0001558370-16-004966.txt : 20160428 0001558370-16-004966.hdr.sgml : 20160428 20160428161935 ACCESSION NUMBER: 0001558370-16-004966 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 57 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160428 DATE AS OF CHANGE: 20160428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Government Properties Income Trust CENTRAL INDEX KEY: 0001456772 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 264273474 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34364 FILM NUMBER: 161600359 BUSINESS ADDRESS: STREET 1: TWO NEWTON PLACE STREET 2: 255 WASHINGTON STREET CITY: NEWTON STATE: MA ZIP: 02458 BUSINESS PHONE: 617-219-1440 MAIL ADDRESS: STREET 1: TWO NEWTON PLACE STREET 2: 255 WASHINGTON STREET CITY: NEWTON STATE: MA ZIP: 02458 10-Q 1 gov-20160331x10q.htm 10-Q GOV_CurrentFolio_10Q

Xa

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-34364

 

GOVERNMENT PROPERTIES INCOME TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Maryland

 

26-4273474

(State or Other Jurisdiction of Incorporation or
Organization)

 

(IRS Employer Identification No.)

 

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634

(Address of Principal Executive Offices)  (Zip Code)

 

617-219-1440

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

 

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of April 26, 2016: 71,126,308

 

 

 


 

GOVERNMENT PROPERTIES INCOME TRUST

 

FORM 10-Q

 

March 31, 2016

 

INDEX

 

 

 

 

PART I 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets — March 31, 2016 and December 31, 2015

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended March 31, 2016 and 2015

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows —Three Months Ended March 31, 2016 and 2015

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4. 

Controls and Procedures

30

 

 

 

 

Warning Concerning Forward Looking Statements

31

 

 

 

 

Statement Concerning Limited Liability

34

 

 

 

PART II 

Other Information

 

 

 

 

Item 1A. 

Risk Factors

35

 

 

 

Item 6. 

Exhibits

36

 

 

 

 

Signatures

37

 

 

 

References in this Quarterly Report on Form 10-Q to “the Company”, “GOV”, ”we”, “us” or “our” include Government Properties Income Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

1

 


 

PART I.       Financial Information

 

Item 1.  Financial Statements

 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

Land

 

$

257,716

 

$

253,058

Buildings and improvements

 

 

1,509,921

 

 

1,443,074

    Total real estate properties, gross

 

 

1,767,637

 

 

1,696,132

Accumulated depreciation

 

 

(265,843)

 

 

(255,879)

    Total real estate properties, net

 

 

1,501,794

 

 

1,440,253

 

 

 

 

 

 

 

Equity investment in Select Income REIT

 

 

493,259

 

 

491,369

Assets of discontinued operations

 

 

12,502

 

 

12,468

Assets of property held for sale

 

 

3,098

 

 

3,098

Acquired real estate leases, net

 

 

123,300

 

 

118,267

Cash and cash equivalents

 

 

15,698

 

 

8,785

Restricted cash

 

 

713

 

 

1,022

Rents receivable, net

 

 

46,617

 

 

45,269

Deferred leasing costs, net

 

 

17,909

 

 

14,299

Other assets, net

 

 

44,505

 

 

33,680

Total assets

 

$

2,259,395

 

$

2,168,510

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

311,000

 

$

117,000

Unsecured term loans, net

 

 

546,660

 

 

546,490

Senior unsecured notes, net

 

 

346,095

 

 

345,809

Mortgage notes payable, net

 

 

29,053

 

 

136,299

Liabilities of discontinued operations

 

 

75

 

 

54

Liabilities of property held for sale

 

 

32

 

 

43

Accounts payable and other liabilities

 

 

48,979

 

 

50,543

Due to related persons

 

 

4,380

 

 

2,886

Assumed real estate lease obligations, net

 

 

12,224

 

 

12,735

Total liabilities

 

 

1,298,498

 

 

1,211,859

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 100,000,000 shares

 

 

 

 

 

 

    authorized, 71,126,308 shares issued and outstanding

 

 

711

 

 

711

Additional paid in capital

 

 

1,472,510

 

 

1,472,482

Cumulative net income

 

 

55,873

 

 

38,486

Cumulative other comprehensive income (loss)

 

 

2,548

 

 

(14,867)

Cumulative common distributions

 

 

(570,745)

 

 

(540,161)

Total shareholders’ equity

 

 

960,897

 

 

956,651

Total liabilities and shareholders’ equity

 

$

2,259,395

 

$

2,168,510

 

See accompanying notes.

