EX-99.3 11 gov_123116x10kex993.htm EXHIBIT 99.3 Exhibit
Item 15.  Exhibits and Financial Statement Schedules
(a)
Index to Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement schedules of Select Income REIT are included on the pages indicated:



Report of Independent Registered Public Accounting Firm
To the Trustees and Shareholders of Select Income REIT
We have audited the accompanying consolidated balance sheets of Select Income REIT (the ‘‘Company’’) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2017 expressed an unqualified opinion thereon.
 
 
 
 
/s/ Ernst & Young LLP
Boston, Massachusetts
February 16, 2017


1


SELECT INCOME REIT
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
 
 
December 31,
 
 
2016
 
2015
ASSETS
 
 
 
 
Real estate properties:
 
 
 
 
Land
 
$
1,038,686

 
$
1,036,425

Buildings and improvements
 
3,103,734

 
3,083,243

 
 
4,142,420

 
4,119,668

Accumulated depreciation
 
(242,628
)
 
(164,779
)
 
 
3,899,792

 
3,954,889

Acquired real estate leases, net
 
506,298

 
566,195

Cash and cash equivalents
 
22,127

 
17,876

Restricted cash
 
44

 
1,171

Rents receivable, including straight line rents of $117,008 and $92,264, respectively, net of allowance for doubtful accounts of $873 and $464, respectively
 
124,089

 
99,307

Deferred leasing costs, net
 
10,051

 
7,221

Other assets, net
 
77,281

 
37,686

Total assets
 
$
4,639,682

 
$
4,684,345

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Unsecured revolving credit facility
 
$
327,000

 
$
303,000

Unsecured term loan, net
 
348,373

 
347,876

Senior unsecured notes, net
 
1,430,300

 
1,426,025

Mortgage notes payable, net
 
245,643

 
286,706

Accounts payable and other liabilities
 
101,605

 
105,403

Assumed real estate lease obligations, net
 
77,622

 
86,495

Rents collected in advance
 
18,815

 
16,295

Security deposits
 
11,887

 
11,845

Due to related persons
 
4,475

 
3,740

Total liabilities
 
2,565,720

 
2,587,385

 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
Common shares of beneficial interest, $.01 par value: 125,000,000 shares authorized; 89,427,869 and 89,374,029 shares issued and outstanding, respectively
 
894

 
894

Additional paid in capital
 
2,179,669

 
2,178,477

Cumulative net income
 
441,307

 
324,986

Cumulative other comprehensive income (loss)
 
20,472

 
(19,587
)
Cumulative common distributions
 
(568,380
)
 
(387,810
)
Total shareholders' equity
 
2,073,962

 
2,096,960

Total liabilities and shareholders' equity
 
$
4,639,682

 
$
4,684,345

 
See accompanying notes.


2


SELECT INCOME REIT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, except per share data)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
Rental income
 
$
387,015

 
$
364,139

 
$
189,743

Tenant reimbursements and other income
 
74,992

 
64,226

 
32,937

Total revenues
 
462,007

 
428,365

 
222,680


 
 
 
 
 
 
EXPENSES:
 
 
 
 
 
 
Real estate taxes
 
42,879

 
37,460

 
22,202

Other operating expenses
 
52,957

 
41,953

 
18,597

Depreciation and amortization
 
133,762

 
122,906

 
41,054

Acquisition related costs
 
306

 
21,987

 
7,348

General and administrative
 
28,602

 
25,859

 
14,881

Loss on asset impairment
 
5,484

 

 

Total expenses
 
263,990

 
250,165

 
104,082

 
 
 
 
 
 
 
Operating income
 
198,017

 
178,200

 
118,598

 
 
 
 
 
 
 
Dividend income
 
1,268

 
1,666

 

Interest expense (including net amortization of debt issuance costs, premiums and discounts of $5,508, $5,100 and $1,579, respectively)
 
(82,620
)
 
(73,885
)
 
(12,974
)
(Loss) gain on early extinguishment of debt
 

 
(6,845
)
 
243

Loss on distribution to common shareholders of The RMR Group Inc. common stock
 

 
(23,717
)
 

Income before income tax expense, equity in earnings of an investee and gain on sale of property
 
116,665

 
75,419

 
105,867

Income tax expense
 
(448
)
 
(515
)
 
(175
)
Equity in earnings of an investee
 
137

 
20

 
87

Income before gain on sale of property
 
116,354

 
74,924

 
105,779

Gain on sale of property
 

 

 
116

Net income
 
116,354

 
74,924

 
105,895

Net income allocated to noncontrolling interest
 
(33
)
 
(176
)
 

Net income attributed to SIR
 
116,321

 
74,748

 
105,895

 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
Unrealized gain (loss) on investment in available for sale securities
 
39,814

 
(19,820
)
 

Unrealized gain on interest rate swap
 
93

 
276

 

Equity in unrealized gain (loss) of an investee
 
152

 
(20
)
 
2

Other comprehensive income (loss)
 
40,059

 
(19,564
)
 
2

Comprehensive income
 
156,413

 
55,360

 
105,897

Comprehensive income allocated to noncontrolling interest
 
(33
)
 
(176
)
 

Comprehensive income attributed to SIR
 
$
156,380

 
$
55,184

 
$
105,897

 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
89,304

 
86,699

 
55,964

Weighted average common shares outstanding - diluted
 
89,324

 
86,708

 
56,035

 
 
 
 
 
 
 
Net income attributed to SIR per common share - basic and diluted
 
$
1.30

 
$
0.86

 
$
1.89

 
See accompanying notes.


3


SELECT INCOME REIT
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Cumulative
 
 
 
 
 
 
Number of
 
 
 
Additional
 
Cumulative
 
Other
 
Cumulative
 
 
 
 
Common
 
Common
 
Paid In
 
Net
 
Comprehensive
 
Common
 
 
 
 
Shares
 
Shares
 
Capital
 
Income
 
Income (Loss)
 
Distributions
 
Total
Balance at December 31, 2013
 
49,829,541

 
$
498

 
$
1,160,894

 
$
144,343

 
$
(25
)
 
$
(107,019
)
 
$
1,198,691

Net income
 

 

 

 
105,895

 

 

 
105,895

Issuance of shares, net
 
10,066,209

 
101

 
279,111

 

 

 

 
279,212

Share grants
 
64,000

 
1

 
1,031

 

 

 

 
1,032

Other comprehensive income
 

 

 

 

 
2

 

 
2

Distributions to common shareholders
 

 

 

 

 

 
(104,385
)
 
(104,385
)
Balance at December 31, 2014
 
59,959,750

 
600

 
1,441,036

 
250,238

 
(23
)
 
(211,404
)
 
1,480,447

Net income and other equity adjustments
 

 

 
(662
)
 
74,748

 

 

 
74,086

Issuance of shares, net
 
29,356,800

 
293

 
737,338

 

 

 

 
737,631

Share grants
 
65,100

 
1

 
895

 

 

 

 
896

Share repurchases
 
(6,851
)
 

 
(130
)
 

 

 

 
(130
)
Forfeited share grants
 
(770
)
 

 

 

 

 

 

Other comprehensive loss
 

 

 

 

 
(19,564
)
 

 
(19,564
)
Distributions to common shareholders
 

 

 

 

 

 
(157,597
)
 
(157,597
)
Distribution to common shareholders of The RMR Group Inc. common stock
 

 

 

 

 

 
(18,809
)
 
(18,809
)
Balance at December 31, 2015
 
89,374,029

 
894

 
2,178,477

 
324,986

 
(19,587
)
 
(387,810
)
 
2,096,960

Net income
 

 

 

 
116,321

 

 

 
116,321

Share grants
 
65,900

 

 
1,523

 

 

 

 
1,523

Share repurchases
 
(12,060
)
 

 
(331
)
 

 

 

 
(331
)
Other comprehensive income
 

 

 

 

 
40,059

 

 
40,059

Distributions to common shareholders
 

 

 

 

 

 
(180,570
)
 
(180,570
)
Balance at December 31, 2016
 
89,427,869

 
$
894

 
$
2,179,669

 
$
441,307

 
$
20,472

 
$
(568,380
)
 
$
2,073,962


See accompanying notes.


