Equity Investment in Select Income REIT

As described in Note 11, as of September 30, 2018, we owned 24,918,421, or approximately 27.8%, of the then outstanding SIR common shares. SIR is a REIT that primarily owns single tenant, net leased properties. As described in Note 1, we completed the Secondary Sale on October 9, 2018. We expect to record a loss on the Secondary Sale of approximately $19,372 in the fourth quarter of 2018.

We accounted for our investment in SIR under the equity method. As a result of the Secondary Sale, our equity method investment in SIR has been reclassified to discontinued operations in our condensed consolidated financial statements as of September 30, 2018. See Note 13 for further information regarding discontinued operations.

Under the equity method, we recorded our proportionate share of SIR’s net income as equity in earnings of SIR included in discontinued operations in our condensed consolidated statements of comprehensive income. We recorded $9,253 and $9,453 of equity in the earnings of SIR for the three months ended September 30, 2018 and 2017, respectively, and $23,843 and $20,271 of equity in the earnings of SIR for the nine months ended September 30, 2018 and 2017, respectively. Our other comprehensive income includes our proportionate share of SIR’s unrealized gains (losses) of ($47) and $1,236 for the three months ended September 30, 2018 and 2017, respectively, and $28 and $5,339 for the nine months ended September 30, 2018 and 2017, respectively.

The adjusted GAAP cost basis of our investment 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 September 30, 2018 and December 31, 2017, our basis difference was $120,492 and $87,137, respectively, and as required under GAAP, we were 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. The increase in the basis difference primarily related to SIR's capital finance activities and changes in its net equity during the nine months ended September 30, 2018. This accretion increased our equity in the earnings of SIR by $1,044 and $736 for the three months ended September 30, 2018 and 2017, respectively, and $3,131 and $2,209 for the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, our investment in SIR had a carrying value of $453,275 and a market value, based on the closing price of SIR common shares on Nasdaq on September 30, 2018, of $546,710.

We received aggregate cash distributions from SIR of $12,708 during both the three months ended September 30, 2018 and 2017, and $38,124 and $38,125 during the nine months ended September 30, 2018 and 2017, respectively.

During the three months ended September 30, 2018 and 2017, SIR issued a net amount of 45,774 and 44,724 common shares, respectively. During the nine months ended September 30, 2018 and 2017, SIR issued a net amount of 63,157 and 59,502 common shares, respectively. We recognized a gain on issuance of shares by SIR of $21 and $51 for the three months ended September 30, 2018 and 2017, respectively, and a gain on issuance of shares by SIR of $29 and $72 for the nine months ended September 30, 2018 and 2017, respectively, as a result of the per share issuance price of these SIR common shares being above 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, 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



	September 30,		December 31,
	2018		2017
Real estate properties, net	$	3,926,606	$	3,905,616
Acquired real estate leases, net	433,947		477,577
Properties held for sale	15,289		5,829
Cash and cash equivalents	25,982		658,719
Rents receivable, net	131,642		127,672
Other assets, net	188,033		127,617
Total assets	$	4,721,499	$	5,303,030

Unsecured revolving credit facility	$	108,000	$	—
Industrial Logistics Properties Trust revolving credit facility	380,000		750,000
Unsecured term loan, net	—		348,870
Senior unsecured notes, net	1,430,688		1,777,425
Mortgage notes payable, net	210,624		210,785
Assumed real estate lease obligations, net	62,176		68,783
Other liabilities	150,371		155,348
Total shareholders' equity attributable to SIR	2,061,556		1,991,819
Noncontrolling interest in consolidated subsidiary	318,084		—
Total liabilities and shareholders' equity	$	4,721,499	$	5,303,030

Condensed Consolidated Statements of Income



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Rental income	$	101,833		$	98,635		$	298,003		$	293,020
Tenant reimbursements and other income	20,048			19,379			60,514			57,158
Total revenues	121,881			118,014			358,517			350,178

Real estate taxes	12,518			11,489			36,748			33,168
Other operating expenses	14,814			14,649			43,714			41,039
Depreciation and amortization	35,371			34,713			105,326			102,770
Acquisition and transaction related costs	3,796			—			3,796			—
General and administrative	15,331			1,608			47,353			24,697
Write-off of straight line rents, net	—			—			10,626			12,517
Loss on asset impairment	—			—			—			4,047
Loss on impairment of real estate assets	9,706			—			9,706			229
Total expenses	91,536			62,459			257,269			218,467
Operating income	30,345			55,555			101,248			131,711

Dividend income	397			397			1,190			1,190
Unrealized gain on equity securities	22,771			—			53,159			—
Interest income	133			19			753			39
Interest expense	(23,287		)	(24,383		)	(69,446		)	(68,278		)
Loss on early extinguishment of debt	—			—			(1,192		)	—
Income before income tax expense, equity in earnings of an investee
and gain on of real estate	30,359			31,588			85,712			64,662
Income tax expense	(185		)	(177		)	(446		)	(364		)
Equity in earnings of an investee	831			31			882			533
Net income before gain on sale of real estate	31,005			31,442			86,148			64,831
Gain on sale of real estate	4,075			—			4,075			—
Net income	35,080			31,442			90,223			64,831
Net income allocated to noncontrolling interest	(5,597		)	—			(15,841		)	—
Net income attributed to SIR	$	29,483		$	31,442		$	74,382		$	64,831

Weighted average common shares outstanding (basic)	89,410			89,355			89,395			89,341
Weighted average common shares outstanding (diluted)	89,437			89,379			89,411			89,364
Net income attributed to SIR per common share (basic and diluted)	$	0.33		$	0.35		$	0.83		$	0.73