10-Q 1 gov-20160630x10q.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 June 30, 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 July 26, 2016: 71,138,808

 

 

 


 

GOVERNMENT PROPERTIES INCOME TRUST

 

FORM 10-Q

 

June 30, 2016

 

INDEX

 

 

 

 

PART I 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2016 and December 31, 2015

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Six Months Ended June 30, 2016 and 2015

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows —Six Months Ended June 30, 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

19

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4. 

Controls and Procedures

34

 

 

 

 

Warning Concerning Forward Looking Statements

35

 

 

 

 

Statement Concerning Limited Liability

38

 

 

 

PART II 

Other Information

 

 

 

 

Item 1A. 

Risk Factors

39

 

 

 

Item 6. 

Exhibits

40

 

 

 

 

Signatures

41

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

Land

 

$

257,746

 

$

253,058

Buildings and improvements

 

 

1,518,845

 

 

1,443,074

    Total real estate properties, gross

 

 

1,776,591

 

 

1,696,132

Accumulated depreciation

 

 

(275,401)

 

 

(255,879)

    Total real estate properties, net

 

 

1,501,190

 

 

1,440,253

 

 

 

 

 

 

 

Equity investment in Select Income REIT

 

 

492,762

 

 

491,369

Assets of discontinued operations

 

 

12,482

 

 

12,468

Assets of property held for sale

 

 

3,095

 

 

3,098

Acquired real estate leases, net

 

 

113,230

 

 

118,267

Cash and cash equivalents

 

 

9,021

 

 

8,785

Restricted cash

 

 

344

 

 

1,022

Rents receivable, net

 

 

46,592

 

 

45,269

Deferred leasing costs, net

 

 

20,214

 

 

14,299

Other assets, net

 

 

52,280

 

 

33,680

Total assets

 

$

2,251,210

 

$

2,168,510

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

 —

 

$

117,000

Unsecured term loans, net

 

 

546,830

 

 

546,490

Senior unsecured notes, net

 

 

646,272

 

 

345,809

Mortgage notes payable, net

 

 

28,655

 

 

136,299

Liabilities of discontinued operations

 

 

83

 

 

54

Liabilities of property held for sale

 

 

12

 

 

43

Accounts payable and other liabilities

 

 

56,687

 

 

50,543

Due to related persons

 

 

3,578

 

 

2,886

Assumed real estate lease obligations, net

 

 

11,881

 

 

12,735

Total liabilities

 

 

1,293,998

 

 

1,211,859

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

    authorized, 71,138,808 and 71,126,308 shares issued and outstanding, respectively

 

 

711

 

 

711

Additional paid in capital

 

 

1,472,754

 

 

1,472,482

Cumulative net income

 

 

72,686

 

 

38,486

Cumulative other comprehensive income (loss)

 

 

12,391

 

 

(14,867)

Cumulative common distributions

 

 

(601,330)

 

 

(540,161)

Total shareholders’ equity

 

 

957,212

 

 

956,651

Total liabilities and shareholders’ equity

 

$

2,251,210

 

$

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 June 30,

 

Six Months Ended June 30,

    

 

    

2016

    

2015

    

2016

    

2015

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income 

 

$

64,061

 

$

62,113

 

$

127,672

 

$

124,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

7,566

 

 

7,674

 

 

15,219

 

 

15,084

 

Utility expenses

 

 

3,673

 

 

4,001

 

 

7,847

 

 

8,572

 

Other operating expenses

 

 

13,266

 

 

12,190

 

 

26,177

 

 

24,400

 

Depreciation and amortization

 

 

17,985

 

 

17,299

 

 

36,309

 

 

34,514

 

Acquisition related costs

 

 

64

 

 

183

 

 

216

 

 

189

 

General and administrative

 

 

4,008

 

 

3,713

 

 

7,534

 

 

7,717

 

Total expenses

 

 

46,562

 

 

45,060

 

 

93,302

 

 

90,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

17,499

 

 

17,053

 

 

34,370

 

 

34,296

 

Dividend income

 

 

363

 

 

 —

 

 

363

 

 

 —

 

Interest income

 

 

10

 

 

 —

 

 