4


SELECT INCOME REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net income
 
$
116,354

 
$
74,924

 
$
105,895

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation
 
78,151

 
72,448

 
27,122

Net amortization of debt issuance costs, premiums and discounts
 
5,508

 
5,100

 
1,579

Amortization of acquired real estate leases and assumed real estate lease obligations
 
52,691

 
46,059

 
12,852

Amortization of deferred leasing costs
 
1,413

 
1,058

 
956

Provision for losses on rents receivable
 
496

 
(463
)
 
844

Straight line rental income
 
(24,744
)
 
(27,370
)
 
(16,038
)
Loss on asset impairment
 
5,484

 

 

Loss (gain) on early extinguishment of debt
 

 
6,845

 
(243
)
Loss on distribution to common shareholders of The RMR Group Inc. common stock
 

 
23,717

 

Gain on sale of property
 

 

 
(116
)
Other non-cash expenses, net
 
(607
)
 
484

 
2,061

Equity in earnings of an investee
 
(137
)
 
(20
)
 
(87
)
Change in assets and liabilities:
 
 
 
 
 
 
Restricted cash
 
1,127

 
16

 

Rents receivable
 
(534
)
 
1,265

 
2,144

Deferred leasing costs
 
(4,485
)
 
(1,888
)
 
(1,464
)
Other assets
 
(883
)
 
(1,772
)
 
(200
)
Accounts payable and other liabilities
 
(572
)
 
28,287

 
(1,594
)
Rents collected in advance
 
2,520

 
(3,587
)
 
1,051

Security deposits
 
42

 
436

 
1,989

Due to related persons
 
735

 
2,234

 
(8
)
Net cash provided by operating activities
 
232,559

 
227,773

 
136,743

 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Real estate acquisitions and deposits
 
(18,046
)
 
(2,179,621
)
 
(223,205
)
Real estate improvements
 
(8,862
)
 
(3,797
)
 
(2,175
)
Proceeds from sale of properties, net
 

 
501,668

 
116

Investment in Affiliates Insurance Company
 

 

 
(825
)
Investment in The RMR Group Inc.
 

 
(19,219
)
 

Net cash used in investing activities
 
(26,908
)
 
(1,700,969
)
 
(226,089
)
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Proceeds from issuance of common shares, net
 

 

 
277,329

Proceeds from issuance of senior unsecured notes, net
 

 
1,433,694

 

Proceeds from borrowings
 
205,000

 
1,819,000

 
281,000

Payments of borrowings
 
(221,525
)
 
(1,593,245
)
 
(370,731
)
Debt issuance costs
 

 
(23,761
)
 
(388
)
Distributions to common shareholders
 
(180,570
)
 
(157,597
)
 
(104,385
)
Repurchase of common shares
 
(331
)
 
(130
)
 

Purchase of noncontrolling interest
 
(3,908
)
 

 

Distributions to noncontrolling interest
 
(66
)
 
(393
)
 

Net cash (used in) provided by financing activities
 
(201,400
)
 
1,477,568

 
82,825

 
 
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
4,251

 
4,372

 
(6,521
)
Cash and cash equivalents at beginning of period
 
17,876

 
13,504

 
20,025

Cash and cash equivalents at end of period
 
$
22,127

 
$
17,876

 
$
13,504


See accompanying notes.

5


SELECT INCOME REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
SUPPLEMENTAL DISCLOSURES:
 
 
 
 
 
 
Interest paid
 
$
76,930

 
$
45,078

 
$
11,598

Income taxes paid
 
$
428

 
$
293

 
$
92

 
 
 
 
 
 
 
NON-CASH INVESTING ACTIVITIES:
 
 
 
 
 
 
Real estate and investment acquired by issuance of shares
 
$

 
$
(736,740
)
 
$

Real estate acquired by assumption of mortgage notes payable
 
$

 
$
(297,698
)
 
$

Real estate sold by assumption of mortgage notes payable
 
$

 
$
29,955

 
$

Working capital assumed
 
$

 
$
(13,333
)
 
$

 
 
 
 
 
 
 
NON-CASH FINANCING ACTIVITIES:
 
 
 
 
 
 
Assumption of mortgage notes payable
 
$

 
$
297,698

 
$

Mortgage notes payable assumed in real estate sale
 
$

 
$
(29,955
)
 
$

Issuance of SIR common shares
 
$

 
$
736,740

 
$

Distribution to common shareholders of The RMR Group Inc. common stock
 
$

 
$
(18,809
)
 
$

 
See accompanying notes.


6


SELECT INCOME REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1. Organization
Select Income REIT, or SIR, we, us or our, was organized as a real estate investment trust, or REIT, under Maryland law on December 19, 2011 as a wholly owned subsidiary of Equity Commonwealth, or EQC, to primarily own and invest in single tenant, net leased properties. On February 16, 2012, we acquired 100% ownership of 30 initial properties (251 buildings, leasable land parcels and easements), or the Initial Properties, by means of a contribution from EQC to one of our subsidiaries. On March 12, 2012, we completed our initial public offering and we became a separate publicly owned company.
As of December 31, 2016, we owned 121 properties (362 buildings, leasable land parcels and easements) with a total of approximately 44,813,000 rentable square feet.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. These consolidated financial statements include our accounts and the accounts of our subsidiaries, which are 100% owned or controlled directly or indirectly by us. The portion of a consolidated subsidiary that is not controlled by us, or the noncontrolling interest, is presented as a liability in our consolidated balance sheet and separately as net income allocated to noncontrolling interest in our consolidated statements of comprehensive income. See Note 8 for further information regarding a property we owned pursuant to a joint venture. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.
Real Estate Properties. We record our properties at cost, and we calculate depreciation on real estate investments on a straight line basis over estimated useful lives generally ranging from seven to 40 years. EQC estimated the purchase price allocations and the useful lives of our Initial Properties and we estimate the purchase price allocations and the useful lives of our other properties. In some circumstances, we engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determinations of useful lives.
We allocate the purchase prices of our properties to land, building and improvements based on determinations of the fair values of these assets assuming the properties are vacant. We determine the fair value of each property using methods similar to those used by independent appraisers. For properties qualifying as acquired businesses under The Financial Accounting Standards Board, or FASB, Accounting Standards Codification 805, Business Combinations, we allocate a portion of the purchase price to above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective leases. The terms of below market leases that include bargain renewal options, if any, are further adjusted if we determine that renewal to be probable. We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase. In making these allocations, we considered factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us. We allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to the accompanying consolidated financial statements. If the value of tenant relationships becomes material in the future, we may separately allocate those amounts and amortize the allocated amount over the estimated life of the relationships.
We amortize capitalized above market lease values (included in acquired real estate leases in our consolidated balance sheets) and below market lease values (presented as assumed real estate lease obligations in our consolidated balance sheets) as a reduction or increase, respectively, to rental income over the terms of the associated leases. Such amortization resulted in changes to rental income of $1,732, $3,430 and $196 during the years ended December 31, 2016, 2015 and 2014, respectively. We amortize the value of acquired in place leases (included in acquired real estate leases in our consolidated balance sheets), exclusive of the value of above market and below market acquired in place leases, or Lease Origination Value, over the terms of the associated leases. Such amortization, which is included in depreciation and amortization expense, totaled $54,422,

7


$49,489 and $13,048 during the years ended December 31, 2016, 2015 and 2014, respectively. If a lease is terminated prior to its stated expiration, we write off the unamortized amounts relating to that lease.
At December 31, 2016 and 2015, our acquired real estate leases and assumed real estate lease obligations were as follows:
 
 
December 31,
 
 
2016
 
2015
Acquired real estate leases:
     
     
     
     
Capitalized above market lease values
 
$
100,746

 
$
101,446

Less: accumulated amortization
 
(28,611
)
 
(22,577
)
Capitalized above market lease values, net
 
72,135

 
78,869

 
 
 
 
 
Lease Origination Value
 
563,898

 
568,109

Less: accumulated amortization
 
(129,735
)
 
(80,783
)
Lease Origination Value, net
 
434,163

 
487,326

Acquired real estate leases, net
 
$
506,298

 
$
566,195

 
 
 
 
 
Assumed real estate lease obligations:
 
 
 
 
Capitalized below market lease values
 
$
107,375

 
$
108,038

Less: accumulated amortization
 
(29,753
)
 
