Equity Investment in Select Income REIT

As described in Note 7, as of December 31, 2017, we owned 24,918,421, or approximately 27.8%, of the then outstanding SIR common shares. SIR is a REIT which primarily owns single tenant, net leased properties. We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our consolidated statements of comprehensive income (loss). During the years ended December 31, 2017, 2016 and 2015, we recorded $21,584, $35,381 and $21,882 of equity in earnings of SIR, respectively. Our other comprehensive income (loss) includes our proportionate share of SIR’s unrealized gains (losses) of $8,967, $11,207 and ($5,493) for the years ended December 31, 2017, 2016 and 2015, respectively.

The cost of our investments in SIR exceeded our proportionate share of SIR’s total shareholders’ equity book value on their dates of acquisition by an aggregate of $166,272. As required under GAAP, we were amortizing this difference to equity in earnings of investees over the average remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of the respective dates of our acquisitions. This amortization decreased our equity in the earnings of SIR by $4,742 for the year ended December 31, 2015. We recorded a loss on impairment of $203,297 of our SIR investment during the second quarter of 2015 resulting in the carrying value of our SIR investment being less than our proportionate share of SIR’s total shareholders’ equity book value as of June 30, 2015. As a result, the previous basis difference was eliminated and as of December 31, 2017, we are accreting a basis difference of ($87,137) to earnings over the estimated remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of June 30, 2015. This accretion increased our equity in the earnings of SIR by $2,944 and $2,956 for the years ended December 31, 2017 and 2016, respectively.

As of December 31, 2017, our investment in SIR had a carrying value of $467,499 and a market value, based on the closing price of SIR common shares on Nasdaq on December 29, 2017, of $626,200. We periodically evaluate our equity investment in SIR for possible indicators of other than temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. These indicators may include the length of time the market value of our investment is below our cost basis, the financial condition of SIR, our intent and ability to be a long term holder of the investment and other considerations. If the decline in fair value is judged to be other than temporary, we may record an impairment charge to adjust the basis of the investment to its fair value.

During years ended December 31, 2017, 2016 and 2015, we received cash distributions from SIR totaling $50,832, $50,335 and $47,030, respectively. In addition, during the year ended December 31, 2015, we received from SIR a non-cash distribution of 441,056 shares of RMR Inc. class A common stock valued at $5,244.

During years ended December 31, 2017, 2016 and 2015, SIR issued 59,502, 65,900 and 29,414,279 common shares, respectively. We recognized a gain (loss) on issuance of shares by SIR of $72, $86 and ($42,145), respectively, during the years ended December 31, 2017, 2016 and 2015 as a result of the per share issuance price of these SIR common shares being above (below) the then average per share carrying value of our SIR common shares.

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

Consolidated Balance Sheets



	As of December 31,
	2017		2016
Real estate properties, net	$	3,905,616	$	3,899,792
Properties held for sale	5,829		—
Acquired real estate leases, net	477,577		506,298
Cash and cash equivalents	658,719		22,127
Rents receivable, net	127,672		124,089
Other assets, net	127,617		87,376
Total assets	$	5,303,030	$	4,639,682

Unsecured revolving credit facility	$	—	$	327,000
ILPT revolving credit facility	750,000		—
Unsecured term loan, net	348,870		348,373
Senior unsecured notes, net	1,777,425		1,430,300
Mortgage notes payable, net	210,785		245,643
Assumed real estate lease obligations, net	68,783		77,622
Other liabilities	155,348		136,782
Shareholders' equity	1,991,819		2,073,962
Total liabilities and shareholders' equity	$	5,303,030	$	4,639,682

Consolidated Statements of Income



	Year Ended December 31,
	2017			2016			2015
Rental income	$	392,285		$	387,015		$	364,139
Tenant reimbursements and other income	75,818			74,992			64,226
Total revenues	468,103			462,007			428,365
Real estate taxes	44,131			42,879			37,460
Other operating expenses	55,567			52,957			41,953
Depreciation and amortization	137,672			133,762			122,906
Acquisition and transaction related costs	1,075			306			21,987
General and administrative	54,818			28,602			25,859
Write-off of straight line rents receivable, net	12,517			5,484			—
Loss on asset impairment	4,047			—			—
Loss on impairment of real estate assets	229			—			—
Total expenses	310,056			263,990			250,165
Operating income	158,047			198,017			178,200
Dividend income	1,587			1,268			1,666
Interest expense	(92,870		)	(82,620		)	(73,885		)
Loss on early extinguishment of debt	—			—			(6,845		)
Loss on distribution to common shareholders of The RMR Group Inc. common stock	—			—			(23,717		)
Income before income tax expense and equity in earnings of an investee	66,764			116,665			75,419
Income tax expense	(466		)	(448		)	(515		)
Equity in earnings of an investee	608			137			20
Net income	66,906			116,354			74,924
Net income allocated to noncontrolling interest	—			(33		)	(176		)
Net income attributed to SIR	$	66,906		$	116,321		$	74,748

Weighted average common shares outstanding (basic)	89,351			89,304			86,699
Weighted average common shares outstanding (diluted)	89,370			89,324			$	86,708
Net income attributed to SIR per common share (basic and diluted)	$	0.75		$	1.30		$	0.86