Equity Investment in Select Income REIT

As described in Note 11, as of March 31, 2017, we owned 24,918,421, or approximately 27.9%, of the then outstanding SIR common shares. SIR is a real estate investment trust which owns properties that are primarily leased to single tenants.

We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. We recorded $2,611 and $9,857 of equity in the earnings of SIR for the three months ended March 31, 2017 and 2016, respectively. Our other comprehensive income includes our proportionate share of SIR’s unrealized gains of $4,492 for both the three months ended March 31, 2017 and 2016.

The adjusted GAAP cost basis of our investments in SIR was less than our proportionate share of SIR’s total shareholders’ equity book value on the dates we acquired the shares. As of March 31, 2017, our remaining basis difference was $89,449 and as required under GAAP, we are accreting this basis difference to earnings over the estimated remaining useful lives of certain real estate assets and intangible assets and liabilities owned by SIR. This accretion increased our equity in the earnings of SIR by $736 and $740 for the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017, our investment in SIR had a carrying value of $482,103 and a market value, based on the closing price of SIR common shares on the Nasdaq on March 31, 2017, of $642,646. We periodically evaluate our equity investment in SIR for possible indicators of other than temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. These indicators may include the length of time the market value of our investment is below our cost basis, the financial condition of SIR, our intent and ability to be a long term holder of the investment and other considerations. If the decline in fair value is judged to be other than temporary, we may record an impairment charge to adjust the basis of the investment to its fair value.

We received cash distributions from SIR totaling $12,708 and $12,459 during the three months ended March 31, 2017 and 2016, respectively.

The following are summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, or the SIR Quarterly Report. References in our condensed consolidated financial statements to the SIR Quarterly Report are included as references to the source of the data only, and the information in the SIR Quarterly Report is not incorporated by reference into our condensed consolidated financial statements.

Condensed Consolidated Balance Sheets



	March 31,		December 31,
	2017		2016
Real estate properties, net	$	3,881,945	$	3,899,792
Acquired real estate leases, net	486,932		506,298
Cash and cash equivalents	18,101		22,127
Rents receivable, net	111,688		124,089
Other assets, net	115,399		87,376
Total assets	$	4,614,065	$	4,639,682

Unsecured revolving credit facility	$	342,000	$	327,000
Unsecured term loan, net	348,497		348,373
Senior unsecured notes, net	1,431,368		1,430,300
Mortgage notes payable, net	245,418		245,643
Assumed real estate lease obligations, net	75,411		77,622
Other liabilities	120,168		136,782
Shareholders' equity	2,051,203		2,073,962
Total liabilities and shareholders' equity	$	4,614,065	$	4,639,682

Condensed Consolidated Statements of Income



	Three Months Ended March 31,
	2017			2016
Rental income	$	97,344		$	97,860
Tenant reimbursements and other income	18,950			19,372
Total revenues	116,294			117,232

Real estate taxes	10,843			10,288
Other operating expenses	12,867			12,958
Depreciation and amortization	33,740			33,469
Acquisition related costs	—			58
General and administrative	14,888			6,976
Reserve for straight line rent receivable, net	12,517			—
Loss on asset impairment	4,047			—
Total expenses	88,902			63,749
Operating income	27,392			53,483

Dividend income	397			—
Interest expense	(21,087		)	(20,609		)
Income before income tax expense and equity in earnings of an investee	6,702			32,874
Income tax expense	(102		)	(139		)
Equity in earnings of an investee	128			77
Net income	6,728			32,812
Net income allocated to noncontrolling interest	—			(33		)
Net income attributed to SIR	$	6,728		$	32,779

Weighted average common shares outstanding (basic)	89,331			89,286
Weighted average common shares outstanding (diluted)	$	89,348		$	89,295
Net income attributed to SIR per common share (basic and diluted)	$	0.08		$	0.37