 

 

 

 

 

 

2

 


 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2016

    

2015

 

 

 

 

 

 

 

Rental income 

 

$

63,611

 

$

62,659

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Real estate taxes

 

 

7,653

 

 

7,410

Utility expenses

 

 

4,174

 

 

4,571

Other operating expenses

 

 

12,911

 

 

12,210

Depreciation and amortization

 

 

18,324

 

 

17,215

Acquisition related costs

 

 

152

 

 

6

General and administrative

 

 

3,526

 

 

4,004

Total expenses

 

 

46,740

 

 

45,416

 

 

 

 

 

 

 

Operating income

 

 

16,871

 

 

17,243

Interest income

 

 

6

 

 

12

Interest expense (including net amortization of debt premium and discounts

 

 

 

 

 

 

  and debt issuance costs of $471 and $332, respectively)

 

 

(9,364)

 

 

(9,302)

Gain on early extinguishment of debt

 

 

104

 

 

 —

Loss on issuance of shares by Select Income REIT

 

 

 —

 

 

(40,771)

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

  and equity in earnings (losses) of investees

 

 

7,617

 

 

(32,818)

Income tax expense

 

 

(15)

 

 

(30)

Equity in earnings (losses) of investees

 

 

9,934

 

 

(316)

Income (loss) from continuing operations

 

 

17,536

 

 

(33,164)

Loss from discontinued operations

 

 

(149)

 

 

(206)

Net income (loss)

 

 

17,387

 

 

(33,370)

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

Unrealized gain on investment in available for sale securities

 

 

12,871

 

 

 —

Equity in unrealized gain of investees

 

 

4,544

 

 

58

Other comprehensive income

 

 

17,415

 

 

58

Comprehensive income (loss)

 

$

34,802

 

$

(33,312)

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic and diluted)

 

 

71,031

 

 

70,266

 

 

 

 

 

 

 

Per common share amounts (basic and diluted):

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.25

 

$

(0.47)

Income (loss) from discontinued operations

 

$

 

$

Net income (loss)

 

$

0.24

 

$

(0.47)

 

See accompanying notes.

 

3

 


 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2016

    

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

17,387

 

$

(33,370)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

10,237

 

 

9,626

Net amortization of debt premiums and discounts and debt issuance costs

 

 

471

 

 

332

Gain on early extinguishment of debt

 

 

(104)

 

 

 —

Straight line rental income

 

 

(149)

 

 

(663)

Amortization of acquired real estate leases

 

 

7,712

 

 

7,340

Amortization of deferred leasing costs

 

 

709

 

 

556

Other non-cash (income) expense, net

 

 

(105)

 

 

507

Equity in (earnings) losses of investees

 

 

(9,934)

 

 

316

Loss on issuance of shares by Select Income REIT

 

 

 —

 

 

40,771

Distributions of earnings from Select Income REIT

 

 

9,117

 

 

2,176

Change in assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

309

 

 

(762)

Deferred leasing costs

 

 

(1,989)

 

 

(412)

Rents receivable

 

 

(1,215)

 

 

1,587

Other assets

 

 

1,849

 

 

2,699

Accounts payable and accrued expenses

 

 

(4,577)

 

 

(2,656)

Due to related persons

 

 

1,494

 

 

201

Net cash provided by operating activities

 

 

31,212

 

 

28,248

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(79,244)

 

 

 —

Real estate improvements

 

 

(4,964)

 

 

(2,678)

Investment in Select Income REIT

 

 

 —

 

 

(95,821)

Distributions in excess of earnings from Select Income REIT

 

 

3,342

 

 

11,354

Proceeds from sale of properties, net

 

 

 —

 

 

30,521

Net cash used in investing activities

 

 

(80,866)

 

 

(56,624)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Repayment of mortgage notes payable

 

 

(106,849)

 

 

(610)

Borrowings on unsecured revolving credit facility

 

 

204,000

 

 

75,000

Repayments on unsecured revolving credit facility

 

 

(10,000)

 

 

(20,000)

Debt issuance costs

 

 

 —

 

 

(16)

Distributions to common shareholders

 

 

(30,584)

 

 

(30,252)

Net cash provided by financing activities

 

 

56,567

 

 

24,122

Increase (decrease) in cash and cash equivalents

 

 

6,913

 

 

(4,254)

Cash and cash equivalents at beginning of period

 

 

8,785

 

 

13,791

Cash and cash equivalents at end of period

 

$

15,698

 

$

9,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

Interest paid

 

$

12,319

 

$

12,078

Income taxes paid

 

$

44

 

$

131

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

4

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

Note 1.    Basis of Presentation

 

The accompanying condensed consolidated financial statements of Government Properties Income Trust and its subsidiaries, or we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.  All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

 

The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets, impairment of real estate and equity method investments and the valuation of intangible assets.

