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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, | ||
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| Title Of Each Class | Name Of Each Exchange On Which Registered | ||
Common Shares of Beneficial Interest |
| The Nasdaq Stock | |
| 5.875% Senior Notes due 2046 | The Nasdaq Stock Market LLC | ||
Large accelerated filer ☒ | Accelerated filer ☐ | ||||
Non-accelerated filer ☐ | Smaller reporting company ☐ | ||||
| (Do not check if a |
| Emerging growth company ☐ | |||
23, 2018: 99,145,304.
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OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROM OPERATIONS, OR FFO, AVAILABLE FOR COMMON SHAREHOLDERS, NORMALIZED FUNDS FROM OPERATIONS, OR NORMALIZED FFO, AVAILABLE FOR COMMON SHAREHOLDERS, CONSOLIDATED PROPERTY NET OPERATING INCOME, OR NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
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| LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY FOR TAXATION AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES, AND |
| ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL. |
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CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CUSTOMARY CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,
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THESECURRENTLY UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS CHANGES IN GOVERNMENT TENANTS’ NEEDS FOR LEASED SPACE, ACTS OF TERRORISM, NATURAL DISASTERS OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.
STATEMENT CONCERNING LIMITED LIABILITY
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219-1440. tenant(s); the location of the property; shareholders. capital, including our debt leverage. United States. markets. Some of our competitors may have greater financial and other resources than we have. We believe we have some competitive advantages in leasing to government tenants and purchasing government leased properties because of our experience and familiarity with government leasing procedures. We also believe the experience and abilities of our management and the quality of our properties may afford us some competitive advantages and allow us to operate our business successfully despite the competitive nature of our business. 10-K. Other Matters. Legislative and regulatory developments may occur at the federal, state and local levels that have direct or indirect impact on the ownership, leasing and operation of our properties. We may need to make expenditures, to the extent these costs are not paid by our tenants, due to changes in government regulations, or the application of such regulations to our properties, including the Americans with Disabilities Act, 7 Our continued qualification and taxation as a REIT will depend upon our compliance 9 year in which the failure was discovered. ours, and our investment in the stock and other securities of such QRSs will be disregarded. For example, we joined with SIR in filing a protective TRS election, effective for the third quarter of 2014, and we have reaffirmed this protective election with SIR every January thereafter, and we may continue to do so unless and until our ownership of SIR falls below 10%. Pursuant to this protective TRS election, we believe that if SIR is not a REIT for some reason, then it would instead be considered one of our TRSs, and as such its value would either fit within our REIT gross asset tests described below or would be such that any penalty taxes associated with our remediation of a REIT asset test failure for which there is reasonable cause, as described below, would be much lower than if no such TRS election were in place, though any applicable penalty taxes might still be substantial. Protective TRS elections will not impact our compliance with the 75% and 95% gross income tests described below, because we do not expect our gains and dividends from a subsidiary REIT’s shares to jeopardize compliance with these tests even if for some reason the subsidiary is not a REIT. circumstances, however, we expect that we would qualify for the REIT asset tests’ relief provision described below, and thereby would preserve our qualification for taxation as a REIT. If the relief provision below were to apply to us, we would be subject to tax at the highest regular corporate income tax rate 13 14 real property (as so reduced by senior liens) will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test. We attempt to structure our activities to avoid transactions that are prohibited transactions, or otherwise conduct such activities through TRSs. We cannot be sure whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. Gains subject to the 100% penalty tax are excluded from the 75% and 95% gross income tests, whereas real property gains that are not dealer gains or that are exempted from the 100% penalty tax on account of the safe harbors are considered qualifying gross income for purposes of the 75% and 95% gross income tests. failure or otherwise satisfy all of the REIT asset tests. These relief provisions may apply to Act. In addition, we will be subject to a 4% nondeductible excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax. If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, or if we so choose, we may find it necessary or desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our qualification for taxation as a REIT. We While the payment of a deficiency dividend will apply to a prior year for purposes of our REIT distribution requirements and our dividends paid deduction, it will be treated as an additional distribution to the shareholders receiving it in the year such dividend is paid. income and gains with respect to that taxable year, our taxable dividends paid financial statements. acquisitions, or that are the subject of cost segregation analyses. 20 21 In addition, no portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders. U.S. shareholders are urged to consult their tax advisors regarding the application of the 3.8% Medicare tax, including the applicability of the deduction-without-outlay mechanism of Section 199A of the IRC to the calculation of their net investment income. the impact of federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares. Taxation of Non-U.S. Shareholders Distributions.A distribution by us to a non-U.S. shareholder that is not Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies to the applicable withholding agent its non-U.S. shareholder status on an applicable IRS Form W-8 or substantially similar form. Even without having executed an applicable IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker’s foreign office. 25 instrument and applicable law. We are not an investment company registered under the Investment Company Act of 1940, as amended. registration statement under the Securities Act of 1933, as amended, provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our outstanding shares has been registered under the Exchange Act within the necessary time frame to satisfy the foregoing condition. improvements, and tenant relocations in such circumstances are more prevalent now than in our past experience. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations have recently resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals. At present, 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. business plan. plan. properties or we may pay higher prices for, and realize lower net cash flows than we hope to achieve from, acquisitions. 31 shareholders. securityholders. Amounts recoverable under our leases for increased operating costs may be less than the actual increased costs. common shares. decline. certain properties we own. our securities to decline. the illiquid nature of real estate markets, which limits our ability to sell our assets rapidly to respond to changing market conditions; materially and adversely affect us. our business and the value of our securities. securities. We are dependent upon RMR LLC to manage our business and implement our growth strategy. conflicts, and may restrict our investment activities. Barry Portnoy was our other Managing Trustee and a director and an officer of RMR Inc. until his death on February 25, 2018. RMR LLC or its subsidiary also acts as the manager for interest with respect to matters involving us, RMR Inc., RMR LLC, our Managing Trustee, the other companies to which RMR LLC or its subsidiary provides management services and their related parties. Conflicts of interest or the appearance of conflicts of interest could have a material adverse impact on our reputation, business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result. us. In us. Our management arrangements with RMR LLC may discourage control of us. and could have a material adverse impact on our reputation and business. SIR’s board of trustees may also amend or revise SIR’s operational, financing and investment policies, including its policies with respect to its intention to qualify for taxation as a REIT, acquisitions, dispositions, growth, operations, indebtedness, capitalization and distributions, or to approve transactions that deviate from these policies, without a vote of, or notice to, SIR’s shareholders. SIR may determine to issue significant amounts of equity capital, which would dilute our ownership interest in SIR; actual receipt of an improper benefit or profit in money, property or services; or result, we and our shareholders would not be able to pursue litigation shareholders. If we cease to qualify for taxation as a REIT under the IRC, then our ability to raise capital might be adversely affected, we will be in breach under our credit agreement, we may be subject to material amounts of federal and state income taxes and the rates applicable to “qualified dividends.” shares to decline. decline. 44 our making of distributions is subject to compliance with restrictions contained in our credit agreement and may be subject to restrictions in future debt obligations we may incur; and shareholders. securities. the extent of investor interest in our securities; Further issuances of equity securities may be dilutive to current shareholders. 46 Undepreciated Depreciated Annualized Number of Number of Carrying Carrying Rental Property Location Properties Buildings Value(1) Value(1) Income(2) Alabama 2 2 $ $ $ Arizona 2 2 California 9 9 Colorado 3 5 District of Columbia 2 2 Florida 2 2 Georgia 6 10 Idaho 1 3 Illinois 1 1 Indiana 1 3 Kansas 1 1 Kentucky 1 1 Maryland 7 8 Massachusetts 4 4 Michigan 1 1 Minnesota 2 2 Mississippi 1 1 Missouri 2 2 New Hampshire 1 1 New Jersey 1 1 New Mexico 1 1 - New York 4 4 Oregon 1 1 South Carolina 1 3 Tennessee 1 1 Texas 1 1 Vermont 1 1 Virginia 6 11 Washington 2 4 West Virginia 1 1 Wisconsin 1 1 Wyoming 1 1 Total 71 91 $ $ $ Excludes value assigned to real estate intangibles in purchase price allocation. Annualized rental income is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of December 31, 49 High Low 2015 First Quarter $ $ Second Quarter Third Quarter Fourth Quarter 2014 First Quarter $ $ Second Quarter Third Quarter Fourth Quarter Cash Distributions Per Common Share 2015 2014 First Quarter $ $ Second Quarter Third Quarter Fourth Quarter Total $ $ 50 Year Ended December 31, 2015 2014 2013 2012 2011 Income statement data: Rental income $ $ $ $ $ Expenses: Real estate taxes Utility expenses Other operating expenses Depreciation and amortization Loss on impairment of real estate - - - - Acquisition related costs General and administrative Total expenses Operating income Dividend income - - - - Interest income Interest expense Gain (loss) on early extinguishment of debt - - - Loss on distribution to common shareholders of The RMR Group Inc. common stock - - - - Loss on issuance of shares by Select Income REIT - - - Loss on impairment of Select Income REIT investment - - - - Income (loss) from continuing operations before income taxes and equity in earnings of investees Income tax expense Equity in earnings of investees Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) $ $ $ $ $ Weighted average shares outstanding (basic) Weighted average shares outstanding (diluted) Per common share data: Income from continuing operations (basic) $ $ $ $ $ Income from continuing operations (diluted) $ $ $ $ $ Income (loss) from discontinued operations (basic and diluted) $ $ $ $ $ Net income (loss) (basic and diluted) $ $ $ $ $ Common distributions paid $ (1) $ $ $ $ As of December 31, Balance sheet data: 2015 2014 2013 2012 2011 Total real estate investments (before depreciation) (2) $ $ $ $ $ Real estate investments, net (2) Total assets Debt, net of premiums and discounts Shareholders' equity Excludes a non-cash distribution of Excludes properties classified as assets held for sale or discontinued 51 10-K. 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. Comparable All Properties(1) Properties(2) December 31, December 31, 2015 2014 2015 2014 Total properties Total buildings Total square feet(3) Percent leased(3)(4) Based on consolidated properties we owned on December 31, Based on consolidated properties we owned on December 31, Subject to 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 Year ended December 31, 2015 2014 Average annualized effective rental rate per square foot(1): All properties(2) $ $ Comparable properties(3) $ $ Average Based on consolidated properties we owned on December 31, Based on consolidated properties we owned on December 31, Year Ended December 31, 2015 Available Leased for Lease Total Beginning of period Changes resulting from: Disposition of a property — Lease expirations — Lease renewals(1) — New leases(1) — Remeasurements(2) — End of period Year Ended December 31, 2015 Old Effective New Effective Rent Per Rent Per Rentable Square Foot(1) Square Foot(1) Square Feet New leases $ $ Lease renewals $ $ Total leasing activity $ $ 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. Government Non-Government Year Ended December 31, 2015 Leases Leases Total Rentable square feet leased during the period Tenant leasing costs and concession commitments(1) (in thousands) $ $ $ Tenant leasing costs and concession commitments per rentable square foot(1) $ $ $ Weighted (by square feet) average lease term (years) Total leasing costs and concession commitments per rentable square foot per year(1) $ $ $ Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. Year ended December 31, 2015 2014 Tenant improvements(1) $ $ Leasing costs(2) $ $ Building improvements(3) $ $ Development, redevelopment and other activities(4) $ $ �� Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space. Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements. Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. average basis, be 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(3) of Total of Total 2016 $ 2017 2018 2019 2020 2021 2022 2023 2024 2025 and thereafter Total $ Weighted average remaining lease term (in years) 4.7 4.4 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 December 31, Leased square feet is pursuant to leases existing as of December 31, 57 these transactions will not change. 58 Acquired Properties Results(2) Disposed Property Results(3) Comparable Properties Results(1) Year Ended Year Ended Consolidated Results Year Ended December 31, December 31, December 31, Year Ended December 31, $ % $ % 2015 2014 Change Change 2015 2014 2015 2014 2015 2014 Change Change Rental income $ $ $ % $ $ $ $ $ $ $ % Operating expenses: Real estate taxes % % Utility expenses % % Other operating expenses % % Total operating expenses % % Net operating income(4) $ $ $ % $ $ $ $ % Other expenses: Depreciation and amortization % Loss on impairment of real estate — nm Acquisition related costs % General and administrative % Total other expenses % Operating income % Dividend income — nm Interest income % Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $1,376 and $1,310, respectively) % Gain (loss) on early extinguishment of debt nm Loss on distribution to common shareholders of The RMR Group Inc. common stock — nm Loss on issuance of shares by Select Income REIT nm Loss on impairment of Select Income REIT investment — nm Income (loss) from continuing operations before income taxes and equity in earnings of investees % Income tax expense % Equity in earnings of investees % Income (loss) from continuing operations % Income (loss) from discontinued operations nm Net income (loss) $ $ $ nm Weighted average common shares outstanding (basic) % Weighted average common shares outstanding (diluted) % Per common share amounts: Income (loss) from continuing operations (basic) $ $ $ nm Income (loss) from continuing operations (diluted) $ $ $ nm Income (loss) from discontinued operations (basic and diluted) $ $ $ nm Net income (loss) (basic and diluted) $ $ $ nm Calculation of Funds From Operations and Normalized Funds From Operations(5) Net income (loss) $ $ Plus: Depreciation and amortization Plus: Loss on impairment of real estate — Plus: FFO attributable to Select Income REIT investment Less: Equity in earnings from Select Income REIT Less: Increase in carrying value of asset held for sale — Less: Net gain on sale of properties from discontinued operations — Funds from operations Plus: Acquisition related costs Plus: Loss on early extinguishment of debt — Plus: Loss on distribution to common shareholders of The RMR Group Inc. common stock — Plus: Loss on issuance of shares by Select Income REIT Plus: Loss on impairment of Select Income REIT investment — Plus: Normalized FFO attributable to Select Income REIT investment Less: FFO attributable to Select Income REIT investment Less: Gain on early extinguishment of debt — Normalized funds from operations $ $ Funds from operations per common share (basic) $ $ Funds from operations per common share (diluted) $ $ Normalized funds from operations per common share (basic) $ $ Normalized funds from operations per common share (diluted) $ $ Comparable properties consist of Acquired properties consist of Consolidated Property NOI to be an appropriate supplemental measure to net income We calculate FFO available for common shareholders and Normalized FFO available for common shareholders as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or properties. during 2016, and include the operating results of one disposed property (one building) for less than the entire year, as we sold the property during 2017. Our consolidated statements of comprehensive income for the year ended December 31, 2016 exclude the operating results of 36 acquired properties (73 buildings) for the entire year, as we acquired these properties during 2017, include three acquired properties (five buildings) for less than the entire year, as we acquired these properties during 2016, include the operating results of one disposed property (one building) for the entire year, as we sold that property during 2017, and include the operating results of one disposed property (one building) for less than the entire year, as we sold that property during 2016. 