Item 1. Financial Statements
GOVERNMENT PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
Real estate properties:
|
|
|
|
|
|
|
Land
|
|
$
|
259,416
|
|
|
$
|
253,058
|
|
Buildings and improvements
|
|
1,528,585
|
|
|
1,443,074
|
|
Total real estate properties, gross
|
|
1,788,001
|
|
|
1,696,132
|
|
Accumulated depreciation
|
|
(285,974
|
)
|
|
(255,879
|
)
|
Total real estate properties, net
|
|
1,502,027
|
|
|
1,440,253
|
|
|
|
|
|
|
Equity investment in Select Income REIT
|
|
491,973
|
|
|
491,369
|
|
Assets of discontinued operations
|
|
12,490
|
|
|
12,468
|
|
Assets of property held for sale
|
|
—
|
|
|
3,098
|
|
Acquired real estate leases, net
|
|
105,499
|
|
|
118,267
|
|
Cash and cash equivalents
|
|
13,749
|
|
|
8,785
|
|
Restricted cash
|
|
514
|
|
|
1,022
|
|
Rents receivable, net
|
|
49,350
|
|
|
45,269
|
|
Deferred leasing costs, net
|
|
20,012
|
|
|
14,299
|
|
Other assets, net
|
|
69,456
|
|
|
33,680
|
|
Total assets
|
|
$
|
2,265,070
|
|
|
$
|
2,168,510
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Unsecured revolving credit facility
|
|
$
|
25,000
|
|
|
$
|
117,000
|
|
Unsecured term loans, net
|
|
547,000
|
|
|
546,490
|
|
Senior unsecured notes, net
|
|
646,551
|
|
|
345,809
|
|
Mortgage notes payable, net
|
|
28,250
|
|
|
136,299
|
|
Liabilities of discontinued operations
|
|
61
|
|
|
54
|
|
Liabilities of property held for sale
|
|
—
|
|
|
43
|
|
Accounts payable and other liabilities
|
|
52,237
|
|
|
50,543
|
|
Due to related persons
|
|
3,974
|
|
|
2,886
|
|
Assumed real estate lease obligations, net
|
|
11,257
|
|
|
12,735
|
|
Total liabilities
|
|
1,314,330
|
|
|
1,211,859
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
Common shares of beneficial interest, $.01 par value: 100,000,000 shares
authorized, 71,178,999 and 71,126,308 shares issued and outstanding, respectively
|
|
712
|
|
|
711
|
|
Additional paid in capital
|
|
1,473,557
|
|
|
1,472,482
|
|
Cumulative net income
|
|
84,264
|
|
|
38,486
|
|
Cumulative other comprehensive income (loss)
|
|
24,127
|
|
|
(14,867
|
)
|
Cumulative common distributions
|
|
(631,920
|
)
|
|
(540,161
|
)
|
Total shareholders’ equity
|
|
950,740
|
|
|
956,651
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,265,070
|
|
|
$
|
2,168,510
|
|
See accompanying notes.
GOVERNMENT PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
64,478
|
|
|
$
|
62,092
|
|
|
$
|
192,150
|
|
|
$
|
186,864
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
7,591
|
|
|
7,735
|
|
|
22,810
|
|
|
22,819
|
|
Utility expenses
|
|
5,483
|
|
|
5,194
|
|
|
13,330
|
|
|
13,788
|
|
Other operating expenses
|
|
13,854
|
|
|
12,281
|
|
|
40,031
|
|
|
36,659
|
|
Depreciation and amortization
|
|
18,404
|
|
|
17,161
|
|
|
54,713
|
|
|
51,675
|
|
Acquisition related costs
|
|
147
|
|
|
270
|
|
|
363
|
|
|
459
|
|
General and administrative
|
|
3,816
|
|
|
3,714
|
|
|
11,350
|
|
|
11,431
|
|
Total expenses
|
|
49,295
|
|
|
46,355
|
|
|
142,597
|
|
|
136,831
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
15,183
|
|
|
15,737
|
|
|
49,553
|
|
|
50,033
|
|
Dividend income
|
|
304
|
|
|
—
|
|
|
667
|
|
|
—
|
|
Interest income
|
|
47
|
|
|
2
|
|
|
63
|
|
|
14
|
|
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $805, $360, $2,024 and $1,020, respectively)
|
|
(12,608
|
)
|
|
(9,137
|
)
|
|
(32,286
|
)
|
|
(27,894
|
)
|
Gain on early extinguishment of debt
|
|
—
|
|
|
34
|
|
|
104
|
|
|
34
|
|
Gain (loss) on issuance of shares by Select Income REIT
|
|
72
|
|
|
(21
|
)
|
|
88
|
|
|
(42,145
|
)
|
Loss on impairment of Select Income REIT investment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(203,297
|
)
|
Income (loss) from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity in earnings of investees
|
|
2,998
|
|
|
6,615
|
|
|
18,189
|
|
|
(223,255
|
)
|
Income tax (expense) benefit
|
|
(13
|
)
|
|
13
|
|
|
(63
|
)
|
|
(49
|
)
|
Equity in earnings of investees
|
|
8,668
|
|
|
10,294
|
|
|
28,002
|
|
|
16,072
|
|
Income (loss) from continuing operations
|
|
11,653
|
|
|
16,922
|
|
|
46,128
|
|
|
(207,232
|
)
|
Loss from discontinued operations
|
|
(154
|
)
|
|
(11
|
)
|
|
(429
|
)
|
|
(390
|
)
|
Income (loss) before gain on sale of property
|
|
11,499
|
|
|
16,911
|
|
|
45,699
|
|
|
(207,622
|
)
|
Gain on sale of property
|
|
79
|
|
|
—
|
|
|
79
|
|
|
—
|
|
Net income (loss)
|
|
11,578
|
|
|
16,911
|
|
|
45,778
|
|
|
(207,622
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investment in available for sale securities
|
|
8,463
|
|
|
—
|
|
|
28,571
|
|
|
—
|
|
Equity in unrealized gain (loss) of investees
|
|
3,273
|
|
|
(355
|
)
|
|
10,423
|
|
|
(166
|
)
|
Other comprehensive income (loss)
|
|
11,736
|
|
|
(355
|
)
|
|
38,994
|
|
|
(166
|
)
|
Comprehensive income (loss)
|
|
$
|
23,314
|
|
|
$
|
16,556
|
|
|
$
|
84,772
|
|
|
$
|
(207,788
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
71,054
|
|
|
71,004
|
|
|
71,041
|
|
|
70,589
|
|
Weighted average common shares outstanding (diluted)
|
|
71,084
|
|
|
71,021
|
|
|
71,064
|
|
|
70,589
|
|
|
|
|
|
|
|
|
|
|
Per common share amounts (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
$
|
0.65
|
|
|
$
|
(2.94
|
)
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net income (loss)
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
$
|
0.64
|
|
|
$
|
(2.94
|
)
|
See accompanying notes.
GOVERNMENT PROPERTIES INCOME TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
45,778
|
|
|
$
|
(207,622
|
)
|
Adjustments to reconcile net income (loss) to cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
31,611
|
|
|
29,115
|
|
Net amortization of debt premiums and discounts and debt issuance costs
|
|
2,024
|
|
|
1,020
|
|
Gain on sale of property
|
|
(79
|
)
|
|
—
|
|
Gain on early extinguishment of debt
|
|
(104
|
)
|
|
(34
|
)
|
Straight line rental income
|
|
(1,789
|
)
|
|
(2,820
|
)
|
Amortization of acquired real estate leases
|
|
21,948
|
|
|
21,771
|
|
Amortization of deferred leasing costs
|
|
2,343
|
|
|
1,387
|
|
Other non-cash (income) expense, net
|
|
500
|
|
|
1,288
|
|
Equity in earnings of investees
|
|
(28,002
|
)
|
|
(16,072
|
)
|
(Gain) loss on issuance of shares by Select Income REIT
|
|
(88
|
)
|
|
42,145
|
|
Loss on impairment of Select Income REIT investment
|
|
—
|
|
|
203,297
|
|
Distributions of earnings from Select Income REIT
|
|
25,676
|
|
|
18,850
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
Restricted cash
|
|
508
|
|
|
950
|
|
Deferred leasing costs
|
|
(7,998
|
)
|
|
(2,408
|
)
|
Rents receivable
|
|
(126
|
)
|
|
456
|
|
Other assets
|
|
(1,466
|
)
|
|
(865
|
)
|
Accounts payable and accrued expenses
|
|
(150
|
)
|
|
(1,037
|
)
|
Due to related persons
|
|
1,088
|
|
|
(368
|
)
|
Net cash provided by operating activities
|
|
91,674
|
|
|
89,053
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Real estate acquisitions and deposits
|
|
(83,705
|
)
|
|
—
|
|
Real estate improvements
|
|
(23,357
|
)
|
|
(9,746
|
)
|
Investment in Select Income REIT
|
|
—
|
|
|
(95,821
|
)
|
Investment in The RMR Group Inc.
|
|
—
|
|
|
(6,467
|
)
|
Distributions in excess of earnings from Select Income REIT
|
|
11,951
|
|
|
15,721
|
|
Proceeds from sale of properties, net
|
|
263
|
|
|
30,520
|
|
Net cash used in investing activities
|
|
(94,848
|
)
|
|
(65,793
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Repayment of mortgage notes payable
|
|
(107,562
|
)
|
|
(48,476
|
)
|
Proceeds from issuance of senior unsecured notes
|
|
310,000
|
|
|
—
|
|
Borrowings on unsecured revolving credit facility
|
|
254,000
|
|
|
165,000
|
|
Repayments on unsecured revolving credit facility
|
|
(346,000
|
)
|
|
(51,000
|
)
|
Payment of debt issuance costs
|
|
(10,229
|
)
|
|
(21
|
)
|
Repurchase of common shares
|
|
(312
|
)
|
|
(174
|
)
|
Distributions to common shareholders
|
|
(91,759
|
)
|
|
(91,074
|
)
|
Net cash provided by (used in) financing activities
|
|
8,138
|
|
|
(25,745
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
4,964
|
|
|
(2,485
|
)
|
Cash and cash equivalents at beginning of period
|
|
8,785
|
|
|
13,791
|
|
Cash and cash equivalents at end of period
|
|
$
|
13,749
|
|
|
$
|
11,306
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
Interest paid
|
|
$
|
32,599
|
|
|
$
|
30,107
|
|
Income taxes paid
|
|
$
|
94
|
|
|
$
|
143
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
Investment in The RMR Group Inc. paid in common shares
|
|
$
|
—
|
|
|
$
|
13,545
|
|
Sale of property
|
|
$
|
3,600
|
|
|
$
|
—
|
|
Mortgage note receivable related to sale of property
|
|
$
|
(3,600
|
)
|
|
$
|
—
|
|
See accompanying notes.
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 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 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 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 how changes in the fair value of available for sale equity investments we hold are presented in our condensed consolidated financial statements.
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
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
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.
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 is 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 in our condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-15 will have in 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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
For the Nine Months
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted average common shares for basic earnings per share
|
|
71,054
|
|
|
71,004
|
|
|
71,041
|
|
|
70,589
|
|
Effect of dilutive securities: unvested share awards
|
|
30
|
|
|
17
|
|
|
23
|
|
|
—
|
|
Weighted average common shares for diluted earnings per share
|
|
71,084
|
|
|
71,021
|
|
|
71,064
|
|
|
70,589
|
|
Note 4. Real Estate Properties
As of
September 30, 2016
, we owned
71
properties (
91
buildings), with an undepreciated carrying value of
$1,788,001
, 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 contracts 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
September 30, 2016
, we entered into
17
leases for
136,466
rentable square feet, for a weighted (by rentable square feet) average lease term of
6.8 years
and we made commitments for approximately
$3,428
of leasing related costs. During the
nine
months ended
September 30, 2016
, we entered into
51
leases for
1,226,068
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
10.3 years
and we made commitments for approximately
$35,033
of leasing related costs. As of
September 30, 2016
, we have estimated unspent leasing related
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
obligations of
$21,580
and have committed to redevelop and expand an existing property at an estimated cost to complete of approximately
$17,990
.