(21,543
)
Assumed real estate lease obligations, net
 
$
77,622

 
$
86,495

As of December 31, 2016, the weighted average amortization periods for capitalized above market lease values, Lease Origination Value and capitalized below market lease values were 12.6 years, 9.4 years, and 11.0 years, respectively.  Future amortization of net intangible acquired real estate lease assets and liabilities to be recognized over the current terms of the associated leases as of December 31, 2016 are estimated to be $52,102 in 2017, $51,167 in 2018, $48,707 in 2019, $47,986 in 2020, $47,334 in 2021 and $181,380 thereafter. 
We recognize impairment losses on real estate investments when indicators of impairment are present and the estimated undiscounted cash flow from our real estate investments is less than the carrying amount of such real estate investments. Impairment indicators may include declining tenant occupancy, lack of progress releasing vacant space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. We review our properties for impairment quarterly, or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future undiscounted cash flows expected to be generated from that property. If the sum of these expected future undiscounted cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. The determination of undiscounted cash flow includes consideration of many factors including income to be earned from the investment, holding costs (exclusive of interest), estimated selling prices, and prevailing economic and market conditions. As of December 31, 2016, we recorded a loss on asset impairment of $5,484 to reduce the carrying value of one vacant property located in Maynard, MA to its estimated fair value. See Note 7 for further information.
We believe some of our properties may contain asbestos. We believe any asbestos on our properties is contained in accordance with applicable laws and regulations and we have no current plans to remove it. If we removed the asbestos or demolished the affected properties, certain environmental regulations specify the manner in which the asbestos must be removed and we could incur substantial costs complying with such regulations. Due to the uncertainty of the timing and amount of costs we may incur, we cannot reasonably estimate the fair value and we have not recognized a liability in our financial statements for these costs. Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed; however, we do not have any present plans to change the use of those lands or to undertake this environmental cleanup. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as, for example, fire or flood, although some of our tenants may maintain such insurance. However, as of both December 31, 2016 and 2015, accrued environmental remediation costs of $8,160 were included in accounts payable and other liabilities in our

8


consolidated balance sheets. These accrued environmental remediation costs relate to maintenance of our properties for current uses, and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. Although we do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us, we cannot be sure that such conditions or costs are not present in our properties or that other costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs are included in other operating expenses in our consolidated statements of comprehensive income.
Cash and Cash Equivalents. We consider highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Restricted Cash. Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our mortgage debts.
Deferred Leasing Costs. Deferred leasing costs include capitalized brokerage, legal and other fees associated with the successful negotiation of leases, which are amortized to depreciation and amortization expense on a straight line basis over the terms of the respective leases. Deferred leasing costs totaled $13,987 and $10,243 at December 31, 2016 and 2015, respectively, and accumulated amortization of deferred leasing costs totaled $3,936 and $3,022 at December 31, 2016 and 2015, respectively. Included in deferred leasing costs at December 31, 2016, is $61 of estimated costs associated with leases under negotiation. Future amortization of deferred leasing costs to be recognized during the current terms of our existing leases as of December 31, 2016, are estimated to be $1,371 in 2017, $1,278 in 2018, $1,177 in 2019, $1,089 in 2020, $890 in 2021 and $4,185 thereafter.
Debt Issuance Costs. Debt issuance costs include capitalized issuance or assumption costs related to borrowings, which are amortized to interest expense over the terms of the respective loans. Debt issuance costs, net of accumulated amortization, for our revolving credit facility are included in other assets in our consolidated balance sheets. Debt issuance costs, net of accumulated amortization, for our unsecured term loan, senior unsecured notes and mortgage notes payable are presented as a direct deduction from the associated debt liability in our consolidated balance sheets. As of December 31, 2016 and 2015, debt issuance costs for our revolving credit facility were $5,910 and $5,910, respectively, and accumulated amortization of debt issuance costs for our revolving credit facility were $2,751 and $1,360, respectively. As of December 31, 2016 and 2015, debt issuance costs, net of accumulated amortization, for our unsecured term loan, senior unsecured notes and mortgage notes payable were $1,627, $7,538 and $17, respectively. Future amortization of debt issuance costs to be recognized with respect to our loans as of December 31, 2016, are estimated to be $3,925 in 2017, $3,261 in 2018, $2,243 in 2019, $912 in 2020, $753 in 2021 and $1,247 thereafter.
Available for sale securities. As of December 31, 2016, we own 1,586,836 shares of class A common stock of The RMR Group Inc., or RMR Inc. Our investment in RMR Inc. is classified as an available for sale security. Available for sale securities are recorded at fair value based on their quoted market price at the end of the reporting period. Unrealized gains and losses on available for sale securities are recorded as a component of cumulative other comprehensive income (loss) in shareholders’ equity. As further described in Note 13, we initially acquired 3,166,891 shares of class A common stock of RMR Inc. on June 5, 2015 for cash and share consideration of $35,954. We concluded, for accounting purposes, that the cash and share consideration we paid for our investment in these shares represented a discount to the fair value of these shares. We initially accounted for this investment under the cost method of accounting and recorded this investment at its estimated fair value of $81,850 as of June 5, 2015 using Level 3 inputs, as defined in the fair value hierarchy under U.S. generally accepted accounting principles, or GAAP. As a result, 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 consolidated balance sheets. A part of this liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management and property management fee expense. We amortized $2,230 and $1,268 of this liability during the years ended December 31, 2016 and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods. As of December 31, 2016, the remaining unamortized amount of this liability was $42,400.
We evaluate our investments in available for sale securities to determine if a decline in the fair value below our carrying value is other than temporary. We consider the severity and the duration of the decline, and our ability and intent to hold the investment until recovery when making this assessment. If a decline in fair value is determined to be other than temporary, an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized in earnings.

9


Other Assets. Other assets consist primarily of deposits on potential acquisitions, our investments in RMR Inc. and Affiliates Insurance Company, or AIC, debt issuance costs on our revolving credit facility, prepaid real estate taxes and other prepaid expenses. We account for our investment in AIC using the equity method of accounting. Significant influence is present through common representation on the boards of trustees or directors of us and AIC. Our Managing Trustees own ABP Trust, which is the controlling shareholder of RMR Inc. RMR Inc. is the managing member of our manager, The RMR Group LLC, or RMR LLC. Our Managing Trustees are also directors and officers of RMR Inc. and officers of RMR LLC. RMR LLC also provides management and administrative services to AIC, and each of our Trustees is a director of AIC. See Notes 7 and 13 for further information regarding our investments in RMR Inc. and AIC.
We evaluate our equity method investments to determine if there are any events or circumstances (impairment indicators) that are likely to have a significant adverse effect on the fair value of the investment. Fair value estimates consider all available financial information related to the investee. Examples of such impairment indicators include, but are not limited to: a significant deterioration in earnings performance; a significant adverse change in the regulatory or economic environment of an investee; or a significant doubt about an investee’s ability to continue as a going concern. If an impairment indicator is identified, an estimate of the fair value of the investment is compared to its carrying value. If the fair value of the investment is less than its carrying value, a determination is made as to whether the related impairment is other than temporary. For other than temporary impairments, an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized in earnings to adjust the basis of the investment to its fair value.
Derivative Instruments and Hedging Activities. We account for our derivative instruments at fair value. Accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the designation of the derivative instrument. The change in fair value of the effective portion of the derivative instrument that is not designated as a hedge or that does not meet the hedge accounting criteria are recorded as a gain or loss to operations.
Revenue Recognition. Rental income from operating leases is recognized on a straight line basis over the lives of lease agreements. We defer the recognition of contingent rental income, such as percentage rents, until the specific targets that trigger the contingent rental income are achieved. Contingent rental income recognized for the years ended December 31, 2016, 2015 and 2014, totaled $846, $1,468 and $1,270, respectively. Tenant reimbursements and other income include property level operating expenses and capital expenditures reimbursed by our tenants as well as other incidental revenues. Certain tenants are obligated to pay directly their obligations under their leases for insurance, real estate taxes and certain other expenses. These costs, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our consolidated financial statements. To the extent any tenant responsible for these costs under their respective lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, we would record a liability for such obligation.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of certain tenants to make payments required under their leases. The computation of the allowance is based on the tenants’ payment histories and current credit profiles, as well as other considerations.
Income Taxes. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and, accordingly, we generally will not be subject to federal income taxes provided we distribute our taxable income and meet certain other requirements to qualify as a REIT. We are, however, subject to certain state and local taxes.
Cumulative Other Comprehensive Income (Loss). Cumulative other comprehensive income (loss) consists of unrealized gains and losses related to our investments in RMR Inc. and AIC and changes in the fair value of our interest rate derivative.
Use of Estimates. Preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that may affect the amounts reported in these consolidated financial statements and related notes. The actual results could differ from these estimates. Significant estimates in the consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and the assessments of the carrying values and impairments of long lived assets.
Net Income Per Common Share. We calculate basic earnings per common share by dividing net income attributed to SIR by the weighted average number of common shares outstanding during the period. We calculate diluted net income per share using the more dilutive of the two class method or the treasury stock method.
New Accounting Pronouncements. On January 1, 2016, we adopted FASB Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changed how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact in our consolidated financial statements.