16

 

 

12

 

Interest expense (including net amortization of debt premium and discounts

 

 

 

 

 

 

 

 

 

 

 

 

 

  and debt issuance costs of $747, $328, $1,219 and $660, respectively)

 

 

(10,314)

 

 

(9,455)

 

 

(19,678)

 

 

(18,757)

 

Gain on early extinguishment of debt

 

 

 —

 

 

 —

 

 

104

 

 

 —

 

Gain (loss) on issuance of shares by Select Income REIT

 

 

16

 

 

(1,353)

 

 

16

 

 

(42,124)

 

Loss on impairment of Select Income REIT investment

 

 

 —

 

 

(203,297)

 

 

 —

 

 

(203,297)

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

  and equity in earnings of investees

 

 

7,574

 

 

(197,052)

 

 

15,191

 

 

(229,870)

 

Income tax expense

 

 

(35)

 

 

(32)

 

 

(50)

 

 

(62)

 

Equity in earnings of investees

 

 

9,400

 

 

6,094

 

 

19,334

 

 

5,778

 

Income (loss) from continuing operations

 

 

16,939

 

 

(190,990)

 

 

34,475

 

 

(224,154)

 

Loss from discontinued operations

 

 

(126)

 

 

(173)

 

 

(275)

 

 

(379)

 

Net income (loss)

 

 

16,813

 

 

(191,163)

 

 

34,200

 

 

(224,533)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investment in available for sale securities

 

 

7,237

 

 

 —

 

 

20,108

 

 

 —

 

Equity in unrealized gain of investees

 

 

2,606

 

 

131

 

 

7,150

 

 

189

 

Other comprehensive income

 

 

9,843

 

 

131

 

 

27,258

 

 

189

 

Comprehensive income (loss)

 

$

26,656

 

$

(191,032)

 

$

61,458

 

$

(224,344)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

71,038

 

 

70,485

 

 

71,034

 

 

70,377

 

Weighted average common shares outstanding (diluted)

 

 

71,061

 

 

70,485

 

 

71,046

 

 

70,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts (basic and diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.24

 

$

(2.71)

 

$

0.49

 

$

(3.19)

 

Loss from discontinued operations

 

$

 —

 

$

 —

 

$

 —

 

$

(0.01)

 

Net income (loss)

 

$

0.24

 

$

(2.71)

 

$

0.48

 

$

(3.19)

 

 

See accompanying notes.

 

3

 


 

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

    

2016

    

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

34,200

 

$

(224,533)

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

 

 

 

 

 

 

Depreciation

 

 

20,781

 

 

19,363

Net amortization of debt premiums and discounts and debt issuance costs

 

 

1,219

 

 

660

Gain on early extinguishment of debt

 

 

(104)

 

 

 —

Straight line rental income

 

 

(584)

 

 

(2,207)

Amortization of acquired real estate leases

 

 

14,842

 

 

14,617

Amortization of deferred leasing costs

 

 

1,475

 

 

1,087

Other non-cash (income) expense, net

 

 

302

 

 

1,057

Equity in earnings of investees

 

 

(19,334)

 

 

(5,778)

(Gain) loss on issuance of shares by Select Income REIT

 

 

(16)

 

 

42,124

Loss on impairment of Select Income REIT investment

 

 

 —

 

 

203,297

Distributions of earnings from Select Income REIT

 

 

17,760

 

 

10,425

Change in assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

678

 

 

(174)

Deferred leasing costs

 

 

(3,409)

 

 

(2,123)

Rents receivable

 

 

1,428

 

 

539

Other assets

 

 

1,120

 

 

2,027

Accounts payable and accrued expenses

 

 

971

 

 

1,491

Due to related persons

 

 

692

 

 

983

Net cash provided by operating activities

 

 

72,021

 

 

62,855

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(79,285)

 

 

(1,400)

Real estate improvements

 

 

(14,149)

 

 

(5,386)

Investment in Select Income REIT

 

 

 —

 

 

(95,821)

Investment in The RMR Group Inc.