Acquisition Activities
During the
nine
months ended
September 30, 2016
, we acquired an 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
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|
|
|
Buildings
|
|
Other
|
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|
|
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
|
)
|
In July 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.
Also in July 2016, we entered an agreement to acquire an office property (
one
building) located in Manassas, VA with
69,374
rentable square feet for a purchase price of
$13,200
, excluding acquisition costs. This property is
100%
leased to Prince William County.
In August 2016, we entered an agreement to acquire transferable development rights that would allow us to expand a property we own in Washington, D.C. for a purchase price of
$2,030
, excluding acquisition costs.
Our pending acquisitions are subject to conditions; accordingly, we cannot be sure that we will complete these acquisitions or that these acquisitions will not be delayed or the terms of these acquisitions will not change.
We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our 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 July 2016, we sold an office property (
one
1
building
) in Savannah, GA with
35,228
rentable square feet that had a net book value of
$2,986
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. This sales transaction did not qualify for full gain recognition under GAAP and is being accounted for under the installment method. Accordingly, we recognized a gain on sale of real estate of
$79
during the three months ended September 30, 2016 and recorded a deferred gain of
$712
, which we currently expect to recognize when the mortgage note is repaid. The mortgage note receivable of
$3,600
, net of the
$712
deferred gain, is included in other assets on our condensed consolidated balance sheet at September 30, 2016.
We classified this property as held for sale as of June 30, 2016. The results of operations for this property were included in continuing operations in our condensed consolidated financial statements up to the date of sale. Summarized balance sheet information for the property as of December 31, 2015 is as follows:
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
December 31,
|
|
|
2015
|
Real estate properties, net
|
|
$
|
3,071
|
|
Rents receivable
|
|
1
|
|
Other assets
|
|
26
|
|
Assets of property held for sale
|
|
$
|
3,098
|
|
|
|
|
Other liabilities
|
|
$
|
43
|
|
Liabilities of property held for sale
|
|
$
|
43
|
|
Disposition Activities – Discontinued Operations
In March 2016, we entered 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
September 30, 2016
. The contract sales price 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 cannot be sure 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
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Real estate properties, net
|
|
$
|
12,260
|
|
|
$
|
12,260
|
|
Other assets
|
|
230
|
|
|
208
|
|
Assets of discontinued operations
|
|
$
|
12,490
|
|
|
$
|
12,468
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
61
|
|
|
$
|
54
|
|
Liabilities of discontinued operations
|
|
$
|
61
|
|
|
$
|
54
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Rental income
|
|
$
|
6
|
|
|
$
|
28
|
|
|
$
|
62
|
|
|
$
|
86
|
|
Real estate taxes
|
|
(27
|
)
|
|
71
|
|
|
(73
|
)
|
|
(69
|
)
|
Utility expenses
|
|
(34
|
)
|
|
(46
|
)
|
|
(113
|
)
|
|
(124
|
)
|
Other operating expenses
|
|
(70
|
)
|
|
(35
|
)
|
|
(219
|
)
|
|
(197
|
)
|
General and administrative
|
|
(29
|
)
|
|
(29
|
)
|
|
(86
|
)
|
|
(86
|
)
|
Loss from discontinued operations
|
|
$
|
(154
|
)
|
|
$
|
(11
|
)
|
|
$
|
(429
|
)
|
|
$
|
(390
|
)
|
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
$1,205
and
$613
for the three months ended
September 30, 2016
and
2015
, respectively, and
$1,789
and
$2,820
for the
nine
months ended
September 30, 2016
and
2015
,
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
respectively. Rents receivable include
$20,784
and
$18,995
of straight line rent receivables at
September 30, 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,
13
state governments, and
three
other government tenants combined were responsible for approximately
92.4%
and
92.8%
of our annualized rental income, excluding
one
property (
one
building) classified as discontinued operations, as of
September 30, 2016
and
2015
, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately
63.9%
and
67.5%
of our annualized rental income, excluding one property classified as discontinued operations, as of
September 30, 2016
and
2015
, respectively.
Geographic Concentration
At
September 30, 2016
, our
71
properties (
91
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
14.6%
,
10.0%
,
9.9%
,
9.2%
,
8.1%
,
7.6%
and
5.3%
of our annualized rental income as of
September 30, 2016
, respectively.
Note 7. Indebtedness
Our principal debt obligations at
September 30, 2016
were: (1)
$25,000
of outstanding borrowings under our
$750,000
unsecured revolving credit facility; (2)
$550,000
aggregate outstanding principal amount of term loans; (3) an aggregate outstanding principal amount of
$660,000
of public issuances of senior unsecured notes; and (4)
$27,877
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
September 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
September 30, 2016
. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of
September 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
nine
months ended
September 30, 2016
and
1.4%
and
1.5%
, respectively, for the three and
nine
months ended
September 30, 2015
. As of
September 30, 2016
and
October 25, 2016
, we had
$25,000
and
$15,000
outstanding under our 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
September 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
September 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
1.9%
for both the three and
nine
months ended
September 30, 2016
and
1.6%
for both the three and
nine
months ended
September 30, 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
September 30, 2016
, on the amount outstanding under our
$250,000
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of
September 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
2.3%
for both the three and
nine
months ended
September 30, 2016
and
2.0%
for both the three and
nine
months ended September 30,
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
$299,771
, 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 accrued 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
September 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
nine
months ended
September 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
nine
months ended
September 30, 2016
, which represented the net unamortized debt premium and debt issuance costs related to this note.
At
September 30, 2016
,
three
of our properties (
three
buildings) with an aggregate net book value of
$53,150
are encumbered by
three
mortgages for an aggregate principal amount of
$27,877
. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.
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
September 30, 2016
, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
46,068
|
|
|
$
|
46,068
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
September 30, 2016
. The net unrealized gain of
$19,180
for these shares as of
September 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
September 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, mortgage note 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
September 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 September 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
|
|
$
|
346,667
|
|
|
$
|
358,384
|
|
|
$
|
345,809
|
|
|
$
|
351,692
|
|
Senior unsecured notes, 5.875% interest rate, due in 2046
|
|
299,884
|
|
|
320,664
|
|
|
—
|
|
|
—
|
|
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)
|
|
13,894
|
|
|
15,008
|
|
|
14,045
|
|
|
14,678
|
|
Mortgage note payable, 7.00% interest rate, due in 2019
(2)
|
|
8,872
|
|
|
9,409
|
|
|
9,145
|
|
|
9,645
|
|
Mortgage note payable, 8.15% interest rate, due in 2021
(2)
|
|
5,484
|
|
|
5,964
|
|
|
6,258
|
|
|
6,711
|
|
|
|
$
|
674,801
|
|
|
$
|
709,429
|
|
|
$
|
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.
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 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 August 22, 2016, we paid a regular quarterly distribution to common shareholders of record on July 22, 2016 of
$0.43
per share, or
$30,590
. On October 11, 2016, we declared a regular quarterly distribution payable to common shareholders of record on October 21, 2016 of
$0.43
per share, or
$30,607
. We expect to pay this amount on or about November 21, 2016 using cash on hand and borrowings under our revolving credit facility.
Share Issuances and Purchases
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 on that day, to each of our
five
Trustees as part of their annual compensation.
On September 15, 2016, pursuant to our 2009 Incentive Share Award Plan, we granted an aggregate of
53,400
of our common shares to our officers and certain other employees of our manager, RMR LLC, valued at
$22.16
per share, the closing price of our common shares on The NASDAQ Stock Market LLC, or Nasdaq, on that day.
On September 26, 2016, we purchased an aggregate of
13,209
of our common shares valued at
$23.63
per common share, the closing price of our common shares on the Nasdaq on that day, from our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares.
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 our equity method investees, 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
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
Unrealized Gain
|
|
Equity in
|
|
|
|
|
(Loss) on Investment
|
|
Unrealized Gain
|
|
|
|
|
in Available for
|
|
(Loss) of
|
|
|
|
|
Sale Securities
|
|
Investees
|
|
Total
|
Balance at June 30, 2016
|
|
$
|
10,717
|
|
|
$
|
1,674
|
|
|
$
|
12,391
|
|
Other comprehensive income before reclassifications
|
|
8,463
|
|
|
3,235
|
|
|
11,698
|
|
Amounts reclassified from cumulative other comprehensive income (loss) to net income
(1)
|
|
—
|
|
|
38
|
|
|
38
|
|
Net current period other comprehensive income
|
|
8,463
|
|
|
3,273
|
|
|
11,736
|
|
Balance at September 30, 2016
|
|
$
|
19,180
|
|
|
$
|
4,947
|
|
|
$
|
24,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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
|
|
28,571
|
|
|
10,382
|
|
|
38,953
|
|
Amounts reclassified from cumulative other comprehensive income (loss) to net income
(1)
|
|
—
|
|
|
41
|
|
|
41
|
|
Net current period other comprehensive income
|
|
28,571
|
|
|
10,423
|
|
|
38,994
|
|
Balance at September 30, 2016
|
|
$
|
19,180
|
|
|
$
|
4,947
|
|
|
$
|
24,127
|
|
|
|
(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).
|
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
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 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
$2,572
and
$2,438
for the three months ended
September 30, 2016
and
2015
, respectively, and
$7,614
and
$7,482
for the
nine
months ended
September 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
$2,249
and
$1,930
for the three months ended
September 30, 2016
and
2015
, respectively, and
$6,636
and
$5,861
for the
nine
months ended
September 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
$3,221
and
$3,011
for property management related expenses for the three months ended
September 30, 2016
and
2015
, respectively, and
$9,132
and
$8,478
for the
nine
months ended
September 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 September 2016 and 2015, we awarded annual share grants of
53,400
and
53,100
of our common shares, respectively, to our officers and to other employees of RMR LLC. In September 2016, we purchased
13,209
of our common shares, at the closing price of our common shares on the Nasdaq on the date of purchase, from our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. 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
$504
and
$292
for the three months ended
September 30, 2016
and
2015
, respectively, and
$1,239
and
$725
for the
nine
months ended
September 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
$90
and
$111
for the three months ended
September 30, 2016
and
2015
, respectively, and
$277
and
$278
for the
nine
months ended
September 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. 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
$281
of this liability for the three months ended
September 30, 2016
and 2015, respectively, and
$815
and
$346
of this liability for the
nine
months ended
September 30, 2016
and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods. As of
September 30, 2016
, the remaining unamortized amount of this liability was
$20,938
.
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
As of
September 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, which was for the period from December 14, 2015 through March 31, 2016. We received a dividend of
$304
on our RMR Inc. class A common shares during the three months ended
September 30, 2016
which was for the period from April 1, 2016 through June 30, 2016. On October 11, 2016, RMR Inc. declared a regular quarterly dividend of
$0.25
per class A common share payable to shareholders of record on October 21, 2016. RMR Inc. has stated that it expects to pay this dividend on or about November 17, 2016.
Our investment in RMR Inc. class A common shares is included in other assets in our condensed consolidated balance sheets and 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.
SIR
: As of
September 30, 2016
, we owned
24,918,421
common shares of SIR, or
27.9%
of SIR's outstanding common shares. 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
$12,708
and
$12,459
on our SIR common shares during the three months ended
September 30, 2016
and
2015
, respectively, and
$37,627
and
$34,571
during the
nine
months ended
September 30, 2016
and
2015
, respectively. On October 11, 2016, SIR declared a regular quarterly distribution of
$0.51
per common share payable to shareholders of record on October 21, 2016. SIR has stated that it expects to pay this distribution on or about November 17, 2016. We account for our investment in SIR common shares under the equity method. For additional information about our ownership of SIR common shares and how we account for this investment, see Note 11.