2016. Utility expenses. The Acquired Properties Results(2) Comparable Properties Results(1) Year Ended Consolidated Results Year Ended December 31, December 31, Year Ended December 31, $ % $ % 2014 2013 Change Change 2014 2013 2014 2013 Change Change Rental income $ $ $ % $ $ $ $ $ % Operating expenses: Real estate taxes % % Utility expenses % % Other operating expenses % % Total operating expenses % % Net operating income(3) $ $ $ % $ $ % Other expenses: Depreciation and amortization % Loss on impairment of real estate — nm % Acquisition related costs % General and administrative % Total other expenses % Operating income % Interest income % Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $1,310 and $1,340, respectively) % Loss on early extinguishment of debt — nm Loss on issuance of shares by Select Income REIT — nm Income from continuing operations before income taxes and equity in earnings of investees % Income tax expense % Equity in earnings of investees nm Income from continuing operations % Income (loss) from discontinued operations nm Net income $ $ $ % Weighted average common shares outstanding (basic) % Weighted average common shares outstanding (diluted) % Per common share amounts: Net income from continuing operations (basic) $ $ $ % Net income from continuing operations (diluted) $ $ $ % Net income (loss) from discontinued operations (basic and diluted) $ $ $ nm Net income (basic and diluted) $ $ $ % Calculation of Funds From Operations and Normalized Funds From Operations(4) Net income $ $ Plus: Depreciation and amortization from continuing operations Plus: Depreciation and amortization from discontinued operations — Plus: Loss on asset impairment from continuing operations — Plus: Loss on asset impairment from discontinued operations — Plus: FFO attributable to Select Income REIT investment — Less: Equity in earnings from Select Income REIT — Less: Increase in carrying value of asset held for sale — Less: Net gain on sale of properties from discontinued operations Funds from operations Plus: Acquisition related costs Plus: Loss on early extinguishment of debt — Plus: Loss on issuance of shares by Select Income REIT — Plus: Normalized FFO attributable to Select Income REIT investment — Less: FFO attributable to Select Income REIT investment — Normalized funds from operations $ $ Funds from operations per common share (basic) $ $ Funds from operations per common share (diluted) $ $ Normalized funds from operations per common share (basic) $ $ Normalized funds from operations per common share (diluted) $ $ Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on 2017. and borrowings under our revolving credit facility. 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. 67 68 Payments Due by Period Less than 1-3 3-5 More than Contractual Obligations Total 1 Year Years Years 5 Years Long term debt obligations $ $ $ $ $ Tenant related obligations(1) Projected interest expense(2) Total $ $ $ $ $ Committed tenant related obligations their supplements. As noted above, in June 2017, both Moody's and S&P updated our $25,000 (or up to $50,000 in certain circumstances). management services and which may have trustees, directors and officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc., including: SIR, of which we are the largest shareholder and at December 31, or estimate incorrectly or if future tenant operations, market or industry factors differ from our expectations we may record an impairment charge that is inappropriate or fail to record a charge when we should have done so, or the amount of any such charges may be inaccurate. Annual Annual Interest Principal Interest Interest Payments Debt Balance(1) Rate(1) Expense(1) Maturity Due Senior unsecured notes $ % $ 2019 Semi-annually Mortgage % 2016 Monthly Mortgage % 2016 Monthly Mortgage % 2021 Monthly Mortgage % 2019 Monthly Mortgage % 2021 Monthly $ $ The principal balances and interest rates are the amounts $9,202. $9,590. perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results. Impact of Changes in Interest Rates Outstanding Total Interest Annual Earnings Interest Rate(1) Debt Expense Per Year Per Share Impact(2) At December 31, 2015 % $ $ $ 100 bps increase % $ $ $ Weighted based on the respective interest rates and outstanding borrowings under our Based on the weighted average shares outstanding (diluted) for the year ended December 31, Impact of Changes in Interest Rates Outstanding Total Interest Annual Earnings Interest Rate(1) Debt Expense Per Year Per Share Impact(2) At December 31, 2015 % $ $ $ 100 bps increase % $ $ $ Weighted based on the respective interest rates and outstanding borrowings under our Based on the weighted average shares outstanding (diluted) for the year ended December 31, Management Report on Assessment of Internal Control Over Financial Reporting 75 Equity compensation plans approved by None. Equity compensation plans not approved by None. Total None. 76 Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.) (+)Management contract or compensatory plan or arrangement. 79 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. COSO criteria. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. F-2 December 31, December 31, 2015 2014 ASSETS Real estate properties: Land $ $ Buildings and improvements Total real estate properties, gross Accumulated depreciation Total real estate properties, net Equity investment in Select Income REIT Assets of discontinued operations Assets of property held for sale Acquired real estate leases, net Cash and cash equivalents Restricted cash Rents receivable, net Deferred leasing costs, net Deferred financing costs, net Other assets, net Total assets $ $ LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ $ — Unsecured term loans Senior unsecured notes, net of discount Mortgage notes payable, including premiums Liabilities of discontinued operations Liabilities of property held for sale Accounts payable and other liabilities Due to related persons Assumed real estate lease obligations, net Total liabilities Commitments and contingencies Shareholders’ equity: Common shares of beneficial interest, $.01 par value: 100,000,000 shares authorized, 71,126,308 and 70,349,227 shares issued and outstanding, respectively Additional paid in capital Cumulative net income Cumulative other comprehensive income (loss) Cumulative common distributions Total shareholders’ equity Total liabilities and shareholders’ equity $ $ F-3 Year Ended December 31, 2015 2014 2013 Rental income $ $ $ �� Expenses: Real estate taxes Utility expenses Other operating expenses Depreciation and amortization Loss on impairment of real estate — — Acquisition related costs General and administrative Total expenses Operating income Dividend income — — Interest income Interest expense (including net amortization of debt premium and discounts and deferred financing fees of $1,376, $1,310, and $1,340, respectively) Gain (loss) on early extinguishment of debt — Loss on distribution to common shareholders of The RMR Group Inc. common stock — — Loss on issuance of shares by Select Income REIT — Loss on impairment of Select Income REIT investment — — Income (loss) from continuing operations before income taxes and equity in earnings of investees Income tax expense Equity in earnings of investees Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) Other comprehensive loss Unrealized loss on investment in available for sale securities — — Equity in unrealized loss of investees Other comprehensive loss Comprehensive income (loss) $ $ $ Weighted average common shares outstanding (basic) Weighted average common shares outstanding (diluted) Per common share amounts: Income (loss) from continuing operations (basic) $ $ $ Income (loss) from continuing operations (diluted) $ $ $ Income (loss) from discontinued operations (basic and diluted) $ $ $ Net income (loss) (basic and diluted) $ $ $ F-4 Cumulative Additional Cumulative Other Cumulative Number of Common Paid In Net Comprehensive Common Shares Shares Capital Income Income (Loss) Distributions Total Balance at December 31, 2012 $ $ $ $ $ $ Issuance of shares, net - - - - - - - Share grants - - - - Unrealized loss from investees - - - - - Net income - - - - - Distributions to common shareholders - - - - - Balance at December 31, 2013 Issuance of shares, net - - - Share grants - - - Unrealized loss from investees - - - - - Net income - - - - - Distributions to common shareholders - - - - - Balance at December 31, 2014 Issuance of shares, net - - - Share grants - - - Share repurchases - - - - Unrealized loss from investees - - - - - Unrealized loss on investment in The RMR Group Inc. - - - - - Net loss - - - - - Distribution to common shareholders - - - - - Distribution of The RMR Group Inc. common stock - - - - - Balance at December 31, 2015 $ $ $ $ $ $ F-5 Year Ended December 31, 2015 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ $ $ Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation Net amortization of debt premiums and discounts and deferred financing fees (Gain) loss on early extinguishment of debt — Straight line rental income Amortization of acquired real estate leases Amortization of deferred leasing costs Other non-cash expenses Loss on impairment of real estate — Increase in carrying value of asset held for sale — — Net gain on sale of properties — Equity in earnings of investees Loss on issuance of shares by Select Income REIT — Loss on distribution to common shareholders of The RMR Group Inc. common stock — — Loss on impairment of Select Income REIT investment — — Distributions of earnings from Select Income REIT — Change in assets and liabilities: Restricted cash Deferred leasing costs Rents receivable Other assets Accounts payable and accrued expenses Due to related persons Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions and deposits — Real estate improvements Investment in Select Income REIT — Investment in The RMR Group Inc. — — Investment in Affiliates Insurance Company — — Distributions in excess of earnings from Select Income REIT — Proceeds from sale of properties, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable Proceeds from issuance of common shares, net — — Proceeds from issuance of senior notes, net of discount — — Proceeds from unsecured term loans — — Repayment of unsecured term loans — — Borrowings on unsecured revolving credit facility Repayments on unsecured revolving credit facility Financing fees — Repurchase of common shares — — Distributions to common shareholders Net cash (used in) provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period $ $ $ F-6 GOVERNMENT PROPERTIES INCOME TRUST Year Ended December 31, Supplemental cash flow information: 2015 2014 2013 Interest paid $ $ $ Income taxes paid $ $ $ Non-cash investing activities: Investment in The RMR Group Inc. paid in common shares $ $ — $ — Real estate acquisition funded with the assumption of mortgage debt $ — $ $ — Distribution of The RMR Group Inc. common shares received from Select Income REIT $ $ — $ — Non-cash financing activities: Assumption of mortgage debt $ — $ $ — Distribution to common shareholders of The RMR Group Inc. common stock $ $ — $ — F-7 Real Estate Properties. We record our properties at cost and provide depreciation on real estate investments on a straight line basis over estimated useful lives generally ranging from 7 to 40 years. In some circumstances, we engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determinations of useful lives. For transactions that qualify as business combinations, we allocate the excess, if any, of the consideration over the fair value of the assets acquired to goodwill. We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives. F-10 For the Year Ended December 31, 2015 2014 2013 Weighted average common shares for basic earnings per share Effect of dilutive securities: unvested share awards - Weighted average common shares for diluted earnings per share In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. currently have recorded a deferred gain on sale of real estate of $712 that under current guidance would be recognized upon repayment of a promissory note we received in connection with the sale but will be recognized in its entirety upon adoption of ASU No. 2014-09. We currently expect to adopt the standard using the modified retrospective approach. F-12 2016 2017 2018 2019 2020 Thereafter $ F-17 December 31, December 31, 2015 2014 Real estate properties, net $ $ Rents receivable - Other assets Assets of discontinued operations $ $ Other liabilities $ $ Liabilities of discontinued operations $ $ Year Ended December 31, 2015 2014 2013 Rental income $ $ $ Real estate taxes Utility expenses Other operating expenses Depreciation and amortization — — General and administrative Loss on asset impairment — — Increase in carrying value of asset held for sale — — Net gain on sale of properties — Income (loss) from discontinued operations $ $ $ F-18 The Up-C Transaction was completed pursuant to a transaction agreement common stock of RMR Inc. We are On February 28, 2015, we entered into a share purchase agreement, or the SIR Purchase Agreement, with Lakewood Capital Partners, LP, or Lakewood, All of our Trustees and all of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC. RMR LLC provides management and administrative services to AIC pursuant to a management and administrative services At December 31, December 31, December 31, 2015 2014 Unsecured revolving credit facility, due in 2019 $ $ — Unsecured term loan, due in 2020 Unsecured term loan, due in 2022 Senior unsecured notes, 3.75% interest rate, including unamortized discounts of $2,019 and $2,577, respectively, due in 2019 Mortgage note payable, 5.55% interest rate, including unamortized premiums of $441 and $2,167, respectively, due in 2016(1) (2) Mortgage note payable, 6.21% interest rate, due in 2016(1) (3) Mortgage note payable, 5.88% interest rate, due in 2021(1) Mortgage note payable, 7.00% interest rate, including unamortized premiums of $470 and $605, respectively, due in 2019(1) Mortgage note payable, 8.15% interest rate, including unamortized premiums of $292 and $398, respectively, due in 2021(1) Mortgage note payable, 5.73% interest rate, including unamortized premiums of $0 and $177, respectively, due in 2015(1)(4) — $ $ Our $750,000 facility. 2015, respectively. respectively. 2017. $1,715. We recorded a loss on extinguishment of debt of $21 for the year ended December 31, 2017, which represented unamortized debt issuance costs related to this note. values of our financial instruments approximated their carrying values in our consolidated financial statements due to their short term nature or variable interest rates, except as follows: As of December 31, 2015 As of December 31, 2014 Carrying Amount Fair Value Carrying Amount Fair Value Senior unsecured notes, 3.75% interest rate, due in 2019 $ $ $ $ Mortgage note payable, 5.55% interest rate, due in 2016(1) Mortgage note payable, 6.21% interest rate, due in 2016(1) Mortgage note payable, 5.88% interest rate, due in 2021(1) Mortgage note payable, 7.00% interest rate, due in 2019(1) Mortgage note payable, 8.15% interest rate, due in 2021(1) Mortgage note payable, 5.73% interest rate, due in 2015(1) — — $ $ $ $ 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) $ $ 17,497 $ — $ — Non-Recurring Fair Value Measurements Assets: Property held for sale and classified as discontinued operations (2) $ $ — $ — $ Awards: 2015 2014 2013 Weighted Weighted Weighted Number Average Number Average Number Average of Grant Date of Grant Date of Grant Date Shares Fair Value Shares Fair Value Shares Fair Value Unvested shares, beginning of year $ 23.40 $ 23.71 $ 23.82 Shares granted 16.59 23.70 24.12 Shared forfeited or repurchased 23.41 - - 23.68 Shares vested 21.20 24.17 24.38 Unvested shares, end of year $ 20.11 $ 23.40 $ 23.71 Cash distributions $18.50 per share in an underwritten public offering. On FPO Transaction. Unrealized Loss Equity in on Investment in Unrealized Gains Available for (Losses) in Sale Securities Investees Total Balance at December 31, 2012 $ - $ $ Other comprehensive loss before reclassifications - Amounts reclassified from cumulative other comprehensive loss to net income (1) - Net current period other comprehensive loss - Balance at December 31, 2013 - Other comprehensive loss before reclassifications - Amounts reclassified from cumulative other comprehensive loss to net income (1) - Net current period other comprehensive loss - Balance at December 31, 2014 - Other comprehensive loss before reclassifications Amounts reclassified from cumulative other comprehensive loss to net income (1) - Net current period other comprehensive loss Balance at December 31, 2015 $ $ $ We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our consolidated statements of comprehensive income (loss). F-28 respectively. 2017 and 2016, respectively. December 31, December 31, 2015 2014 Real estate properties, net $ $ Acquired real estate leases, net Cash and cash equivalents Rents receivable, net Other assets, net Total assets $ $ Revolving credit facility $ $ Term loan Senior unsecured notes, net - Mortgage notes payable, net Assumed real estate lease obligations, net Other liabilities Shareholders' equity Total liabilities and shareholders' equity $ $ F-29 Year Ended December 31, 2015 2014 2013 Rental income $ $ $ Tenant reimbursements and other income Total revenues Real estate taxes Other operating expenses Depreciation and amortization Acquisition related costs General and administrative Total expenses Operating income Dividend income - - Interest expense (Loss) gain on early extinguishment of debt - Loss on distribution of The RMR Group Inc. common stock - - Income before income tax (expense) benefit and equity in earnings of an investee Income tax (expense) benefit Equity in earnings of an investee Income before gain on sale of property Gain on sale of property - - Net income Net income allocated to noncontrolling interest - - Net income attributed to SIR $ $ $ Weighted average common shares outstanding (basic) Weighted average common shares outstanding (diluted) Basic and diluted net income attributed to SIR per common share $ $ $ F-30 Year Ended December 31, 2015 Investment Investment in Real Estate in SIR Corporate Consolidated Rental income $ $ — $ — $ Expenses: Real estate taxes — — Utility expenses — — Other operating expenses — — Depreciation and amortization — — Acquisition related costs — General and administrative — — Total expenses — Operating income (loss) — Dividend income — — Interest income — Interest expense — Gain on early extinguishment of debt — — Loss on distribution to common shareholders of The RMR Group Inc. common stock — — Loss on issuance of shares by Select Income REIT — — Loss on impairment of Select Income REIT investment — — Income (loss) from continuing operations before income taxes and equity in earnings of investees Income tax expense — — Equity in earnings of investees — Income (loss) from continuing operations Loss from discontinued operations — — Net income (loss) $ $ $ $ As of December 31, 2015 Investment Investment in Real Estate in SIR Corporate Consolidated Total Assets $ $ $ $ F-32 Year Ended December 31, 2014 Investment Investment in Real Estate in SIR Corporate Consolidated Rental income $ $ — $ — $ Expenses: Real estate taxes — — Utility expenses — — Other operating expenses — — Depreciation and amortization — — Loss on impairment of real estate — — Acquisition related costs — — General and administrative — — Total expenses — Operating income (loss) — Interest and other income — — Interest expense — Loss on early extinguishment of debt — — Loss on issuance of shares by Select Income REIT — Income (loss) from continuing operations before income taxes and equity in earnings of investees Income tax expense — — Equity in earnings of investees — Income (loss) from continuing operations Income from discontinued operations — — Net income (loss) $ $ $ $ As of December 31, 2014 Investment Investment in Real Estate in SIR Corporate Consolidated Total Assets $ $ $ $ F-33 2015 First Second Third Fourth Quarter Quarter Quarter Quarter Rental income $ $ $ $ Net income (loss) (1) Net income (loss) per common share (basic and diluted) (1) Common distributions declared (2) 2014 First Second Third Fourth Quarter Quarter Quarter Quarter Rental income $ $ $ $ Net income Net income