10


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 FASB 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 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 loan, senior unsecured notes and mortgage notes payable of $2,124, $9,607 and $41, respectively, were reclassified from assets to an offset to the associated debt liability in our consolidated balance sheet.
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 consolidated financial statements.
In December 2016, we adopted FASB ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. The implementation of this update did not have an impact in our consolidated financial statements.
In 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. ASU No. 2014-09 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 ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In 2015, the FASB provided for a one-year deferral of the effective date for ASU No. 2014-09, which is now effective for us beginning January 1, 2018. A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. We are continuing to evaluate ASU No. 2014-09 (and related clarifying guidance issued by the FASB); however, we do not expect its adoption to have a significant impact on the timing of our revenue recognition in our 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. ASU No. 2016-01 states that these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale securities we hold are presented in our consolidated financial statements.
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 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

11


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 31, 2016. We do not expect the adoption of ASU No. 2016-09 to have a material impact in our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-15 will have in our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies how companies should present restricted cash and restricted cash equivalents. Companies will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-18 will have in our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which provides additional guidance on evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets or of businesses. The update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. We are currently assessing the impact of the update; however, subsequent to adoption we believe certain acquisitions which under previous guidance would have been accounted for as business combinations may now be accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs may be capitalized as opposed to recognized as expense under business combination guidance. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. This update will be applied prospectively to any transactions occurring within the period of adoption.
Note 3. Real Estate Properties
As of December 31, 2016, we owned 121 properties (362 buildings, leasable land parcels and easements) with approximately 44,813,000 rentable square feet.
2016 and 2017 Acquisitions:
On February 29, 2016, we acquired a joint venture interest in an office building containing approximately 344,000 square feet located in Duluth, GA. We paid $3,908 for this 11.0% ownership interest. Following this acquisition, we own 100% of this office building. See Note 8 for more information regarding this joint venture arrangement, our acquisition of the 11.0% interest and certain resulting accounting.
During the year ended December 31, 2016, we also acquired two properties (two buildings) located in Huntsville, AL and Richmond, VA with a combined 107,657 rentable square feet for an aggregate purchase price of $17,960, excluding acquisition related costs. The Huntsville, AL acquisition was accounted for as an acquisition of assets and the Richmond, VA acquisition was accounted for as a business combination. We allocated the purchase prices of these acquisitions based on the

12


estimated fair values of the acquired assets and assumed liabilities as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
 
 
 
 
Properties/
 
Square
 
Purchase
 
 
 
Building and
 
Real Estate
Date
 
Location
 
Buildings
 
Feet
 
Price (1)
 
Land
 
Improvements
 
Leases
July 2016
 
Huntsville, AL (2)
 
1 / 1
 
57,420

 
$
10,200

 
$
1,652

 
$
8,548

 
$

October 2016
 
Richmond, VA
 
1 / 1
 
50,237

 
7,760

 
1,270

 
4,824

 
1,666

 
 
 
 
2 / 2
 
107,657

 
$
17,960

 
$
2,922

 
$
13,372

 
$
1,666

(1)
Purchase price excludes acquisition related costs.
(2)
This property was acquired and simultaneously leased back to the seller. We accounted for this acquisition as an acquisition of assets and capitalized acquisition related costs of $86 related to this transaction.
On January 13, 2017, we acquired a land parcel adjacent to one our properties located in McAlester, OK for $226, excluding acquisition related costs. We currently intend to develop an expansion of the adjacent property we own for an existing tenant on this acquired property.
On December 29, 2016, we entered an agreement to acquire a single tenant, net leased office property located in Tampa, FL with approximately 133,000 rentable square feet for a purchase price of $14,300, excluding acquisition related costs. This pending acquisition is subject to closing conditions; accordingly, we cannot be sure that we will acquire this property, that the acquisition will not be delayed or that the terms will not change.
2015 Acquisitions and Dispositions:
On January 29, 2015, we completed our acquisition of Cole Corporate Income Trust, Inc., a Maryland corporation, or CCIT, pursuant to the Agreement and Plan of Merger, dated as of August 30, 2014, as amended, or the Merger Agreement, by and among us, SC Merger Sub LLC, a Maryland limited liability company and our wholly owned subsidiary, or SIR Merger Sub, and CCIT. At the effective time on January 29, 2015, CCIT merged with and into SIR Merger Sub, and the separate corporate existence of CCIT ceased, with SIR Merger Sub surviving as our wholly owned subsidiary, or the CCIT Merger.
At the effective time of the CCIT Merger, we acquired CCIT’s full property portfolio which included 64 office and industrial net leased properties (73 buildings), or the 64 CCIT Properties, as well as 23 healthcare properties which we sold concurrently to Senior Housing Properties Trust, or SNH. The total consideration for our acquisition of CCIT’s full portfolio was $2,990,210, including the assumption of $297,698 of mortgage debt principal (of which $29,955 was assumed by SNH in our sale of the healthcare properties to SNH) and excluding acquisition related costs. Pursuant to the terms of the Merger Agreement, we paid $1,245,321 in cash and issued 28,439,111 of our common shares at a value of $25.20 per share, or an aggregate of $716,666, to former holders of CCIT common stock. Concurrently with the entry into the merger agreement for the CCIT Merger, on August 30, 2014, we, a wholly owned subsidiary of ours and SNH, entered into a purchase and sale agreement and joint escrow instructions for our sale to SNH of entities owning 23 healthcare properties, or the CCIT MOBs, that were to be acquired by us in the CCIT Merger. Pursuant to this purchase and sale agreement, on January 29, 2015, concurrently with the closing of the CCIT Merger, we sold to SNH the CCIT MOBs for $531,923, including a purchase price adjustment of $7,677 and SNH's assumption of $29,955 of mortgage debt, but excluding working capital. In April 2015, we paid $1,316 to SNH to settle certain working capital activity for the CCIT MOBs as of the sale date. The following tables summarize the total consideration, the estimated fair values of the assets acquired and liabilities assumed in the CCIT Merger and the net purchase price after the completion of our sale of the 23 healthcare properties to SNH:

13


Total Purchase Price (excluding acquisition costs):
 
Aggregate share consideration
$
716,666

 
Assumed working capital
(3,794
)
 
Assumed mortgage principal
297,698

 
Non-cash portion of purchase price
1,010,570

 
Cash consideration paid to former holders of CCIT common stock
1,245,321

 
CCIT shareholders distribution, debt and loan assumption costs paid at closing
734,319

 
Cash portion of purchase price
1,979,640

 
Gross purchase price
$
2,990,210

 
 
 
Purchase Price Allocation:
 
Land
$
315,352

 
Buildings and improvements
2,260,870

 
Acquired real estate leases
492,997

 
Cash
17,127

 
Restricted cash
1,145

 
Rents receivable
4,354

 
Other assets
565

 
Total assets
3,092,410

 
Mortgage notes payable (1)
(299,710
)
 
Fair value of derivative instrument (2)
(1,779
)
 
Accounts payable and accrued expenses
(8,142
)
 
Assumed real estate lease obligations
(71,701
)
 
Rents collected in advance
(10,194
)
 
Security deposits
(1,061
)
 
Amount allocated to noncontrolling interest
(3,517
)
 
Net assets acquired
2,696,306

 
Assumed working capital
(3,794
)
 
Assumed principal balance of debt
297,698

 
Gross purchase price
$
2,990,210

 
 
 
Reconciliation to Net Purchase Price (excluding acquisition costs):
 