 

 

 —

 

 

(6,468)

Distributions in excess of earnings from Select Income REIT

 

 

7,158

 

 

11,687

Proceeds from sale of properties, net

 

 

 —

 

 

30,520

Net cash used in investing activities

 

 

(86,276)

 

 

(66,868)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Repayment of mortgage notes payable

 

 

(107,202)

 

 

(1,203)

Proceeds from issuance of senior unsecured notes

 

 

310,000

 

 

 —

Borrowings on unsecured revolving credit facility

 

 

229,000

 

 

100,000

Repayments on unsecured revolving credit facility

 

 

(346,000)

 

 

(41,000)

Payment of debt issuance costs

 

 

(10,138)

 

 

(16)

Distributions to common shareholders

 

 

(61,169)

 

 

(60,508)

Net cash provided by (used in) financing activities

 

 

14,491

 

 

(2,727)

Increase (decrease) in cash and cash equivalents

 

 

236

 

 

(6,740)

Cash and cash equivalents at beginning of period

 

 

8,785

 

 

13,791

Cash and cash equivalents at end of period

 

$

9,021

 

$

7,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

Interest paid

 

$

17,343

 

$

17,980

Income taxes paid

 

$

76

 

$

78

Interest capitalized

 

$

9

 

$

 —

Non-cash investing activities:

 

 

 

 

 

 

Investment in The RMR Group Inc. paid in common shares

 

$

 —

 

$

13,836

 

 

 

 

 

 

 

 

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 GOV, 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 on 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 FASB 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 on 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 how changes in the fair value of available for sale equity investments we hold are presented in our condensed consolidated financial statements.

5

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(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 on 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 on our condensed consolidated financial statements.   

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-13 will have on our condensed consolidated financial statements.

 

Note 3.    Weighted Average Common Shares

 

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

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

Weighted average common shares for basic earnings per share

 

71,038

 

 

70,485

 

 

71,034

 

 

70,377

Effect of dilutive securities: unvested share awards

 

23

 

 

 -

 

 

12

 

 

 -

Weighted average common shares for diluted earnings per share

 

71,061

 

 

70,485

 

 

71,046

 

 

70,377

 

 

 

 

 

 

 

 

 

Note 4.   Real Estate Properties

 

As of June 30, 2016, we owned 72 properties (92 buildings), with an undepreciated carrying value of $1,779,937,  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 June 30, 2016, we entered into 15 leases for 566,640 rentable square feet, for a weighted (by rentable square feet) average lease term of 10.1 years and we made commitments for approximately $11,136 of leasing related costs. During the six months ended June 30, 2016, we entered into 35 leases for 1,089,602 rentable square feet, including a 25,579 square foot expansion to

6

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

be constructed at an existing property, for a weighted (by rentable square feet) average lease term of 10.8 years and we made commitments for approximately $31,605 of leasing related costs. As of June 30, 2016, we have estimated unspent leasing related obligations of $23,891 and have committed to redevelop and expand an existing property at an estimated cost of approximately $12,800.

 

Acquisition Activities

 

During the six months ended June 30, 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 $79,235, excluding acquisition costs.  Our allocation of the purchase price of this acquisition based on the estimated fair values of the acquired assets and assumed liabilities is presented in the table below.  The allocation of purchase price is based on preliminary estimates and may change upon the completion of (i) third party valuations and (ii) our analysis of acquired in place leases and land and building valuations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

    

Number

    

    

    

    

 

    

    

 

    

    

 

    

    

 

 

    

 

    

    

 

    

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

Buildings

 

Other

 

 

 

 

Acquired

 

Acquisition

 

 

 

 

 

Properties/

 

Square

 

Purchase

 

 

 

 

and

 

Assumed

 

Acquired

 

Lease

 

Date

 

Location

 

Type

 

Buildings

 

Feet

 

Price

 

Land

 

Improvements

 

Assets

 

Leases

 

Obligations

 

January 2016

 

Sacramento, CA

 

Office

 

1 / 1

 

337,811

 

$

79,235

 

$

4,688

 

$

61,722

 

$

2,167

 

$

11,245

 

$

(587)

 

 

On July 6, 2016, we acquired certain land we leased from a third party at one of our properties in Atlanta, GA for  $1,623, excluding acquisition costs.