per common share (basic and diluted) Common distributions declared GOVERNMENT PROPERTIES INCOME TRUST 2017 Costs Initial Cost to Company Capitalized Cost amount carried at Close of Period Original Buildings and Subsequent to Impairments/ Buildings and Accumulated Date(s) Construction Property Location Encumbrances Land Equipment Acquisition Writedowns Land Equipment Total (1) Depreciation(2) Acquired Date(s) 1 131 Clayton Street Montgomery, AL $ - $ $ $ $ - $ $ $ $ 6/22/2011 2007 2 4344 Carmichael Road Montgomery, AL - - - 12/17/2013 2009 3 15451 North 28th Avenue Phoenix, AZ - - 9/10/2014 1996 4 711 14th Avenue Safford, AZ - - 6/16/2010 1992 5 5045 East Butler Street Fresno, CA - - 8/29/2002 1971 6 10949 N. Mather Boulevard Rancho Cordova, CA - - - 10/30/2013 2012 7 9800 Goethe Road Sacramento, CA - - 12/23/2009 1993 8 9815 Goethe Road Sacramento, CA - - 9/14/2011 1992 9 Capitol Place Sacramento, CA - - 12/17/2009 1988 10 4181 Ruffin Road San Diego, CA - - 7/16/2010 1981 11 4560 Viewridge Road San Diego, CA - - 3/31/1997 1996 12 Sky Park Centre San Diego, CA - - 6/24/2002 1986 13 Turning Basin Business Park Stockton, CA - - - 7/20/2012 2012 14 16194 West 45th Street Golden, CO - - 3/31/1997 1997 15 12795 West Alameda Parkway Lakewood, CO - 1/15/2010 1988 16 Corporate Center Lakewood, CO - - 10/11/2002 1980 17 20 Massachusetts Avenue Washington, DC - - 3/31/1997 1996 18 625 Indiana Avenue Washington DC - - 8/17/2010 1989 19 7850 Southwest 6th Court Plantation, FL - - 5/12/2011 1999 20 8900 Grand Oak Circle Tampa, FL - 10/15/2010 1994 21 181 Spring Street NW Atlanta, GA - - 7/25/2012 2007 22 Corporate Square Atlanta, GA - - 7/16/2004 1967 GOVERNMENT PROPERTIES INCOME TRUST 2017 Costs Initial Cost to Company Capitalized Cost amount carried at Close of Period Original Buildings and Subsequent to Impairments/ Buildings and Accumulated Date(s) Construction Property Location Encumbrances Land Equipment Acquisition Writedowns Land Equipment Total (1) Depreciation(2) Acquired Date(s) 23 Executive Park Atlanta, GA - - 7/16/2004 1972 24 One Georgia Center Atlanta, GA - - 9/30/2011 1968 25 4712 Southpark Boulevard Ellenwood, GA - - 7/25/2012 2005 26 South Vinnell Way Boise, ID - - 9/11/2012 1996; 1997; 2002 27 2020 S. Arlington Heights Arlington Heights, IL - - 12/29/2009 1988 28 Intech Park Indianapolis, IN - - 10/14/2011 2000; 2001; 2008 29 400 State Street Kansas City, KS - - 6/16/2010 1971 30 7125 Industrial Road Florence, KY - - 12/31/2012 1980 31 251 Causeway Street Boston, MA - - 8/17/2010 1987 32 75 Pleasant Street Malden, MA - - 5/24/2010 2008 33 25 Newport Avenue Quincy, MA - - 2/16/2011 1985 34 One Montvale Avenue Stoneham, MA - - 6/16/2010 1945 35 4201 Patterson Avenue Baltimore, MD - - 10/15/1998 1989 36 20400 Century Boulevard Germantown, MD - - 3/31/1997 1995 37 3300 75th Avenue Landover, MD - 2/26/2010 1985 38 1401 Rockville Pike Rockville, MD - - 2/2/1998 1986 39 2115 East Jefferson Street Rockville, MD - - 8/27/2013 1981 40 Rutherford Business Park Windsor Mill, MD - - 11/16/2012 1972 41 Meadows Business Park Woodlawn, MD - - 2/15/2011 1973 42 11411 E. Jefferson Avenue Detroit, MI - - 4/23/2010 2009 43 330 South Second Avenue Minneapolis, MN - - 7/16/2010 1980 44 Rosedale Corporate Plaza Roseville, MN - - 12/1/1999 1987 45 1300 Summit Street Kansas City, MO - - 9/27/2012 1998 46 4241-4300 NE 34th Street Kansas City, MO - - 3/31/1997 1995 GOVERNMENT PROPERTIES INCOME TRUST 2017 Costs Initial Cost to Company Capitalized Cost amount carried at Close of Period Original Buildings and Subsequent to Impairments/ Buildings and Accumulated Date(s) Construction Property Location Encumbrances Land Equipment Acquisition Writedowns Land Equipment Total (1) Depreciation(2) Acquired Date(s) 47 1220 Echelon Parkway Jackson, MS - - 7/25/2012 2009 48 10-12 Celina Avenue Nashua, NH - - 8/31/2009 1979 49 50 West State Street Trenton, NJ - - 12/30/2010 1989 50 435 Montano Boulevard Albuquerque, NM - - 7/16/2010 1986 51 138 Delaware Avenue Buffalo, NY - - 3/31/1997 1994 52 Airline Corporate Center Colonie, NY - - - 6/22/2012 2004 53 5000 Corporate Court Holtsville, NY - - 8/31/2011 2000 54 305 East 46th Street New York, NY - - 5/27/2011 1928 55 4600 25th Avenue Salem, OR - - 12/20/2011 1957 56 Synergy Business Park Columbia, SC - - 5/10/2006; 9/17/2010 1982; 1985 57 One Memphis Place Memphis, TN - - 9/17/2010 1985 58 701 Clay Road Waco, TX - - 12/23/1997 1997 59 Enterchange at Meadowville Chester, VA - - 8/28/2013 1999 60 3920 Pender Drive Fairfax, VA - - 3/21/2014 1981 61 Pender Business Park Fairfax, VA - 11/4/2013 2000 62 1759 & 1760 Business Center Drive Reston, VA - 5/28/2014 1987 63 9960 Mayland Drive Richmond, VA - - 5/20/2014 1994 64 Aquia Commerce Center Stafford, VA - - 6/22/2011 1988; 1999 65 65 Bowdoin Street S. Burlington, VT - - 4/9/2010 2009 66 840 North Broadway Everett, WA - - 6/28/2012 1985 67 Stevens Center Richland, WA - - 3/31/1997 1995 68 11050 West Liberty Drive Milwaukee, WI - - 6/9/2011 2006 69 2029 Stonewall Jackson Drive Falling Waters, WV - - 3/31/1997 1993 70 5353 Yellowstone Road Cheyenne, WY - - 3/31/1997 1995 $ - Assets Held for Sale 71 220 E. Bryan Street Savannah, GA - - 7/16/2010 1990 Assets Discontinued Operations 72 5600 Columbia Pike Falls Church, VA - - 3/31/1997 1993 GOVERNMENT PROPERTIES INCOME TRUST 2017 Real Estate Accumulated Properties Depreciation Balance at December 31, 2012 $ $ Additions Disposals Balance at December 31, 2013 Additions Loss on asset impairment Disposals Reclassification of assets held for sale - Balance at December 31, 2014 Additions Disposals Reclassification of assets held for sale Balance at December 31, 2015 $ $ S-5 By: /s/ David M. Blackman President and Chief Operating Officer February David M. Blackman February Mark L. Kleifges /s/ Barbara D. Gilmore /s/ Elena Poptodorova2015, excluding one property (one building) classified as discontinued operations,2017, we wholly owned 71108 properties (91(167 buildings) withand had a noncontrolling ownership interest in two properties (three buildings) through two unconsolidated joint ventures in which we own 50% and 51% interests. As of December 31, 2017, our consolidated properties have an undepreciated carrying value of approximately $1.7$3.0 billion and a depreciated carrying value of approximately $1.4$2.6 billion. These 71Our 108 consolidated properties have approximately 10.717.5 million rentable square feet.2015,2017, we also owned 24,918,421 common shares of beneficial interest, par value $.01 per share, of Select Income REIT, or SIR, or approximately 27.9%27.8% of the then outstanding common shares of SIR. SIR is a REIT that iswhich primarily focused on owning and investing inowns single tenant, net leased single tenant properties. As of December 31, 20152017 our investment in SIR had a market value of approximately $626.2 million and a carrying value of approximately $491.4$467.5 million. See Note 1112 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for more information regarding our investment in SIR. We account for our investment in SIR under the equity method. 02458‑1634,02458-1634, and our telephone number is (617) 219‑1440.into new leases as leases approach expiration, enter into new leases for our vacant space and selectively acquire additional properties that are majority leased to government tenants, selectively dispose of properties when we determine that our continued ownership will not achieve desired returns or if the opportunity costs for continuing to own those properties exceed our expected returns from those properties and pay distributions to our shareholders.properties. As our current leases expire, we will attempt to renew our leases with existing tenants or to enter into leases with new tenants, in both circumstances at rents equal to or higher than the rents we now receive. Our ability to renew leases with our existing tenants or to enter into new leases with new tenants and the rents we are able to charge will depend in large part upon market conditions which are generally beyond our control. We may also selectively dispose of properties when we determine that our continued ownership will not achieve desired returns or if we determine that we have uses for the sale proceeds which will meet our other business objectives.approval.wegovernment tenants and private sector tenants within the metropolitan Washington D.C. market area. We expect to use the extensive nationwide resources of our manager, The RMR Group LLC, a Maryland limited liability company, or RMR LLC, to locate and acquire such properties. We believe that current government budgetary pressures may cause an increased demand for leased space bymethodology, spending priorities, and the current U.S. presidential administration's views on the size and scope of government tenants, as opposed to governments acquiring buildings or constructing new buildings. However, these same budgetary pressuresemployment have also resulted in a decrease in government employment, government tenants improvingreducing their space utilization per employee and consolidation into existing government owned properties, thereby reducing the demand for government leased space. Although we believe that we will be able to locate and acquire additional properties that are majority leased to government tenants, our acquisition of FPO enabled us to expand our business strategy to include the acquisition, ownership and operation of office properties leased to both government and private sector tenants in the metropolitan Washington, D.C. market area. The metropolitan Washington, D.C. market area is one of the largest office markets in the United States and the nation’s largest beneficiary of spending by the U.S. government. We expect to acquire additional properties primarily for purposesthe purpose of realizing income from the operations of those properties rather than to realize capital gains by selling those properties.1•the historic and expected operating expenses, including real estate taxes, incurred and expected to be incurred at the property;marketsmarket in which the property is located;credit worthinesscreditworthiness of the property’s tenantstenant(s) and how essential the occupant’s mission at the property is to the tenant;tenant’s utilizationlikelihood of the leased space in the building and the likelihood of tenantstenant(s) renewing at lease expiration;•••the location and type of property;capital.capital, including our debt leverage.persons,entities, including personsentities engaged in real estate activities. We may invest in the securities of other personsentities for the purpose of exercising control, or otherwise, make loans to other persons or entities, engage in the sale of investments, offer securities in exchange for property or repurchase or reacquire our securities.We have in the past considered, andin the future consider, the possibilitychange our acquisition policies without a vote of, entering into mergers or strategic combinations with other companies. A principal goal of any such transaction may benotice to, further diversify our revenue sources and increase our cash flow from operations.•whether property is leased and the expected cost and required time to re‑leaseoccupancy of the property;•a(a) replacement tenant;•tenant(s) if the property has significant vacancies or is likely to become substantially vacant;••2•our intended use of the proceeds we may realize from the sale of a property;•• needs from time to time; andcapital.Policies.Policies and satisfy a number of organizational and operational requirements.. Accordingly, we generally will not be able to retain sufficient cash fromto fund our operations, to repay our debts, invest in our properties and fund acquisitions and development or fund acquisitions.redevelopment efforts. Instead, we expect to repay our debts, invest in our properties and fund acquisitions by borrowing and issuingdevelopment or redevelopment efforts with borrowings under our revolving credit facility, proceeds from equity or debt securities we may issue, cash distributions we may receive on our SIR common shares or using retained cash from operations whichthat may exceed our distributions. distributions paid. To the extent we obtain additional debt financing, we may do so on an unsecured or a secured basis. We may seek to obtain lines of credit or to issue securities senior to our common shares, including preferred shares or debt securities, which may be convertible into our common shares or be accompanied by warrants to purchase our common shares. We may also finance acquisitions by assuming debt or through the issuance of equity or other securities. The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions and expansions of existing or new properties. unsecured revolving credit facility, that we use for working capital and general business purposes, andincluding to fund acquisitions. In some instances, we may assume outstanding mortgage debt in connection with our acquisitions or place new mortgages on properties we own. InFor more information regarding our financing sources and activities, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Investment and Financing Liquidity and Resources” of this Annual Report on Form 10-K.pastFPO Transaction, our leverage increased through our assumption and issuance of additional debt. As noted above, we refinanced or reduced amounts outstanding under intend to dispose of certain properties in order to reduce our then existing revolving credit facility with term debt or equity issuances, andleverage. However, we expect to continue this practice in the future. We will decide when and whether to issue new debt or equity depending upon market conditions and other factors. Because our ability to raise capital may depend, in large part, upon market conditions, we can provide no assurancecannot be sure that we will be successful in these efforts or be able to raise sufficient capital to repaymaintain our debt or to fund our growth strategies.Although there are no limitations in our organizational documents on the amountinvestment grade ratings.indebtedness weTrustees may incur, the borrowing limitations established by the covenants in the agreement governing our revolving credit and term loan facilities, or our credit agreement, and our senior unsecured notes indenture and its supplement currently restrict our ability to incur indebtedness and require us to maintain certain financial ratios. However, we may seek to amend these covenants or seek replacement financings with less restrictive covenants. We may from time to time reevaluate and modifychange our financing policies at any time without a vote of, or notice to, our shareholders.light of then current market conditions, relative availabilityits headquarters and costs of debt and equity capital,regional offices located throughout the changing values of properties, growth and acquisition opportunities and other factors, and we may increase or decrease our ratio of debt to total capitalization.The RMR Group Inc. (NASDAQ: RMR), a Maryland corporation, or RMR Inc., is a holding company and substantially all of its business is conducted by its majority owned subsidiary, RMR LLC. Barry Portnoy and Adam Portnoy, our Managing Trustees, areTrustee, as the current sole trustee of ABP Trust is the controlling shareholders, directors and officersshareholder of RMR Inc. He is also a director and an officer of RMR Inc. Barry Portnoy was our other Managing Trustee02458‑1634,02458-1634, and its telephone number is (617) 796‑8390.796-8390. RMR LLC or its subsidiaries also acts as the manager to SIR, Industrial Logistics Properties Trust, or ILPT, Hospitality Properties Trust, or HPT, and Senior Housing Properties Trust, or SNH, and Tremont Mortgage Trust, or TRMT, and provides management and other services to other private and public companies, including Five Star Quality Care,Senior Living Inc., or FVE,Five Star, TravelCenters of America LLC, or TA, and Sonesta International Hotels Corporation, or Sonesta. As of the date of this Annual Report on Form 10‑K,10-K, the executive officers of RMR LLC are: Adam Portnoy, President and Chief Executive Officer; Barry Portnoy, Chairman; David M. Blackman, Executive Vice President; Jennifer B. Clark, Executive Vice President, General Counsel and Secretary; David J. Hegarty, Executive Vice President; Matthew P. Jordan, Executive Vice President; Mark L. Kleifges, Executive Vice President; Bruce J. Mackey Jr., Executive Vice President; John G. Murray, Executive Vice President; Thomas M. O’Brien,John C. Popeo, Executive Vice President; and John C. Popeo,Andrew J. Rebholz, Executive Vice President. David M. Blackman and Mark L. Kleifges are also our executive officers. Messrs. Blackman and Kleifges and other officers of RMR LLC also serve as officers of other companies to which RMR LLC provides management services.Employees. We have no employees. Services which would otherwise be provided to us by employees are provided by RMR LLC and by our Managing Trustees and officers. As of February 10, 2016, RMR LLC had approximately 420 full time employees in its headquarters and regional offices located throughout the United States. government tenants is a highly competitive business. We compete against other REITs, numerous financial institutions, individuals and public and private companies, including entities funded by both domestic and foreign capital, who are actively engaged in this business. Also, we compete for investments based on a number of factors including purchase prices, closing terms, underwriting criteria and our reputation. Our ability to successfully compete is also materially impacted by the availability and cost of capital to us. We do not believe we have a dominant position in any of the geographic markets in which we operate, but some of our competitors are dominant in selected 310‑K.no assurances canwe cannot be givensure that conditions are not present at our properties or that costs we may be required to incur in the future to remediate contamination will not have a material adverse effect on our business or financial condition. For more information, see “Risk Factors—Risks Related to Our Business—Ownership of real estate is subject to environmental and climate change risks.”2015, 422017, 69 of our consolidated buildings with an aggregate of 5,223,7698,637,564 rentable square feet (47.2%(45.4% and 49.9%50.1% of our eligible consolidated buildings and eligible consolidated rentable square feet, respectively) were ENERGY STAR certified.certificationdesignation in selecting new premises or renewing leases at existing premises. The LEED® certificationdesignation program is administered by the U.S. Green Building Council, a nonprofit organization focused on promoting environmental sustainability for the built environment. Buildings that reach specified levels of sustainability may receive a LEED® certification.designation. As of December 31, 2015, 152017, 25 of our consolidated buildings with an aggregate of 2,087,1123,602,853 rentable square feet (16.5%(15.5% and 19.5%20.6% of our total consolidated buildings and total consolidated rentable square feet, respectively) were LEED®certified.designated.OurWe believe our effort to obtain additional ENERGY STAR labels and/or LEED® certificationsdesignations and manage our properties in a sustainable manner benefit our business while also bettering the environment. We are also monitoring the U.S. presidential administration policies and practices for potential changes to "green lease" policies. For more information, see “Risk Factors—Risks Related to Our Business—The U.S. Government’s “green lease” policies may adversely affect us.”67 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.4Segment Information.
