OFFICE PROPERTIES INCOME TRUST - Quarter Report: 2016 March (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 March 31, 2016

 

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)

 

 

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):

 

 

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 April 26, 2016: 71,126,308

 

 

 

GOVERNMENT PROPERTIES INCOME TRUST

 

FORM 10-Q

 

March 31, 2016

 

INDEX

 

 

 

 

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

 

PART I.       Financial Information

 

Item 1.  Financial Statements

 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

(unaudited)

 

 

 

 

See accompanying notes.

 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

 

 

 

See accompanying notes.

 

 

Note 1.    Basis of Presentation

 

The accompanying condensed consolidated financial statements of Government Properties Income Trust and its subsidiaries, or 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 consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015, 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. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

 

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

 

On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, 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. The implementation of this update did not have an impact in our condensed consolidated financial statements.

 

On January 1, 2016, we adopted FASB 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, and 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. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loans, senior unsecured notes and mortgage notes payable of $3,510, $2,172 and $344, respectively, were reclassified from assets to the associated debt liability in our condensed consolidated balance sheets.

 

On January 1, 2016, we adopted FASB 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 they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect available for sale equity investments we hold.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016.  We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.   

 

Note 3.    Per Common Share Amounts

 

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):

 

 

 

 

 

 

 

 

Note 4.   Real Estate Properties

 

As of March 31, 2016, we owned 72 properties (92 buildings), with an undepreciated carrying value of $1,770,983,  excluding one property (one building) classified as discontinued operations with an undepreciated carrying value of $12,260. We generally lease space at our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leases expiring between 2016 and 2032.  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 March 31, 2016, we entered into 20 leases for 522,962 rentable square feet, including a 25,579 square foot expansion to be constructed at an existing property, for a weighted (by rentable square feet) average lease term of 11.6 years and we made commitments for approximately $20,469 of leasing related costs. We have estimated unspent leasing related obligations of $22,752 as of March 31, 2016. In addition, prior to the commencement of the lease, we have committed to redevelop and expand the existing property referenced above at an estimated cost of approximately $12,800.

 

Acquisition Activities

 

During the three months ended March 31, 2016, we acquired one office property (one building) located in Sacramento, CA with 337,811 rentable square feet.  This property was 86% leased, of which 71% was leased to the State of California and occupied by three separate agencies on the date of acquisition.  The purchase price was $79,244, excluding acquisition costs.  Our allocation of the purchase price of this acquisition based on the estimated fair values of

the acquired assets and assumed liabilities is presented in the table below. The allocation of the purchase price is based on preliminary estimates and may change upon completion of third party appraisals.

 

 

 

In April 2016, we exercised our option to purchase for $1,623 an adjacent land parcel at one of our existing properties in Atlanta, GA. We expect this transaction to close during the third quarter of 2016.

 

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

 

Disposition Activities – Continuing Operations

 

In 2015, we began marketing for sale an office property ( one building) in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 at March 31, 2016.  In March 2016, we entered into an agreement to sell this property.  The contract sales price is $4,500, which amount is before transaction costs we may incur.  This sale is subject to conditions and is currently expected to occur in the third quarter of 2016.  We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or that its terms will not change. We have classified this property as held for sale as of March 31, 2016.  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:

 

 

Disposition Activities – Discontinued Operations

 

In March 2016, we entered into an agreement to sell an office property ( one building) in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at March 31, 2016.  The contract sales price is $14,750, which amount is before transaction costs we may incur.  This sale is subject to conditions, including the purchaser obtaining certain zoning entitlements, and is currently expected to occur in the first quarter of 2017.  We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or that its terms will not change. We have classified this property, 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, as a discontinued operation in our condensed consolidated financial statements. Summarized balance sheet and income statement information for the property is as follows:

 

Balance Sheets:

 

 

 

Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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 $149 and $663 for the three months ended March 31, 2016 and 2015, respectively.  Rents receivable include $19,144 and $18,995 of straight line rent receivables at March 31, 2016 and December 31, 2015, 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 three other government tenants combined were responsible for approximately 92.8% and 92.7% of our annualized rental income, excluding one property (one building) classified as discontinued operations, as of March 31, 2016 and 2015, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 64.6% and 67.7% of our annualized rental income, excluding one property classified as discontinued operations, as of March 31, 2016 and 2015, respectively.

 

Geographic Concentration

 

At March 31, 2016, our 72 properties (92 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, Maryland, New York and Massachusetts were responsible for approximately 14.6%, 10.0%, 9.9%, 8.8%, 8.2%, 8.0% and 5.3% of our annualized rental income as of March 31, 2016, respectively.