 

Note 2.    Recent Accounting Pronouncements

 

On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changes how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact in our condensed consolidated financial statements.

 

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 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 condensed 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 loans, senior unsecured notes and mortgage notes payable of $3,510, $2,172 and $344, respectively, were reclassified from assets to the associated debt liability in our condensed consolidated balance sheets.

 

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 condensed 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. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect available for sale equity investments we hold.

 

5

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

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 condensed 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 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 15, 2016.  We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.   

 

Note 3.    Per Common Share Amounts

 

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):

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2016

 

2015

Weighted average common shares for basic earnings per share

 

71,031

 

 

70,266

Effect of dilutive securities: unvested share awards

 

 -

 

 

 -

Weighted average common shares for diluted earnings per share

 

71,031

 

 

70,266

 

 

 

 

 

 

Note 4.   Real Estate Properties

 

As of March 31, 2016, we owned 72 properties (92 buildings), with an undepreciated carrying value of $1,770,983,  excluding one property (one building) classified as discontinued operations with an undepreciated carrying value of $12,260. We generally lease space at our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leases expiring between 2016 and 2032.  Our leases generally require us to pay all or some property operating expenses and to provide all or most property management services.  During the three months ended March 31, 2016, we entered into 20 leases for 522,962 rentable square feet, including a 25,579 square foot expansion to be constructed at an existing property, for a weighted (by rentable square feet) average lease term of 11.6 years and we made commitments for approximately $20,469 of leasing related costs. We have estimated unspent leasing related obligations of $22,752 as of March 31, 2016. In addition, prior to the commencement of the lease, we have committed to redevelop and expand the existing property referenced above at an estimated cost of approximately $12,800.

 

Acquisition Activities

 

During the three months ended March 31, 2016, we acquired one office property (one building) located in Sacramento, CA with 337,811 rentable square feet.  This property was 86% leased, of which 71% was leased to the State of California and occupied by three separate agencies on the date of acquisition.  The purchase price was $79,244, excluding acquisition costs.  Our allocation of the purchase price of this acquisition based on the estimated fair values of

6

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

the acquired assets and assumed liabilities is presented in the table below. The allocation of the purchase price is based on preliminary estimates and may change upon completion of third party appraisals.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

    

Number

    

    

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

Buildings

 

 

 

 

Acquired

 

Other

Acquisition

 

 

 

 

 

Properties/

 

Square

 

Purchase

 

 

 

 

and

 

Acquired

 

Lease

 

Assumed

Date

 

Location

 

Type

 

Buildings

 

Feet

 

Price

 

Land

 

Improvements

 

Leases

 

Obligations

 

Liabilities

January 2016

 

Sacramento, CA

 

Office

 

1 / 1

 

337,811

 

$

79,244

 

$

4,658

 

$

61,330

 

$

13,525

 

$

(269)

 

$

 —

 

 

In April 2016, we exercised our option to purchase for $1,623 an adjacent land parcel at one of our existing properties in Atlanta, GA. We expect this transaction to close during the third quarter of 2016.

 

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

 

Disposition Activities – Continuing Operations

 

In 2015, we began marketing for sale an office property ( one building) in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 at March 31, 2016.  In March 2016, we entered into an agreement to sell this property.  The contract sales price is $4,500, which amount is before transaction costs we may incur.  This sale is subject to conditions and is currently expected to occur in the third quarter of 2016.  We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or that its terms will not change. We have classified this property as held for sale as of March 31, 2016.  The results of operations for this property are included in continuing operations in our condensed consolidated financial statements.  Summarized balance sheet information for the property is as follows:

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2016

 

2015

Real estate properties, net

 

$

3,071

 

$

3,071

Rents receivable

 

 

 -

 

 

1

Other assets

 

 

27

 

 

26

Assets of property held for sale

 

$

3,098

 

$

3,098

 

 

 

 

 

 

 

Other liabilities

 

$

32

 

$

43

Liabilities of property held for sale

 

$

32

 

$

43

 

 

 

 

 