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 paid 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
September 30, 2016
and
December 31, 2015
, our investment in AIC had a carrying value of
$7,229
and
$6,946
, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income (loss) of
$13
and
($24)
related to our investment in AIC for the three months ended
September 30, 2016
and
2015
, respectively, and
$107
and
$70
for the
nine
months ended
September 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
$81
and
($72)
for the three months ended
September 30, 2016
and
2015
, respectively, and
$175
and
($91)
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
Directors’ and Officers’ Liability Insurance:
We, RMR Inc., RMR LLC and certain companies to which RMR LLC provides management services participate in a combined directors’ and officers’ liability insurance policy. In September 2016, we participated in a one year extension of this combined directors’ and officers’ insurance policy through September 2018. Our premium for this policy extension was approximately
$106
.
Note 11. Equity Investment in Select Income REIT
As of
September 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
$8,655
and
$10,318
of equity in the earnings of SIR for the three months ended
September 30, 2016
and
2015
, respectively, and
$27,895
and
$16,002
for the
nine
months ended
September 30, 2016
and
2015
, respectively. Our other comprehensive income (loss) includes our proportionate share of SIR’s unrealized gains (losses) of
$3,192
and
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
($283)
for the three months ended
September 30, 2016
and
2015
, respectively, and
$10,248
and
($75)
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
As of
September 30, 2016
, our investment in SIR had a carrying value of
$491,973
and a market value, based on the closing price of SIR common shares on the Nasdaq on
September 30, 2016
, of
$670,306
. 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 and
nine
months ended
September 30, 2016
, SIR issued
53,400
and
65,900
common shares, respectively. During the three and
nine
months ended
September 30, 2015
, SIR issued
45,389
and
29,414,279
common shares, respectively. We recognized a gain (loss) on issuance of shares by SIR of
$72
and
($21)
during the three months ended
September 30, 2016
and
2015
, respectively, and a gain (loss) of
$88
and
($42,145)
during the
nine
months ended
September 30, 2016
and
2015
, respectively, as a result of the per share issuance price of these SIR common shares being above (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
zero
and
$4,742
for the three and
nine
months ended
September 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 being less than our proportionate share of SIR’s total shareholders’ equity book value as of June 30, 2015. As a result, the previous basis difference was eliminated and we are currently accreting 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 accretion increased our equity in the earnings of SIR by
$740
and
$2,219
for the three and
nine
months ended
September 30, 2016
, respectively, and by
$1,893
for the three and
nine
months ended
September 30, 2015
.
We received cash distributions from SIR totaling
$12,708
and
$12,459
during the three months ended
September 30, 2016
and
2015
, respectively, and
$37,627
and
$34,571
during the
nine
months ended
September 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
September 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.
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Real estate properties, net
|
|
$
|
3,913,589
|
|
|
$
|
3,954,889
|
|
Acquired real estate leases, net
|
|
519,952
|
|
|
566,195
|
|
Cash and cash equivalents
|
|
16,697
|
|
|
17,876
|
|
Rents receivable, net
|
|
117,163
|
|
|
99,307
|
|
Other assets, net
|
|
89,855
|
|
|
46,078
|
|
Total assets
|
|
$
|
4,657,256
|
|
|
$
|
4,684,345
|
|
|
|
|
|
|
Unsecured revolving credit facility
|
|
$
|
297,000
|
|
|
$
|
303,000
|
|
Unsecured term loan, net
|
|
348,249
|
|
|
347,876
|
|
Senior unsecured notes, net
|
|
1,429,247
|
|
|
1,426,025
|
|
Mortgage notes payable, net
|
|
286,102
|
|
|
286,706
|
|
Assumed real estate lease obligations, net
|
|
79,833
|
|
|
86,495
|
|
Other liabilities
|
|
124,891
|
|
|
137,283
|
|
Shareholders' equity
|
|
2,091,934
|
|
|
2,096,960
|
|
Total liabilities and shareholders' equity
|
|
$
|
4,657,256
|
|
|
$
|
4,684,345
|
|
Condensed Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Rental income
|
|
$
|
96,037
|
|
|
$
|
94,745
|
|
|
$
|
290,512
|
|
|
$
|
267,389
|
|
Tenant reimbursements and other income
|
|
18,999
|
|
|
17,197
|
|
|
56,660
|
|
|
46,182
|
|
Total revenues
|
|
115,036
|
|
|
111,942
|
|
|
347,172
|
|
|
313,571
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
10,755
|
|
|
9,871
|
|
|
31,565
|
|
|
27,247
|
|
Other operating expenses
|
|
14,394
|
|
|
11,313
|
|
|
39,987
|
|
|
30,121
|
|
Depreciation and amortization
|
|
33,366
|
|
|
33,070
|
|
|
100,240
|
|
|
90,179
|
|
Acquisition related costs
|
|
13
|
|
|
402
|
|
|
71
|
|
|
21,720
|
|
General and administrative
|
|
7,553
|
|
|
6,328
|
|
|
21,903
|
|
|
19,488
|
|
Total expenses
|
|
66,081
|
|
|
60,984
|
|
|
193,766
|
|
|
188,755
|
|
Operating income
|
|
48,955
|
|
|
50,958
|
|
|
153,406
|
|
|
124,816
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
397
|
|
|
—
|
|
|
872
|
|
|
—
|
|
Interest expense
|
|
(20,690
|
)
|
|
(20,034
|
)
|
|
(61,883
|
)
|
|
(53,710
|
)
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,845
|
)
|
Income before income tax expense and equity in earnings (loss) of an investee
|
|
28,662
|
|
|
30,924
|
|
|
92,395
|
|
|
64,261
|
|
Income tax expense
|
|
(107
|
)
|
|
(98
|
)
|
|
(370
|
)
|
|
(324
|
)
|
Equity in earnings (loss) of an investee
|
|
13
|
|
|
(25
|
)
|
|
107
|
|
|
70
|
|
Net income
|
|
28,568
|
|
|
30,801
|
|
|
92,132
|
|
|
64,007
|
|
Net income allocated to noncontrolling interest
|
|
—
|
|
|
(46
|
)
|
|
(33
|
)
|
|
(135
|
)
|
Net income attributed to SIR
|
|
$
|
28,568
|
|
|
$
|
30,755
|
|
|
$
|
92,099
|
|
|
$
|
63,872
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
89,308
|
|
|
89,267
|
|
|
89,295
|
|
|
85,827
|
|
Weighted average common shares outstanding (diluted)
|
|
89,334
|
|
|
89,274
|
|
|
89,318
|
|
|
85,837
|
|
Net income attributed to SIR per common share (basic and diluted)
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
1.03
|
|
|
$
|
0.74
|
|
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 September 30, 2016
|
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
in Real Estate
|
|
in SIR
|
|
Corporate
|
|
Consolidated
|
Rental income
|
|
$
|
64,478
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,478
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
7,591
|
|
|
—
|
|
|
—
|
|
|
7,591
|
|
Utility expenses
|
|
5,483
|
|
|
—
|
|
|
—
|
|
|
5,483
|
|
Other operating expenses
|
|
13,854
|
|
|
—
|
|
|
—
|
|
|
13,854
|
|
Depreciation and amortization
|
|
18,404
|
|
|
—
|
|
|
—
|
|
|
18,404
|
|
Acquisition related costs
|
|
147
|
|
|
—
|
|
|
—
|
|
|
147
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
3,816
|
|
|
3,816
|
|
Total expenses
|
|
45,479
|
|
|
—
|
|
|
3,816
|
|
|
49,295
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
18,999
|
|
|
—
|
|
|
(3,816
|
)
|
|
15,183
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
304
|
|
|
304
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
47
|
|
|
47
|
|
Interest expense
|
|
(429
|
)
|
|
—
|
|
|
(12,179
|
)
|
|
(12,608
|
)
|
Gain on issuance of shares by Select Income REIT
|
|
—
|
|
|
72
|
|
|
—
|
|
|
72
|
|
Income (loss) from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and equity in earnings of investees
|
|
18,570
|
|
|
72
|
|
|
(15,644
|
)
|
|
2,998
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
Equity in earnings of investees
|
|
—
|
|
|
8,655
|
|
|
13
|
|
|
8,668
|
|
Income (loss) from continuing operations
|
|
18,570
|
|
|
8,727
|
|
|
(15,644
|
)
|
|
11,653
|
|
Loss from discontinued operations
|
|
(154
|
)
|
|
—
|
|
|
—
|
|
|
(154
|
)
|
Income (loss) before gain on sale of property
|
|
18,416
|
|
|
8,727
|
|
|
(15,644
|
)
|
|
11,499
|
|
Gain on sale of property
|
|
79
|
|
|
—
|
|
|
—
|
|
|
79
|
|
Net income (loss)
|
|
$
|
18,495
|
|
|
$
|
8,727
|
|
|
$
|
(15,644
|
)
|
|
$
|
11,578
|
|
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
in Real Estate
|
|
in SIR
|
|
Corporate
|
|
Consolidated
|
Rental income
|
|
$
|
192,150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
192,150
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
22,810
|
|
|
—
|
|
|
—
|
|
|
22,810
|
|
Utility expenses
|
|
13,330
|
|
|
—
|
|
|
—
|
|
|
13,330
|
|
Other operating expenses
|
|
40,031
|
|
|
—
|
|
|
—
|
|
|
40,031
|
|
Depreciation and amortization
|
|
54,713
|
|
|
—
|
|
|
—
|
|
|
54,713
|
|
Acquisition related costs
|
|
363
|
|
|
—
|
|
|
—
|
|
|
363
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
11,350
|
|
|
11,350
|
|
Total expenses
|
|
131,247
|
|
|
—
|
|
|
11,350
|
|
|
142,597
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
60,903
|
|
|
—
|
|
|
(11,350
|
)
|
|
49,553
|
|
Dividend income
|
|
—
|
|
|
—
|
|
|
667
|
|
|
667
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
63
|
|
|
63
|
|
Interest expense
|
|
(1,953
|
)
|
|
—
|
|
|
(30,333
|
)
|
|
(32,286
|
)
|
Gain on early extinguishment of debt
|
|
104
|
|
|
—
|
|
|
—
|
|
|
104
|
|
Gain on issuance of shares by Select Income REIT
|
|
—
|
|
|
88
|
|
|
—
|
|
|
88
|
|
Income (loss) from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and equity in earnings of investees
|
|
59,054
|
|
|
88
|
|
|
(40,953
|
)
|
|
18,189
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(63
|
)
|
|
(63
|
)
|
Equity in earnings of investees
|
|
—
|
|
|
27,895
|
|
|
107
|
|
|
28,002
|
|
Income (loss) from continuing operations
|
|
59,054
|
|
|
27,983
|
|
|
(40,909
|
)
|
|
46,128
|
|
Loss from discontinued operations
|
|
(429
|
)
|
|
—
|
|
|
—
|
|
|
(429
|
)
|
Income (loss) before gain on sale of property
|
|
58,625
|
|
|
27,983
|
|
|
(40,909
|
)
|
|
45,699
|
|
Gain on sale of property
|
|
79
|
|
|
—
|
|
|
—
|
|
|
79
|
|
Net income (loss)
|
|
$
|
58,704
|
|
|
$
|
27,983
|
|
|
$
|
(40,909
|
)
|
|
$
|
45,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
in Real Estate
|
|
in SIR
|
|
Corporate
|
|
Consolidated
|
Total Assets
|
|
$
|
1,699,658
|
|
|
$
|
491,973
|
|
|
$
|
73,439
|
|
|
$
|
2,265,070
|
|
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
in Real Estate
|
|
in SIR
|
|
Corporate
|
|
Consolidated
|
Rental income
|
|