 

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

 

On July 22, 2016, we sold an office property ( one building ) in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 at June 30, 2016 for $4,000, excluding closing costs. In connection with this sale, we provided $3,600 of mortgage financing to the buyer. The mortgage note requires interest to be paid at an annual rate of LIBOR plus 4.0%, subject to a minimum annual interest rate of 5.0%, and requires monthly payments of interest only until maturity on June 30, 2021. We have classified this property as held for sale as of June 30, 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:

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2016

 

2015

Real estate properties, net

 

 

$

3,071

 

$

3,071

Rents receivable

 

 

 

 -

 

 

1

Other assets

 

 

 

24

 

 

26

Assets of property held for sale

 

 

$

3,095

 

$

3,098

 

 

 

 

 

 

 

 

Other liabilities

 

 

$

12

 

$

43

Liabilities of property held for sale

 

 

$

12

 

$

43

 

7

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

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 June 30, 2016.  The contract sales price, as amended in June 2016, is $13,000, excluding closing costs.  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 FASB 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:

 

Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2016

 

2015

Real estate properties, net

 

$

12,260

 

$

12,260

Other assets

 

 

222

 

 

208

Assets of discontinued operations

 

$

12,482

 

$

12,468

 

 

 

 

 

 

 

Other liabilities

 

$

83

 

$

54

Liabilities of discontinued operations

 

$

83

 

$

54

 

Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2016

    

2015

 

2016

    

2015

Rental income

 

$

28

 

$

27

 

$

56

 

$

58

Real estate taxes

 

 

(23)

 

 

(70)

 

 

(46)

 

 

(140)

Utility expenses

 

 

(29)

 

 

(11)

 

 

(79)

 

 

(78)

Other operating expenses

 

 

(73)

 

 

(91)

 

 

(149)

 

 

(162)

General and administrative

 

 

(29)

 

 

(28)

 

 

(57)

 

 

(57)

Loss from discontinued operations

 

$

(126)

 

$

(173)

 

$

(275)

 

$

(379)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 the 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 assessments of the likelihood of lease cancellation on a separate lease basis.

 

We increased rental income to record revenue on a straight line basis by $435 and $1,544 for the three months ended June 30, 2016 and 2015, respectively, and $584 and $2,207 for the six months ended June 30, 2016 and 2015, respectively.  Rents receivable include $19,579 and $18,995 of straight line rent receivables at June 30, 2016 and December 31, 2015, respectively.

 

8

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

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 92.7% and 92.8% of our annualized rental income, excluding one property (one building) classified as discontinued operations, as of June 30, 2016 and 2015, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 64.1% and 67.7% of our annualized rental income, excluding one property classified as discontinued operations, as of June 30, 2016 and 2015, respectively.

 

Geographic Concentration

 

At June 30, 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, New York, Maryland and Massachusetts were responsible for approximately 14.7%, 10.0%, 9.9%, 9.2%, 8.1%, 7.6% and 5.3% of our annualized rental income as of June 30, 2016, respectively.

 

Note 7.   Indebtedness

 

Our principal debt obligations at June 30, 2016 were: (1) $550,000 aggregate outstanding principal amount of term loans; (2) an aggregate outstanding principal amount of $660,000 of public issuances of senior unsecured notes; and (3) $28,238 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 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 revolving credit facility by one year to January 31, 2020.  We can borrow, repay and reborrow funds available under our 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 June 30, 2016, on borrowings under our revolving credit facility.  We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at June 30, 2016.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of June 30, 2016, the annual interest rate payable on borrowings under our revolving credit facility was 1.7% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.7% for both the three and six months ended June 30, 2016  and 1.4% and 1.6%, respectively, for the three and six months ended June 30, 2015.  As of both June 30, 2016 and July 26, 2016, we had no amounts outstanding under our revolving credit facility.

 

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 June 30, 2016, on the amount outstanding under our $300,000 term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings.  As of June 30, 2016, the annual interest rate for the amount outstanding under our $300,000 term loan was 1.9%. The weighted average annual interest rate under our $300,000 term loan was 1.8% and 1.6%, respectively, for the three and six months ended June 30, 2016 and 2015.