 

 

 

Disposition Activities – Discontinued Operations

 

In March 2016, we entered into an agreement to sell an office property ( one building) in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at March 31, 2016.  The contract sales price is $14,750, which amount is before transaction costs we may incur.  This sale is subject to conditions, including the purchaser obtaining certain zoning entitlements, and is currently expected to occur in the first quarter of 2017.  We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or that its terms will not change. We have classified this property, which was held for sale prior to our adoption of ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, as a discontinued operation in our condensed consolidated financial statements. Summarized balance sheet and income statement information for the property is as follows:

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

 

Balance Sheets:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2016

 

2015

Real estate properties, net

 

$

12,260

 

$

12,260

Rents receivable

 

 

17

 

 

 -

Other assets

 

 

225

 

 

208

Assets of discontinued operations

 

$

12,502

 

$

12,468

 

 

 

 

 

 

 

Other liabilities

 

$

75

 

$

54

Liabilities of discontinued operations

 

$

75

 

$

54

 

Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months ended March 31,

 

 

2016

    

2015

Rental income

 

$

28

 

$

31

Real estate taxes

 

 

(23)

 

 

(70)

Utility expenses

 

 

(50)

 

 

(67)

Other operating expenses

 

 

(76)

 

 

(71)

General and administrative

 

 

(28)

 

 

(29)

Loss from discontinued operations

 

$

(149)

 

$

(206)

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 5.   Revenue Recognition

 

We recognize rental income from operating leases that contain fixed contractual rent changes on a straight line basis over the term of the lease agreements.  Certain of our leases with government tenants provide the tenant the right to terminate before the lease expiration date if its respective legislature or other funding authority does not appropriate the funding necessary for the government tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the fully executed term of the lease because we believe the occurrence of early terminations to be remote contingencies based on both our historical experience and our assessment of the likelihood of lease cancellation on a separate lease basis.

 

We increased rental income to record revenue on a straight line basis by $149 and $663 for the three months ended March 31, 2016 and 2015, respectively.  Rents receivable include $19,144 and $18,995 of straight line rent receivables at March 31, 2016 and December 31, 2015, respectively.

 

Note 6.   Concentration

 

Tenant and Credit Concentration

 

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. The U.S. Government, 12 state governments, and three other government tenants combined were responsible for approximately 92.8% and 92.7% of our annualized rental income, excluding one property (one building) classified as discontinued operations, as of March 31, 2016 and 2015, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 64.6% and 67.7% of our annualized rental income, excluding one property classified as discontinued operations, as of March 31, 2016 and 2015, respectively.

 

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

Geographic Concentration

 

At March 31, 2016, our 72 properties (92 buildings), excluding one property (one building) classified as discontinued operations, were located in 31 states and the District of Columbia.  Properties located in California, Virginia, the District of Columbia, Georgia, Maryland, New York and Massachusetts were responsible for approximately 14.6%, 10.0%, 9.9%, 8.8%, 8.2%, 8.0% and 5.3% of our annualized rental income as of March 31, 2016, respectively.

 

Note 7.   Indebtedness

 

Our principal debt obligations at March 31, 2016 were: (1) outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) $550,000 aggregate outstanding principal amount of term loans (3) $350,000 of senior unsecured notes; and (4) $28,592 aggregate principal amount of mortgage notes. 

 

Our $750,000 unsecured revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our unsecured revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our unsecured revolving credit facility by one year to January 31, 2020.  We can borrow, repay and reborrow funds available under our unsecured revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at March 31, 2016, on borrowings under our unsecured revolving credit facility.  We also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility, which was 25 basis points per annum at March 31, 2016.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of March 31, 2016, the annual interest rate payable on borrowings under our unsecured revolving credit facility was 1.6% and the weighted average annual interest rate for borrowings under our unsecured revolving credit facility was 1.6% and 2.0%, respectively, for the three months ended March 31, 2016 and 2015.  As of March 31, 2016 and April 26, 2016, we had $311,000 and $303,000 outstanding under our unsecured revolving credit facility, respectively.

 

Our $300,000 unsecured term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at a rate of LIBOR plus a premium, which was 140 basis points per annum at March 31, 2016, on the amount outstanding under our $300,000 unsecured term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings.  As of March 31, 2016, the annual interest rate for the amount outstanding under our $300,000 unsecured term loan was 1.8%. The weighted average annual interest rate under our $300,000 unsecured term loan was 1.8% and 1.6%, respectively, for the three months ended March 31, 2016 and 2015.