Gross purchase price
$
2,990,210

 
Proceeds from properties sold to SNH
(501,668
)
 
Mortgage principal assumed by SNH, including loan assumption costs of $300 (3)
(30,255
)
 
Net purchase price
$
2,458,287

 
(1)
Includes the fair value adjustment totaling $2,012 on $297,698 of mortgage principal assumed in connection with the CCIT Merger.
(2)
Represents the fair value of an interest rate swap agreement relating to a $41,000 mortgage note assumed in connection with the CCIT Merger.
(3)
Excludes the fair value adjustment totaling $1,073.
In accordance with GAAP, we accounted for the CCIT Merger as a business combination with SIR treated as the acquirer of CCIT for accounting purposes. Under business combination accounting rules, the assets acquired and liabilities assumed were recorded as of the acquisition date, at their respective estimated fair value, and added to those of SIR. We allocated the purchase price of this acquisition based on the estimated fair values of the acquired assets and liabilities assumed in a manner consistent with our purchase price allocation accounting policy described in Note 2. We engaged an independent real estate consulting firm to assist us with determining the purchase price allocations and to provide market information and evaluations which are relevant to purchase price allocations and determinations of useful lives. As of the date acquired, the weighted average amortization periods for capitalized above market lease values, Lease Origination Value and capitalized below market lease values were 10.2 years, 11.4 years and 12.3 years, respectively.

14



On June 29, 2016, we received an assessment from the State of Washington for real estate excise tax, interest and penalties of $2,837 on certain properties we acquired in connection with our acquisition of CCIT, in January 2015. We believe we are not liable for this tax and are disputing the assessment. As of December 31, 2016, we have not recorded a loss related to this matter.
During the year ended December 31, 2015, in addition to the 64 CCIT Properties, we also acquired four properties (six buildings) with a combined 890,904 rentable square feet and an ancillary land parcel adjacent to one of our existing properties for an aggregate purchase price of $217,100, excluding acquisition related costs. We accounted for these acquisitions as business combinations and allocated the purchase prices of these acquisitions based on the estimated fair value of the acquired assets and assumed liabilities as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assumed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
 
Real Estate
 
Other
 
 
 
 
Properties/
 
Square
 
Purchase
 
 
 
Building and
 
Real Estate
 
Lease
 
Assumed
Date
 
Location
 
Buildings
 
Feet
 
Price (1)
 
Land
 
Improvements
 
Leases
 
Obligations
 
Liabilities
April 2015
 
Phoenix, AZ
 
1 / 1
 
106,397

 
$
16,850

 
$
2,490

 
$
10,799

 
$
3,649

 
$
(78
)
 
$
(10
)
April 2015
 
Birmingham, AL
 
 

 
2,000

 
2,000

 

 

 

 

July 2015
 
Richmond, VA
 
1 / 3
 
88,890

 
12,750

 
2,401

 
7,289

 
3,060

 

 

July 2015
 
Kansas City, MO
 
1 / 1
 
595,607

 
153,500

 
4,263

 
73,891

 
75,346

 

 

November 2015
 
Parsippany, NJ
 
1 / 1
 
100,010

 
32,000

 
4,188

 
14,919

 
12,893

 

 

 
 
 
 
4 / 6
 
890,904

 
$
217,100

 
$
15,342

 
$
106,898

 
$
94,948

 
$
(78
)
 
$
(10
)
(1)
Purchase price excludes acquisition related costs.
2016 Tenant Improvements and Leasing Costs:
We committed $13,638 for expenditures related to tenant improvements and leasing costs for approximately 1,978,000 square feet of leases executed during 2016. Committed but unspent tenant related obligations based on existing leases as of December 31, 2016, were $23,390.  
Future Minimum Lease Payments:
The future minimum lease payments scheduled to be received by us during the current terms of our leases as of December 31, 2016 are as follows:
 
 
Minimum
 
 
Lease
Year
 
Payment
2017
 
$
364,448

2018
 
366,853

2019
 
361,265

2020
 
360,368

2021
 
359,542

Thereafter
 
2,208,525

 
 
$
4,021,001

Pro Forma Information (Unaudited):
The following table presents our pro forma results of operations for the year ended December 31, 2015 as if the CCIT Merger and the related financing activities described above and in Note 6, had occurred on January 1, 2015. In addition to the 64 CCIT Properties, this pro forma data also includes four additional properties (six buildings) we acquired during 2015 for an aggregate purchase price of $215,100, excluding acquisition related costs. This pro forma data is not necessarily indicative of what our actual results of operations would have been for the period presented, nor does it represent the results of operations for any future period. Differences could result from numerous factors, including future changes in our portfolio of investments,

15


changes in interest rates, changes in our capital structure, changes in net property level operating expenses, changes in property level revenues, including rents expected to be received from our existing leases or leases we entered into during 2016 and may enter into during and after 2017, and for other reasons.
 
Year Ended
 
December 31,
 
2015
Total revenues
$
458,430

Net income attributed to SIR
$
99,094

Net income attributed to SIR per share
$
1.11

 
During the year ended December 31, 2015, we recognized revenues of $215,585 and operating income of $77,558 arising from our 2015 acquisitions.
Note 4. Tenant Concentration and Segment Information
We operate in one business segment: ownership of properties that include buildings and leased industrial lands that are primarily net leased to single tenants. During the periods presented in this report, no single one of our tenants accounted for more than 10% of our total revenues. A “net leased property” or a property being “net leased” means that the building or land lease requires the tenant to pay rent and pay, or reimburse us, for all, or substantially all, property level operating expenses and capital expenditures, such as real estate taxes, insurance, utilities, maintenance and repairs, other than, in certain circumstances, roof and structural element related expenditures; however, in some instances, tenants reimburse us for all expenses in excess of certain amounts included in the stated rent. We define a single tenant leased building or land parcel as a building or land parcel with at least 90% of its rentable square footage leased to one tenant. Our buildings and lands are primarily leased to single tenants; however, we also own some multi-tenant buildings on the island of Oahu, HI, and one mainland multi-tenant office property. For the years ended December 31, 2016, 2015 and 2014, approximately 19.8%, 21.0% and 38.2%, respectively, of total revenues was from 11 properties (229 buildings, leasable land parcels and easements) with a combined approximately 17,778,000 rentable square feet that we own on Oahu, HI.
Note 5. Derivatives and Hedging Activities
We are exposed to certain risks relating to our ongoing business operations, including the effect of changes in interest rates. We use derivative instruments to manage only a part of our interest rate risk. We have an interest rate swap agreement to manage our interest rate risk exposure on a $41,000 mortgage note due 2020, with interest payable at a rate equal to a spread over LIBOR. We assumed this mortgage note and related interest rate swap agreement in connection with the CCIT Merger.
We record all derivatives on our balance sheet at fair value. The following table summarizes the terms of our outstanding interest rate swap agreement, which we designate as a cash flow hedge:
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
 
 
 
 
Notional
 
 
 
 
 
 
 
of Liability
 
 
 
 
Amount as of
 
Interest
 
Effective
 
Maturity
 
as of
 
 
Balance Sheet Location
 
December 31, 2016
 
Rate (1)
 
Date
 
Date
 
December 31, 2016
Interest Rate Swap
 
Accounts Payable and Other Liabilities
 
$
41,000

 
4.16
%
 
1/29/2015
 
8/3/2020
 
$
820

(1)
The interest rate consists of the underlying index swapped to a fixed rate and the applicable interest rate spread.
The table below presents the effects of our interest rate derivative on our consolidated statements of comprehensive income for the years ended December 31, 2016 and 2015:

16


 
Year Ended December 31,
 
2016
 
2015
Amount of gain (loss) recognized in cumulative
 
 
 
other comprehensive income (effective portion)
$
(284
)
 
$
61

Amount of gain reclassified from cumulative
 
 
 
other comprehensive income into
 
 
 
interest expense (effective portion)
$
377

 
$
215

We may enter into additional interest rate swaps or hedge agreements to manage some of our interest rate risk associated with other floating rate borrowings.
Note 6. Indebtedness
At December 31, 2016 and 2015, our outstanding indebtedness consisted of the following:
 
