 

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·

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

 

·

SOME GOVERNMENT TENANTS MAY EXERCISE THEIR RIGHTS TO VACATE THEIR SPACE BEFORE THE STATED EXPIRATION OF THEIR LEASES, AND WE MAY BE UNABLE TO OBTAIN 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,

 

·

CONTINGENCIES IN OUR PENDING AND FUTURE ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING ACQUISITIONS AND SALES MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE,

 

·

WE ARE MARKETING TWO OFFICE PROPERTIES WITH AN AGGREGATE NET BOOK VALUE OF $15.4 MILLION FOR SALE. WE MAY ELECT NOT TO SELL THESE PROPERTIES AND THERE CAN BE NO ASSURANCE THAT WE WILL COMPLETE A SALE OF EITHER OF THESE PROPERTIES OR THAT ANY SUCH SALE WOULD REALIZE NET PROCEEDS IN AN AMOUNT AT LEAST EQUAL TO OUR BOOK VALUES OF THESE PROPERTIES,

 

·

CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR UNSECURED REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,

 

·

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

 

·

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

 

·

THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS MAY BE INCREASED TO UP TO $2.5 BILLION ON A COMBINED BASIS IN CERTAIN CIRCUMSTANCES; HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,

 

·

WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING CERTAIN OTHER CONDITIONS.  HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET,

 

·

WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING RMR LLC, RMR INC., SIR, AIC AND OTHERS AFFILIATED WITH THEM 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,

 

·

THE MARGINS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY AND TERM LOANS AND THE FACILITY FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR CREDIT RATINGS.  FUTURE CHANGES IN OUR CREDIT RATINGS MAY CAUSE THE INTEREST AND FEES WE PAY TO CHANGE,

 

·

SIR MAY REDUCE THE AMOUNT OF ITS DISTRIBUTIONS TO ITS SHAREHOLDERS, INCLUDING US,

 

·

WE MAY BE UNABLE TO SELL OUR SIR COMMON SHARES FOR AN AMOUNT EQUAL TO OUR CARRYING VALUE OF THOSE SHARES AND ANY SUCH SALE MAY BE AT A DISCOUNT TO MARKET PRICE BECAUSE OF THE LARGE SIZE OF OUR SIR HOLDINGS OR OTHERWISE,

 

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·

THE PURCHASE PRICE WE PAID FOR THE RMR INC. SHARES AND OUR ECONOMIC OWNERSHIP INTEREST IN RMR LLC ARE STATED IN THIS QUARTERLY REPORT ON FORM 10-Q.   AN IMPLICATION OF THESE STATEMENTS MAY BE THAT THE RMR INC. SHARES WE EXPECT TO DISTRIBUTE TO OUR SHAREHOLDERS WILL HAVE A MARKET VALUE AT LEAST EQUAL TO THE VALUE WE PAID FOR THE RMR INC. SHARES.  IN FACT, THE VALUE OF THE RMR INC. SHARES MAY BE DIFFERENT FROM THE PRICE WE PAID FOR THE RMR INC. SHARES.  THE MARKET VALUE OF THE RMR INC. SHARES WILL DEPEND UPON VARIOUS FACTORS, INCLUDING SOME THAT ARE BEYOND OUR CONTROL, SUCH AS MARKET CONDITIONS GENERALLY AT THE TIME THE RMR INC. SHARES ARE AVAILABLE FOR TRADING.  THERE CAN BE NO ASSURANCE PROVIDED REGARDING THE PRICE AT WHICH THE RMR INC. SHARES WILL TRADE IF AND WHEN THEY ARE DISTRIBUTED AND LISTED ON A NATIONAL STOCK EXCHANGE,

 

