Note 11. Equity Investment in Select Income REIT

As described in Note 6, as of December 31, 2015, we owned 24,918,421, or approximately 27.9%, of the then outstanding SIR common shares. SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties.

We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our consolidated statements of comprehensive income (loss). For the year ended December 31, 2015 and during the period from July 9, 2014, the date of our initial investment in SIR, to December 31, 2014, we recorded $21,882 and $17,113 of equity in the earnings of SIR, respectively.

As of December 31, 2015 and 2014, our investment in SIR had a carrying value of $491,369 and $680,137, respectively, and a market value, based on the closing price of SIR common shares on the NYSE on December 31, 2015 and 2014, of $493,884 and $524,815, respectively.

During the year ended December 31, 2015 and the period from July 9, 2014 to December 31, 2014, SIR issued 29,414,279 and 67,947 common shares, respectively. We recognized a loss on issuance of shares by an equity investee of $42,145 and $53, respectively, during the year ended December 31, 2015 and the period from July 9, 2014 to December 31, 2014 as a result of the per share issuance price of these SIR common shares being below the average per share carrying value of our SIR common shares.

In performing our periodic evaluation of other than temporary impairment of our investment in SIR during the second quarter of 2015, we determined, based on the length of time and the extent to which the market value of our SIR investment was below our carrying value, that the decline in fair value was other than temporary. Accordingly, we recorded a $203,297 loss on impairment to reduce the carrying value of our SIR investment to its estimated fair value during the second quarter of 2015. We estimated fair value using the closing price of SIR common shares on the NYSE as of June 30, 2015.

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 acquisition. This amortization decreased our equity in the earnings of SIR by $4,742 for the year ended December 31, 2015, and $6,237 for the period from July 9, 2014 to December 31, 2014. Recording the loss on impairment noted above resulted in the carrying value of our SIR investment to be less than our proportionate share of SIR’s total shareholders’ book equity as of June 30, 2015. As a result, the previous basis difference was eliminated and we are currently amortizing a basis difference of ($95,035) to earnings over the estimated remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of June 30, 2015. This amortization increased our equity in the earnings of SIR by for the year ended December 31, 2015 by $1,480.

During the year ended December 31, 2015 and during the period from July 9, 2014 to December 31, 2014, we received cash distributions from SIR totaling $47,030 and $20,640, respectively. In addition, on December 14, 2015, we received from SIR a non-cash distribution of 441,056 shares of RMR Inc. class A common stock valued at $5,244.

The following summarized financial data of SIR as reported in SIR’s Annual Report on Form 10-K for the year ended December 31, 2015, or the SIR Annual Report, includes the financial position and results of operations for periods prior to July 9, 2014 (the date on which we acquired our initial interest in SIR). References in our 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 financial statements.

Consolidated Balance Sheets:


	December 31,		December 31,
	2015		2014
Real estate properties, net	$	3,954,889	$	1,772,510
Acquired real estate leases, net		566,195		120,700
Cash and cash equivalents		17,876		13,504
Rents receivable, net		99,307		68,385
Other assets, net		57,850		18,132
Total assets	$	4,696,117	$	1,993,231

Revolving credit facility	$	303,000	$	77,000
Term loan		350,000		350,000
Senior unsecured notes, net		1,435,632		-
Mortgage notes payable, net		286,747		18,816
Assumed real estate lease obligations, net		86,495		26,475
Other liabilities		137,283		40,493
Shareholders' equity		2,096,960		1,480,447
Total liabilities and shareholders' equity	$	4,696,117	$	1,993,231

Consolidated Statements of Income:


	Year Ended December 31,
	2015		2014		2013
Rental income	$	364,139	$	189,743	$	159,011
Tenant reimbursements and other income		64,226		32,937		29,312
Total revenues		428,365		222,680		188,323

Real estate taxes		37,460		22,202		20,271
Other operating expenses		41,953		18,597		16,111
Depreciation and amortization		122,906		41,054		31,091
Acquisition related costs		21,987		7,348		2,002
General and administrative		25,859		14,881		12,423
Total expenses		250,165		104,082		81,898
Operating income		178,200		118,598		106,425

Dividend income		1,666		-		-
Interest expense		(73,885)		(12,974)		(13,763)
(Loss) gain on early extinguishment of debt		(6,845)		243		-
Loss on distribution of The RMR Group Inc. common stock		(23,717)		-		-
Income before income tax (expense) benefit and equity in earnings of an investee		75,419		105,867		92,662
Income tax (expense) benefit		(515)		(175)		96
Equity in earnings of an investee		20		87		334
Income before gain on sale of property		74,924		105,779		93,092
Gain on sale of property		-		116		-
Net income		74,924		105,895		93,092
Net income allocated to noncontrolling interest		(176)		-		-
Net income attributed to SIR	$	74,748	$	105,895	$	93,092

Weighted average common shares outstanding (basic)		86,699		55,964		44,539
Weighted average common shares outstanding (diluted)		86,708		56,035		44,592
Basic and diluted net income attributed to SIR per common share	$	0.86	$	1.89	$	2.09