 
December 31,
 
 
2016
 
2015
Revolving credit facility, due in 2019
 
$
327,000

 
$
303,000

Term loan, due in 2020
 
350,000

 
350,000

Senior unsecured notes, 2.85%, due in 2018
 
350,000

 
350,000

Senior unsecured notes, 3.60%, due in 2020
 
400,000

 
400,000

Senior unsecured notes, 4.15%, due in 2022
 
300,000

 
300,000

Senior unsecured notes, 4.50%, due in 2025
 
400,000

 
400,000

Mortgage note payable, LIBOR plus 160 bps (1) (2)
 

 
40,233

Mortgage note payable, 5.950%, due in 2017 (1) 
 
17,498

 
17,755

Mortgage note payable, 4.50%, due in 2019 (1) (3)
 
1,984

 
2,000

Mortgage note payable, 4.50%, due in 2019 (1) (3)
 
2,381

 
2,400

Mortgage note payable, 3.87%, due in 2020 (1) (3)
 
12,360

 
12,360

Mortgage note payable, 4.16%, due in 2020 (1) (4)
 
41,000

 
41,000

Mortgage note payable, 3.99%, due in 2020 (1) (3)
 
48,750

 
48,750

Mortgage note payable, 3.55%, due in 2023 (1) (3)
 
71,000

 
71,000

Mortgage note payable, 3.70%, due in 2023 (1) (3)
 
50,000

 
50,000

 
 
2,371,973

 
2,388,498

Unamortized debt issuance costs, premiums and discounts
 
(20,657
)
 
(24,891
)
 
 
$
2,351,316

 
$
2,363,607

 
(1)
We assumed all of these mortgage notes in connection with our acquisition 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 amortize the fair value premiums to interest expense over the respective terms of the mortgage notes to reduce interest expense to the estimated market interest rates as of the date of acquisition.
(2)
This mortgage note was repaid at par in November 2016.
(3)
In connection with the CCIT Merger, we assumed these fixed rate mortgage notes with an aggregate principal balance of $186,510. We recorded these mortgage notes at their estimated fair value aggregating $187,449 on the date of acquisition.
(4)
This mortgage note was assumed in connection with the CCIT Merger. Interest on this mortgage note is payable at a rate equal to a premium over LIBOR but has been fixed by a cash flow hedge which sets the rate at approximately 4.16% until August 3, 2020, which is the maturity date of the mortgage note.
On January 9, 2015, we replaced our then existing $750,000 unsecured revolving credit facility and $350,000 unsecured term loan with a new credit agreement providing $1,100,000 in aggregate borrowing availability, or the credit agreement. The credit agreement replaced our prior revolving credit facility maturing on March 11, 2016 with a new $750,000

17


unsecured revolving credit facility that has a maturity date of March 29, 2019, interest payable on borrowings of LIBOR plus 105 basis points and a facility fee of 20 basis points per annum, based on the total amount of lending commitments. Both the interest rate premium and the facility fee for the revolving credit facility are subject to adjustment based on changes to our credit ratings. Upon the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the revolving credit facility to March 29, 2020. As of December 31, 2016 and 2015, the annual interest rate payable on borrowings under our revolving credit facility was 1.76% and 1.44%, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.49%, 1.25% and 1.45% for the years ended December 31, 2016, 2015 and 2014, respectively. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of December 31, 2016 and February 14, 2017, we had $327,000 and $332,000, respectively, outstanding under our revolving credit facility and $423,000 and $418,000, respectively, available to borrow under our revolving credit facility.
The credit agreement also replaced our prior term loan maturing on July 11, 2017 with a new $350,000 unsecured term loan that has a maturity date of March 31, 2020 and interest payable on the amount outstanding of LIBOR plus 115 basis points. The interest rate premium for the term loan is subject to adjustment based on changes to our credit ratings. As of December 31, 2016 and 2015, the annual interest rate payable for the amount outstanding under our term loan was 1.77% and 1.39%, respectively. The weighted average annual interest rate for the amount outstanding under our term loan was 1.63%, 1.34% and 1.69% for the years ended December 31, 2016, 2015 and 2014, respectively.
In addition, the credit agreement governing our revolving credit facility and term loan includes a feature under which the maximum aggregate borrowing availability under the revolving credit facility and the term loan may be increased to up to $2,200,000 on a combined basis under certain circumstances.
In connection with the closing of the CCIT Merger, we entered into a bridge loan agreement with a group of institutional lenders pursuant to which we obtained a 364-day $1,000,000 senior unsecured bridge loan, which had a maturity date of January 28, 2016, bore interest at LIBOR plus 140 basis points (subject to adjustment based on changes to our credit ratings), and was prepayable in whole or in part at any time. On February 3, 2015, we repaid in full the $1,000,000 senior unsecured bridge loan and reduced amounts then outstanding on our revolving credit facility with net proceeds from an underwritten public offering of $1,450,000 aggregate principal amount of senior unsecured notes, which included: $350,000 aggregate principal amount of 2.85% senior unsecured notes due 2018; $400,000 aggregate principal amount of 3.60% senior unsecured notes due 2020; $300,000 aggregate principal amount of 4.15% senior unsecured notes due 2022; and $400,000 aggregate principal amount of 4.50% senior unsecured notes due 2025. We also assumed eight mortgage notes associated with properties that we acquired in the CCIT Merger with an aggregate principal amount of $267,743, net of mortgage notes related to properties sold to SNH.
The credit agreement and our 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 RMR LLC ceasing to act as our business manager and property manager. Our senior unsecured 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 generally 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 December 31, 2016.
During the year ended December 31, 2015, we recognized a loss on early extinguishment of debt aggregating $6,845 from the write off of unamortized debt issuance costs related to the repayment and termination of the bridge loan that was entered in connection with the CCIT Merger, our prior revolving credit facility and our prior term loan.
At December 31, 2016, eight of our properties (11 buildings) with a net book value of $393,569 had secured mortgage notes we assumed in connection with our acquisition of those properties. The aggregate principal amount outstanding under these mortgage notes as of December 31, 2016, was $244,973. These mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

18


The required principal payments due during the next five years and thereafter under all our outstanding debt as of December 31, 2016 are as follows:
 
 
Principal
 
Year
 
Payment
 
2017
 
$
17,571

 
2018
 
350,304

 
2019
 
331,926

 
2020
 
851,172

 
2021
 

 
Thereafter
 
821,000

 
 
 
$
2,371,973

(1) 
(1)
Total debt outstanding as of December 31, 2016, including unamortized debt issuance costs, premiums and discounts was $2,351,316.
Note 7. Fair Value of Assets and Liabilities
The table below presents certain of our assets and liabilities measured at fair value at December 31, 2016, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset and liability:
 
 
 
 
Fair Value at Reporting Date Using
 
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring Fair Value Measurements:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Investment in RMR Inc. (1)
 
$
62,680

 
$
62,680

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap (2)
 
$
(820
)
 
$

 
$
(820
)
 
$

 
 
 
 
 
 
 
 
 
Non-Recurring Fair Value Measurements:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Real estate properties (3)
 
$
18,000

 
$

 
$

 
$
18,000

(1)
Our 1,586,836 shares of class A common stock of RMR Inc., which are included in other assets in our consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $42,686. The unrealized gain of $19,994 for these shares as of December 31, 2016 is included in cumulative other comprehensive income in our consolidated balance sheets.
(2)
As discussed in Note 5, we assumed an interest rate swap agreement on a $41,000 mortgage note assumed in connection with the CCIT Merger. This interest rate swap agreement is carried at fair value and is included in accounts payable and other liabilities in our consolidated balance sheets and is valued using Level 2 inputs. The fair value of this instrument is determined using interest rate pricing models. Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimate presented in the table above is not necessarily indicative of the amount for which we could be liable upon extinguishment of the liability.
(3)
As of December 31, 2016, we recorded a loss on asset impairment of $5,484 to reduce the carrying value of one vacant property located in Maynard, MA from $23,484 to its estimated fair value of $18,000. We estimated the fair value of this property with a direct capitalization approach utilizing market specific assumptions.