·

WE CURRENTLY EXPECT TO DISTRIBUTE APPROXIMATELY HALF OF THE RMR INC. SHARES WE ACQUIRED (EXCLUDING SHARES WE MAY RECEIVE AS A SHAREHOLDER OF SIR, WHICH WE CURRENTLY INTEND TO RETAIN) TO OUR SHAREHOLDERS.  THE PROCESS OF PREPARING A REGISTRATION STATEMENT FOR THE DISTRIBUTION OF THE RMR INC. SHARES REQUIRES EXTENSIVE LEGAL AND ACCOUNTING SERVICES.  THE REGISTRATION STATEMENT IS SUBJECT TO REVIEW BY SEC STAFF, WHICH MAY TAKE CONSIDERABLE TIME TO COMPLETE.  THE LISTING OF THE RMR INC. SHARES ON A NATIONAL STOCK EXCHANGE WILL ALSO BE SUBJECT TO THE SATISFACTION OF THE LISTING REQUIREMENTS AND APPROVAL OF THE APPLICABLE STOCK EXCHANGE.  WE CAN PROVIDE NO ASSURANCE WHEN OR IF THE REGISTRATION STATEMENT WILL BE DECLARED EFFECTIVE BY THE SEC, THAT THE RMR INC. SHARES WILL BE APPROVED FOR LISTING ON A NATIONAL STOCK EXCHANGE OR WHEN THE DISTRIBUTION OF THE RMR INC. SHARES WILL OCCUR, IF EVER, AND

 

·

THE BUSINESS MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE BEEN AMENDED AND EXTENDED FOR 20 YEAR TERMS. THE AMENDED MANAGEMENT AGREEMENTS INCLUDE TERMS WHICH PERMIT EARLY TERMINATION AND EXTENSIONS IN CERTAIN CIRCUMSTANCES.  ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR 20 YEARS OR FOR SHORTER OR LONGER TERMS.

 

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, ACTS OF TERRORISM, NATURAL DISASTERS OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.

 

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT OR IN OUR OTHER FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR 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.

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Part II.   Other Information

 

Item 1A.  Risk Factors

 

There have been no material changes to risk factors from those we previously disclosed in our Annual Report and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Issuer purchase of equity securities.    The following table provides information about our purchases of our equity securities during the quarter ended September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

 

Total Number of

 

 

Approximate Dollar

 

 

 

 

 

 

 

 

Shares Purchased

 

 

Value of Shares that

 

 

 

 

 

 

 

 

as Part of Publicly

 

 

May Yet Be Purchased

 

 

Number of Shares

 

Average Price

 

 

Announced Plans

 

 

Under the Plans or

Calendar Month

 

Purchased (1)

 

Paid per Share

 

or Programs

 

Programs

September 2015

 

10,721

 

$

16.12

 

$

 

$

Total

 

10,721

 

$

16.12

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

During September 2015, all common share purchases were made to satisfy certain of our officers’ and other RMR LLC employees’ tax withholding and payment obligations in connection with the vesting of awards of our restricted common shares.  We repurchased these shares at their fair market value based upon the trading price of our common shares on the repurchase date.

 

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Item 6. Exhibits

 

 

 

Exhibit

Number

Description

 

 

3.1

Composite Copy of Amended and Restated Declaration of Trust, dated September 8, 2009, as amended to date. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 28, 2014.)

 

 

3.2

Composite Copy of Amended and Restated Bylaws of the Company, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.)

 

 

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.)

 

 

4.2

Indenture, dated as of August 18, 2014, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 18, 2014.)

 

 

4.3

Supplemental Indenture No. 1, dated as of August 18, 2014, between the Company and U.S. Bank National Association, relating to the Company’s 3.75% Senior Notes due 2019, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 18, 2014.)

 

 

10.1

First Amendment to 2009 Incentive Share Award Plan. (Filed herewith.)

 

 

10.2

Form of Restricted Share Agreement.  (Filed herewith)

 

 

12.1

Computation of Ratio of Earnings to Fixed Charges. (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, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of 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.)

 

 

 

 

 

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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, 2015

 

 

 

 

 

 

 

By:

/s/ Mark L. Kleifges

 

 

Mark L. Kleifges 
Treasurer and Chief Financial Officer 
(principal financial and accounting officer) 
Dated: October 29, 2015

 

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