 

Note 7.   Indebtedness

 

Our principal debt obligations at March 31, 2016 were: (1) outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) $550,000 aggregate outstanding principal amount of term loans (3) $350,000 of senior unsecured notes; and (4) $28,592 aggregate principal amount of mortgage notes. 

 

Our $750,000 unsecured revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our unsecured revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our unsecured revolving credit facility by one year to January 31, 2020.  We can borrow, repay and reborrow funds available under our unsecured revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at March 31, 2016, on borrowings under our unsecured revolving credit facility.  We also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility, which was 25 basis points per annum at March 31, 2016.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of March 31, 2016, the annual interest rate payable on borrowings under our unsecured revolving credit facility was 1.6% and the weighted average annual interest rate for borrowings under our unsecured revolving credit facility was 1.6% and 2.0%, respectively, for the three months ended March 31, 2016 and 2015.  As of March 31, 2016 and April 26, 2016, we had $311,000 and $303,000 outstanding under our unsecured revolving credit facility, respectively.

 

Our $300,000 unsecured term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at a rate of LIBOR plus a premium, which was 140 basis points per annum at March 31, 2016, on the amount outstanding under our $300,000 unsecured term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings.  As of March 31, 2016, the annual interest rate for the amount outstanding under our $300,000 unsecured term loan was 1.8%. The weighted average annual interest rate under our $300,000 unsecured term loan was 1.8% and 1.6%, respectively, for the three months ended March 31, 2016 and 2015.

 

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 unsecured term loan is repaid on or prior 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. We are required to pay interest at a rate of LIBOR plus a premium, which was 180 basis points per annum as of March 31, 2016, on the amount outstanding under our $250,000 unsecured term loan.  The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of March 31, 2016, the annual interest rate for the amount outstanding under our $250,000 unsecured term loan was 2.2%.  The weighted average annual interest rate under our $250,000 unsecured term loan was 2.2% and 2.0%, respectively, for the three months ended March 31, 2016 and 2015.

 

Our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan and our $250,000 unsecured 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 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 unsecured 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, or RMR LLC, ceasing to act as our business manager and property manager.  Our credit agreement and our senior unsecured notes indenture and its supplement also contain a number of covenants, including covenants that restrict our ability to incur debts, require us to maintain certain financial ratios and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances.  We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indenture and its supplement at March 31, 2016.

 

In February 2016, we repaid, at par, a $23,473 mortgage note requiring annual interest of 6.21% which was secured by one office property (one building) located in Landover, MD. This mortgage note was scheduled to mature in August 2016.  We recorded a loss on extinguishment of debt of $21 in the three months ended March 31, 2016, which represented unamortized debt issuance costs related to this note.

 

In March 2016, we repaid, at par, an $83,000 mortgage note requiring annual interest of 5.55% which was secured by one office property (two buildings) located in Reston, VA.  This mortgage note was scheduled to mature in April 2016.  We recorded a gain on extinguishment of debt of $125 in the three months ended March 31, 2016, which represented the net unamortized debt premium and debt issuance costs related to this note.

 

At March 31, 2016, three of our properties (three buildings) with an aggregate net book value of $54,684 secured three mortgage notes with an aggregate principal amount of $28,592. 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

 

The table below presents certain of our assets measured at fair value at March 31, 2016, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:

 

 

In addition to the assets described in the table above, 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 March 31, 2016 and December 31, 2015, 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:

 

 

 

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 25, 2016, we paid a regular quarterly distribution to common shareholders of record on January 22, 2016 of $0.43 per share, or $30,584.    

 

On April 13, 2016, we declared a regular quarterly distribution payable to common shareholders of record on April 25, 2016, in the amount of $0.43 per share, or $30,584.    We expect to pay this distribution on or about May 23, 2016 using cash on hand and borrowings under our unsecured revolving credit facility.

 

Cumulative Other Comprehensive Income (Loss)

Cumulative other comprehensive income (loss) represents the unrealized gain on the RMR Inc. shares we own and our share of the comprehensive income (loss) of Select Income REIT, or SIR, and Affiliates Insurance Company, or AIC. The following table presents changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the three months ended March 31, 2016:

 

 

 

Note 10.   Related Person Transactions

 

We have relationships and historical and continuing transactions with RMR LLC and others related to it, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees or officers of us.  These relationships include our ownership of approximately 27.9% of the outstanding common shares of SIR, at March 31, 2016.  For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.