Internet Website. Our internet website address is www.govreit.com. Copies of our governance guidelines, code of business conduct and ethics, or Code of Conduct, and the charters of our audit, compensation and nominating and governance committees are posted on our website and also may be obtained free of charge by writing to our Secretary, Government Properties Income Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts, 02458-1634 or at our website. We also have a policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that shareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the Securities and Exchange Commission, or SEC. Security holders may send communications to our Board of Trustees or individual Trustees by writing to the party for whom the communication is intended at c/o Secretary, Government Properties Income Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634 or email secretary@govreit.com. Our website address is included several times in this Annual Report on Form 10-K as textual references only and the information in our website is not incorporated by reference into this Annual Report on Form 10-K.or the ADA, fire and safety regulations, building codes, land use regulations or environmental regulations on containment, abatement or removal.Segment Information. We operate in two business segments: ownership of properties that are primarily leased to government tenants and our equity method investment in SIR.Internet Website. Our internet website address is www.govreit.com. Copies of our governance guidelines, code of business conduct and ethics, or Code of Conduct, our policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and the charters of our audit, compensation and nominating and governance committees are posted on our website and also may be obtained free of charge by writing to our Secretary, Government Properties Income Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts, 02458‑1634 or at our website. We make available, free of charge, on our website, our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the Securities and Exchange Commission, or SEC. Any shareholder or other interested party who desires to communicate with our non‑management Trustees, individually or as a group, may do so by filling out a report on our website. Our Board of Trustees also provides a process for security holders to send communications to the entire Board of Trustees. Information about the process for sending communications to our Board of Trustees can be found on our website. Our website address and the website addresses of one or more unrelated third parties are included several times in this Annual Report on Form 10‑K as textual references only and the information in any such website is not incorporated by reference into this Annual Report on Form 10‑K.5consequencesconsiderations that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:·a bank, insurance company or other financial institution;·a regulated investment company or REIT;·a person who marks-to-market our shares;
a bank, insurance company or other financial institution;·a person who has a functional currency other than the United States dollar;·a person who acquires or owns our shares in connection with employment or other performance of services;
a regulated investment company or REIT;·a person subject to alternative minimum tax;·a person who acquires or owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction or conversion transaction;
a subchapter S corporation;·a United States expatriate;
a broker, dealer or trader in securities or foreign currency;·a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by a qualified foreign pension fund; or·except as specifically described in the following summary, a trust, estate, tax-exempt entity or foreign person.United StatesU.S. Internal Revenue Service, or the IRS, with respect to any matter described in this summary, and we cannot assure yoube sure that the IRS or a court will agree with all of the statements made in this summary. The IRS could, for example, take a different position from that described in this summary with respect to our acquisitions, operations, valuations, restructurings or other matters, which, if a court agreed, could result in significant tax liabilities for applicable parties. In addition, this summary is not exhaustive of all possible tax consequences,considerations, and does not discuss any estate, gift, state, local or foreign tax consequences.considerations. For all these reasons, we urge you and any holder of or prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.·a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws;6
an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws;·an entity treated as a corporation for federal income tax purposes that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia;·an estate the income of which is subject to federal income taxation regardless of its source; ora partnership or a U.S. shareholder.If anyan entity (or other arrangement) treated as a partnership for federal income tax purposes isor a beneficial owner ofU.S. shareholder.or(or other arrangementarrangement) treated as a partnership for federal income tax purposes that is a beneficial ownerholder of our shares and the partners in such a partnership (as determined for federal income tax purposes) are urged to consult their own tax advisors about the federal income tax consequences and other tax consequences of the acquisition, ownership and disposition of our shares.year ended December 31, 2009.year. Our REIT election, assuming continuing compliance with the then applicable qualification tests, has continued and will continue in effect for subsequent taxable years. Although no assurance canwe cannot be given,sure, we believe that from and after our 2009 taxable yearIRC as a REIT.theirour shareholders’ income as dividends to the extent of our available current or accumulated earnings and profits. Our dividends are not generally entitled to the preferential tax rates on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends or as qualified dividend income, all as explained below. However, for taxable years beginning after 2017 and before 2026 and pursuant to the deduction-without-outlay mechanism of Section 199A of the IRC, our noncorporate shareholders will be eligible for lower effective tax rates on our dividends that are not treated as capital gain dividends or as qualified dividend income. No portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders. Distributions in excess of our current or accumulated earnings and profits generally are treated for federal income tax purposes as returns of capital to the extent of a recipient shareholder’s basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, of which there are none outstanding at this time,andthereafter to distributions made on our common shares.shares. For all these purposes, our distributions include cash distributions, any in kind distributions of property that we might make, and deemed or constructive distributions resulting from capital market activities (such as some redemptions), as described below.has provided to us anis of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2009 through 20152017 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC. Our counsel’s opinions are conditioned upon the assumption that our leases, our declaration of trust and all other legal documents to which we arehave been or have beenare a party have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in this Annual Report on Form 10-K and upon representations made by us to our counsel as to certain factual matters relating to our organization and operations and our expected manner of operation. If this assumption or a description or representation is inaccurate or incomplete, our counsel’s opinions may be adversely affected and may not be relied upon. The opinions of our counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given byneither Sullivan & Worcester LLP or usnor we can be sure that we will qualify as or be taxed as a REIT for any particular year. Any opinion of Sullivan & Worcester LLP as to our qualification or taxation as a REIT will be expressed as of the date issued. Our counsel will have no obligation to advise us or our shareholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. Also, the opinions of our counsel are not binding on either the IRS or a court, and either could take a position different from that expressed by our counsel.7 on a continuing basis with various qualification tests imposed under the IRC and summarized below. While we believe that we have satisfied and will satisfy these tests, our counsel does not review compliance with these tests on a continuing basis. If we fail to qualify for taxation as a REIT in any year, we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of regular C corporations, meaning that federal income tax generally will be applied at both the corporate and shareholder levels. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders could be reduced or eliminated.circumstances:
circumstances, as described below:·We will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” determined by including our undistributed net capital gains, if any.·If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference. ·If we fail to satisfy the REIT asset tests described below, due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test.8or elect not to qualify for taxation as a REIT,in any year, then we will be subject to federal income tax in the same manner as a regular C corporation. Further, as a regular C corporation, distributions to our shareholders will not be deductible by us, nor will distributions be required under the IRC. Also, to the extent of our current and accumulated earnings and profits, all distributions to our shareholders will generally be taxable as ordinary dividends potentially eligible for the preferential tax rates discussed below in “Taxationunder the heading “—Taxation of Taxable U.S. Shareholders” and, subject to limitations in the IRC, will be potentially eligible for the dividends received deduction for corporate shareholders. Finally, we will generally be disqualified from qualification for taxation as a REIT for the four taxable years following the taxable year in which the termination of our REIT status is effective. Our failure to qualify for taxation as a REIT for even one year could result in us reducing or eliminating distributions to our shareholders, or in us incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level income taxes. Relief provisions under the IRC may allow us to continue to qualify for taxation as a REIT even if we fail to comply with various REIT requirements, all as discussed in more detail below. However, it is impossible to state whether in any particular circumstance we would be entitled to the benefit of these relief provisions.(1)that is managed by one or more trustees or directors;(2)the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;(3)that would be taxable, but for Sections 856 through 859 of the IRC, as a domestic C corporation;(4)that is not a financial institution or an insurance company subject to special provisions of the IRC;(5)the beneficial ownership of which is held by 100 or more persons;(6)that is not “closely held” as defined under the personal holding company stock ownership test, as described below; and(7)that meets other tests regarding the nature of its income and assets and the amount of its distributions, all as described below.(1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the IRC, as a domestic C corporation; (4) that is not a financial institution or an insurance company subject to special provisions of the IRC; (5) the beneficial ownership of which is held by 100 or more persons; (6) that is not “closely held,” meaning that during the last half of each taxable year, not more than 50% in value of the outstanding shares are owned, directly or indirectly, by five or fewer “individuals” (as defined in the IRC to include specified tax-exempt entities); and (7) that meets other tests regarding the nature of its income and assets and the amount of its distributions, all as described below. Section 856(h)(2) of the IRC provides that neither condition (5) nor (6) need to have been met during our first taxable year as a REIT. WeAlthough we cannot be sure, we believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before the close of our most recently completed taxable year, and that we will continue to meet these conditions in our current and future taxable years. There can, however, be no assurance in this regard.9By reason of condition (6), we will fail to qualify for taxation as a REIT for a taxable year if at any time during the last half of a year (except for our first taxable year as a REIT) more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust restricts transfers of our shares that would otherwise result in concentrated ownership positions. In addition, ifThese restrictions, however, do not ensure that we have previously satisfied, and may not ensure that we will in all cases be able to continue to satisfy, the share ownership requirements described in condition (6). If we comply with applicable Treasury regulations to ascertain the ownership of our outstanding shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. A shareholder whothat fails or refuses to comply with the request is required by Treasury regulations to submit a statement with its federal income tax return disclosing its actual ownership of our shares and other information.the term “individuals” is defined in the IRC to includean “individual” generally includes a natural persons,person, a supplemental unemployment compensation benefit plans,plan, a private foundations and portionsfoundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not other entities orinclude a qualified pension plansplan or profit-sharing trusts.trust. As a result, REIT shares owned by an entity that is not an “individual” are considered to be owned by the direct and indirect owners of the entity that are individuals (as so defined), rather than to be owned by the entity itself. Similarly, REIT shares held by a qualified pension plan or profit-sharing trust are treated as held directly by the individual beneficiaries in proportion to their actuarial interests in such plan or trust. Consequently, five or fewer such trusts could own more than 50% of the interests in an entity without jeopardizing that entity’s qualification for taxation as a REIT. However, as discussed below in “Taxation of Tax-Exempt U.S. Shareholders,” if a REIT is a “pension-held REIT,” each qualified pension plan or profit-sharing pension trust owning more than 10% of the REIT’s shares by value generally may be taxed on a portion of the dividends it receives from the REIT.It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision. This relief provision appliesmay apply to anya failure of the applicable conditions even if the failure first occurred in a year prior to the taxable year.taxable REIT subsidiariesa TRS as discussed below, Section 856(i) of the IRC provides that any corporation, 100% of whose stock is held by a REIT and its disregarded subsidiaries, is a qualified REIT subsidiary and shall not be treated as a separate corporation.corporation for U.S. federal income tax purposes. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT’s. We believe that each of our direct and indirect wholly owned subsidiaries, other than the taxable REIT subsidiariesTRSs discussed below (and entities ownedtaxable REIT subsidiaries)TRSs), will be either a qualified REIT subsidiary within the meaning of Section 856(i) of the IRC or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under Treasury regulations issued under Section 7701 of the IRC.IRC, each such entity referred to as a QRS. Thus, except for the taxable REIT subsidiaries discussed below (and entities owned in whole or in part by the taxable REIT subsidiaries), in applying all of the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly owned subsidiariesQRSs are treated as ours.discusseddescribed below, the REIT is generally deemed to own its proportionate share, based on respective capital interests, of the income and assets of the partnership corresponding to(except that for purposes of the 10% value test, described below, the REIT’s proportionate capitalshare of the partnership’s assets is based on its proportionate interest in the partnershipequity and is deemed to be entitled tospecified debt securities issued by the income of the partnership attributable to this proportionate share.partnership). In addition, for these purposes, the character of the assets and items of gross income of the partnership generally remains the same in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we become a partner is treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirementrequirements discussed below, we wouldmust take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the IRC.REITs.REITs We may in the futureinvest in real estate through one or more . When a subsidiary entities that are intended to qualifyqualifies for taxation as REITs. Anya REIT separate and apart from its REIT parent, the subsidiary’s shares are qualifying real estate assets for purposes of the REIT parent’s 75% asset test described below. However, failure of the subsidiary REIT will generally be subject to separately satisfy the various REIT qualification requirements and other limitations described in this summary or that are otherwise applicable to us. If one of our subsidiary REITs were to fail(and failure to qualify for taxation as a 10REIT, thenthe applicable relief provisions) would generally result in (a) the subsidiary REIT would becomebeing subject to regular United StatesU.S. corporate income tax, as described above, and (b) ourthe REIT parent’s ownership of shares in the subsidiary REIT would cease(i) ceasing to be a qualifying real estate assetassets for purposes of the 75% asset test, and would become(ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test generally applicable to oura REIT’s ownership in corporations other than REITs qualifiedand TRSs, and (iii) thereby jeopardizing the REIT subsidiariesparent’s own REIT qualification and taxabletaxation on account of the subsidiary’s failure cascading up to the REIT subsidiaries,parent, all as described under “Asset“—Asset Tests” below. IfREIT were to failentities that have intended and are intended to qualify for taxation as a REIT, it is possible that we would not meet the 5% asset test, the 10% vote test or the 10% value testREITs. We have made protective TRS elections with respect to our interest in the subsidiary REIT, in which event we would fail to qualify for taxation as a REIT unless we could utilize applicable relief provisions. We may make protective taxable REIT subsidiary elections as described below with respect to our subsidiary REITs and may implementhave implemented other protective arrangements intended to avoid a cascading REIT failure if any of our subsidiary REITs weredid not to qualify for taxation as a REIT, but there canwe cannot be no assurancesure that such protective elections and other arrangements will be effective in every instance so as to avoid or mitigate the resulting adverse consequences to us.WeAs a REIT, we are permitted to own any or all of the securities of a “taxable REIT subsidiary” as defined in Section 856(l) of the IRC,TRS, provided that no more than 25% (20% beginning with20% (25% before our 2018 taxable year) of the total value of our assets, at the close of each quarter, is comprised of our investments in the stock or other securities of our taxableTRSs. Very generally, a TRS is a subsidiary corporation other than a REIT subsidiaries.in which a REIT directly or indirectly holds stock and that has made a joint election with its affiliated REIT to be treated as a TRS. Our ownership of stock and other securities in taxable REIT subsidiariesTRSs is exempt from the 5% asset test, the 10% vote test and 5% REIT asset teststhe 10% value test discussed below. Among other requirements, a taxable REIT subsidiary of ours must:(1)be a corporation (other than a REIT) for federal income tax purposes in which we directly or indirectly own shares;(2)join with us in making a taxable REIT subsidiary election;(3)not directly or indirectly operate or manage a lodging facility or a health care facility; and(4)not directly or indirectly provide to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility or a health care facility.taxable REIT subsidiaryTRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities of such corporation willis automatically be treated as a taxable REIT subsidiary.TRS. Subject to the discussion below, we believe that we and each of our taxable REIT subsidiariesTRSs have complied with, and will continue to comply with, on a continuous basis, the requirements for taxable REIT subsidiaryTRS status at all times during which we intend for the subsidiary’s taxable REIT subsidiaryTRS election is reported as beingto be in effect, and we believe that the same will be true for any taxable REIT subsidiaryTRS that we later form or acquire.taxable REIT subsidiaryTRS effective as of June 5, 2015. RMR Inc., through its principal subsidiary, RMR LLC, has provided and continues to providetaxable REIT subsidiariesTRSs under Section 856(l)(3) of the IRC relating to operating or managing lodging facilities or health care facilities should include only regular onsite services or day-to-day operational activities at or for lodging facilities or health care facilities. To the best of our knowledge, neither RMR Inc. nor RMR LLC has been or is involved in proscribed activities at or for lodging facilities or health care facilities. Thus, we do not believe that Section 856(l)(3) of the IRC precluded or precludes RMR Inc. from being treated as our taxable REIT subsidiary.TRS. In addition, because we acquired a significant portion of our investment in RMR Inc. in exchange for our common shares that were newly issued, our counsel, Sullivan & Worcester LLP, is of the opinion that our investment in RMR Inc. should qualifyhave qualified as a “temporary investment of new