$
|
62,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,092
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
7,735
|
|
|
—
|
|
|
—
|
|
|
7,735
|
|
Utility expenses
|
|
5,194
|
|
|
—
|
|
|
—
|
|
|
5,194
|
|
Other operating expenses
|
|
12,281
|
|
|
—
|
|
|
—
|
|
|
12,281
|
|
Depreciation and amortization
|
|
17,161
|
|
|
—
|
|
|
—
|
|
|
17,161
|
|
Acquisition related costs
|
|
270
|
|
|
—
|
|
|
—
|
|
|
270
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
3,714
|
|
|
3,714
|
|
Total expenses
|
|
42,641
|
|
|
—
|
|
|
3,714
|
|
|
46,355
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
19,451
|
|
|
—
|
|
|
(3,714
|
)
|
|
15,737
|
|
Interest income
|
|
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Interest expense
|
|
(1,727
|
)
|
|
—
|
|
|
(7,410
|
)
|
|
(9,137
|
)
|
Gain on early extinguishment of debt
|
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
Loss on issuance of shares by Select Income REIT
|
|
—
|
|
|
(21
|
)
|
|
—
|
|
|
(21
|
)
|
Income (loss) from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and equity in earnings (losses) of investees
|
|
17,758
|
|
|
(21
|
)
|
|
(11,122
|
)
|
|
6,615
|
|
Income tax benefit
|
|
—
|
|
|
—
|
|
|
13
|
|
|
13
|
|
Equity in earnings (losses) of investees
|
|
—
|
|
|
10,318
|
|
|
(24
|
)
|
|
10,294
|
|
Income (loss) from continuing operations
|
|
17,758
|
|
|
10,297
|
|
|
(11,133
|
)
|
|
16,922
|
|
Loss from discontinued operations
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
Net income (loss)
|
|
$
|
17,747
|
|
|
$
|
10,297
|
|
|
$
|
(11,133
|
)
|
|
$
|
16,911
|
|
GOVERNMENT PROPERTIES INCOME TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
in Real Estate
|
|
in SIR
|
|
Corporate
|
|
Consolidated
|
Rental income
|
|
$
|
186,864
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
186,864
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
22,819
|
|
|
—
|
|
|
—
|
|
|
22,819
|
|
Utility expenses
|
|
13,788
|
|
|
—
|
|
|
—
|
|
|
13,788
|
|
Other operating expenses
|
|
36,659
|
|
|
—
|
|
|
—
|
|
|
36,659
|
|
Depreciation and amortization
|
|
51,675
|
|
|
—
|
|
|
—
|
|
|
51,675
|
|
Acquisition related costs
|
|
459
|
|
|
—
|
|
|
—
|
|
|
459
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
11,431
|
|
|
11,431
|
|
Total expenses
|
|
125,400
|
|
|
—
|
|
|
11,431
|
|
|
136,831
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
61,464
|
|
|
—
|
|
|
(11,431
|
)
|
|
50,033
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
Interest expense
|
|
(21,618
|
)
|
|
—
|
|
|
(6,276
|
)
|
|
(27,894
|
)
|
Gain on early extinguishment of debt
|
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
Loss on issuance of shares by Select Income REIT
|
|
—
|
|
|
(42,145
|
)
|
|
—
|
|
|
(42,145
|
)
|
Loss on impairment of Select Income REIT investment
|
|
—
|
|
|
(203,297
|
)
|
|
—
|
|
|
(203,297
|
)
|
Income (loss) from continuing operations before income
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and equity in earnings of investees
|
|
39,880
|
|
|
(245,442
|
)
|
|
(17,693
|
)
|
|
(223,255
|
)
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(49
|
)
|
|
(49
|
)
|
Equity in earnings of investees
|
|
—
|
|
|
16,002
|
|
|
70
|
|
|
16,072
|
|
Income (loss) from continuing operations
|
|
39,880
|
|
|
(229,440
|
)
|
|
(17,672
|
)
|
|
(207,232
|
)
|
Loss from discontinued operations
|
|
(390
|
)
|
|
—
|
|
|
—
|
|
|
(390
|
)
|
Net income (loss)
|
|
$
|
39,490
|
|
|
$
|
(229,440
|
)
|
|
$
|
(17,672
|
)
|
|
$
|
(207,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
in Real Estate
|
|
in SIR
|
|
Corporate
|
|
Consolidated
|
Total Assets
|
|
$
|
1,639,462
|
|
|
$
|
491,369
|
|
|
$
|
37,679
|
|
|
$
|
2,168,510
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended
December 31, 2015
, or our Annual Report.
OVERVIEW
We are a real estate investment trust, or REIT, organized under Maryland law. As of
September 30, 2016
, we owned
71
properties (
91
buildings), excluding one property (
one
building) classified as discontinued operations. Our properties are located in
31
states and the District of Columbia and contain approximately
11
million rentable square feet, of which
61.1%
was leased to the U.S. Government,
22.3%
was leased to
13
state governments,
2.8%
was leased to three other government tenants,
8.8%
was leased to various non-governmental organizations and
5.0%
was available for lease as of
September 30, 2016
. The U.S. Government,
13
state governments and
three
other government tenants combined were responsible for
92.4%
and
92.8%
of our annualized rental income as of
September 30, 2016
and
2015
, respectively. The term annualized rental income as used in this section is defined 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.
As of
September 30, 2016
, we also owned
24,918,421
common shares, or approximately
27.9%
of the then outstanding common shares, of Select Income REIT, or SIR. SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties. See Notes 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our investment in SIR. We account for our investment in SIR under the equity method.
Property Operations
As of
September 30, 2016
, excluding one property (one building) classified as discontinued operations,
95.0%
of our rentable square feet was leased, compared to
93.5%
of our rentable square feet as of
September 30, 2015
. Occupancy data for our properties as of
September 30, 2016
and
2015
is as follows (square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable
|
|
|
All Properties
(1)
|
|
Properties
(2)
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total properties
|
|
71
|
|
|
71
|
|
|
70
|
|
|
70
|
|
Total buildings
|
|
91
|
|
|
91
|
|
|
90
|
|
|
90
|
|
Total square feet
(3)
|
|
10,950
|
|
|
10,701
|
|
|
10,612
|
|
|
10,666
|
|
Percent leased
(3)(4)
|
|
95.0
|
%
|
|
93.5
|
%
|
|
95.2
|
%
|
|
93.8
|
%
|
|
|
(1)
|
Based on properties we owned on
September 30, 2016
and
2015
, respectively, and excludes one property (one building) classified as discontinued operations.
|
|
|
(2)
|
Based on properties we owned on
September 30, 2016
and which we owned continuously since January 1, 2015, and excludes one property (one building) classified as discontinued operations. Our comparable properties increased from 67 properties (86 buildings) at
September 30, 2015
as a result of our acquisition of four properties (five buildings) during the year ended
December 31, 2014
, offset by the sale of one property (one building) during the
nine
months ended
September 30, 2016
.
|
|
|
(3)
|
Subject to changes when space is re-measured or re-configured for tenants.
|
|
|
(4)
|
Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.
|
The average annualized effective rental rate per square foot for our properties for the three and
nine
months ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Average annualized effective rental rate per square foot
(1)
:
|
|
|
|
|
|
|
|
|
All properties
(2)
|
|
$
|
25.31
|
|
|
$
|
24.97
|
|
|
$
|
25.15
|
|
|
$
|
24.72
|
|
Comparable properties
(3)
|
|
$
|
25.09
|
|
|
$
|
24.98
|
|
|
$
|
24.94
|
|
|
$
|
24.70
|
|
|
|
(1)
|
Average annualized effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified. Excludes one property (one building) classified as discontinued operations.
|
|
|
(2)
|
Based on properties we owned on
September 30, 2016
and excludes one property (one building) classified as discontinued operations.
|
|
|
(3)
|
Based on properties we owned on
September 30, 2016
and which we owned continuously since July 1, 2015 and January 1, 2015, respectively, and excludes one property (one building) classified as discontinued operations.
|
During the three and
nine
months ended
September 30, 2016
, changes in rentable square feet leased and available for lease at our properties, excluding one property (one building) classified as discontinued operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
Available
|
|
|
|
|
|
Available
|
|
|
|
|
Leased
|
|
for Lease
|
|
Total
|
|
Leased
|
|
for Lease
|
|
Total
|
Beginning of period
|
|
10,347,357
|
|
|
638,010
|
|
|
10,985,367
|
|
|
10,115,001
|
|
|
585,963
|
|
|
10,700,964
|
|
Changes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of properties
|
|
—
|
|
|
—
|
|
|
—
|
|
|
290,878
|
|
|
46,933
|
|
|
337,811
|
|
Disposition of properties
|
|
—
|
|
|
(35,228
|
)
|
|
(35,228
|
)
|
|
—
|
|
|
(35,228
|
)
|
|
(35,228
|
)
|
Lease expirations
|
|
(82,030
|
)
|
|
82,030
|
|
|
—
|
|
|
(1,204,575
|
)
|
|
1,204,575
|
|
|
—
|
|
Lease renewals
(1)
|
|
75,895
|
|
|
(75,895
|
)
|
|
—
|
|
|
1,017,982
|
|
|
(1,017,982
|
)
|
|
—
|
|
New leases
(1)(2)
|
|
60,571
|
|
|
(60,571
|
)
|
|
—
|
|
|
182,507
|
|
|
(182,507
|
)
|
|
—
|
|
Re-measurements
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,408
|
)
|
|
(53,408
|
)
|
End of period
|
|
10,401,793
|
|
|
548,346
|
|
|
10,950,139
|
|
|
10,401,793
|
|
|
548,346
|
|
|
10,950,139
|
|
|
|
(1)
|
Based on leases entered into during the three and
nine
months ended
September 30, 2016
.
|
|
|
(2)
|
Rentable square footage of new leases for the
nine
months ended
September 30, 2016
excludes a
25,579
square foot expansion to be constructed at an existing property prior to the commencement of the lease.
|
|
|
(3)
|
Rentable square footage is subject to changes when space is re-measured or re-configured for tenants.
|
Leases at our properties totaling
82,030
and
1,204,575
rentable square feet expired during the three and
nine
months ended
September 30, 2016
, respectively. During the three and
nine
months ended
September 30, 2016
, we entered into leases totaling
136,466
and
1,226,068
rentable square feet, including a
25,579
square foot expansion to be constructed at an existing property, and lease renewals of
75,895
and
1,017,982
rentable square feet, respectively. The weighted (by rentable square feet) average rental rates for leases of
62,552
and
1,038,052
rentable square feet entered into with government tenants (which includes the
25,579
square foot expansion referenced above) during the three and
nine
months ended
September 30, 2016
increased by
10.5%
and
9.6%
, respectively, when compared to the weighted (by rentable square feet) average prior rents for the same space. The weighted (by rentable square feet) average rental rates for leases of
73,914
and
188,016
rentable square feet entered into with non-government tenants during the three and
nine
months ended
September 30, 2016
decreased by
3.8%
and
2.0%
, respectively, when compared to the weighted (by rentable square feet) average rental rates previously charged for the same space.