 

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 unsecured term loan is repaid on or prior to November 21, 2016, a prepayment premium of 1.0% of the amount repaid will be payable. Subsequent to November 21, 2016, no prepayment premium will be payable. We are required to pay interest at a rate of LIBOR plus a premium, which was 180 basis points per annum as of March 31, 2016, on the amount outstanding under our $250,000 unsecured term loan.  The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of March 31, 2016, the annual interest rate for the amount outstanding under our $250,000 unsecured term loan was 2.2%.  The weighted average annual interest rate under our $250,000 unsecured term loan was 2.2% and 2.0%, respectively, for the three months ended March 31, 2016 and 2015.

 

Our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan and our $250,000 unsecured term loan are governed by a credit agreement with a syndicate of institutional lenders that includes a number of features common to all of these credit arrangements. This credit agreement also includes a feature under which the maximum aggregate borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

 

Our $350,000 of 3.75% senior unsecured notes due 2019 are governed by an indenture and a supplement to the indenture, and require semi-annual payments of interest only through maturity.  The outstanding amount of these notes

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

may be prepaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.

 

Our credit agreement and 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 The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager.  Our credit agreement and our senior unsecured notes indenture and its supplement also contain a number of covenants, including covenants that restrict our ability to incur debts, require us to maintain certain financial ratios and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances.  We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indenture and its supplement at March 31, 2016.

 

In February 2016, we repaid, at par, a $23,473 mortgage note requiring annual interest of 6.21% which was secured by one office property (one building) located in Landover, MD. This mortgage note was scheduled to mature in August 2016.  We recorded a loss on extinguishment of debt of $21 in the three months ended March 31, 2016, which represented unamortized debt issuance costs related to this note.

 

In March 2016, we repaid, at par, an $83,000 mortgage note requiring annual interest of 5.55% which was secured by one office property (two buildings) located in Reston, VA.  This mortgage note was scheduled to mature in April 2016.  We recorded a gain on extinguishment of debt of $125 in the three months ended March 31, 2016, which represented the net unamortized debt premium and debt issuance costs related to this note.

 

At March 31, 2016, three of our properties (three buildings) with an aggregate net book value of $54,684 secured three mortgage notes with an aggregate principal amount of $28,592. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

 

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

Note 8.   Fair Value of Assets and Liabilities

 

The table below presents certain of our assets measured at fair value at March 31, 2016, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Fair Value at Reporting Date Using    

 

 

    

    

 

    

Quoted Prices in

    

    

 

    

Significant

 

 

 

Estimated

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

Fair

 

Identical Assets

 

Observable Inputs

 

Inputs

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Recurring Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Investment in RMR Inc. (1)

 

$

30,368

 

$

30,368

 

$

 —

 

$

 —

Non-Recurring Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Property held for sale and classified as discontinued operations (2)

 

$

12,260

 

$

 —

 

$

 —

 

$

12,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Our 1,214,225 shares of class A common stock of The RMR Group Inc., or RMR Inc., which are included in other assets in our condensed 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 $26,888 as of March 31, 2016.  The net unrealized gain of $3,480 for these shares as of March 31, 2016 is included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets.

(2)

We estimated the fair value of this property at March 31, 2016 based upon broker estimates of value less estimated sale costs (Level 3 inputs as defined in the fair value hierarchy under GAAP).

 

In addition to the assets described in the table above, our financial instruments include cash and cash equivalents, restricted cash, rents receivable, mortgage notes payable, accounts payable, senior unsecured notes, an unsecured revolving credit facility, unsecured term loans, amounts due to related persons, other accrued expenses and security deposits.  At March 31, 2016 and December 31, 2015, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements due to their short term nature or variable interest rates, except as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

As of December 31, 2015

 

    

Carrying Amount (1)

    

Fair Value

 

Carrying Amount (1)

    

Fair Value

Senior unsecured notes, 3.75% interest rate, due in 2019

 

$

346,095

 

$

358,376

 

$

345,809

 

$

351,692

Mortgage note payable, 6.21% interest rate, due in 2016(2) (3)

 

 

 —

 

 

 —

 

 

23,476

 

 

24,038

Mortgage note payable, 5.55% interest rate, due in 2016(2) (4)

 

 

 —

 

 

 —

 

 

83,375

 

 

83,457

Mortgage note payable, 5.88% interest rate, due in 2021(2)

 

 

13,994

 

 

14,921

 

 

14,045

 

 

14,678

Mortgage note payable, 7.00% interest rate, due in 2019(2)

 

 

9,055

 

 

9,600

 

 

9,145

 

 

9,645

Mortgage note payable, 8.15% interest rate, due in 2021(2)

 

 

6,004

 

 

6,506

 

 

6,258

 

 

6,711

 

 

$

375,148

 

$

389,403

 

$

482,108

 

$

490,221

(1)

Carrying amount includes certain unamortized debt issuance costs and unamortized premiums and discounts.