capital” under Section 856(c)(5)(B) of the IRC to the extent related to such issuance of our common shares. To the extent our investment in RMR Inc. so qualifies,qualified, it will constituteconstituted a “real estate asset” under Section 856(c) of the IRC and woulddid not constitute a security subject to the REIT asset test limitations discussed below for a one-year period commencingthat ended in June 5, 2015.2016. If the IRS or a court determines, contrary to the opinion of our counsel, that RMR Inc. was or is precluded from being treated as our taxable REIT subsidiary,TRS, then our ownership position in RMR Inc. in excess of 10% of RMR Inc.’s outstanding securities by vote or value, except to the extent and for the period qualifyingthat such ownership qualified as a “temporary investment of new capital,” would have been and would be in violation of the applicable REIT asset tests described below. Under those 11 currently 35%, on the net income generated by our investment in RMR Inc. in excess of a 10% ownership position in that company.taxable REIT subsidiariesTRSs can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% gross income test or the 95% gross income test discussed below. Moreover, because our taxable REIT subsidiariesTRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit generally are not imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, our TRSs may generally conduct activities that would be treated as prohibited transactions or would give rise to nonqualified income if conducted by us directly. As regular C corporations, TRSs may generally utilize net operating losses and other tax attribute carryforwards to reduce or otherwise eliminate federal income tax liability in a given taxable REIT subsidiariesyear. Net operating losses and other carryforwards are subject to limitations, however, including limitations imposed under Section 382 of the IRC following an “ownership change” (as defined in applicable Treasury regulations) and a limitation stemming from December 2017 amendments to the IRC providing that carryforwards of net operating losses arising in taxable years beginning after 2017 generally cannot offset more than 80% of the current year’s taxable income. Moreover, pursuant to the December 2017 amendments to the IRC, net operating losses arising in taxable years beginning after 2017 may not be carried back, but may be carried forward indefinitely. As a result, we cannot be sure that our TRSs will be able to utilize, in full or in part, any net operating losses or other carryforwards that they may generate in the future.generally undertake third-party managementRestrictions and development activities and activities not related to real estate. Restrictionssanctions are imposed on taxable REIT subsidiariesTRSs and their affiliated REITs to ensure that theythe TRSs will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the taxable REIT subsidiary’s adjusted taxable income for that year. However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year’s 50% adjusted taxable income limitation. In addition, if a taxable REIT subsidiaryTRS pays interest, rent or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm’s length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Further, if in comparison to an arm’s length transaction, a third-party tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiaryTRS for services rendered, and if the REIT has not adequately compensated the taxable REIT subsidiaryTRS for services provided to or on behalf of the third-party tenant, then the REIT may be subject to an excise tax equal to 100% of the undercompensation to the taxable REIT subsidiary.TRS. A safe harbor exception to this excise tax applies if the taxable REIT subsidiaryTRS has been compensated at a rate at least equal to 150% of its direct cost in furnishing or rendering the service. Finally, beginning inwith our 2016 taxable year, the 100% excise tax also applies to the underpricing of services provided by a taxable REIT subsidiaryone of our TRSs to its parent REITus in contexts where the services are unrelated to services for REITour tenants. There canWe cannot be no assurancesure that arrangements involving our taxable REIT subsidiariesTRSs will not result in the imposition of one or more of these deduction limitationsrestrictions or excise taxes,sanctions, but we do not believe that we or our taxable REIT subsidiariesTRSs are or will be subject to these impositions.12income that satisfy the 75% gross income test described above, dividends, interest, or gains from the sale or disposition of stock, securities or real property.For purposesexchange gain (as defined in Section 856(n)(2) of the IRC); and (f) income from the repurchase or discharge of indebtedness) must be derived from investments relating to real property, including “rents from real property” as defined under Section 856 of the IRC, interest and gain from mortgages on real property or on interests in real property, income and gain from foreclosure property, gain from the sale or other disposition of real property, or dividends on and gain from the sale or disposition of shares in other REITs (but excluding in all cases any gains subject to the 100% tax on prohibited transactions). When we receive new capital in exchange for our shares or in a public offering of our five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% andgross income test.tests outlined above,test (or any property that generates such income or gain); (d) beginning with our 2016 taxable year, any income from “clearly identified” hedging transactions that we enter into to manage risk associated with extant, qualified hedges of liabilities or properties that have been extinguished or disposed; (e) passive foreign exchange gain (as defined in Section 856(n)(3) of the IRC); and (f) income from the repurchase or discharge of indebtedness) must be derived from a “shared appreciation provision” in a mortgage loan is generally treated as gain recognized oncombination of items of real property income that satisfy the 75% gross income test described above, dividends, interest, or gains from the sale or disposition of stock, securities or real property (but excluding in all cases any gains subject to the property to which it relates. 100% tax on prohibited transactions).there canwe cannot be no assurancesure in this regard.·The amount of rent received generally must not be based on the income or profits of any person, but may be based on a fixed percentage or percentages of receipts or sales.13
of rental income treated as attributable to personal property is determined according to the ratio of the fair market value of the personal property to the total fair market value of the real and personal property that is rented.the services satisfy the geographically customary standard, because the services have been provided by a taxable REIT subsidiary, or for both reasons.mortgage loan secured by a mortgage on real property or on interests in real property (including, in the case of a loan secured by both real property and personal property, such personal property to the extent that it does not exceed 15% of the total fair market value of all of the property securing the loan) with a fair market value at the time the loan is made (reduced by any senior liens on the property) at least equal to the amount of thesuch loan. If the amount of the loan exceeds the fair market value of the real property (as so reduced by senior liens), the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property (as so reduced by senior liens), then a part of the interest income from such loan equal to the totalpercentage amount by which the loan exceeds the value of the mortgage loan.athe property would so qualify. In the case ofForeclosure property leasedis generally any real property, including interests in real property, and any personal property incident to such real property:toas a tenant, foreclosure property generally consistsresult of the realREIT having bid on such property and incidental personalat foreclosure, or having otherwise reduced such property that the REIT has reduced to ownership or possession uponby agreement or process of law, after there was a default or when default was imminent default under theon a lease of such property or on indebtedness that such property secured;tenant,REIT was acquired at a time when the default was not imminent or anticipated; andto which a timely foreclosure property election is made. property.maximumhighest regular corporate income tax rate currently 35%, under the foreclosure property income tax rules of Section 857(b)(4) of the IRC. Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property” as described above, then that rental income is not subject to the foreclosure property income tax.willtogether known as dealer gains, may be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transactionThe 100% tax does not apply to gains from the sale of property that is held through a TRS, but such income also may adversely affect our abilitywill be subject to satisfytax in the 75% and 95% gross income tests for federalhands of the TRS at regular corporate income tax qualification as a REIT.rates; we may therefore utilize our TRSs in transactions in which we might otherwise recognize dealer gains. Whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding theeach particular transaction. There can be no assurance as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. Sections 857(b)(6)(C) and (E) of the IRC provide a safe harborharbors pursuant to which limited sales of real property held for at least two years and meeting specified additional requirements will not be treated as prohibited transactions. However, compliance with the safe harborharbors is not always achievable in practice.·own our assets for investment with a view to long-term income production and capital appreciation;·engage in the business of developing, owning, leasing and managing our existing properties and acquiring, developing, owning, leasing and managing new properties; and·make occasional dispositions of our assets consistent with our long-term investment objectives.·our failure to meet the test is due to reasonable cause and not due to willful neglect; and· the 75% gross income test or the 95% gross income test for that taxable year.14It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% gross income test or the 95% gross income test. test for that taxable year.appliesmay apply to anya failure of the applicable income tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.·Not more than 25% of the value of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.·Not more than 25% (20% beginning with our 2018 taxable year) of the value of our total assets may be represented by stock or other securities of taxable REIT subsidiaries.taxable REIT subsidiary,TRS of ours, to the extent that and during the period in which they qualify as temporary investments of new capital, shouldwill be treated as real estate assets, and not as securities, for purposes of the above REIT asset tests.and not as a security, for purposes of the 75% asset test above. But if the loan is undersecured when made, then the portion adequately secured byREITand the remaining portion will generally be treated as a separate security that must satisfy applicable asset tests.valueasset test, the 10% vote test or the 10% vote or value teststest at the close of any quarter and we do not cure such failure within 30days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is “de minimis”de minimis and (b) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% value andasset test, the 10% vote test and the 10% value asset tests.test. For purposes of this relief provision, the failure will be de minimis if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000. If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify for taxation as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (1) $50,000 or (2) the highest regular corporate income tax rate of corporate tax imposed currently 35%, on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the 15anya failure of the applicable asset tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.certainspecified rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay “rents from real property,” (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT. In addition, any debt instrument issued by an entity classified as a partnership for federal income tax purposes, and not otherwise excepted from the definition of a security for purposes of the above safe harbor, will not be treated as a security for purposes of the 10% value test if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test., the above REIT asset tests outlined above on a continuing basis beginning with our first taxable year as a REIT.(1)the sum of 90% of our “real estate investment trust taxable income” and 90% of our net income after tax, if any, from property received in foreclosure, over(2)the amount by which our noncash income (e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges) exceeds 5% of our “real estate investment trust taxable income.”(1) the sum of 90% of our “real estate investment trust taxable income” and 90% of our net income after tax, if any, from property received in foreclosure, over (2) the amount by which our noncash income (e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges) exceeds 5% of our “real estate investment trust taxable income.” taxes on foreclosure property income).BecauseFrom and after our 2015 taxable year, the preferential distribution rule has not applied to us because we arehave been and expect to remain a “publicly offered REIT” (as defined in Section 562(c)(2) of the IRC) that is required to file annual and periodic reports with the SEC under the Exchange Act, the preferential distribution rule does not apply to us beginning with our 2015 taxable year.thesuch dividend will be treated as having been both paid and received on December 31 of the prior taxable year.16can provide no assurancecannot be sure that financing would be available for these purposes on favorable terms, ifor at all.inheritinherit from acquired corporations, as described below.We own a substantial amount of the outstanding common shares of SIR, which we currently expect is and will remain qualified for taxation as a REIT under the IRC. For any of our taxable years in which SIR qualifies for taxation as a REIT, our investment in SIR will count as a qualifying REIT asset toward the REIT gross asset tests and our gains and dividends from SIR common shares will count as qualifying income under the 75% and 95% gross income tests, all as described above. However, because we do not and cannot control SIR’s compliance with the federal income tax requirements for REIT qualification and taxation, we can provide no assurance that SIR is or will remain qualified for taxation as a REIT under the IRC. Accordingly, we have joined with SIR in filing a protective taxable REIT subsidiary election under Section 856(l) of the IRC, effective for the third quarter of 2014, and we have reaffirmed this protective election with SIR every January 1 thereafter, and may continue to do so, unless and until our ownership of SIR falls below 10%. Pursuant to this protective taxable REIT subsidiary election, we believe that even if SIR is not a REIT for some reason, then it would instead be considered one of our taxable REIT subsidiaries, and as such its value would either fit within our REIT gross asset tests described above or would be such that any penalty taxes associated with our remediation of a REIT asset test failure for which there is reasonable cause, as described above, would be much lower than if no such taxable REIT subsidiary election were in place, though any applicable penalty taxes might still be substantial. The protective taxable REIT subsidiary election will not impact our compliance with the 75% and 95% gross income tests described above; we do not expect our gains and dividends from SIR common shares to jeopardize compliance with these tests, even if for some reason SIR is not a REIT.taxable REIT subsidiaryTRS election, each of theour acquired entities and their various wholly-owned corporate and noncorporate subsidiaries generally will become either our qualified REIT subsidiaries under Section 856(i) of the IRC or disregarded entities under Treasury regulations issued under Section 7701 of the IRC.QRSs. Thus, after the acquisition,such acquisitions, all assets, liabilities and items of income, deduction and credit of the acquired and then disregarded entitieswill be treated as ours for purposes of the various REIT qualification tests described above. In addition, we generally will be treated as the successor to the acquired and then disregarded entities’ (a) federal income tax attributes, such as those entities’ (a) adjusted tax bases in their assets and their depreciation schedules; and (b) earnings and profits for federal income tax purposes, if any. The carryover of these attributes creates REIT implications such as built-in gains tax exposure and additional distribution requirements, as described below.However, wherewhen we make an election under Section 338(g) of the IRC with respect to corporations that we acquire,we generallywill not be subject to such attribute carryovers.carryovers in respect of attributes existing prior to such election.As described above, notwithstandingNotwithstanding our qualification and taxation as a REIT, under specified circumstances we may be subject to corporate income taxation if we dispose of assets previously held byacquire a C corporation. Specifically, if we acquire anREIT asset from a corporation in a transaction in whichwhere our adjusted tax basis in the assetin the hands of adirectly or indirectly from such C corporation and if we subsequently recognize gain onsell the disposition of that asset during a five-yearthe five year periodbeginning on the date on whichday the asset ceased to bebeing owned by thesuch C corporation, then we will generally pay tax at the highest regular corporate tax rate, currently 35%, on the lesser of (a) the excess, if any, of the asset’s fair market value over its adjusted tax basis, each determined as of the time the asset ceased to be owned by the C corporation or (b) our gain recognized in the disposition. Accordingly, any taxable disposition of an asset so acquired during such five-year periodcould be subject to this built-in gains tax.corporation. To the extent of our income and gains in a taxable year that are subject to the built-in gains tax, net of any taxes paid on such 17to you in the following year will be potentially eligible for treatment as qualified dividends that are taxedtaxation to our noncorporate U.S. shareholders at the preferential rates. However, wetax rates for “qualified dividends” as described below under the heading “—Taxation of Taxable U.S. Shareholders”. We generally do not expect to sell any assets if that saledoing so would result in the imposition of a material built-in gains tax liability. We cannot, however, provide assuranceliability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we will not changeexpect to make appropriate provision for the associated tax liabilities on our plans in this regard. no later than the end of the applicable tax year all of the C corporation earnings and profits inherited in that transaction, if any, no later than the end of our taxable year in which the transaction occurs, in order to preserve our qualification for taxation as a REIT. IfHowever, if wefail to do so, werelief provisions would not qualify allow us to maintain our qualification for taxation as a REIT for that year and a number of years thereafter, unlessprovided we are able to rely on the relief provision described below. Although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as the amount of our undistributeddistribute any subsequently discovered C corporation earnings and profits we will compute, withand pay an interest charge in respect of the assistanceperiod of accountants as needed, the amount of undistributeddelayed distribution. C corporation earnings and profits that we inherit are, in our corporate acquisitions.However, there can be no assurance that, if audited,general, specially allocated under a priority rule to the IRS would not, upon subsequent examination, propose adjustments toearliest possible distributions following the event causing the inheritance, and only then is the balance of our calculation of the undistributed earnings and profits that we inherit, including adjustments that might be deemed necessary byfor the IRStaxable year allocated among our distributions to the extent not already treated as a resultdistribution of its examination of the companies we acquired. In any such examination, the IRS might consider all taxable years of the acquired entities as open for review for purposes of its proposed adjustments. If it is subsequently determined that we had undistributedC corporation earnings and profits asunder the priority rule. The distribution of the end of the applicable tax year, we may be eligible for a relief provision similar to the “deficiency dividends” procedure described above. To utilize this relief provision, we would have to pay an interest charge for the delay in distributing the undistributed earnings and profits; in addition, we would be required to distribute to our shareholders, in addition to our other REIT distribution requirements, the amount of the undistributedthese C corporation earnings and profits lessis potentially eligible for taxation to noncorporate U.S. shareholders at the interest charge paid.preferential tax rates for “qualified dividends” as described below under the heading “—Taxation of Taxable U.S. Shareholders”.acquisitions.theour facilities must be classified for U.S. federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case.discusseddescribed above, we expect to make distributions to our shareholders from time to time. These distributions may include cash distributions, in kind distributions of property, and deemed or constructive distributions resulting from capital market activities. The United StatesU.S. federal income tax treatment of our distributions will vary based on the status of the recipient shareholder as more fully described below under “Taxationthe headings “—Taxation of Taxable U.S. Shareholders,” “Taxation“—Taxation of Tax-Exempt U.S. Shareholders,” and “Taxation“—Taxation of Non-U.S. Shareholders.”yourthe particular tax treatment of any redemption.18suchthese preferential tax rates, except that any distribution of C corporation earnings and profits and taxed built-in gain items will potentially be eligible for these preferential tax rates. As a result, our ordinary dividends generally are generally taxed at the higher federal income tax rates applicable to ordinary income.income (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is available to our noncorporate U.S. shareholders for taxable years after 2017 and before 2026). To summarize, the preferential federal income tax rates for long-term capital gains and for qualified dividends generally apply to:(1)long-term capital gains, if any, recognized on the disposition of our shares;(2)our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a maximum 25% federal income tax rate);(3)our dividends attributable to dividend income, if any, received by us from C corporations such as taxable REIT subsidiaries;(4)our dividends attributable to earnings and profits that we inherit from C corporations; and(5)our dividends to the extent attributable to income upon which we have paid federal corporate income tax (such as sale gains subject to the 35% built-in gains tax), net of the corporate taxes thereon.