During the three and
nine
months ended
September 30, 2016
, changes in effective rental rates per square foot achieved for new leases and lease renewals that commenced during the three and
nine
months ended
September 30, 2016
, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
|
Old Effective
|
|
New Effective
|
|
|
|
Old Effective
|
|
New Effective
|
|
|
|
|
Rent Per
|
|
Rent Per
|
|
Rentable
|
|
Rent Per
|
|
Rent Per
|
|
Rentable
|
|
|
Square Foot
(1)
|
|
Square Foot
(1)
|
|
Square Feet
|
|
Square Foot
(1)
|
|
Square Foot
(1)
|
|
Square Feet
|
New leases
|
|
$
|
32.58
|
|
|
$
|
22.48
|
|
|
$
|
89,116
|
|
|
$
|
29.02
|
|
|
$
|
22.93
|
|
|
$
|
159,851
|
|
Lease renewals
|
|
$
|
26.83
|
|
|
$
|
26.27
|
|
|
$
|
72,504
|
|
|
$
|
25.05
|
|
|
$
|
26.37
|
|
|
$
|
991,120
|
|
Total leasing activity
|
|
$
|
30.00
|
|
|
$
|
24.18
|
|
|
$
|
161,620
|
|
|
$
|
25.60
|
|
|
$
|
25.90
|
|
|
$
|
1,150,971
|
|
|
|
(1)
|
Effective rental rate includes contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excluding lease value amortization.
|
During the three and
nine
months ended
September 30, 2016
, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
Non-Government
|
|
|
Three Months Ended September 30, 2016
|
|
Leases
|
|
Leases
|
|
Total
|
Rentable square feet leased during the period
|
|
62,552
|
|
|
73,914
|
|
|
136,466
|
|
Tenant leasing costs and concession commitments
(1)
(in thousands)
|
|
$
|
1,087
|
|
|
$
|
2,341
|
|
|
$
|
3,428
|
|
Tenant leasing costs and concession commitments per rentable square foot
(1)
|
|
$
|
17.38
|
|
|
$
|
31.67
|
|
|
$
|
25.12
|
|
Weighted (by square feet) average lease term (years)
|
|
6.9
|
|
|
6.6
|
|
|
6.8
|
|
Total leasing costs and concession commitments per rentable square foot per year
(1)
|
|
$
|
2.50
|
|
|
$
|
4.77
|
|
|
$
|
3.71
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
Non-Government
|
|
|
Nine Months Ended September 30, 2016
|
|
Leases
|
|
Leases
|
|
Total
|
Rentable square feet leased during the period
(2)
|
|
1,038,052
|
|
|
188,016
|
|
|
1,226,068
|
|
Tenant leasing costs and concession commitments
(1)(3)
(in thousands)
|
|
30,100
|
|
|
4,933
|
|
|
35,033
|
|
Tenant leasing costs and concession commitments per rentable square foot
(1)(3)
|
|
$
|
29.00
|
|
|
$
|
26.24
|
|
|
$
|
28.57
|
|
Weighted (by square feet) average lease term (years)
|
|
11.1
|
|
|
6.3
|
|
|
10.3
|
|
Total leasing costs and concession commitments per rentable square foot per year
(1)(3)
|
|
$
|
2.62
|
|
|
$
|
4.15
|
|
|
$
|
2.76
|
|
|
|
(1)
|
Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.
|
|
|
(2)
|
Rentable square footage includes a
25,579
square foot expansion to be constructed at an existing property prior to the commencement of the lease.
|
|
|
(3)
|
Excludes the estimated cost to complete of
$17,990
to redevelop and expand an existing property prior to the commencement of the lease.
|
During the three and
nine
months ended
September 30, 2016
and
2015
, amounts capitalized at our properties, excluding one property (one building) classified as discontinued operations, for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Tenant improvements
(1)
|
|
$
|
5,636
|
|
|
$
|
2,213
|
|
|
$
|
12,306
|
|
|
$
|
5,039
|
|
Leasing costs
(2)
|
|
$
|
655
|
|
|
$
|
439
|
|
|
$
|
8,002
|
|
|
$
|
2,876
|
|
Building improvements
(3)
|
|
$
|
3,009
|
|
|
$
|
2,210
|
|
|
$
|
8,691
|
|
|
$
|
4,151
|
|
Development, redevelopment and other activities
(4)
|
|
$
|
1,292
|
|
|
$
|
946
|
|
|
$
|
4,221
|
|
|
$
|
1,167
|
|
|
|
(1)
|
Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.
|
|
|
(2)
|
Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements.
|
|
|
(3)
|
Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.
|
|
|
(4)
|
Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property, and (ii) capital expenditure projects that reposition a property or result in new sources of revenue.
|
As of
September 30, 2016
, we have estimated unspent leasing related obligations of
$21,580
and have committed to redevelop and expand an existing property at an estimated cost to complete of approximately
$17,990
.
We believe that current government budgetary pressures have resulted in a decrease in government employment, government tenants reducing their space utilization per employee and consolidation into existing government owned properties, thereby reducing the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. However, relocation has become more prevalent in instances where efforts by government tenants to reduce their space utilization requires a significant reconfiguration of currently leased space. Accordingly, we are unable to reasonably project what the financial impact of market conditions or changing government financial circumstances will be on our financial results for future periods.
The Internal Revenue Service, or IRS, has publicly stated that it plans to discontinue its tax return processing operations at our property located in Fresno, CA in 2021. The IRS lease for this property, which accounted for approximately
3.3%
of our annualized rental income as of September 30, 2016, expires in 2021. The IRS has also publicly stated that it plans to
discontinue its tax return processing operations in Covington, KY in 2019. Our property located in Florence, KY is leased to the IRS and we believe it is used to support these operations. This lease, which accounted for approximately
1.0%
of our annualized rental income as of September 30, 2016, expires in 2022 but is subject to early termination rights beginning in 2017. The IRS has not notified us of its intentions regarding these properties.
As of
September 30, 2016
, we had leases totaling
970,781
rentable square feet that were scheduled to expire through September 30, 2017. As of
October 25, 2016
, tenants with leases totaling
138,936
rentable square feet that are scheduled to expire through September 30, 2017, have notified us that they do not plan to renew their leases upon expiration and we can provide no assurance as to whether additional tenants may or may not renew their leases upon expiration. Based upon current market conditions and tenant negotiations for leases scheduled to expire through September 30, 2017, we expect that the rental rates we are likely to achieve on new or renewed leases for space under expiring leases through September 30, 2017 will, in the aggregate and on a weighted (by annualized revenues) average basis, be modestly higher than the rates currently being paid, thereby generally resulting in higher revenue from the same space. We can provide no assurance regarding the rental rates which will result from our ongoing negotiations regarding lease renewals or any new leases we may enter into; also, we may experience material declines in our rental income due to vacancies upon lease expirations. Prevailing market conditions and government tenants' needs at the time we negotiate and enter leases will generally determine rental rates and demand for leased space in our properties, and market conditions and government tenants' needs are beyond our control.
As of
September 30, 2016
, lease expirations at our properties, excluding one property (one building) classified as discontinued operations, by year are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Expirations
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
of
|
|
of Leased
|
|
|
|
|
|
Cumulative
|
|
Rental
|
|
|
|
Cumulative
|
|
|
Tenants
|
|
Square
|
|
|
|
Percent
|
|
Percent
|
|
Income
|
|
Percent
|
|
Percent
|
Year
(1)
|
|
Expiring
|
|
Feet
(2)
|
|
|
|
of Total
|
|
of Total
|
|
Expiring
|
|
of Total
|
|
of Total
|
2016
|
|
20
|
|
|
494,157
|
|
|
|
|
4.8
|
%
|
|
4.8
|
%
|
|
$
|
21,738
|
|
|
8.5
|
%
|
|
8.5
|
%
|
2017
|
|
36
|
|
|
796,454
|
|
|
|
|
7.7
|
%
|
|
12.5
|
%
|
|
16,755
|
|
|
6.5
|
%
|
|
15.0
|
%
|
2018
|
|
39
|
|
|
1,067,705
|
|
|
|
|
10.3
|
%
|
|
22.8
|
%
|
|
29,612
|
|
|
11.6
|
%
|
|
26.6
|
%
|
2019
|
|
38
|
|
|
1,644,650
|
|
|
|
|
15.8
|
%
|
|
38.6
|
%
|
|
43,215
|
|
|
16.9
|
%
|
|
43.5
|
%
|
2020
|
|
33
|
|
|
1,307,618
|
|
|
|
|
12.6
|
%
|
|
51.2
|
%
|
|
31,072
|
|
|
12.1
|
%
|
|
55.6
|
%
|
2021
|
|
37
|
|
|
1,058,636
|
|
|
|
|
10.2
|
%
|
|
61.4
|
%
|
|
20,759
|
|
|
8.1
|
%
|
|
63.7
|
%
|
2022
|
|
16
|
|
|
710,006
|
|
|
|
|
6.8
|
%
|
|
68.2
|
%
|
|
15,414
|
|
|
6.0
|
%
|
|
69.7
|
%
|
2023
|
|
14
|
|
|
536,625
|
|
|
|
|
5.2
|
%
|
|
73.4
|
%
|
|
12,326
|
|
|
4.8
|
%
|
|
74.5
|
%
|
2024
|
|
13
|
|
|
960,838
|
|
|
|
|
9.2
|
%
|
|
82.6
|
%
|
|
21,841
|
|
|
8.5
|
%
|
|
83.0
|
%
|
2025 and thereafter
|
|
33
|
|
|
1,825,104
|
|
|
(3)
|
|
17.4
|
%
|
|
100.0
|
%
|
|
43,349
|
|
|
17.0
|
%
|
|
100.0
|
%
|
Total
|
|
279
|
|
|
10,401,793
|
|
|
|
|
100.0
|
%
|
|
|
|
$
|
256,081
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
5.0
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
(1)
|
The year of lease expiration is pursuant to current contract terms. Some government tenants have the right to vacate their space before the stated expirations of their leases. As of
September 30, 2016
, government tenants occupying approximately
11.1%
of our rentable square feet and responsible for approximately
8.6%
of our annualized rental income as of
September 30, 2016
have currently exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in
2016
,
2017
,
2018
,
2019
,
2020
,
2021
,
2022
,
2023
, 2026 and 2027, early termination rights become exercisable by other tenants who currently occupy an additional approximately
1.6%
,
2.5%
,
1.6%
,
4.5%
,
6.3%
,
0.7%
,
2.5%
,
2.0%
,
0.9%
and
0.6%
of our rentable square feet, respectively, and contribute an additional approximately
1.8%
,
1.9%
,
1.6%
,
4.8%
,
6.9%
,
0.7%
,
1.7%
,
1.8%
,
1.2%
and
0.7%
of our annualized rental income, respectively, as of
September 30, 2016
. In addition, as of
September 30, 2016
, 15 of our government tenants have currently exercisable rights to terminate their leases if the legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These
15
tenants occupy approximately
18.1%
of our rentable square feet and contribute approximately
17.9%
of our annualized rental income as of
September 30, 2016
.
|
|
|
(2)
|
Leased square feet is pursuant to leases existing as of
September 30, 2016
, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to changes when space is re-measured or re-configured for new tenants.
|
|
|
(3)
|
Leased square footage excludes a
25,579
square foot expansion to be constructed at an existing property prior to the commencement of the lease.
|
Acquisition and Disposition Activities (dollar amounts in thousands)
On January 29, 2016, we acquired an office property (one building) located in Sacramento, CA with
337,811
rentable square feet for a purchase price of
$79,235
, excluding acquisition costs, using cash on hand and borrowings under our revolving credit facility. We acquired this property at a capitalization rate of
7.2%
. We calculate the capitalization rate for property acquisitions as the ratio of (x) annual straight line rental income, excluding the impact of above and below market lease amortization, based on leases in effect on the acquisition date, less estimated annual property operating expenses as of the acquisition date, excluding depreciation and amortization expense, to (y) the acquisition purchase price, including the principal amount of assumed debt, if any, and excluding acquisition costs.
In March 2016, we entered 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
September 30, 2016
. The contract sales price 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.
In July 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.
Also in July 2016, we sold an office property (one building) in Savannah, GA with
35,228
rentable square feet and a net book value of
$2,986
at
September 30, 2016
for
$4,000
, excluding closing costs. In connection with this sale, we provided
$3,600
of mortgage financing to the buyer.
Also in July 2016, we entered an agreement to acquire an office property (
one
building) located in Manassas, VA with
69,374
rentable square feet for a purchase price of
$13,200
, excluding acquisition costs. This property is
100%
leased to Prince William County.