19


In addition to the assets and liability described in the table above, our financial instruments include cash and cash equivalents, restricted cash, rents receivable, a revolving credit facility, a term loan, senior unsecured notes, mortgage notes payable, accounts payable, rents collected in advance, security deposits and amounts due to related persons. At December 31, 2016 and 2015, the fair value of our financial instruments approximated their carrying values in our consolidated financial statements, due to their short term nature or variable interest rates, except as follows: 
 
 
At December 31, 2016
 
At December 31, 2015
 
 
Carrying
 
Estimated
 
Carrying
 
Estimated
 
 
Value
 
Fair Value
 
Value
 
Fair Value
Senior unsecured notes, due 2018 at 2.85%
 
$
348,667

 
$
352,074

 
$
347,448

 
$
353,063

Senior unsecured notes, due 2020 at 3.60%
 
$
395,955

 
$
400,656

 
$
394,712

 
$
402,984

Senior unsecured notes, due 2022 at 4.15%
 
$
295,301

 
$
297,186

 
$
294,471

 
$
293,373

Senior unsecured notes, due 2025 at 4.50%
 
$
390,377

 
$
387,030

 
$
389,394

 
$
386,000

Mortgage notes payable
 
$
245,643

 
$
243,845

 
$
246,473

 
$
242,435

We estimate the fair value of our senior unsecured notes using an average of the bid and ask prices of the notes as of the measurement date (Level 2 inputs). We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
Note 8. Noncontrolling Interest
One of the properties acquired in connection with the CCIT Merger was owned pursuant to a joint venture arrangement. The joint venture was formed by CCIT on December 19, 2013 to own and manage an office building with approximately 344,000 square feet in Duluth, GA. Pursuant to the joint venture agreement, the joint venture partner had the right to exercise an option after two years which required us to purchase the remaining 11.0% ownership interest of the joint venture partner at fair market value. Upon the closing of the CCIT Merger, we determined that we had a controlling interest in this joint venture and therefore met the GAAP requirements for consolidation under the voting model. We initially recorded the noncontrolling interest in this joint venture at its acquisition date fair value of $3,517 and classified it as temporary equity due to the redemption option existing outside of our control. The portion of the joint venture’s net income and comprehensive income not allocated to us, or $33 and $176 for the years ended December 31, 2016 and 2015, respectively, is reported as noncontrolling interest in our consolidated statements of comprehensive income.
On February 29, 2016, we acquired the 11.0% ownership interest of our joint venture partner for $3,908. As a result, for periods from and after that date, there is no longer a noncontrolling interest with respect to this office building and we now own 100% of this property.
Note 9. Shareholders’ Equity
Share Awards:
We have common shares available for issuance under the terms of our equity compensation plan adopted in 2012, or the 2012 Plan. As described in Note 13, we granted restricted common shares to our officers and certain other employees of RMR LLC in 2016, 2015 and 2014. We also granted each of our Trustees 2,500 restricted common shares with an aggregate value of $303 ($61 per Trustee), 2,500 restricted common shares with an aggregate value of $287 ($57 per Trustee) and 2,500 restricted common shares with an aggregate value of $385 ($77 per Trustee) in 2016, 2015 and 2014, respectively, as part of their annual compensation. The values of the share grants were based upon the closing price of our common shares trading on the New York Stock Exchange, or NYSE, through June 30, 2016, and on The NASDAQ Stock Market LLC, or Nasdaq, beginning on July 1, 2016, on the dates of grants. The common shares granted to our Trustees vested immediately. The common shares granted to our officers and certain other employees of RMR LLC vest in five equal annual installments beginning on the date of grant. We include the value of granted shares in general and administrative expenses ratably over the vesting period. These unvested shares are re-measured at fair value on a recurring basis using quoted market prices of the underlying shares.
A summary of shares granted, vested and forfeited under the terms of the 2012 Plan for the years ended December 31, 2016, 2015 and 2014 is as follows:

20


 
 
 
 
Weighted
 
 
 
 
Average
 
 
Number
 
Grant Date
 
 
of Shares
 
Fair Value
Unvested shares at December 31, 2013
 
42,543

 
$
24.79

 
 
 
 
 
2014 Activity:
 
 
 
 
Granted
 
64,000

 
$
26.64

Vested
 
(36,694
)
 
$
27.39

Unvested shares at December 31, 2014
 
69,849

 
$
25.29

 
 
 
 
 
2015 Activity:
 
 
 
 
Granted
 
65,100

 
$
19.36

Vested
 
(44,929
)
 
$
19.94

Forfeited
 
(770
)
 
$
22.38

Unvested shares at December 31, 2015
 
89,250

 
$
22.11

 
 
 
 
 
2016 Activity:
 
 
 
 
Granted
 
65,900

 
$
25.80

Vested
 
(58,090
)
 
$
25.89

Unvested shares at December 31, 2016
 
97,060

 
$
23.65

The 97,060 unvested shares as of December 31, 2016 are scheduled to vest as follows: 36,100 shares in 2017, 29,780 shares in 2018, 20,500 shares in 2019 and 10,680 in 2020. As of December 31, 2016, the estimated future compensation expense for the unvested shares was approximately $2,446 based on the closing share price of our common shares on December 31, 2016 of $25.20. The weighted average period over which the compensation expense will be recorded is approximately 22 months. During the years ended December 31, 2016, 2015 and 2014, we recorded $1,623, $935 and $984, respectively, of compensation expense related to our 2012 Plan.
At December 31, 2016, 2,745,140 common shares remain available for issuance under the 2012 Plan.
2016 Share Purchases:
On September 26, 2016 and September 30, 2016, we purchased an aggregate of 11,017 and 1,043, respectively, of our common shares valued at $27.64 and $26.90 per common share, respectively, the closing price of our common shares on Nasdaq on those days, 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.
2015 Share Issuances and Purchases:
In connection with the CCIT Merger in January 2015, we issued 28,439,111 of our common shares to former holders of CCIT common stock.
On June 5, 2015, we issued 880,000 of our common shares in connection with our acquisition of an interest in RMR Inc., as further described in Note 13.
On September 24, 2015, we purchased an aggregate of 6,851 of our common shares valued at $19.04 per common share, the closing price of our common shares on the NYSE on that day, 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.
During the year ended December 31, 2015, we issued 37,689 of our common shares to RMR LLC as part of the business management fees payable by us under our business management agreement. See Note 12 for further information regarding this agreement.
Distributions:
During the years ended December 31, 2016 and 2015, we paid distributions on our common shares as follows:

21


Declaration
 
Record
 
Paid
 
Distributions
 
Total
Date
 
Date
 
Date
 
Per Share
 
Distributions
1/11/2016
 
1/22/2016
 
2/23/2016
 
$
0.5000

 
$
44,709

4/13/2016
 
4/25/2016
 
5/19/2016
 
0.5000

 
44,687

7/12/2016
 
7/22/2016
 
8/18/2016
 
0.5100

 
45,587

10/11/2016
 
10/21/2016
 
11/17/2016
 
0.5100

 
45,587

 
 
 
 
 
 
$
2.0200

 
$
180,570

 
 
 
 
 
 
 
 
 
1/12/2015
 
1/23/2015
 
2/24/2015
 
$
0.4800

 
$
28,782

1/16/2015
 
1/28/2015
 
2/27/2015
 
0.1493

(1) 
8,953

4/13/2015
 
4/24/2015
 
5/21/2015
 
0.3444

(2) 
30,511

7/13/2015
 
7/24/2015
 
8/20/2015
 
0.5000

 
44,664

10/12/2015
 
10/23/2015
 
11/19/2015
 
0.5000

 
44,687

11/16/2015
 
11/27/2015
 
12/14/2015
 
0.2100

(3) 
18,809

 
 
 
 
 
 
$
2.1837

 
$
176,406

(1)
This prorated distribution was calculated based upon our then historical quarterly dividend rate ($0.48 per share per quarter) for the period from January 1, 2015 to January 28, 2015, its payment was conditioned upon the closing of the CCIT Merger and it was intended to permit us to align the two companies’ distributions for the first quarter of 2015.
(2)
This prorated distribution was calculated based on a quarterly distribution rate of $0.50 per share for the period from and including January 29, 2015 (the effective date of the CCIT Merger) through March 31, 2015.
(3)
As described in Note 13, on December 14, 2015, we distributed 1,580,055 shares, or 0.0177 of a share for each of our common shares, of RMR Inc. shares of class A common stock we owned to our shareholders as a special distribution. The difference between the cost basis and fair value of those shares on the date of distribution of $23,717 was recorded as a loss on distribution to common shareholders of RMR Inc. common stock in our consolidated statements of comprehensive income.
Distributions per share paid or payable by us to our common shareholders for the years ended December 31, 2016, 2015 and 2014 were $2.02, $2.1837 and $1.90, respectively. The distribution of shares of class A common stock of RMR Inc. described above resulted in a taxable in-kind distribution of $0.21 for each of our common shares. The characterization of our distributions for 2016 was 62.72% ordinary income, 0.70% qualified dividend and 36.58% return of capital, for 2015 was 54.33% ordinary income, 39.77% capital gain, 4.96% unrecaptured Section 1250 gain and 0.94% qualified dividend, and for 2014 was 98.64% ordinary income and 1.36% return of capital.
On January 13, 2017, we declared a regular quarterly distribution of $0.51 per common share, or approximately $45,600, to shareholders of record on January 23, 2017. We expect to pay this distribution on or about February 21, 2017.