(1) long-term capital gains, if any, recognized on the disposition of our shares; (2) our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a maximum 25% federal income tax rate); (3) our dividends attributable to dividend income, if any, received by us from C corporations such as TRSs; (4) our dividends attributable to earnings and profits that we inherit from C corporations; and (5) our dividends to the extent attributable to income upon which we have paid federal corporate income tax (such as taxes on built-in gains), net of the corporate income taxes thereon. profits.profits (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is available to our noncorporate U.S. shareholders for taxable years after 2017 and before 2026). Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends generally will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.(1)we will be taxed at regular corporate capital gains tax rates on retained amounts;(2)each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend;(3)each U.S. shareholder will receive a credit or refund for its designated proportionate share of the tax that we pay;(4)each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over the U.S. shareholder’s proportionate share of the tax that we pay; and(5)both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.(1) we will be taxed at regular corporate capital gains tax rates on retained amounts; (2) each of our U.S. shareholders will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated as a capital gain dividend; (3) each of our U.S. shareholders will receive a credit or refund for its designated proportionate share of the tax that we pay; (4) each of our U.S. shareholders will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over the U.S. shareholder’s proportionate share of the tax that we pay; and (5) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. capital gain dividend that is 19the shareholder’sour shares, but will reduce the shareholder’s basis in thosesuch shares. To the extent that these excess distributions exceed a U.S. shareholder’s adjusted basis in oursuch shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at preferential maximum rates. No U.S. shareholder may include on its federal income tax return any of our net operating losses or any of our capital losses. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will permit or require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim. Also, until such time as regulations are issued, we may choose to allocate applicable tax preference items to our shareholders.succeeding taxtaxable years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (b) $2 million in any single year or $4 million in a prescribed combination of succeeding taxtaxable years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis. The annual maximum penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.ordinary income dividend distributions received from us and,only if an appropriate election is made by the shareholder, capital gain dividend distributions and qualified dividends received from us; however, distributionsus, and it is possible that ordinary REIT dividends received from us. In addition, a U.S. shareholder that utilizes the deduction under Section 199A of the IRC with respect to qualified REIT dividends received from us may also be required to make a similar election in order to include such qualified REIT dividends in the calculation of net investment income. Distributions treated as a nontaxable return of the shareholder’s basis will not enter into the computation of net investment income.these rules.material considerations of an investment in our shares relevant to such investors. If you are a tax-exempt shareholder, we urge you to consult with your own tax advisor to determine 20Subject to the pension-held REIT rules discussed below, ourconduit.Any trustsconduit or otherwise hold mortgage assets or conduct mortgage securitization activities that are described in Section 401(a) of the IRC and are tax-exempt under Section 501(a) of the IRC, or tax-exempt pension trusts, that own more than 10% by value of a “pension-held REIT” at any time during a taxable year may be required to treat a percentage of all dividends received from the pension-held REIT during the year as UBTI. This percentage is equal to the ratio of:(1)the pension-held REIT’s gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension trust, less direct expenses related to that income, to(2)the pension-held REIT’s gross income from all sources, less direct expenses related to that income,except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if:
generate “excess inclusion” income.·the REIT is “predominantly held” by tax-exempt pension trusts; and·the REIT would fail to satisfy the “closely held” ownership requirement, discussed above in “REIT Qualification Requirements,” if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by the tax-exempt pension trusts rather than by their respective beneficiaries.A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the interests in such REIT, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the interests in such REIT, own in the aggregate more than 50% by value of the interests in such REIT. Because of the share ownership concentration restrictions contained in our declaration of trust, we believe that we have not been and will not become a pension-held REIT and accordingly, the tax treatment described above should be inapplicable to our tax-exempt shareholders. However, because our shares have been and are expected to remain publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT.Social clubs, voluntary employee benefit associations and supplemental unemployment benefit trusts exempt from federal income taxation under Sections 501(c)(7), (c)(9) and (c)(17) of the IRC, respectively, are subject to different UBTI rules, which generally will require them to characterize distributions from a REIT as UBTI. In addition, these prospective investors should consult their own tax advisors concerning any “set aside” or reserve requirements applicable to them.United StatesU.S. federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules.material considerations of an investment in our shares relevant to such investors. If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United StatesU.S. federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares.In general,regular United Statesthe often higher federal income tax in the same manner as a U.S. shareholder with respectand withholding rates, branch profits taxes and increased reporting and filing requirements that apply to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder’s conduct of a trade or business in the United States (and, if provided by an applicable income tax treaty, is attributable to a permanent establishment or fixed base the non-U.S. shareholder maintains in the United States). In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a U.S. trade or businessbusiness. This expectation and a number of the determinations below are predicated on our shares being listed on a U.S. national securities exchange, such as The NASDAQ Stock Market LLC, or Nasdaq. Although we cannot be sure, we expect that each class of our shares has been and will remain listed on a U.S. national securities exchange; however, we cannot be sure that our shares will continue to be so listed in future taxable years or that any class of our shares that we may issue in the United States may alsofuture will be subject to the 30% branch profits tax under Section 884 of the IRC, or lower applicable tax treaty rate, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion of the United States federal income taxation of non-U.S. so listed.21shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States.attributable to gain from the sale or exchange of a “United States real property interest” within the meaning of Section 897 of the IRC, or a USRPI, and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of our current or accumulated earnings and profits. A distribution of this type will generally be subject to United StatesU.S. federal income tax and withholding at the rate of 30%, or at a lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated to the applicable withholding agent its entitlement to benefits under a tax treaty. In the case of any deemed or constructive distributions or a distribution in kind, the applicable withholding agent will have to collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. shareholder would otherwise receive or own, and the non-U.S. shareholder may bear brokerage or other costs for this withholding procedure. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the statutory rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate as a capital gain dividend. Notwithstanding this potential withholding on distributions in excess of our current and accumulated earnings and profits, these excess portions of distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder’s adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of our current and accumulated earnings and profits exceed the non-U.S. shareholder’s adjusted basis in our shares, the distributions will give rise to U.S. federal income tax liability ifonly in the unlikely event that the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below.below under the heading “—Dispositions of Our Shares.” A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to it in excess of such shareholder’s allocable share of our current and accumulated earnings and profits.From time to time, somedistributions may beshares is listed on a U.S. national securities exchange, capital gain dividends that we declare and pay to a non-U.S. shareholder on those shares, as well as dividends to a non-U.S. shareholder on those shares attributable to theour sale or exchange of USRPIs. However, capital gain dividends that are received by a non-U.S. shareholder, as well as dividends attributable to our sales“United States real property interests” within the meaning of USRPIs, will be subject to the taxation and withholding regime applicable to ordinary income dividends and the branch profits tax will not apply, provided that (a) these dividends are received with respect to a class of shares that is “regularly traded” on a domestic “established securities market” such as the New York Stock Exchange, or the NYSE, both terms as defined by applicable Treasury regulations, and (b) the non-U.S. shareholder does not own more than 10% (5% for dividends before December 18, 2015) of that class of shares at any time during the one-year period ending on the date of distributionSection 897 of the applicable capital gain and USRPI dividends. If both of these provisions are satisfied, qualifying non-U.S. shareholdersIRC, or USRPIs, will not be subject to withholding either on capital gain dividends or on dividends that are attributable to our sales of USRPIs as though those amounts were effectively connected with a United StatesU.S. trade or business, and qualifying non-U.S. shareholders will not be required to file United StatesU.S. federal income tax returns or pay branch profits tax in respect of these dividends. Instead, these dividends will generally be subject to United States federal income tax and withholdingtreated as ordinary dividends currently at a 30% tax rate unless, as discussed below, reduced by an applicable treaty. Although there can be no assurance in this regard, we believe that our common shares have been and will remain “regularly traded” on a domestic “established securities market” within the meaning of applicable Treasury regulations; however, we can provide no assurance that our shares will continuesubject to be “regularly traded” on a domestic “established securities market” in future taxable years.Except as discussed above, for any year in which we qualify for taxation as a REIT, distributions that are attributable to gain from the sale or exchange of a USRPI are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or businesswithholding in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder that does not qualify for the special rule above (a) will be taxed on these amounts at the normal capital gain and other tax rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals, (b) will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed asmanner described below, and (c) if such non-U.S. shareholder is also a corporation, it may owe the 30% branch profits tax under Section 884 of the IRC, or lower applicable tax treaty rate, in respect of these amounts. The applicable withholding agent will be required to withhold from distributions to such non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder’s United States federal income tax liability, and the non-U.S. shareholder may file for a refund from the IRS of any amount of withheld tax in excess of that tax liability.22A special “wash sale” rule may apply to a non-U.S. shareholder who owns any class of our shares if (a) the non-U.S. shareholder owns more than 5% of that class of shares at any time during the one-year period ending on the date of the distribution described below, or (b) that class of our shares is not, within the meaning of applicable Treasury regulations, “regularly traded” on a domestic “established securities market” such as the NYSE. Although there can be no assurance in this regard, we believe that our common shares have been and will remain “regularly traded” on a domestic “established securities market” within the meaning of applicable Treasury regulations, all as discussed above; however, we can provide no assurance that our shares will continue to be “regularly traded” on a domestic “established securities market” in future taxable years. We anticipate this wash sale rule will apply, if at all, only(a) to a non-U.S. shareholder that owns more than 10% (5% for dispositions before December 18, 2015) of either our common shares or any class of our preferred shares or (b) if the particular class of our shares were to be no longer “regularly traded.” Such a non-U.S. shareholder will be treated as having made a “wash sale” of our shares if it (a) disposes of an interest in our shares during the 30 days preceding the ex-dividend date of a distribution by us that, but for such disposition, would have been treated by the non-U.S. shareholder in whole or in part as gain from the sale or exchange of a USRPI, and then (b) acquires or enters into a contract to acquire a substantially identical interest in our shares, either actually or constructively through a related party, during the 61 day period beginning 30 days prior to the ex-dividend date. In the event of such a wash sale, the non-U.S. shareholder will have gain from the sale or exchange of a USRPI in an amount equal to the portion of the distribution that, but for the wash sale, would have been a gain from the sale or exchange of a USRPI. As discussed above, a non-U.S. shareholder’s gain from the sale or exchange of a USRPI can trigger increased United States taxes, such as the branch profits tax applicable to non-U.S. corporations, and increased United States tax filing requirements.If for any taxable year we designate capital gain dividends for our shareholders, then a portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all outstanding classes of our shares.United StatesU.S. corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets specified additional conditions. A non-U.S. shareholder must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld with respect to a distribution to a non-U.S. shareholder exceeds the shareholder’s United StatesU.S. federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. The 35% withholding tax rate discussed above on some capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the current preferential maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. In the caseany deemed or constructive distribution orour shares was not listed on a U.S. national securities exchange and we made a distribution on those shares that was attributable to gain from the sale or exchange of a USRPI, then a non-U.S. shareholderkind,the United States conducted by the non-U.S. shareholder. In addition, the applicable withholding agent may collect the amountwould be required to be withheld by reducingwithhold from a distribution to cash for remittancesuch a non-U.S. shareholder, and remit to the IRS, a sufficient portionup to 21% of the propertymaximum amount of any distribution that thewas or could have been designated as a capital gain dividend. The non-U.S. shareholder also would otherwise receive or own ifgenerally be subject to the cash portionsame treatment as a U.S. shareholder with respect to the distribution (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of any such distribution is not sufficienta nonresident alien individual), would be subject to coverfulsome U.S. federal income tax return reporting requirements, and, in the withholding liability, and thecase of a corporate non-U.S. shareholder, may bear brokerage or other costs for this withholding procedure.Non-U.S. shareholders should generally be ableowe the up to treat amounts we designate as retained but constructively distributed capital gains in the same manner as actual distributions of capital gain dividends by us. In addition, a non-U.S. shareholder should be able to offset as a credit against its federal income30% branch profits tax liability the proportionate shareunder Section 884 of the IRC (or lower applicable tax paid by us on such retained but constructively distributed capital gains. A non-U.S. shareholder may file for a refund from the IRS for the amount that the non-U.S. shareholder’s proportionate sharetreaty rate) in respect of tax paid by us exceeds its federal income tax liability on the constructively distributed capital gains.these amounts.United StatesU.S. federal income taxation exceptor withholding. We expect that our shares will not be USRPIs because one or both of the following exemptions will be available at all times.nonresident alien individual who was inclass of our shares is listed on a U.S. national securities exchange, a non-U.S. shareholder’s gain on the United States for 183 days or more during the taxable year maysale of those shares will not be subject to U.S. federal income taxation as a 30% tax on this gain. Oursale of a USRPI. Second, our shares will not constitute a USRPIUSRPIs if we are a “domestically controlledcontrolled” REIT.” A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% of the fair market value of theits outstanding shares was directly or indirectly held by foreign persons. From and after December 18, 2015, a person who at all relevant times holds less than 5% of a REIT’s shares that are regularly traded“regularly traded” on an establisheda domestic “established securities 23market in the United States market” is deemed to be a U.S. person in making the determination of whether a REIT is domestically controlled, unless the REIT has actual knowledge that the person is not a U.S. person. Other presumptions apply in making the determination with respect to other classes of REIT shareholders. As a result of applicable presumptions, we expect to be able to demonstrate from and after December 18, 2015 that we are less than 50% foreign owned.owned. For periods prior to December 18, 2015, we believe that we were less than 50% foreign owned, but that may not be possible to demonstrate.demonstrate unless and until technical corrections legislation expressly expands application of the ownership presumptions. Accordingly, although we can provide no assurancecannot be sure, we believe that we have been orare and will remain a domestically controlled REIT, particularly “domestically controlled” REIT.if that determination includes the period before December 18, 2015, when the presumptions described above did not apply. Even if we are notIf, contrary to our expectation, a domestically controlled REIT, a non-U.S. shareholder’s gain on the sale of our shares will not beis subject to United StatesU.S. federal income taxation as a sale(for example, because neither of athe above exemptions were then available, USRPI, ifi.e., that class of shares is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market such as the NYSE, and the non-U.S. shareholder has at all times during the preceding five years owned 10% (5% for dispositions before December 18, 2015) or less by value of that class of shares. In this regard, because the shares held by others may be redeemed,a non-U.S. shareholder’s percentage interest in a class of our shares may increase even if it acquires no additional shares in that class. If were not then listed on a gain on the sale of our shares is subject to United States federal income taxation under these rules, theU.S. national securities exchange and we were not a “domestically controlled” REIT), then (a) a non-U.S. shareholder willwould generally be subject to the same treatment as a U.S. shareholder with respect to its gain (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals) and will, (b) the non-U.S. shareholder would also be requiredsubject to file a United Statesfulsome U.S. federal income tax return reporting requirements, and (c) a purchaser of that gain. A purchaserclass of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 15% (10% for dispositions on or before February 16, 2016) of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS.United StatesU.S. federal income tax withholding, then the applicable withholding agent will be required to withhold the appropriate amount with respect to a deemed or constructive distribution or a distribution in kind even though there is insufficient cash from which to satisfy the withholding obligation. To satisfy this withholding obligation, the applicable withholding agent may collect the amount of United StatesU.S. federal income tax required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the shareholder would otherwise receive or own, and the shareholder may bear brokerage or other costs for this withholding procedure.liability.liability, provided that such shareholder timely files for a refund or credit with the IRS. A U.S. shareholder may be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:·provides the U.S. shareholder’s correct taxpayer identification number; and·certifies that the U.S. shareholder is exempt from backup withholding because it comes within an enumerated exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding.24non-United Statesnon-U.S. entities are subject to diligence and reporting requirements for purposes of identifying accounts and investments held directly or indirectly by United StatesU.S. persons. The failure to comply with these additional information reporting, certification and other requirements could result in a 30% U.S. withholding tax on applicable payments to non-United States persons.non-U.S. persons, notwithstanding any otherwise applicable provisions of an income tax treaty. In particular, a payee that is a foreign financial institution that is subject to the diligence and reporting requirements described above must enter into an agreement with the United StatesU.