In August 2016, we entered an agreement to acquire transferable development rights that would allow us to expand a property we own in Washington, D.C. for a purchase price of
$2,030
, excluding acquisition costs.
Our pending acquisitions and dispositions are subject to conditions; accordingly, we cannot be sure that we will complete these acquisitions and dispositions or that these acquisitions and dispositions will not be delayed or the terms of these acquisitions and dispositions will not change.
Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants; however, we cannot be sure that we will reach any agreement to acquire such properties, or that if we do reach any such agreement, that we will complete any acquisitions. Although we have not identified properties for disposition other than the property described above, we expect to periodically identify properties for sale based on future changes in market conditions, changes in property performance, our expectation regarding lease renewals, our plans with regard to particular properties or alternative opportunities we may wish to pursue. Our plans for particular properties and other strategic considerations may cause us to change our acquisition and disposition strategies, and we may do so at any time and without shareholder approval.
RESULTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Three Months Ended
September 30, 2016
, Compared to Three Months Ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Property
|
|
Disposed Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
(2)
|
|
Results
(3)
|
|
|
|
|
|
|
|
|
|
|
Comparable Properties Results
(1)
|
|
Three Months Ended
|
|
Three Months Ended
|
|
Consolidated Results
|
|
|
Three Months Ended September 30,
|
|
September 30,
|
|
September 30,
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
|
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
Rental income
|
|
$
|
62,298
|
|
|
$
|
62,072
|
|
|
$
|
226
|
|
|
0.4
|
%
|
|
$
|
2,180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
64,478
|
|
|
$
|
62,092
|
|
|
$
|
2,386
|
|
|
3.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
7,391
|
|
|
7,722
|
|
|
(331
|
)
|
|
(4.3
|
%)
|
|
205
|
|
|
—
|
|
|
(5
|
)
|
|
13
|
|
|
7,591
|
|
|
7,735
|
|
|
(144
|
)
|
|
(1.9
|
%)
|
Utility expenses
|
|
5,268
|
|
|
5,178
|
|
|
90
|
|
|
1.7
|
%
|
|
213
|
|
|
—
|
|
|
2
|
|
|
16
|
|
|
5,483
|
|
|
5,194
|
|
|
289
|
|
|
5.6
|
%
|
Other operating expenses
|
|
13,271
|
|
|
12,252
|
|
|
1,019
|
|
|
8.3
|
%
|
|
579
|
|
|
—
|
|
|
4
|
|
|
29
|
|
|
13,854
|
|
|
12,281
|
|
|
1,573
|
|
|
12.8
|
%
|
Total operating expenses
|
|
25,930
|
|
|
25,152
|
|
|
778
|
|
|
3.1
|
%
|
|
997
|
|
|
—
|
|
|
1
|
|
|
58
|
|
|
26,928
|
|
|
25,210
|
|
|
1,718
|
|
|
6.8
|
%
|
Net operating income
(4)
|
|
$
|
36,368
|
|
|
$
|
36,920
|
|
|
$
|
(552
|
)
|
|
(1.5
|
%)
|
|
$
|
1,183
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(38
|
)
|
|
37,550
|
|
|
36,882
|
|
|
668
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,404
|
|
|
17,161
|
|
|
1,243
|
|
|
7.2
|
%
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
270
|
|
|
(123
|
)
|
|
(45.6
|
%)
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,816
|
|
|
3,714
|
|
|
102
|
|
|
2.7
|
%
|
Total other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,367
|
|
|
21,145
|
|
|
1,222
|
|
|
5.8
|
%
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,183
|
|
|
15,737
|
|
|
(554
|
)
|
|
(3.5
|
%)
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
—
|
|
|
304
|
|
|
nm
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
2
|
|
|
45
|
|
|
nm
|
|
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $805 and $360, respectively)
|
|
(12,608
|
)
|
|
(9,137
|
)
|
|
(3,471
|
)
|
|
38.0
|
%
|
Gain on early extinguishment of debt
|
|
—
|
|
|
34
|
|
|
(34
|
)
|
|
nm
|
|
Gain (loss) on issuance of shares by Select Income REIT
|
|
72
|
|
|
(21
|
)
|
|
93
|
|
|
nm
|
|
Income from continuing operations before income taxes and equity in earnings of investees
|
|
2,998
|
|
|
6,615
|
|
|
(3,617
|
)
|
|
(54.7
|
%)
|
Income tax (expense) benefit
|
|
(13
|
)
|
|
13
|
|
|
(26
|
)
|
|
nm
|
|
Equity in earnings of investees
|
|
8,668
|
|
|
10,294
|
|
|
(1,626
|
)
|
|
(15.8
|
%)
|
Income from continuing operations
|
|
11,653
|
|
|
16,922
|
|
|
(5,269
|
)
|
|
(31.1
|
%)
|
Loss from discontinued operations
|
|
(154
|
)
|
|
(11
|
)
|
|
(143
|
)
|
|
nm
|
|
Income before gain on sale of property
|
|
11,499
|
|
|
16,911
|
|
|
(5,412
|
)
|
|
(32.0
|
%)
|
Gain on sale of property
|
|
79
|
|
|
—
|
|
|
79
|
|
|
nm
|
|
Net income
|
|
$
|
11,578
|
|
|
$
|
16,911
|
|
|
$
|
(5,333
|
)
|
|
(31.5
|
%)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
71,054
|
|
|
71,004
|
|
|
50
|
|
|
0.1
|
%
|
Weighted average common shares outstanding (diluted)
|
|
71,084
|
|
|
71,021
|
|
|
63
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Per common share amounts (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
$
|
(0.08
|
)
|
|
(33.3
|
%)
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—%
|
|
Net income
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
$
|
(0.08
|
)
|
|
(33.3
|
%)
|
|
|
|
|
|
|
|
|
|
Calculation of Funds From Operations and Normalized Funds From Operations
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,578
|
|
|
$
|
16,911
|
|
|
|
|
|
|
Plus: Depreciation and amortization
|
|
18,404
|
|
|
17,161
|
|
|
|
|
|
|
Plus: FFO attributable to Select Income REIT investment
|
|
17,264
|
|
|
17,780
|
|
|
|
|
|
|
Less: Equity in earnings from Select Income REIT
|
|
(8,655
|
)
|
|
(10,318
|
)
|
|
|
|
|
|
Less: Gain on sale of property
|
|
(79
|
)
|
|
—
|
|
|
|
|
|
Funds from operations
|
|
38,512
|
|
|
41,534
|
|
|
|
|
|
|
Plus: Acquisition related costs
|
|
147
|
|
|
270
|
|
|
|
|
|
|
Plus: Loss on issuance of shares by Select Income REIT
|
|
—
|
|
|
21
|
|
|
|
|
|
|
Plus: Loss on impairment of Select Income REIT investment
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Plus: Normalized FFO attributable to Select Income REIT investment
|
|
17,267
|
|
|
17,892
|
|
|
|
|
|
|
Less: FFO attributable to Select Income REIT investment
|
|
(17,264
|
)
|
|
(17,780
|
)
|
|
|
|
|
|
Less: Gain on early extinguishment of debt
|
|
—
|
|
|
(34
|
)
|
|
|
|
|
|
Less: Gain on issuance of shares by Select Income REIT
|
|
(72
|
)
|
|
—
|
|
|
|
|
|
|
Normalized funds from operations
|
|
$
|
38,590
|
|
|
$
|
41,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations per common share (basic and diluted)
|
|
$
|
0.54
|
|
|
$
|
0.58
|
|
|
|
|
|
|
Normalized funds from operations per common share (basic and diluted)
|
|
$
|
0.54
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
(1)
|
Comparable properties consist of
70
properties (
90
buildings) we owned on
September 30, 2016
and which we owned continuously since July 1, 2015, and excludes one property (one building) classified as discontinued operations.
|
|
|
(2)
|
Acquired property consists of one property (one building) we acquired during the three months ended March 31, 2016.
|
|
|
(3)
|
Disposed property consists of one property (one building) we sold during the three months ended
September 30, 2016
.
|
|
|
(4)
|
The calculation of net operating income, or NOI, excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions because we record those amounts as depreciation and amortization. We consider NOI to be an appropriate supplemental measure to net income (loss) because it may help both investors and management to understand the operations of our properties. We use NOI to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to net income (loss) or operating income as an indicator of our operating performance or as a measure of our liquidity. This measure should be considered in conjunction with net income (loss) and operating income as presented in our Condensed Consolidated Statements of Comprehensive Income (Loss). Other REITs and real estate companies may calculate NOI differently than we do.
|
|
|
(5)
|
We calculate funds from operations, or FFO, and normalized funds from operations, or Normalized FFO, as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization and the difference between FFO attributable to an equity investment and equity in earnings of an equity investee but excluding impairment charges on real estate assets, any gain or loss on sale of properties, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT's definition of FFO because we include the difference between FFO and Normalized FFO attributable to our equity investment in SIR, we include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will ultimately be payable when all contingencies for determining any such fees are determined at the end of the calendar year and we exclude acquisition related costs, gains or losses on early extinguishment of debt, loss on impairment of SIR investment and gains or losses on issuance of shares by SIR. We consider FFO and Normalized FFO to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss) and operating income. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, our receipt of distributions from SIR and our expected needs and availability of cash to pay our obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income (loss) or operating income as an indicator of our operating performance or as a measure of our liquidity. These measures should be considered in conjunction with net income (loss) and operating income as presented in our Condensed Consolidated Statements of Comprehensive Income (Loss). Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.
|
We refer to the
70
properties (
90
buildings) we owned on
September 30, 2016
and which we have owned continuously since July 1, 2015, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the one property (one building) we acquired during the three months ended March 31, 2016 as the acquired property. We refer to the one property (one building) we sold during the three months ended September 30, 2016 as the disposed property.
Our condensed consolidated statements of comprehensive income for the three months ended
September 30, 2016
include the operating results of the acquired property for the entire period, as we acquired this property prior to July 1, 2016, and include the operating results of the disposed property for less than the entire period, as that property was sold during the period. Our condensed consolidated statements of comprehensive income for the three months ended
September 30, 2015
exclude the operating results of the acquired property for the entire period, as we acquired that property after
September 30, 2015
, and include the operating results of the disposed property for the entire period, as we sold that property after September 30, 2015.
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended
September 30, 2016
, compared to the three month period ended
September 30, 2015
.
Rental income.
The increase
in rental income reflects an increase in rental income for comparable properties and the effect of the acquired property partially offset by the effect of the disposed property. Rental income increased
$2,180
as a result of the acquired property. Rental income decreased
$20
as a result of the disposed property. Rental income for comparable properties
increased
$226
due primarily to an increase in occupied space at certain of our properties in the
2016
period. Rental income includes non-cash straight line rent adjustments totaling
$1,205
in the
2016
period and
$613
in the
2015
period, and amortization of acquired leases and assumed lease obligations totaling
($370)
in the
2016
period and
($298)
in the
2015
period.
Real estate taxes.
The decrease
in real estate taxes reflects a decrease in real estate taxes for comparable properties partially offset by the net effect of the acquired property and the disposed property. Real estate taxes increased
$205
as a result of the acquired property. Real estate taxes decreased
$18
as a result of the disposed property. Real estate taxes for comparable properties decreased
$331
due primarily to the effect of lower real estate tax valuation assessments at certain of our properties in the
2016
period.
Utility expenses.
The increase
in utility expenses reflects an increase in utility expenses for comparable properties and the net effect of the acquired property and the disposed property. Utility expenses increased
$213
as a result of the acquired property. Utility expenses declined
$14
as a result of the disposed property. Utility expenses at comparable properties increased
$90
primarily due to an increase in electricity usage at certain of our buildings during the
2016
period compared to the
2015
period.
Other operating expenses.
Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees, net of amortization of the liability we recorded in connection with our June 2015 acquisition of shares of Class A common stock of The RMR Group Inc., or RMR Inc. (see Note 10 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q).