22



Note 10. Cumulative Other Comprehensive Income (Loss)
The following tables present changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the years ended December 31, 2016, 2015 and 2014:
 
 
Unrealized Gain (Loss)
 
Unrealized
 
Equity in
 
 
 
 
on Investment in
 
Gains
 
Unrealized Gain
 
 
 
 
Available for
 
on Derivative
 
(Loss) of an
 
 
 
 
Sale Securities
 
Instruments (1)
 
Investee (2)
 
Total
Balance at December 31, 2013
 
$

 
$

 
$
(25
)
 
$
(25
)
 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 

 
45

 
45

Amounts reclassified from cumulative other comprehensive income to net income
 

 

 
(43
)
 
(43
)
Net current period other comprehensive income
 

 

 
2

 
2

Balance at December 31, 2014
 

 

 
(23
)
 
(23
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
(19,820
)
 
61

 
(99
)
 
(19,858
)
Amounts reclassified from cumulative other comprehensive income (loss) to net income
 

 
215

 
79

 
294

Net current period other comprehensive income (loss)
 
(19,820
)
 
276

 
(20
)
 
(19,564
)
Balance at December 31, 2015
 
(19,820
)
 
276

 
(43
)
 
(19,587
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
39,814

 
(284
)
 
152

 
39,682

Amounts reclassified from cumulative other comprehensive income (loss) to net income
 

 
377

 

 
377

Net current period other comprehensive income
 
39,814

 
93

 
152

 
40,059

Balance at December 31, 2016
 
$
19,994

 
$
369

 
$
109

 
$
20,472

(1)
Amounts reclassified from cumulative other comprehensive income is included in interest expense in our consolidated statements of comprehensive income.
(2)
Amounts reclassified from cumulative other comprehensive income (loss) is included in equity in earnings of an investee in our consolidated statements of comprehensive income.
Note 11. Weighted Average Common Shares
We calculate basic earnings per common share by dividing net income attributed to SIR 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):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Weighted average common shares for basic earnings per share
 
89,304

 
86,699

 
55,964

Effect of dilutive securities: unvested share awards
 
20

 
9

 
71

Weighted average common shares for diluted earnings per share
 
89,324

 
86,708

 
56,035


23


Note 12. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations. See Note 13 for further information regarding our relationship, agreements and transactions with RMR LLC.
Fees. Our management agreements with RMR LLC provide for an annual base management fee, an annual incentive management fee and property management and construction supervision fees, payable in cash:
Base Management Fee. The annual base management fee payable to RMR LLC by us for each applicable period is equal to the lesser of:
the sum of (a) 0.5% of the average aggregate historical cost of the real estate assets acquired from a REIT to which RMR LLC provided business management or property management services, or the Transferred Assets, plus (b) 0.7% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets up to $250,000, plus (c) 0.5% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets exceeding $250,000; and
the sum of (a) 0.7% of the average closing price per share of our common shares on the applicable stock exchange on which such shares are principally traded, during such period, multiplied by the average number of our common shares outstanding during such period, plus the daily weighted average of the aggregate liquidation preference of each class of our preferred shares outstanding during such period, plus the daily weighted average of the aggregate principal amount of our consolidated indebtedness during such period, or, together, our Average Market Capitalization, up to $250,000, plus (b) 0.5% of our Average Market Capitalization exceeding $250,000.
The average aggregate historical cost of our real estate investments includes our consolidated assets invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and costs which may be allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar non-cash reserves.
Incentive Fee. The incentive fee which may be earned by RMR LLC for an annual period is calculated as follows:
An amount, subject to a cap, based on the value of our common shares outstanding, equal to 12% of the product of:
our equity market capitalization on the last trading day of the year immediately prior to the relevant measurement period, and
the amount (expressed as a percentage) by which the total returns per share realized by our common shareholders (i.e., share price appreciation plus dividends) exceeds the total shareholder return of the SNL U.S. REIT Equity Index (in each case subject to certain adjustments) for the relevant measurement period.
The measurement periods are generally three year periods ending with the year for which the incentive fee is being calculated, with shorter periods applicable in the case of the calculation of the incentive fee for 2015 (two years) and 2014 (one year).
The benchmark return per share is adjusted if our total return per share exceeds 12% per year in any measurement period and, generally, no incentive management fee is payable by us unless our total return per share during the measurement period is positive.
The incentive management fee is subject to a cap equal to the value of 1.5% of the number of our common shares then outstanding multiplied by the average closing price of our common shares during the 10 consecutive trading days having the highest average closing prices during the final 30 trading days of the relevant measurement period.

24


If our financial statements are restated due to material non-compliance with any financial reporting requirements under the securities laws as a result of the bad faith, fraud, willful misconduct or gross negligence of RMR LLC, for one or more periods in respect of which RMR LLC received an incentive management fee, the incentive management fee payable with respect to periods for which there has been a restatement shall be recalculated by, and approved by a majority vote of, our Independent Trustees, and RMR LLC may be required to pay us an amount equal to the value in excess of that which RMR LLC would have received based upon the incentive management fee as recalculated, either in cash or our common shares.
Property Management and Construction Supervision Fees. The property management fees payable to RMR LLC by us for each applicable period are equal to 3% of gross collected rents and the construction supervision fees payable to RMR LLC by us for each applicable period are equal to 5% of construction costs.
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $21,746, $19,994 and $10,095 for the years ended December 31, 2016, 2015 and 2014, respectively. The net business management fees we recognized are included in general and administrative expenses for these periods. The net business management fees we recognized for the years ended December 31, 2016 and 2015 reflect a reduction of $1,378 and $838, respectively, for the amortization of the liability we recorded in connection with the Up-C Transaction, as further described in Note 2 under “—Available for Sale Securities.” 
In accordance with the then applicable terms of our business management agreement, we issued 34,206 of our common shares to RMR LLC for the period from January 1, 2015 to May 31, 2015, and 36,827 of our common shares to RMR LLC for the year ended December 31, 2014, in each case as payment for a part of the base business management fee we recognized. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash. No incentive fee was payable to RMR LLC under our business management agreement for the years ended December 31, 2016, 2015 or 2014. In March 2014, we issued 32,865 of our common shares to RMR LLC for the incentive fee for the year ended December 31, 2013 pursuant to our business management agreement.
Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $12,681, $11,582 and $6,240 for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our consolidated financial statements.
Expense Reimbursement. 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 $7,533, $4,391 and $2,012 for property management related expenses for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are included in other operating expenses in our consolidated statements of comprehensive income for these periods. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC's employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of centralized accounting personnel and our share of RMR LLC’s costs for providing our internal audit function. Our Audit Committee appoints our Director of Internal Audit and our Compensation Committee approves the costs of our internal audit function. The amounts recognized as expense for internal audit costs were $235, $252 and $286 for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are included in general and administrative expenses in our consolidated statements of comprehensive income for these periods.
Term. Our management agreements with RMR LLC have terms that end on December 31, 2036, and automatically extend on December 31st of each year for an additional year, so that the terms of our management agreements thereafter end on the 20th anniversary of the date of the extension.
Termination Rights. We have the right to terminate one or both of our management agreements with RMR LLC: (1) at any time on 60 days’ written notice for convenience, (2) immediately on written notice for cause, as defined therein, (3) on 60 days’ written notice given within 60 days after the end of an applicable calendar year for a performance reason, as defined therein, and (4) 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 management agreements for good reason, as defined therein.
Termination Fee. If we terminate one or both of our management a