 

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 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 June 30, 2016, on the amount outstanding under our $250,000 term loan.  The interest rate premium is subject to adjustment based upon changes to our credit

9

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

ratings. As of June 30, 2016, the annual interest rate for the amount outstanding under our $250,000 term loan was 2.3%.  The weighted average annual interest rate under our $250,000 term loan was 2.2% and 2.0%, respectively, for the three and six months ended June 30, 2016 and 2015.

 

Our $750,000 revolving credit facility, our $300,000 term loan and our $250,000 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.

 

In May 2016, we issued $300,000 of 5.875% senior unsecured notes due 2046 in an underwritten public offering. In June 2016, the underwriters exercised an option to purchase an additional $10,000 of these notes. The net proceeds from this offering of $299,892, after offering expenses, were used to repay all amounts then outstanding under our revolving credit facility and for general business purposes. These notes require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after May 26, 2021. Our $350,000 of 3.75% senior unsecured notes due 2019 require semi-annual payments of interest only through maturity and may be repaid at par (plus accured and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium. Both issuances of our senior notes are governed by an indenture and its supplements.

 

Our credit agreement and senior notes indenture and its supplements 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 notes indenture and its supplements 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 notes indenture and its supplements at June 30, 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 six months ended June 30, 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 six months ended June 30, 2016, which represented the net unamortized debt premium and debt issuance costs related to this note.

 

At June 30, 2016, three of our properties (three buildings) with an aggregate net book value of $53,927 secured three mortgage notes with an aggregate principal amount of $28,238. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

 

 

10

 


 

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(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 June 30, 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)

 

$

37,605

 

$

37,605

 

$

 —

 

$

 —

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 June 30, 2016.  The net unrealized gain of $10,717 for these shares as of June 30, 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 June 30, 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, accounts payable, a revolving credit facility, term loans, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits.  At June 30, 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 June 30, 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

 

$

346,381

 

$

358,351

 

$

345,809

 

$

351,692

Senior unsecured notes, 5.875% interest rate, due in 2046

 

 

299,891

 

 

316,200

 

 

 —

 

 

 —

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)

 

 

13,944

 

 

15,100

 

 

14,045

 

 

14,678

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

 

 

8,964

 

 

9,551

 

 

9,145

 

 

9,645

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

 

 

5,747

 

 

6,242

 

 

6,258

 

 

6,711

 

 

$

674,927

 

$

705,444

 

$

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 (continued)

(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 May 23, 2016, we paid a regular quarterly distribution to common shareholders of record on April 25, 2016 of $0.43 per share, or $30,585.    On July 12, 2016, we declared a regular quarterly distribution payable to common shareholders of record on July 22, 2016 of $0.43 per share, or $30,590.    We expect to pay this amount on or about August 22, 2016 using cash on hand and borrowings under our revolving credit facility.

 

Share Issuance

On May 17, 2016, we granted 2,500 of our common shares, valued at $19.52 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees as part of their annual compensation.

 

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 and six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

 

 

 

Unrealized Gain

 

 

Equity in

 

 

 

 

 

 

 

(Loss) on Investment

 

 

Unrealized Gain

 

 

 

 

 

 

 

in Available for

 

 

(Loss) of

 

 

 

 

 

 

 

Sale Securities

 

 

Investees

 

Total

Balance at March 31, 2016

 

$

3,480

 

$

(932)

 

$

2,548

Other comprehensive income before reclassifications

 

 

7,237

 

 

2,602

 

 

9,839

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

 

 

 -

 

 

4

 

 

4

Net current period other comprehensive income

 

 

7,237

 

 

2,606

 

 

9,843

Balance at June 30, 2016

 

$

10,717

 

$

1,674

 

$

12,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016

 

 

 

 

Unrealized Gain

 

 

Equity in

 

 

 

 

 

 

 

(Loss) on Investment

 

 

Unrealized Gain

 

 

 

 

 

 

 

in Available for

 

 

(Loss) of

 

 

 

 

 

 

 

Sale Securities

 

 

Investees

 

Total

Balance at December 31, 2015

 

$

(9,391)

 

$

(5,476)

 

$

(14,867)