(2)

We assumed these mortgages in connection with our acquisitions of the encumbered 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 are amortizing the fair value premiums, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.

(3)

This mortgage note was repaid, at par, in February 2016.

(4)

This mortgage note was repaid, at par, in March 2016.

 

We estimate the fair value of our senior unsecured notes using an average of the bid and ask price of the notes as of the measurement date (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP).  Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Note 9.   Shareholders’ Equity

 

Distributions

 

On February 25, 2016, we paid a regular quarterly distribution to common shareholders of record on January 22, 2016 of $0.43 per share, or $30,584.    

 

On April 13, 2016, we declared a regular quarterly distribution payable to common shareholders of record on April 25, 2016, in the amount of $0.43 per share, or $30,584.    We expect to pay this distribution on or about May 23, 2016 using cash on hand and borrowings under our unsecured revolving credit facility.

 

Cumulative Other Comprehensive Income (Loss)

Cumulative other comprehensive income (loss) represents the unrealized gain on the RMR Inc. shares we own and our share of the comprehensive income (loss) of Select Income REIT, or SIR, and Affiliates Insurance Company, or AIC. The following table presents changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the three months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gain (Loss)

 

 

Equity in

 

 

 

 

 

 

 

on Investment in

 

 

Unrealized Gain

 

 

 

 

 

 

 

Available for

 

 

(Loss) of

 

 

 

 

 

 

 

Sale Securities

 

 

Investees

 

Total

Balance at December 31, 2015

 

$

(9,391)

 

$

(5,476)

 

$

(14,867)

Other comprehensive income before reclassifications

 

 

12,871

 

 

4,545

 

 

17,416

Amounts reclassified from cumulative other comprehensive income (loss) to net income (1)

 

 

 -

 

 

(1)

 

 

(1)

Net current period other comprehensive income

 

 

12,871

 

 

4,544

 

 

17,415

Balance at March 31, 2016

 

$

3,480

 

$

(932)

 

$

2,548

(1)

Amounts reclassified from cumulative other comprehensive income (loss) are included in equity in earnings (losses) of investees in our condensed consolidated statements of comprehensive income (loss).

 

 

Note 10.   Related Person Transactions

 

We have relationships and historical and continuing transactions with RMR LLC and others related to it, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees or officers of us.  These relationships include our ownership of approximately 27.9% of the outstanding common shares of SIR, at March 31, 2016.  For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.

RMR LLC:  Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $2,508 and $2,561 for the three months ended March 31, 2016 and 2015, respectively.  No incentive fees were estimated to be payable to RMR LLC for the three months ended March 31, 2016 and 2015, respectively.  The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

In accordance with the terms of our business management agreement, we issued 11,157 of our common shares to RMR LLC for the three months ended March 31, 2015 as payment for a part of the business management fee we recognized for that period.  Beginning June 2015, all management fees under our business management agreement are paid in cash.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,109 and $2,016 for the three months ended March 31, 2016 and 2015, respectively.  These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

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 $2,944 and $2,510 for property management related expenses for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income (loss).

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plan.    In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services.  The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $234 and $314 for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

We lease office space to RMR LLC in certain of our properties for its property management offices.  Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of approximately $91 and $15 for the three months ended March 31, 2016 and 2015, respectively.

RMR Inc.:  In June 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services, including SIR, or collectively, the Other REITs, participated in a transaction whereby we and the Other REITs each acquired shares of class A common stock of RMR Inc. and simultaneously amended our business and property management agreements with RMR LLC to, among other things, provide for continuing 20 year terms.  RMR Inc. is the managing member of RMR LLC and RMR LLC is a subsidiary of RMR Inc.  The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees.

In connection with our acquisition of shares of class A common stock of RMR Inc., 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 condensed consolidated balance sheets.  We are amortizing this liability ratably through December 31, 2035 as a reduction to our management fees expense.  For the three months ended March 31, 2016, we amortized $272 of this liability, which amount is reflected in the net business management and property management fee amounts for the period referenced above.  As of March 31, 2016, the unamortized amount of this liability was $21,482.