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by “specified United States persons” or “United States owned foreign entities” (each as defined in the IRC), annually report information about such accounts, and withhold 30% on applicable payments to noncompliant foreign financial institutions and account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States with respect to these requirements may be subject to different rules. The foregoing withholding regime generally applies to payments of dividends on our shares, and is expected to generally apply to other “withholdable payments” (including payments of gross proceeds from a sale, exchange, redemption, retirement or other disposition of our shares) made after December 31, 2018. In general, to avoid withholding, any non-United Statesnon-U.S. intermediary through which a shareholder owns our shares must establish its compliance with the foregoing regime, and a non-U.S. shareholder must provide certainspecified documentation (usually an applicable IRS Form W-8) containing information about its identity, its status, and if required, its direct and indirect U.S. owners. Non-U.S. shareholders and shareholders who hold our shares through a non-United Statesnon-U.S. intermediary are encouraged to consult with their own tax advisoradvisors regarding foreign account tax compliance.behave retroactive in effect. The rules dealing with federal income taxation are constantly under review by the United StatesU.S. Congress, the IRS and the United StatesU.S. Department of the Treasury, and statutory changes, new regulations, revisions to existing regulations and revised interpretations of established concepts are issued frequently.frequently; in fact, both technical corrections legislation and administrative guidance may someday be enacted or promulgated in response to the substantial December 2017 amendments to the IRC. Likewise, the rules regarding taxes other than United StatesU.S. federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us and our shareholders. Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other consequences of an investment in our shares. We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside. These tax consequences may not be comparable to the United StatesU.S. federal income tax consequences discussed above.25Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of themust consider whether:·their investment in our shares or other securities satisfies the diversification requirements of ERISA;·the investment is prudent in light of possible limitations on the marketability of our shares;·they have authority to acquire our shares or other securities under the applicable governing instrument and Title I of ERISA; and·the investment is otherwise consistent with their fiduciary responsibilities.Trusteesthe IRC and similar provisions to those described below under applicable foreign or state law, individually and collectively, impose certain duties on persons who are fiduciaries of any employee benefit plan subject to Title I of ERISA, or an ERISA Plan, or an individual retirement account or annuity, or an IRA, a Roth IRA, a tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), a Keogh plan or other fiduciariesqualified retirement plan not subject to Title I of ERISA, each a Non-ERISA Plan. Under ERISA and the IRC, any person who exercises any discretionary authority or control over the administration of, or the management or disposition of the assets of, an ERISA planPlan or Non-ERISA Plan, or who renders investment advice for a fee or other compensation to an ERISA Plan or Non-ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan or Non-ERISA Plan.planERISA Plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the planERISA Plan on account of a violation. Fiduciaries of any individual retirement account or annuity, or IRA, Roth IRA, tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), KeoghNon-ERISA Plan or other qualified retirement plan not subject to Title I of ERISA, or non-ERISA plans, should consider that the planNon-ERISA Plan may only make investments that are authorized by the appropriate governing instrument.non-ERISA planNon-ERISA Plan is in no respect a representation by us or any underwriter of the securities that the investment meets all relevant legal requirements with respect to investments by plansthe arrangements generally or any particular plan,arrangement, or that the investment is appropriate for plansarrangements generally or any particular plan.plansPlans and persons making the investment decision for an IRA or other non-ERISA planNon-ERISA Plans should consider the application of the prohibited transaction provisions of ERISA and the IRC in making their investment decision. Sales and other transactions between an ERISA Plan or non-ERISA plan,a Non-ERISA Plan and disqualified persons related to it,or parties in interest, as applicable, are prohibited transactions.transactions and result in adverse consequences absent an exemption. The particular facts concerning the sponsorship, operations and other investments of an ERISA planPlan or non-ERISA planNon-ERISA Plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A non-exempt prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans,Plan fiduciaries, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan.interest. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, or Roth IRA or other tax-favored account is maintained or(or his beneficiary,beneficiary), the IRA, or Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed. Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction.United StatesU.S. Department of Labor has issued a regulation defining “plan assets.” The regulation, as subsequently modified by ERISA, generally provides that when an ERISA Plan or non-ERISA plana Non-ERISA Plan otherwise subject to Title I of ERISA and/or Section 4975 of the IRC acquires a security that is an equity interest in an entity and that security is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA plan’sPlan or non-ERISA plan’s assets Non-ERISA Plansharesequity (that is, our common shares and any other class of preferred sharesequity that we may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is “widely held,” “freely transferable” and either part of a class of securities registered under the Exchange Act,, or sold under an effective 26WeAlthough we cannot be sure, we believe our common shares have been and will remain widely held, and we expect the same to be true of any future class of preferred sharesequity that we may issue, but we can give no assurances in this regard.·any restriction on or prohibition against any transfer or assignment that would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order;·any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer that are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence;
any restriction on or prohibition against any transfer or assignment that would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order;·any administrative procedure that establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and·any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer.underin our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA planPlan or non-ERISA planNon-ERISA Plan that acquires our shares in a public offering. This opinion is conditioned upon certain assumptions and representations, as discussed above in “United“Material United States Federal Income Tax Considerations—Taxation as a REIT.”27 also impair our business operations or financial results. If any of the events or circumstances described below occurs, our business, financial condition, or results of operations, liquidity, prospects or ability to make or sustain distributions to our shareholders could be adversely affected and the trading pricevalue of our securities could decline. Investors and prospective investors should consider the following risks anddescribed below, the information contained under the heading “Warning Concerning Forward Looking2015, excluding one property (one building) classified as discontinued operations,2017 is 4.44.7 years based upon annualized rental income and 4.74.8 years based upon occupied consolidated square footage. As of December 31, 2015, excluding one property (one building) classified as discontinued operations,2017, leases representing approximately 68.2%60.2% of our annualized rental income and 62.9%60.8% of our occupied consolidated square footage will expire by December 31, 2020.2022. Although we typically will seek to renew our leases with current tenants as these leases approach expiration,when they expire, we cannot assurebe sure that we will be successful in doing so. If our tenants do not renew their leases, we may be unable to enter intoobtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties.with substitutefor our properties.or lease to newwith current tenants our rents may decline and our expenses may increase.When we renew leases or lease to new tenants, we may receive lessexperience rent thandecreases, and we currently receive. Lawsmay have to spend substantial amounts for leasing commissions, tenant improvements or other tenant inducements. Moreover, many of our properties have been specially designed for the particular businesses of our tenants; if the current leases for such properties are terminated or are not renewed, we may be required to renovate such properties at substantial costs, decrease the rents we charge or provide other concessions in order to lease such properties to new tenants.When we lease to new or renew leases we may have to spend substantial amounts for leasing commissions, tenant fit outs or other tenant inducements. Many of our leases are for properties that are specially suited to the particular business of our tenants. Because these properties have been designedreducing their space utilization per employee when renewing or physically modified forentering new leases. This may result in a particularrenewing government tenant ifoccupying less space in our property. If that renewing government tenant is the current leasesole occupant of the property, the vacant space may become unleasable. If substantial reconfiguration of the government tenant’s space is terminated or not renewed, we may be required to achieve the increase in space utilized, the government tenant may find it more advantageous to relocate than to renew its lease and renovate the property at substantial costs,existing space.the rent we charge or provide other concessions in order to lease the property to another tenant.There is a general trend amonggovernment employment, in government tenants and in office real estate generally for tenants to decrease the square feet they occupyreducing their space utilization per employee and in consolidation of government tenants into existing government owned properties, thereby reducing the demand for government leased space. Our historical experience with respect to reconfigureproperties 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, efforts to reduce space for changed use. This increase in utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or in renewing their leases for less square feetspace than they currently occupy, which could increase the vacancy rate atoccupy. Also, our properties. The needgovernment tenants’ desire to reconfigure leased office space to increasereduce utilization per employee may also require us to spend increasedsignificant amounts for tenant fit out.acquisitions may not be successful.An elementacquired properties, including those acquired as part of ourthe FPO Transaction.plan involvesplans involve the acquisition of additional properties that are majority leased to government tenants.tenants and government contractor tenants, as well as other properties located in the metropolitan Washington, D.C. market area. There are a limited number of such properties, and we will therefore have fewerwhich may limit our acquisition opportunities than REITs that purchase properties that are leased to both government and non‑government tenants or properties that are not leased when acquired.opportunities. In addition, our ability to complete attractivemake profitable acquisitions may beis subject to risks, including, but not limited to, risks associated with:·competition from other investors, including publicly traded and private REITs, numerous financial institutions, individuals and public and private companies;·contingencies in our acquisition agreements;·the availability of financing; and28
contingencies in our acquisition agreements; and·the terms of our indebtedness.Additionally, weanyour acquired properties.properties, including those acquired as part of the FPO Transaction. For example:·notwithstanding pre‑acquisition due diligence, we do not believe that it is possible to fully understand a property before it is owned and operated for an extended period of time, and we could acquire a property that contains undisclosed defects in design or construction;
we do not believe that it is possible to understand fully a property before it is owned and operated for a reasonable period of time, and, notwithstanding pre-acquisition due diligence, we could acquire a property that contains undisclosed defects in design or construction;·the market in which an acquired property is located may experience unexpected changes that adversely affect the property’s value;·the occupancy of properties that we acquire may decline during our ownership, and rents or returns that are in effect or expected at the time a property is acquired may decline thereafter;
the market in which an acquired property is located may experience unexpected changes that adversely affect the property’s value;·property operating costs for our acquired properties may be higher than anticipated and our acquired properties may not yield expected returns;·if we finance acquisitions using new debt or equity issuances, such financing may result in shareholder dilution;
the occupancy of and rents from properties that we acquire may decline during our ownership;·we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, for unknown liabilities such as liabilities for cleanup of undisclosed environmental contamination, claims by tenants, vendors, or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties;·newly acquired properties might require significant management attention that would otherwise be devoted to our ongoing business; and
property operating costs for our acquired properties may be higher than anticipated and our acquired properties may not yield expected returns;·we might never realize the anticipated benefits of our acquisitions.thereasonably priced capital necessarymay adversely impact our ability to repaycarry out our debts, invest in our properties or fund acquisitions.retainmaintain our qualification for taxation as a REIT under the IRC, we are required to distribute at least 90% of our annual REIT taxable income (excluding capital gains) and satisfy a number of organizational and operational requirements to which REITs are subject.. Accordingly, we generally willmay not be able to retain sufficient cash fromto fund our operations, to repay our debts, invest in our properties or fund acquisitions.our acquisitions or development or redevelopment efforts. Our business and growth strategies therefore depend, in part, upon our ability to raise additional capital at reasonable costs to repay our debts, invest in our properties and fund acquisitions. Because of thecosts. The volatility in the availability of capital to businesses on a global basis and the increased volatility in most debt and equity markets generally may limit our ability to raise reasonably priced capital is not guaranteed; wecapital. We may also be unable to raise reasonably priced capital because of reasons related to our business, market perceptions of our prospects, the terms of our indebtedness or for reasons beyond our control, such as market conditions. IfBecause the earnings we are permitted to retain are limited by the rules governing REIT qualification and taxation, if we are unable to raise reasonably priced capital, we may not be able to carry out our business and growth strategies may fail and we may be unable to remain qualified for taxation as a REIT.We plan to acquire properties that are majority leased to government tenants whenever we are able to identify investment opportunities we consider appropriate and have sufficient available financing to complete the acquisition. We face significant competition for acquisition opportunities from other investors, including publicly traded and private REITs, numerous financial institutions, individuals and public and private companies. Because of competition, we may be unable to, or may pay a 29significantly increased purchase price to, acquire a desired property. Some of our competitors may have greater financial and other resources than we have.In addition, substantially all of our propertiesWe face competition for tenants.tenants at our properties. Some competing properties may be newer, better located or more attractive to tenants. Competing properties may have lower rates of occupancy than our properties, which may result in competing owners offering available space at lower rents than we offer at our properties. ThisDevelopment activities may increase the supply of properties of the type we own in the leasing markets in which we own properties and increase the competition we face. Competition may affect our abilitymake it difficult for us to attract and retain tenants and may reduce the rents we are able to charge. Government tenants may beare generally viewed as desirable tenants and are therefore particularly difficult to attract and retain because theyretain.viewed asunable to acquire desirable tenants by other landlords.TheLEED®‑CI, certificationLEED®-CI, designation in selecting new premises or renewing leases at existing premises. In addition, the Energy Independence and Security Act of 2007 allows the GSA to give preference to buildings for lease that have received an “Energy Star” label. Obtaining such certificationsdesignation and labels may be costly and time consuming, but our failure to do so may result in our competitive disadvantage in acquiring new or retaining existing government tenants.Almost all·Tenants occupying approximately 9.2% of our rentable square feet and contributing approximately 7.2% of our annualized rental income as of December 31, 2015, excluding one property (one building) classified as discontinued operations, Tenants occupying approximately 8.6% of our consolidated rentable square feet and contributing approximately 6.8% of our annualized rental income as of December 31, 2017 have currently exercisable rights to terminate their leases before the stated term of their leases expire.
In 2018, 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026 and 2027, early termination rights become exercisable by other tenants who currently occupy an additional approximately 2.2%, 5.2%, 7.2%, 1.4%, 3.4%, 0.5%, 0.2%, 0.1%, 0.6% and 0.4% of our consolidated rentable square feet, respectively, and contribute an additional approximately 3.6%, 4.9%, 7.0%, 1.4%, 2.9%, 0.6%, 0.3%, 0.2%, 0.8% and 0.4% of our annualized rental income, respectively, as of December 31, 2017.·In 2016, 2017, 2018, 2019, 2020, 2022 and 2023, excluding one property (one building) classified as discontinued operations, early termination rights become exercisable by other tenants who currently occupy an additional approximately 6.0%, 3.1%, 1.3%, 4.7%, 2.9%, 2.1% and 1.4% of our rentable square feet, respectively, and contribute an additional approximately 5.5%, 2.6%, 1.4%, 5.2%, 2.9%, 1.5% and 1.2% of our annualized rental income, respectively, as of December 31, 2015.