The increase
in other operating expenses reflects an increase in expenses for comparable properties and the net effect of the acquired property and the disposed property. Other operating expenses increased
$579
as a result of the acquired property. Other operating expenses declined
$25
as a result of the disposed property. Other operating expenses at comparable properties
increased
$1,019
primarily as a result of higher salaries, cleaning and repairs and maintenance costs at certain of our properties during the
2016
period.
Depreciation and amortization.
The increase
in depreciation and amortization reflects the effect of the property acquisition and improvements made to certain of our properties, partially offset by the effect of certain assets becoming fully depreciated. Depreciation and amortization increased
$1,255
as a result of the acquired property. Depreciation and amortization at comparable properties declined
$12
due primarily to certain depreciable leasing related assets becoming fully depreciated after July 1,
2015
, partially offset by depreciation and amortization of improvements made to certain of our properties after July 1, 2015.
Acquisition related costs.
Acquisition related costs in both the
2016
and
2015
periods include legal and due diligence costs incurred in connection with our property acquisition activity.
General and administrative.
General and administrative expenses consist of fees pursuant to our business management agreement, net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares (see Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The increase in general and administrative expenses is primarily as a result of an increase in stock compensation expense partially offset by a decrease in other professional fees during the
2016
period.
Dividend income.
Dividend income consists of dividends received from our investment in RMR Inc. during the
2016
period.
Interest income.
The increase in interest income is primarily the result of interest earned from the mortgage financing we provided to the purchaser of one of our properties during the 2016 period. For more information, see Note 4 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Interest expense.
The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on borrowings during the
2016
period compared to the
2015
period.
Gain on early extinguishment of debt
. We recorded a $34 gain on early extinguishment of debt in the 2015 period in connection with the repayment of a mortgage note.
Gain (loss) on issuance of shares by Select Income REIT.
Gain (loss) on issuance of shares by SIR is a result of the issuance of common shares by SIR at prices above or (below) our then per share carrying value of our SIR common shares.
Income tax (expense) benefit.
The change in income tax (expense) benefit reflects higher operating income in certain jurisdictions in the
2016
period that is subject to state income taxes, compared to a decrease in our accrued state income tax liability in the
2015
period due to lower estimated operating income in certain jurisdictions.
Equity in earnings of investees.
Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and Affiliates Insurance Company, or AIC.
Loss from discontinued operations.
Loss from discontinued operations reflects operating results for one property (one building) included in discontinued operations during the
2016
and
2015
periods.
Gain on sale of property.
Gain on sale of property represents the portion of the gain recognized from the sale of a property accounted for under the installment method during the
2016
period. For more information, see Note 4 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Net income.
Our net income decreased in the
2016
period compared to the
2015
period as a result of the changes noted above.
RESULTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Nine
Months Ended
September 30, 2016
, Compared to
Nine
Months Ended
September 30, 2015
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Property
|
|
Disposed Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
(2)
|
|
Results
(3)
|
|
|
|
|
|
|
|
|
|
|
Comparable Properties Results
(1)
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
Consolidated Results
|
|
|
Nine Months Ended September 30,
|
|
September 30,
|
|
September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
|
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
Rental income
|
|
$
|
186,297
|
|
|
$
|
185,062
|
|
|
$
|
1,235
|
|
|
0.7
|
%
|
|
$
|
5,852
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1,802
|
|
|
$
|
192,150
|
|
|
$
|
186,864
|
|
|
$
|
5,286
|
|
|
2.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
22,259
|
|
|
22,575
|
|
|
(316
|
)
|
|
(1.4
|
%)
|
|
524
|
|
|
—
|
|
|
27
|
|
|
244
|
|
|
22,810
|
|
|
22,819
|
|
|
(9
|
)
|
|
(0.0
|
%)
|
Utility expenses
|
|
12,889
|
|
|
13,635
|
|
|
(746
|
)
|
|
(5.5
|
%)
|
|
417
|
|
|
—
|
|
|
24
|
|
|
153
|
|
|
13,330
|
|
|
13,788
|
|
|
(458
|
)
|
|
(3.3
|
%)
|
Other operating expenses
|
|
38,534
|
|
|
36,224
|
|
|
2,310
|
|
|
6.4
|
%
|
|
1,438
|
|
|
—
|
|
|
59
|
|
|
435
|
|
|
40,031
|
|
|
36,659
|
|
|
3,372
|
|
|
9.2
|
%
|
Total operating expenses
|
|
73,682
|
|
|
72,434
|
|
|
1,248
|
|
|
1.7
|
%
|
|
2,379
|
|
|
—
|
|
|
110
|
|
|
832
|
|
|
76,171
|
|
|
73,266
|
|
|
2,905
|
|
|
4.0
|
%
|
Net operating income
(4)
|
|
$
|
112,615
|
|
|
$
|
112,628
|
|
|
$
|
(13
|
)
|
|
(0.0
|
%)
|
|
$
|
3,473
|
|
|
$
|
—
|
|
|
$
|
(109
|
)
|
|
$
|
970
|
|
|
115,979
|
|
|
113,598
|
|
|
2,381
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
54,713
|
|
|
51,675
|
|
|
3,038
|
|
|
5.9
|
%
|
Acquisition related costs
|
|
|
|
|
|
363
|
|
|
459
|
|
|
(96
|
)
|
|
(20.9
|
%)
|
General and administrative
|
|
|
|
|
|
11,350
|
|
|
11,431
|
|
|
(81
|
)
|
|
(0.7
|
%)
|
Total other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,426
|
|
|
63,565
|
|
|
2,861
|
|
|
4.5
|
%
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,553
|
|
|
50,033
|
|
|
(480
|
)
|
|
(1.0
|
%)
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667
|
|
|
—
|
|
|
667
|
|
|
nm
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
14
|
|
|
49
|
|
|
350.0
|
%
|
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $2,024 and $1,020, respectively)
|
|
(32,286
|
)
|
|
(27,894
|
)
|
|
(4,392
|
)
|
|
15.7
|
%
|
Gain on early extinguishment of debt
|
|
|
|
|
|
104
|
|
|
34
|
|
|
70
|
|
|
205.9
|
%
|
Gain (loss) on issuance of shares by Select Income REIT
|
|
88
|
|
|
(42,145
|
)
|
|
42,233
|
|
|
nm
|
|
Loss on impairment of Select Income REIT investment
|
|
—
|
|
|
(203,297
|
)
|
|
203,297
|
|
|
nm
|
|
Income (loss) from continuing operations before income taxes and equity in earnings of investees
|
|
18,189
|
|
|
(223,255
|
)
|
|
241,444
|
|
|
(108.1
|
%)
|
Income tax expense
|
|
(63
|
)
|
|
(49
|
)
|
|
(14
|
)
|
|
28.6
|
%
|
Equity in earnings of investees
|
|
28,002
|
|
|
16,072
|
|
|
11,930
|
|
|
74.2
|
%
|
Income (loss) from continuing operations
|
|
46,128
|
|
|
(207,232
|
)
|
|
253,360
|
|
|
nm
|
|
Loss from discontinued operations
|
|
(429
|
)
|
|
(390
|
)
|
|
(39
|
)
|
|
10.0
|
%
|
Income (loss) before gain on sale of property
|
|
45,699
|
|
|
(207,622
|
)
|
|
253,321
|
|
|
nm
|
|
Gain on sale of property
|
|
79
|
|
|
—
|
|
|
79
|
|
|
nm
|
|
Net income (loss)
|
|
$
|
45,778
|
|
|
$
|
(207,622
|
)
|
|
$
|
253,400
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
71,041
|
|
|
70,589
|
|
|
452
|
|
|
0.6
|
%
|
Weighted average common shares outstanding (diluted)
|
|
71,064
|
|
|
70,589
|
|
|
475
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
Per common share amounts (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.65
|
|
|
$
|
(2.94
|
)
|
|
$
|
3.59
|
|
|
nm
|
|
Loss from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
nm
|
|
Net income (loss)
|
|
$
|
0.64
|
|
|
$
|
(2.94
|
)
|
|
$
|
3.58
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Funds From Operations and Normalized Funds From Operations
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,778
|
|
|
$
|
(207,622
|
)
|
|
|
|
|
|
Plus: Depreciation and amortization
|
|
|
|
|
|
54,713
|
|
|
51,675
|
|
|
|
|
|
|
Plus: FFO attributable to Select Income REIT investment
|
|
|
|
|
|
53,609
|
|
|
43,961
|
|
|
|
|
|
|
Less: Equity in earnings from Select Income REIT
|
|
|
|
|
|
(27,895
|
)
|
|
(16,002
|
)
|
|
|
|
|
|
Less: Gain on sale of property
|
|
|
|
|
|
(79
|
)
|
|
—
|
|
|
|
|
|
Funds from operations
|
|
|
|
|
|
126,126
|
|
|
(127,988
|
)
|
|
|
|
|
|
Plus: Acquisition related costs
|
|
|
|
|
|
363
|
|
|
459
|
|
|
|
|
|
|
Plus: Loss on issuance of shares by Select Income REIT
|
|
|
|
|
|
—
|
|
|
42,145
|
|
|
|
|
|
|
Plus: Loss on impairment of Select Income REIT investment
|
|
|
|
|
|
—
|
|
|
203,297
|
|
|
|
|
|
|
Plus: Normalized FFO attributable to Select Income REIT investment
|
|
|
|
|
|
53,629
|
|
|
51,177
|
|
|
|
|
|
|
Less: FFO attributable to Select Income REIT investment
|
|
|
|
|
|
(53,609
|
)
|
|
(43,961
|
)
|
|
|
|
|
|
Less: Gain on early extinguishment of debt
|
|
|
|
|
|
(104
|
)
|
|
(34
|
)
|
|
|
|
|
|
Less: Gain on issuance of shares by Select Income REIT
|
|
|
|
|
|
(88
|
)
|
|
—
|
|
|
|
|
|
|
Normalized funds from operations
|
|
|
|
|
|
$
|
126,317
|
|
|
$
|
125,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations per common share (basic and diluted)
|
|
|
|
|
|
$
|
1.78
|
|
|
$
|
(1.81
|
)
|
|
|
|
|
|
Normalized funds from operations per common share (basic and diluted)
|
|
|
|
|
|
$
|
1.78
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
(1)
|
Comparable properties consist of
70
properties (
90
buildings) we owned on
September 30, 2016
and which we owned continuously since January 1, 2015, and excludes one property (one building) classified as discontinued operations.
|
|
|
(2)
|
Acquired property consists of one property (one building) we acquired during the
nine
months ended
September 30, 2016
.
|
|
|
(3)
|
Disposed properties consist of one property (one building) we sold during the
nine
months ended
September 30, 2015
and one property (one building) we sold during the nine months ended
September 30, 2016
.
|
|
|
(4)
|
See footnote (4) on page 27 for a definition of NOI.
|
|
|
(5)
|
See footnote (5) on page 27 for a definition of FFO and Normalized FFO.
|
We refer to the
70
properties (
90
buildings) we owned on
September 30, 2016
and which we have owned continuously since January 1, 2015, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the one property (one building) we acquired during the
nine
months ended
September 30, 2016
as the acquired property. We refer to the one property (one building) we sold during the
nine
months ended
September 30, 2015
and the one property (one building) we sold during the nine months ended September 30, 2016 as the disposed properties.
Our condensed consolidated statements of comprehensive income (loss) for the
nine
months ended
September 30, 2016
include the operating results of the acquired property for less than the entire period, as we acquired this property during the
2016
period, include the operating results of one disposed property for less than the entire period, as we sold that property during the period, and exclude the operating results of one disposed property for the entire period, as we sold that property prior to January 1, 2016. Our condensed consolidated statements of comprehensive income (loss) for the
nine
months ended
September 30, 2015
exclude the operating results of the acquired property for the entire period, as we acquired that property after
September 30, 2015
, include the operating results of one disposed property for the entire period, as we sold that property after September 30, 2015, and include the operating results of one disposed property for less than the entire period, as we sold that property during the
2015
period.