As of March 31, 2016, we own 1,214,225 shares of class A common stock of RMR Inc.  We receive dividends on these shares as declared and paid by RMR Inc. to all holders of shares of RMR Inc. class A common stock. We did not receive any dividends on these shares during the three months ended March 31, 2016. However, on April 13, 2016, RMR Inc. declared a dividend of $0.2993 on its shares of class A common stock payable to shareholders of record on April 25, 2016.  RMR Inc. has indicated that this dividend represents a regular quarterly dividend of $0.25 per share of class A common stock for the quarter ended March 31, 2016 plus a pro rata dividend of $0.0493 per share of class A common stock for the period from December 14, 2015 to December 31, 2015.  RMR Inc. has indicated that it expects to pay this dividend on or about May 19, 2016.

SIR:  We receive distributions on the common shares of SIR we own as declared and paid by SIR to all holders of its common shares. During the three months ended March 31, 2016 and 2015, we received distributions of $12,459 and $13,530, respectively, on our SIR common shares. In addition, on April 13, 2016, SIR declared a dividend of $0.50 per common share payable to shareholders of record on April 25, 2016. SIR has indicated that it expects to pay this dividend on or about May 19, 2016. For additional information about our ownership of SIR shares, see Note 11 below.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

AIC:  We and six other companies to which RMR LLC provides management services each own in equal amounts of AIC.  We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.

As of March 31, 2016, our investment in AIC had a carrying value of $7,075; this amount is included in other assets in our condensed consolidated balance sheets.  We recognized income of $77 and $72 related to our investment in AIC for the three months ended March 31, 2016 and 2015, respectively.  Our other comprehensive income (loss) includes our proportional share of unrealized gains on securities which are owned by AIC of $52 and $45 for the three months ended March 31, 2016 and 2015, respectively.

Note 11.   Equity Investment in Select Income REIT

 

As of March 31, 2016, 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 condensed consolidated statements of comprehensive income (loss).  For the three months ended March 31, 2016 and 2015, we recorded $9,857 and $2,176 of equity in the earnings of SIR, respectively. Our other comprehensive income (loss) includes unrealized gains attributable to our investment in SIR of $4,492 and $13 for the three months ended March 31, 2016 and 2015, respectively.

 

As of March 31, 2016, our investment in SIR had a carrying value of $493,259 and a market value, based on the closing price of SIR common shares on the New York Stock Exchange on March 31, 2016, of $574,370. 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 the three months ended March 31, 2015, SIR issued 28,453,447 common shares, which included 28,439,111 common shares issued in connection with SIR’s acquisition of Cole Corporate Income Trust, Inc. on January 29, 2015.  We recognized a loss on issuance of shares by SIR of $40,771 during the three months ended March 31, 2015 as a result of the per share issuance price of these SIR common shares being below the then average per share carrying value of our SIR common shares.

 

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 $2,564 for the three months ended March 31, 2015.  We recorded a loss on impairment of our SIR investment during the three months ended June 30, 2015 resulting 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 $740 for the three months ended March 31, 2016.

 

During the three months ended March 31, 2016 and 2015, we received cash distributions from SIR totaling $12,459 and $13,530, respectively.

 

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

The following summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the three months ended March 31, 2016, or the SIR Quarterly Report. References in our 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 financial statements.

 

Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2016

 

2015

Real estate properties, net

 

$

3,936,299

 

$

3,954,889

Acquired real estate leases, net

 

 

550,664

 

 

566,195

Cash and cash equivalents

 

 

31,294

 

 

17,876

Rents receivable, net

 

 

106,741

 

 

99,307

Other assets, net

 

 

67,812

 

 

46,078

Total assets

 

$

4,692,810

 

$

4,684,345

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

328,000

 

$

303,000

Unsecured term loan, net

 

 

348,000

 

 

347,876

Senior unsecured notes, net

 

 

1,427,169

 

 

1,426,025

Mortgage notes payable, net

 

 

286,516

 

 

286,706

Assumed real estate lease obligations, net

 

 

84,255

 

 

86,495

Other liabilities

 

 

117,793

 

 

137,283

Shareholders' equity

 

 

2,101,077

 

 

2,096,960

Total liabilities and shareholders' equity

 

$

4,692,810

 

$

4,684,345

 

Condensed Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2016

 