RMR LLC:  Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $2,508 and $2,561 for the three months ended March 31, 2016 and 2015, respectively.  No incentive fees were estimated to be payable to RMR LLC for the three months ended March 31, 2016 and 2015, respectively.  The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

In accordance with the terms of our business management agreement, we issued 11,157 of our common shares to RMR LLC for the three months ended March 31, 2015 as payment for a part of the business management fee we recognized for that period.  Beginning June 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,109 and $2,016 for the three months ended March 31, 2016 and 2015, respectively.  These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf.  Our property level operating expenses are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC.  We reimbursed RMR LLC $2,944 and $2,510 for property management related expenses for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income (loss).

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plan.    In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services.  The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $234 and $314 for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

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 $91 and $15 for the three months ended March 31, 2016 and 2015, respectively.

RMR Inc.:  In June 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services, including SIR, or collectively, the Other REITs, participated in a transaction whereby we and the Other REITs each acquired shares of class A common stock of RMR Inc. and simultaneously amended our business and property management agreements with RMR LLC to, among other things, provide for continuing 20 year terms.  RMR Inc. is the managing member of RMR LLC and RMR LLC is a subsidiary of RMR Inc.  The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees.

In connection with our acquisition of shares of class A common stock of RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares; this liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets.  We are amortizing this liability ratably through December 31, 2035 as a reduction to our management fees expense.  For the three months ended March 31, 2016, we amortized $272 of this liability, which amount is reflected in the net business management and property management fee amounts for the period referenced above.  As of March 31, 2016, the unamortized amount of this liability was $21,482.

As of March 31, 2016, we own 1,214,225 shares of class A common stock of RMR Inc.  We receive dividends on these shares as declared and paid by RMR Inc. to all holders of shares of RMR Inc. class A common stock. We did not receive any dividends on these shares during the three months ended March 31, 2016. However, on April 13, 2016, RMR Inc. declared a dividend of $0.2993 on its shares of class A common stock payable to shareholders of record on April 25, 2016.  RMR Inc. has indicated that this dividend represents a regular quarterly dividend of $0.25 per share of class A common stock for the quarter ended March 31, 2016 plus a pro rata dividend of $0.0493 per share of class A common stock for the period from December 14, 2015 to December 31, 2015.  RMR Inc. has indicated that it expects to pay this dividend on or about May 19, 2016.

SIR:  We receive distributions on the common shares of SIR we own as declared and paid by SIR to all holders of its common shares. During the three months ended March 31, 2016 and 2015, we received distributions of $12,459 and $13,530, respectively, on our SIR common shares. In addition, on April 13, 2016, SIR declared a dividend of $0.50 per common share payable to shareholders of record on April 25, 2016. SIR has indicated that it expects to pay this dividend on or about May 19, 2016. For additional information about our ownership of SIR shares, see Note 11 below.

AIC:  We and six other companies to which RMR LLC provides management services each own in equal amounts of AIC.  We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.

As of March 31, 2016, our investment in AIC had a carrying value of $7,075; this amount is included in other assets in our condensed consolidated balance sheets.  We recognized income of $77 and $72 related to our investment in AIC for the three months ended March 31, 2016 and 2015, respectively.  Our other comprehensive income (loss) includes our proportional share of unrealized gains on securities which are owned by AIC of $52 and $45 for the three months ended March 31, 2016 and 2015, respectively.

Note 11.   Equity Investment in Select Income REIT

 

As of March 31, 2016, 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 (loss).  For the three months ended March 31, 2016 and 2015, we recorded $9,857 and $2,176 of equity in the earnings of SIR, respectively. Our other comprehensive income (loss) includes unrealized gains attributable to our investment in SIR of $4,492 and $13 for the three months ended March 31, 2016 and 2015, respectively.

 

As of March 31, 2016, our investment in SIR had a carrying value of $493,259 and a market value, based on the closing price of SIR common shares on the New York Stock Exchange on March 31, 2016, of $574,370. 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 the market value of our investment is below our cost basis, 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 may record an impairment charge to adjust the basis of the investment to its fair value.

 

During the three months ended March 31, 2015, SIR issued 28,453,447 common shares, which included 28,439,111 common shares issued in connection with SIR’s acquisition of Cole Corporate Income Trust, Inc. on January 29, 2015.  We recognized a loss on issuance of shares by SIR of $40,771 during the three months ended March 31, 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.

 

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 acquisitions.  This amortization decreased our equity in the earnings of SIR by $2,564 for the three months ended March 31, 2015.  We recorded a loss on impairment of our SIR investment during the three months ended June 30, 2015 resulting 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 $740 for the three months ended March 31, 2016.

 

During the three months ended March 31, 2016 and 2015, we received cash distributions from SIR totaling $12,459 and $13,530, respectively.

 

The following summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the three months ended March 31, 2016, or the SIR Quarterly Report. 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.

 

Condensed Consolidated Balance Sheets:

 

 

 

Condensed Consolidated Statements of Income:

 

 

 

 

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.