Other comprehensive income before reclassifications

 

 

20,108

 

 

7,147

 

 

27,255

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

 

 

 -

 

 

3

 

 

3

Net current period other comprehensive income

 

 

20,108

 

 

7,150

 

 

27,258

Balance at June 30, 2016

 

$

10,717

 

$

1,674

 

$

12,391

(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, SIR and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and

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Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

officers who are also our Trustees or officers.  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 $2,534 and $2,512 for the three months ended June 30, 2016 and 2015, respectively and $5,042 and $5,073 for the six months ended June 30, 2016 and 2015, respectively.  No incentive fees were estimated to be payable to RMR LLC for the three or six months ended June 30, 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 23,222 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period.  Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,277 and $1,887 for the three months ended June 30, 2016 and 2015, respectively, and $4,386 and $3,902 for the six months ended June 30, 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 $2,966 and $2,128 for property management related expenses for the three months ended June 30, 2016 and 2015, respectively; and $5,910 and $5,233 for the six months ended June 30, 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 $501 and $119 for the three months ended June 30, 2016 and 2015, respectively, and $735 and $433 for the six months ended June 30, 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 $92 and $153 for the three months ended June 30, 2016 and 2015, respectively, and $183 and $167 for the six months ended June 30, 2016 and 2015, respectively.

RMR Inc.:    In connection with our June 2015 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.  A part of this liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management and property management fee expense.  We amortized $272 and $543 of this liability for the three and six months ended June 30, 2016, respectively, and $65 of this liability for both the three and six months ended June 30, 2015. These amounts are included in the net business management and property management fee amounts for such periods.  As of June 30, 2016, the remaining unamortized amount of this liability was $21,210.

As of June 30, 2016, we owned 1,214,225 shares of class A common stock of RMR Inc.  We receive dividends on our RMR Inc. class A common shares as declared and paid by RMR Inc. to all holders of its class A common shares.  We received a dividend of $363 on our RMR Inc. class A common shares during the three months ended June 30, 2016,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

which was for the period from December 14, 2015 through March 31, 2016.  Since then, we have not yet received any other dividends on our RMR Inc. class A common shares.  On July 12, 2016, RMR Inc. declared a regular quarterly dividend of $0.25 per class A common share payable to shareholders of record on July 22, 2016.  RMR Inc. has stated that it expects to pay this dividend on or about August 18, 2016.

Our investment in RMR Inc. class A common shares, which is included in other assets in our condensed consolidated balance sheets is recorded at fair value with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our RMR Inc. class A common shares each reporting period as unrealized gain or loss on investment in available for sale securities which is a component of other comprehensive income in our condensed consolidated statements of comprehensive income (loss). For further information, see Notes 8 and 9.

SIRAs of June 30, 2016, we owned 24,918,421 common shares of SIR.  We receive distributions on our SIR common shares as declared and paid by SIR to all holders of its common shares.  We received distributions of $12,459 and $8,582 on our SIR common shares during the three months ended June 30, 2016 and 2015, respectively, and $24,918 and $22,112 during the six months ended June 30, 2016 and 2015, respectively.  On July 12, 2016, SIR declared a quarterly distribution of $0.51 per common share payable to shareholders of record on July 22, 2016.  SIR has stated that it expects to pay this distribution on or about August 18, 2016.  We account for our investment in SIR common shares on the equity method. For additional information about our ownership of SIR common shares and how we account for this investment, see Note 11 below.

AIC:  We and six other companies to which RMR LLC provides management services each own AIC in equal amounts.  We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.  We currently expect to pay aggregate annual premiums, including taxes and fees, of approximately $1,032 in connection with this insurance program for the policy year ending June 30, 2017, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

As of June 30, 2016 and December 31, 2015, our investment in AIC had a carrying value of $7,135 and $6,946, respectively.  These amounts are included in other assets in our condensed consolidated balance sheets.  We recognized income of $17 and $22 related to our investment in AIC for the three months ended June 30, 2016 and 2015, respectively, and $94 and $95 for the six months ended June 30, 2016 and 2015, respectively.  Our other comprehensive income (loss) includes our proportionate part of unrealized gains (losses) on securities which are owned by AIC of $43 and ($64) for the three months ended June 30, 2016 and 2015, respectively, and $95 and ($19) for the six months ended June 30, 2016 and 2015, respectively.

