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.

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