2015

Rental income

 

$

97,860

 

$

80,478

Tenant reimbursements and other income

 

 

19,372

 

 

13,937

  Total revenues

 

 

117,232

 

 

94,415

 

 

 

 

 

 

 

Real estate taxes

 

 

10,288

 

 

8,357

Other operating expenses

 

 

12,958

 

 

9,007

Depreciation and amortization

 

 

33,469

 

 

24,719

Acquisition related costs

 

 

58

 

 

20,539

General and administrative

 

 

6,976

 

 

6,792

  Total expenses

 

 

63,749

 

 

69,414

Operating income

 

 

53,483

 

 

25,001

 

 

 

 

 

 

 

Interest expense

 

 

(20,609)

 

 

(14,179)

Loss on early extinguishment of debt

 

 

 —

 

 

(6,845)

Income before income tax expense and equity in earnings of an investee

 

 

32,874

 

 

3,977

Income tax expense

 

 

(139)

 

 

(31)

Equity in earnings of an investee

 

 

77

 

 

72

Net income

 

 

32,812

 

 

4,018

Net income allocated to noncontrolling interest

 

 

(33)

 

 

(41)

Net income attributed to SIR

 

$

32,779

 

$

3,977

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

89,286

 

 

79,489

Weighted average common shares outstanding (diluted)

 

 

89,295

 

 

79,498

Net income attributed to SIR per common share (basic and diluted)

 

$

0.37

 

$

0.05

 

15

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

 

Note 12.   Segment Information

 

We operate in two separate reportable business segments: ownership of properties that are primarily leased to government tenants and our equity method investment in SIR.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

Investment

 

Investment

 

 

 

 

 

 

 

    

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Rental income 

 

$

63,611

 

$

 —

 

$

 —

 

$

63,611

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,653

 

 

 —

 

 

 —

 

 

7,653

Utility expenses

 

 

4,174

 

 

 —

 

 

 —

 

 

4,174

Other operating expenses

 

 

12,911

 

 

 —

 

 

 —

 

 

12,911

Depreciation and amortization

 

 

18,324

 

 

 —

 

 

 —

 

 

18,324

Acquisition related costs

 

 

152

 

 

 —

 

 

 —

 

 

152

General and administrative

 

 

 —

 

 

 —

 

 

3,526

 

 

3,526

Total expenses

 

 

43,214

 

 

 —

 

 

3,526

 

 

46,740

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

20,397

 

 

 —

 

 

(3,526)

 

 

16,871

Interest income

 

 

 —

 

 

 —

 

 

6

 

 

6

Interest expense

 

 

(8,269)

 

 

 —

 

 

(1,095)

 

 

(9,364)

Gain on early extinguishment of debt

 

 

104

 

 

 —

 

 

 —

 

 

104

Income (loss) from continuing operations before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

        equity in earnings of investees

 

 

12,232

 

 

 —

 

 

(4,615)

 

 

7,617

Income tax expense

 

 

 —

 

 

 —

 

 

(15)

 

 

(15)

Equity in earnings of investees

 

 

 —

 

 

9,857

 

 

77

 

 

9,934

Income (loss) from continuing operations

 

 

12,232

 

 

9,857

 

 

(4,553)

 

 

17,536

Loss from discontinued operations

 

 

(149)

 

 

 —

 

 

 —

 

 

(149)

Net income (loss)

 

$

12,083

 

$

9,857

 

$

(4,553)

 

$

17,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

 

Investment

 

Investment

 

 

 

 

 

 

 

 

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Total Assets

 

$

1,708,910

 

$

493,259

 

$

57,226

 

$

2,259,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

Investment

 

Investment

 

 

 

 

 

 

 

    

in Real Estate

    

in SIR

    

Corporate

    

Consolidated

Rental income 

 

$

62,659

 

$

 —

 

$

 —

 

$

62,659

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,410

 

 

 —

 

 

 —

 

 

7,410

Utility expenses

 

 

4,571

 

 

 —

 

 

 —

 

 

4,571

Other operating expenses

 

 

12,210

 

 

 —

 

 

 —

 

 

12,210

Depreciation and amortization

 

 

17,215

 

 

 —

 

 

 —

 

 

17,215

Acquisition related costs

 

 

6

 

 

 —

 

 

 —

 

 

6

General and administrative

 

 

 —

 

 

 —

 

 

4,004

 

 

4,004

Total expenses

 

 

41,412

 

 

 —

 

 

4,004