Note 11.   Equity Investment in Select Income REIT

 

As of June 30, 2016, we owned 24,918,421, or approximately 27.9%, of the then outstanding SIR common shares.  SIR is a real estate investment trust 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).  We recorded $8,643 and $8,249 of equity in the earnings of SIR for the three months ended June 30, 2016 and 2015, respectively, and $17,760 and $10,425 for the six months ended June 30, 2016 and 2015, respectively. Our other comprehensive income (loss) includes our proportionate share of SIR’s unrealized gains (losses) of $2,563 and ($195) for the three months ended June 30, 2016 and 2015, respectively, and $7,055 and ($207) for the six months ended June 30, 2016 and 2015, respectively.

 

As of June 30, 2016, our investment in SIR had a carrying value of $492,762 and a market value, based on the closing price of SIR common shares on the NYSE on June 30, 2016, of $647,630. We periodically evaluate our equity investment in SIR for possible indicators of other than temporary impairment whenever events or changes in

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

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 and six months ended June 30, 2016, SIR issued 12,500 common shares. During the three and six months ended June 30, 2015, SIR issued 915,853 and 29,368,890 common shares, respectively.  We recognized a gain (loss) on issuance of shares by SIR of $16 and ($1,353) during the three months ended June 30, 2016 and 2015, respectively, and a gain (loss) of $16 and ($42,124) during the six months ended June 30, 2016 and 2015, respectively, as a result of the per share issuance price of these SIR common shares being above or (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 $2,177 and $4,742 for the three and six months ended June 30, 2015, respectively.  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 ($95,089) 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 and $1,480 for the three and six months ended June 30, 2016, respectively.

 

We received cash distributions from SIR totaling $12,459 and $8,582 during the three months ended June 30, 2016 and 2015, respectively, and $24,918 and $22,112 during the six months ended June 30, 2016 and 2015, respectively.

 

The following are summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the quarter ended June 30, 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

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2016

 

2015

Real estate properties, net

 

$

3,920,333

 

$

3,954,889

Acquired real estate leases, net

 

 

535,235

 

 

566,195

Cash and cash equivalents

 

 

10,815

 

 

17,876

Rents receivable, net

 

 

110,285

 

 

99,307

Other assets, net

 

 

73,125

 

 

46,078

Total assets

 

$

4,649,793

 

$

4,684,345

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

280,000

 

$

303,000

Unsecured term loan, net

 

 

348,124

 

 

347,876

Senior unsecured notes, net

 

 

1,428,201

 

 

1,426,025

Mortgage notes payable, net

 

 

286,326

 

 

286,706

Assumed real estate lease obligations, net

 

 

82,044

 

 

86,495

Other liabilities

 

 

128,462

 

 

137,283

Shareholders' equity

 

 

2,096,636

 

 

2,096,960

Total liabilities and shareholders' equity

 

$

4,649,793

 

$

4,684,345

 

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands, except per share data)

(unaudited)

Condensed Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2016

 

2015

 

2016

 

2015

Rental income

 

$

96,615

 

$

92,166

 

$

194,475

 

$

172,644

Tenant reimbursements and other income

 

 

18,289

 

 

15,048

 

 

37,661

 

 

28,985

  Total revenues

 

 

114,904

 

 

107,214

 

 

232,136

 

 

201,629

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

 

10,522

 

 

9,019

 

 

20,810

 

 

17,376

Other operating expenses

 

 

12,635

 

 

9,801

 

 

25,593

 

 

18,808

Depreciation and amortization

 

 

33,405

 

 

32,390

 

 

66,874

 

 

57,109

Acquisition related costs

 

 

 

 

779

 

 

58

 

 

21,318

General and administrative

 

 

7,374

 

 

6,368

 

 

14,350

 

 

13,160

  Total expenses

 

 

63,936

 

 

58,357

 

 

127,685

 

 

127,771

Operating income

 

 

50,968

 

 

48,857

 

 

104,451

 

 

73,858