References to changes in the income and expense categories below relate to the comparison of consolidated results for the
nine
month period ended
September 30, 2016
, compared to the
nine
month period ended
September 30, 2015
.
Rental income.
The increase
in rental income reflects an increase in rental income for comparable properties and the net effect of the acquired property and the disposed properties. Rental income increased
$5,852
as a result of the acquired property. Rental income declined
$1,801
as a result of the disposed properties. Rental income for comparable properties
increased
$1,235
due primarily to an increase in occupied space at certain of our properties in the
2016
period. Rental income includes non-cash straight line rent adjustments totaling
$1,789
in the 2016 period and
$2,820
in the
2015
period, and amortization of acquired leases and assumed lease obligations totaling
($1,103)
in the
2016
period and
($862)
in the
2015
period.
Real estate taxes.
The decrease
in real estate taxes reflects the decrease in real estate taxes for comparable properties partially offset by the net effect of the acquired property and the disposed properties. Real estate taxes increased
$524
as a result of the acquired property. Real estate taxes declined
$217
as a result of the disposed properties. Real estate taxes for comparable properties
declined
$316
due primarily to the effect of lower real estate tax valuation assessments at certain of our properties in the
2016
period.
Utility expenses.
The decrease
in utility expenses reflects a decrease in utility expenses for comparable properties partially offset by the net effect of the acquired property and the disposed properties. Utility expenses increased
$417
as a result of the acquired property. Utility expenses declined
$129
as a result of the disposed properties. Utility expenses at comparable properties
declined
$746
primarily due to milder temperatures experienced in certain parts of the United States during the
2016
period compared to the
2015
period.
Other operating expenses.
The increase
in other operating expenses reflects an increase in expenses for comparable properties and the net effect of the acquired property and the disposed properties. Other operating expenses increased
$1,438
as a result of the acquired property. Other operating expenses declined
$376
as a result of the disposed properties. Other operating expenses at comparable properties
increased
$2,310
primarily as a result of higher salaries, cleaning and insurance costs at certain of our properties partially offset by lower snow removal costs at certain of our properties during the
2016
period.
Depreciation and amortization.
The increase
in depreciation and amortization reflects the effect of the property acquisition and improvements made to certain of our properties, partially offset by the effect of certain assets becoming fully depreciated. Depreciation and amortization increased
$3,343
as a result of the acquired property. Depreciation and amortization at comparable properties
declined
$305
due primarily to certain depreciable leasing related assets becoming fully depreciated after January 1,
2015
, partially offset by depreciation and amortization of improvements made to certain of our properties after January 1, 2015.
Acquisition related costs.
Acquisition related costs in both the
2016
and
2015
periods include legal and due diligence costs incurred in connection with our property acquisition activity.
General and administrative.
The decrease in general and administrative expenses primarily reflects a decrease in other professional fees and services partially offset by an increase in stock compensation expense during the
2016
period.
Dividend income.
Dividend income consists of dividends received from our investment in RMR Inc. during the
2016
period.
Interest income.
The increase in interest income is primarily the result of interest earned from the mortgage financing we provided to the purchaser of one of our properties during the 2016 period. For more information, see Note 4 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Interest expense.
The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on borrowings during the
2016
period compared to the
2015
period.
Gain on early extinguishment of debt
. We recorded a net $104 gain on early extinguishment of debt in the
2016
period in connection with the prepayment of two mortgage notes. We recorded a $34 gain on early extinguishment of debt in the 2015 period in connection with the repayment of a mortgage note.
Gain (loss) on issuance of shares by Select Income REIT.
Gain (loss) on issuance of shares by SIR is a result of the issuance of common shares by SIR at prices above or (below) our then per share carrying value of our SIR common shares.
Loss on impairment of Select Income REIT investment.
We recorded a $203,297 loss on impairment in the
2015
period to reduce the carrying value of our SIR investment to its estimated fair value.
Income tax expense.
The increase in income tax expense reflects higher operating income in certain jurisdictions in the
2016
period that is subject to state income taxes.
Equity in earnings of investees.
Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and AIC.
Loss from discontinued operations.
Loss from discontinued operations reflects operating results for one property (one building) included in discontinued operations during the
2016
and
2015
periods.
Gain on sale of property.
Gain on sale of property represents the portion of the gain recognized from the sale of a property accounted for under the installment method during the 2016 period. For more information, see Note 4 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Net income (loss).
We recognized net income in the
2016
period compared to a net loss in the
2015
period as a result of the changes noted above.
LIQUIDITY AND CAPITAL RESOURCES
Our Operating Liquidity and Resources (dollar amounts in thousands)
Our principal sources of funds to meet operating and capital expenses, debt service obligations and pay distributions on our common shares are the operating cash flows we generate as rental income from our properties, the distributions we receive from our investment in SIR and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses and debt service obligations and pay distributions on our common shares for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:
|
|
•
|
our ability to maintain or increase the occupancy of, and the rental rates at, our properties;
|
|
|
•
|
our ability to control operating expenses at our properties;
|
|
|
•
|
our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating expenses; and
|
|
|
•
|
our receipt of distributions from our investment in SIR.
|
Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully conclude the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.
Our changes in cash flows for the
nine
months ended
September 30, 2016
compared to the same period in
2015
were as follows: (i) cash provided by operating activities increased from
$89,053
in
2015
to
$91,674
in
2016
; (ii) cash used in investing activities increased from
$65,793
in
2015
to
$94,848
in
2016
; and (iii) cash flows from financing activities changed from
$25,745
of cash used in financing activities in
2015
to
$8,138
of cash provided by financing activities in
2016
.
The increase in cash provided by operating activities for the
nine
month period ended
September 30, 2016
as compared to the corresponding prior year period primarily reflects an increase in property net operating income and an increase in distributions of earnings received from our investment in SIR common shares, partially offset by changes in working capital in the
2016
period. The increase in cash used in investing activities for the
nine
month period ended
September 30, 2016
as compared to the corresponding prior year period was due primarily to our real estate acquisition activity in the
2016
period versus disposition activity in the
2015
period, partially offset by our investment in SIR in the
2015
period. The change in cash provided by (used in) financing activities for the
nine
month period ended
September 30, 2016
as compared to the corresponding prior year period was due primarily to an increase in net borrowings in the
2016
period, including our issuance of senior unsecured notes.
Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share and per square foot amounts)
In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 unsecured revolving credit facility. The maturity date of our revolving credit facility is January 31, 2019 and, subject to our 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 are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at
September 30, 2016
, on the amount outstanding 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
September 30, 2016
. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of
September 30, 2016
, the annual interest rate payable on borrowings under our revolving credit facility was
1.7%
. As of
September 30, 2016
and
October 25, 2016
, we had
$25,000
and
$15,000
, respectively, outstanding under our revolving credit facility.
Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders, which also governs our two unsecured term loans:
|
|
•
|
Our $300,000 term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at LIBOR plus a premium, which was 140 basis points per annum at
September 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
September 30, 2016
, the annual interest rate for the amount outstanding under our $300,000 term loan was
1.9%
.
|
|
|
•
|
Our $250,000 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 would be payable. Subsequent to November 21, 2016, no prepayment premium would be payable. We are required to pay interest at LIBOR plus a premium, which was 180 basis points per annum at
September 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 ratings. As of
September 30, 2016
, the annual interest rate for the amount outstanding under our $250,000 term loan was
2.3%
.
|
Our credit agreement also includes a feature under which the maximum borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.
Our credit agreement for our revolving credit facility and term loans provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under the revolving credit facility and term loans only if that subsidiary has
separately incurred debt (other than nonrecourse debt), within the meaning specified in the credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.
Our $350,000 of 3.75% senior unsecured notes require semi-annual payments of interest only through maturity in August 2019 and may be repaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.
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
$299,771
, after offering expenses, were used to repay all amounts then outstanding under our revolving credit facility and for general business purposes.
Our debt maturities (other than our revolving credit facility) are as follows:
$369
in
2016
,
$1,549
in
2017
,
$1,671
in
2018
,
$359,439
in
2019
,
$301,619
in
2020
and
$573,230
thereafter.
None of our debt obligations require sinking fund payments prior to their maturity dates. Our
$27,877
in mortgage debts generally require monthly payments of principal and interest through maturity.
In addition to our debt obligations, as of
September 30, 2016
, we have estimated unspent leasing related obligations of
$21,580
and have committed to redevelop and expand an existing property at an estimated cost to complete of approximately
$17,990
.
We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from our property sales, distributions received from our investment in SIR, assumption of mortgage debt and net proceeds from offerings of equity or debt securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturity date of our revolving credit facility, term loans, senior notes, mortgage notes or our other debts approach, we intend to explore alternatives for repaying or refinancing such amounts. Such alternatives may include incurring additional term debt, issuing equity or debt securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisition of properties or elect to place new mortgages on properties we own as a source of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.
Our ability to obtain, and the costs of, our future financings will depend primarily on market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our business in a manner which will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention.
On
February 25, 2016
, we paid a regular quarterly distribution to common shareholders of $0.43 per share, or approximately
$30,584
. On May 23, 2016, we paid a regular quarterly distribution to common shareholders of $0.43 per share, or approximately
$30,585
. On August 22, 2016, we paid a regular quarterly distribution to common shareholders of record on July 22, 2016 of
$0.43
per share, or
$30,590
. On October 11, 2016, we declared a regular quarterly distribution payable to common shareholders of record on October 21, 2016 of
$0.43
per share, or approximately
$30,607
. We expect to pay this amount on or about November 21, 2016 using cash on hand and borrowings under our revolving credit facility.
In February 2016, we repaid, at par, a $23,473 mortgage note requiring annual interest at 6.21% which was secured by one office property (one building) located in Landover, MD using cash on hand and borrowings under our revolving credit facility. This mortgage note was scheduled to mature in August 2016.
In March 2016, we repaid, at par, an $83,000 mortgage note requiring annual interest at 5.55% which was secured by one office property (two buildings) located in Reston, VA using cash on hand and borrowings under our revolving credit facility. This mortgage note was scheduled to mature in April 2016.
Off Balance Sheet Arrangements
As of
September 30, 2016
, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Debt Covenants (dollars in thousands)
Our principal debt obligations at
September 30, 2016
consisted of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 term loan, our $250,000 term loan, an aggregate outstanding principal amount of $660,000 of public issuances of senior unsecured notes and three secured mortgage notes that were assumed in connection with certain of our acquisitions. Our publicly issued senior unsecured notes are governed by an indenture. Our senior unsecured notes indenture and its supplements and the credit agreement for our revolving credit facility and our two term loans provide for acceleration of payment of all amounts outstanding 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 senior unsecured notes indenture and its supplements and our credit agreement also contain a number of covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain various financial ratios, and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. As of
September 30, 2016
, we believe we were in compliance with the terms and conditions of our respective covenants under our senior unsecured notes indenture and its supplements and our credit agreement.
Neither our credit agreement nor our senior unsecured notes indenture and its supplements contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded by certain credit rating agencies, our interest expense and related costs under our credit agreement would increase.
Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indenture and its supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances).
Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC, SIR and others related to them. For example, we have no employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to management agreements; RMR Inc. is the managing member of RMR LLC and we own shares of class A common stock of RMR Inc.; and the controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees and ABP Trust also owns an equity interest in RMR LLC. Also, we own common shares of SIR; and we and six other companies to which RMR LLC provides management services own in equal amounts AIC, an insurance company, and we participate in a combined property insurance program arranged and reinsured in part by AIC. For further information about these and other such relationships and related person transactions, please see Notes 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our
2016
Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related parties are publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including RMR LLC and companies to which RMR LLC or its affiliates provide management services.