Pursuant to leases with 26 of our government tenants, these tenants have currently exercisable rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 26 tenants represent approximately 12.9% of our consolidated rentable square feet and 12.3% of our annualized rental income as of December 31, 2017.·Pursuant to leases with 15 of our government tenants, these tenants have currently exercisable rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 15 tenants represent approximately 15.5% of our rentable square feet and 16.1% of our annualized rental income as of December 31, 2015.the square foottheir space utilization per employee in its owned and leased buildings and trying to consolidate out of leased space and into existing government owned spaces.properties. If a significant number of such events occur, our income and cash flow may materially decline and our ability to make or sustain regular distributions to our shareholders may be jeopardized.concentrationformula based upon the lower of our market capitalization or the historical cost of certain of our assets. Also, we may pay incentive fees to RMR LLC in certain circumstances based upon total returns realized by our shareholders compared to an index of total returns of certain other REITs. Some of these calculations will depend upon future market prices of our securities and other REITs’ securities which are beyond our control. Accordingly, the amount of annual general and administrative expense savings which we may realize, if any, cannot be precisely calculated; and, in fact we may realize more or less savings or no savings, and our annual general and administrative expenses incurred as a result of the FPO Transaction may be higher than the aggregate amounts we and FPO incurred or would have incurred if we had not acquired FPO.Washington, D.C. metro areaownership and are exposed to changes in market conditions in this area.Approximately 24.5%operation of our annualized rental income as of December 31, 2015, excluding one property (one building) classified as discontinued operations, was received from properties located in the Washington, D.C. metro area. A downturn in economic conditions in this area could result in reduced demand from tenants for our properties or lower the rents that our government tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased space by the U.S. Government in the 30Washington, D.C. metro area,that could increase competition for government tenantsdelays in leasing such properties and adversely affect our abilitygenerating cash flows. Development activities are also subject to retain government tenants when our leases expire.We have a substantial amount of indebtednessrisks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land use, building, occupancy, and other obligations, whichrequired government permits and authorizations. Once completed, any new properties may perform below anticipated financial results. The occurrence of one or more of these circumstances in connection with our development or redevelopment activities could adversely affecthave an adverse effect on our financial condition, results of operations and the value of our securities.2015,2017, our consolidated indebtedness was $2.2 billion, our consolidated total debt to total gross assets ratio, with our SIR common shares included in gross assets at market value, was 53.4% and we had $1.2$180.0 million available for borrowing under our $750.0 million revolving credit facility. The agreement governing our revolving credit facility and our $300.0 million term loan and our $250.0 million term loan, or our credit agreement, includes a feature under which the maximum aggregate borrowing availability may be increased to up to $2.5 billion on a combined basis in certain circumstances.outstanding, which was 54.6%including the risk that our cash flows could be insufficient for us to make required payments on our debt. There are no limits in our organizational documents on the amount of our total book capitalization. Thesedebt we may incur, and we may incur substantial debt. Our debt obligations are substantial, could have important consequences to holders of our common shares and could limit our ability to obtain financing for working capital, capital expenditures, acquisitions, refinancing, lease obligations or other purposes. Theysecurityholders. Our incurring debt may also increase our vulnerability to adverse economic, market and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business, operations or to our industry overall, and place us at a disadvantage in relation to competitors that have lower debt levels. In addition, amounts outstanding under our unsecured revolving credit facility and term loans, which in aggregate represent 57.9% of our total outstandingExcessive debt at December 31, 2015, require interest to be paid at variable interest rates. When interest rates increase, so will our interest costs, which could adversely affect our cash flow,limit our ability to pay principalobtain financing for working capital, capital expenditures, acquisitions, construction projects, refinancing, lease obligations or other purposes and interest onhinder our debt andability to maintain investment grade ratings from nationally recognized credit rating agencies or to make or sustain distributions to our cost of refinancing our debt when it becomes due. For further information regarding our exposure to risks associated with market changes in interest rates, please see elsewhere in this Annual Report on Form 10-K, including Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.” Additionally, if we choose to hedge our interest rate risk, we cannot assure that the hedge will be effective or that our hedging counterparty will meet its obligations to us. Any or all of the above events and factors could have an adverse effect on our results of operations and financial condition.a loan (including any default in covenants contained inof our credit agreement or our senior unsecured notes indenture and its supplement),debt obligations, we may be in default under anythe agreements governing other loan that has cross-defaultdebt obligations of ours which have cross default provisions, further borrowings underincluding our unsecured revolving credit facility may be prohibited, outstanding indebtedness underagreement and our unsecured revolving credit facility, term loans, senior unsecured notes indentureindentures and its supplement ortheir supplements. In such other loanscase, our lenders may be accelerated,demand immediate payment of any outstanding indebtedness and we could be forced to liquidate our assets for less than the values we would receive in a more orderly process.indentureindentures and its supplement contain terms limiting our ability to incur additional debt. These terms, or our failure or inability to meet them, could adversely affect our business and may prevent us from making distributions to our shareholders.Our credit agreement includestheir supplements include various conditions, to our borrowing, financial and other covenants including covenants requiring us to maintain certain minimum debt service coverage and leverage ratios, and events of default. Our senior unsecured notes indenture and its supplement also impose customary restrictions on us, including requiring us to comply with certain debt to asset ratios and debt service coverage ratios if we want to incur additional debt and requiring us to maintain at least a specified ratio of total unencumbered assets to debt. We may not be able to satisfy all of these conditions or may default on some of these covenants for various reasons, including matters which arefor reasons beyond our control. Further, maintaining complianceFor example, our credit agreement and our senior unsecured notes indentures and their supplements require us to maintain certain debt service ratios. Our ability to comply with such covenants will depend upon the net rental income we receive from our properties. If the occupancy at our properties declines or if our rents decline, we may be unable to borrow under our revolving credit facility. Complying with these covenants may limit our ability to pursuetake actions that may otherwise be beneficial to us and our shareholders. unsecured revolving credit facility, we may be unable to meet our business obligations or to grow our business by acquiring additional properties, or we may be required to sell some of our properties. If we default under our credit agreement, our lenders may demand immediate payment and our lenders under our unsecured revolving credit facility may elect not to make further borrowings available to us. Additionally, duringfund future borrowings. During the continuance of any event of default under our credit agreement, we willmay be limited or in some cases prohibited from making distributions onto our common shares.shareholders. Any default under our credit agreement that resultedresults in acceleration of our obligations to repay outstanding indebtedness being accelerated or in our no longer being permitted to borrow under our unsecured revolving credit facility would likely have serious and adverse consequences to us and would likely cause the market pricevalue of our common sharessecurities to materially decline.indebtednessdebt may be more restrictive than the covenants and conditions that are contained in our credit agreement. Defaults underagreement or our future debt could likely have the same consequences as described above.senior unsecured notes indentures and their supplements.31 energy costs which result from climate change laws designed to reduce carbon emissions or otherwise.whichthat have resulted in low interest rates prevailing in the marketplace for a historically long period of time. InSince December 2015,2016, the U.S. Federal Reserve has raised its benchmark interest rate by a quarter of aone percentage point.point, and there are some market expectations that market interest rates will rise further in the near to intermediate term. Market interest rates may continue to increase, and the increasethose increases may materially and negatively affect us. One of the factors that investors typicallyus in several ways, including: important in deciding whether to buy or sell our common shares isbased upon the distribution rate with respect to suchon our common shares relative to the then prevailing market interest rates. If market interest rates go up, investors may expect a higher distribution rate before investing inthan we are able to pay, which may increase our common sharescost of capital, or they may sell our common shares and seek alternatealternative investments with athat offer higher distribution rate.rates. Sales of our common shares may cause a decline in the market prices of such shares, which would reduce our market capitalization and total shareholder return.The potential negative impact on the value of our shares may increase our cost of capital, including decreasing the amount of equity and debt we may be able to raise, increasing the extent of dilution from any equity offering we may make or increasing the costs to us for any such equity or debt offering. unsecured revolving credit facility and term loans require interest to be paid at variable interest rates. When interest rates increase, so will our interest costs will increase, which could adversely affect our cash flow,flows, our ability to pay principal and interest on our debt, our cost of refinancing our debtfixed rate debts when it becomesthey become due and our ability to make or sustain distributions to our shareholders. Additionally, if we choosehedge our interest rate risk, we cannot assure that the hedge will be effective or that our hedging counterparty will meet its obligations to us.An increasedecline. Increases in interest rates could decreaselower the amount buyers may be willing to pay for our properties, thereby reducing the market value of our properties and limitingcause the value of our abilitysecurities to sell properties or to obtain mortgage financing secured by our properties. Further, increased interest rates may effectively increase the cost of properties we acquire to the extent we utilize leverage for those acquisitions and may result in a reduction in our acquisitions to the extent we reduce the amount we offer to pay for properties, due to the effect of increased interest rates, to a price that sellers may not accept.and climate change risks.such asincluding us, for any environmental damages arising at, or migrating from, owned properties, they own, and we cannot assure that we will notmay be held liable for the costs of environmental investigation and clean up at, or near, our properties, including at sites we own and lease to our tenants.properties. As an owner or previous owner of properties, which contain environmental hazards, we also may be liable to pay damages to governmentalgovernment agencies or third parties for costs and damages they incur arising from environmental hazards at, or migrating from, oursuch properties. Moreover, theThe costs and damages whichthat may arise from environmental hazards are often difficult to project and may be substantial.inon our buildingsproperties is contained in accordance with currentapplicable laws and regulations, and we have no current plans to remove it. If we removed the asbestos or demolished thesethe affected properties, certain environmental regulations govern the manner in which the asbestos must be handled and removed, and we could incur substantial costs complying with such regulations.Thererecently beenno recourse to them. activities in different parts of the country that some observers believeworld over the last few years is evidence of global climate change. Such severeSevere weather that may result from climate change may have an adverse effect on individual 32Further,Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires, may have an adverse effect on properties we own and result in significant losses to us and interruption of our business. Also, the current political debate about climate change has resulted in various treaties, laws and regulations whichthat are intended to limit carbon emissions. We believe theseThese or future laws being enacted or proposed may cause energyoperating costs at our properties to increase. Laws enacted to mitigate climate change may make some of our buildings obsolete or causerequire us to make material investments in our properties which could materially and adversely affect our financial condition and results of operations. For more information regarding climate change matters operationsand their possible adverse impact on us, please see “Management’s Discussion and Analysiscause the value of Financial Condition and Results of Operations—Impact of Climate Change.”related to environmental hazards and climate change,discussed above, our business is subject to other risks associated with real estate ownership, including:··the subjectivity of real estate valuations and changes in such valuations over time;
the subjectivity of real estate valuations and changes in such valuations over time;·property and casualty losses;·costs that may be incurred relating to property maintenance and repair, and the need to make expenditures due to changes in governmental regulations, including the ADA;·legislativecurrent and future adverse national real estate trends, including increasing vacancy rates, declining rental rates and regulatory developments that may occur at the federal, state and local levels that have direct or indirect impact on the ownership, leasing and operation of our properties; and
general deterioration of market conditions;·litigation incidental to our business.Our managerfor ourand systems in its operations, and any material failure, inadequacy, interruption or security failure of that technology or those systems could harm our business.networks and systems, including the Internet and commercially available software, to process, transmit, store and store electronicsafeguard information and to manage or support a variety of ourits business processes (including managing our building systems), including financial transactions and maintenance of records, which may include personally identifiablepersonal identifying information of employees and tenants and lease data. If RMR LLC experiences material security or other failures, inadequacies or interruptions of its information technology, it could incur material costs and losses and our operations could be disrupted as a result. Further, third party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to RMR LLC or us. RMR LLC relies on commercially available systems, software, tools and monitoring, as well as its internal procedures and personnel, to provide security for processing, transmitting, storing and storingsafeguarding confidential tenant, customer and vendor information, such as personally identifiable information relatingrelated to its employees and others and information regarding its and our financial accounts. Although RMR LLC takes various actions, and incurs significant costs, to maintain and protect the operation and security of its information technology and systems, including the data maintained in its information systems,those systems. However, it is possible that its securitythese measures will not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of personally identifiable information such as in the event of cyber attacks. information. including physical or electronic break‑ins, computer viruses, attacks by hackers, online fraud schemes and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. For example, in June 2017, RMR LLC became aware that it had been a victim of criminal fraud in which a person pretending to be a representative of a seller in a property acquisition transaction provided fraudulent money wire instructions that caused money to be wire transferred to an account that was believed to be, but was not, the seller’s account. We were not involved in that transaction and we did not incur any loss from that transaction; however, there may be a risk that similar fraudulent activities could be attempted against us, RMR LLC or others with respect to our assets. The cybersecurity risks to RMR LLC, us and third party vendors are heightened by, among other things, the evolving nature of the threats faced, advances in computer capabilities, new discoveries in the field of cryptography and new and increasingly sophisticated methods used to perpetuate illegal or fraudulent activities against RMR LLC, including cyberattacks, email or wire fraud and other attacks security and availability of RMR LLC’s information technology and systems, could interruptor certain third party vendors’ failure to similarly protect their information technology and systems that are relevant to RMR LLC’s or our operations, or to safeguard RMR LLC’s or our business processes, assets and information could result in financial losses, interrupt RMR LLC’s operations, damage ourRMR LLC’s reputation, cause RMR LLC to be in default of material contracts and subject usRMR LLC to liability claims or regulatory penalties andpenalties. Any or all of the foregoing could materially and adversely affect us.is in the process of adoptingadopted new accounting rules that willto be effective for fiscal years ending after December 2018, thatwhich will require companies to capitalize substantially all leases on their balance sheets by recognizing a lessee’s rights and obligations. When the final rules are effective, many companies that account for certain leases on an “off balance sheet” basis will be required to account for such leases “on balance sheet.” This change will remove many of the differences in the way companies account for owned property and leased property and could have a material effect on various aspects of our tenants’ businesses, including the appearance of their credit quality and theother factors they consider in deciding whether to own or lease properties. When the rules are effective, or as the effective date approaches, itthese rules could cause companies that lease properties to prefer shorter lease terms in an effort to reduce the leasing liability required to be recorded on their balance sheets; however, we 33do not expect this rule will affectsheets or some companies may decide to prefer property ownership to leasing. Such decisions by our current or prospective tenants may adversely impact our business and the behaviorvalue of our government tenants. The new rules could also make lease renewal options less attractive, as, under certain circumstances, the rules will require a tenant to assume that a renewal right will be exercised and accrue a liability relating to the longer lease term.The U.S. economy’s recovery to date from its most recent recession has been slow, unsteady and incomplete.The U.S. economy’s recovery to date from its most recent recession has been slow, unsteady and incomplete, which has created volatile market conditions. While the markets had been showing signs of stabilization and growth, new challenges have arisen, including uncertain U.S. Federal Reserve policy regarding the timing and amount of future increases in interest rates and the risk that declining overseas markets may hinder the growth of the U.S. economy. It remains unclear whether the U.S. economy will be able to withstand these market challenges and global uncertainty and achieve meaningful and sustained growth. Economic weakness in the U.S. economy generally or a new recession would likely adversely affect our financial condition and that of our tenants, and could impact the ability or willingness of our tenants to renew our leases or pay rent to us.Insurance on our properties may not adequately cover all losses and uninsured losses could materially and adversely affect us.Generally, we are responsible for the costs of insurance coverage for our properties, such as for casualty, liability, fire and extended coverage. Under certain circumstances insurance proceeds may not be adequate to restore our economic position with respect to an affected property and we could be materially and adversely affected. Furthermore, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as, for example, fire or flood.We may incur significant costs complying with the Americans with Disabilities Act and similar laws.Under the ADA, places of public accommodation and/or commercial facilities must meet federal requirements related to access and use by disabled persons. We may be required to make substantial capital expenditures at our properties to comply with this law. In addition, non-compliance could result in the imposition of fines or an award of damages to private litigants.A number of additional federal, state, and local laws and regulations exist regarding access by disabled persons. These regulations may require modifications to our properties or may affect future renovations. These expenditures may have an adverse impact on overall returns on our investments.there can be nowe cannot guarantee that our disclosure controls and procedures and internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weaknesses, in our disclosure controls and procedures or internal control over financial reporting could result in misstatements of our results of operations or our financial statements or could otherwise materially and adversely affect our business, reputation, results of operations, financial condition or liquidity.We may not realize the expected benefits of our acquisition of an interest in RMR Inc.On June 5, 2015 we entered into the Up-C Transaction with RMR Inc., RMR LLC, ABP Trust (formerly known as Reit Management & Research Trust) and three other REITs to which RMR LLC provides management services in which, among other things, we acquired 1,541,201 shares of RMR Inc.’s class A common stock. ABP Trust acquired 700,000 of our common shares and we amended our management agreements with RMR LLC and extended them for 20 year terms. We subsequently distributed 768,032 of the shares of RMR Inc.’s class A common stock that we received in the Up-C Transaction pro rata to our shareholders. SIR also distributed shares of RMR Inc.’s class A common stock pro rata to its shareholders from which we received 441,056 shares of RMR Inc.’s class A common stock as a shareholder of SIR. We believe the Up-C Transaction provided several benefits to us, including an attractive investment in the equity securities of RMR Inc., the further alignment of the interests of RMR LLC, 34Adam Portnoy and Barry Portnoy with our interests and greater transparency for us and our shareholders into the compensation practices and financial and operating results of RMR LLC. However, our investment in RMR Inc. is subject to various risks, including the highly competitive nature of RMR LLC’s business and the limited public market for RMR Inc.’s securities, among others, which may result in us losing some or all of our investment in RMR Inc. or otherwise not realizing the benefits we expect from the Up-C Transaction. For further information on the Up-C Transaction, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.Also, inIn the event RMR LLC is unwilling or unable to continue to provide management services to us, our cost of obtaining substitute services may be greater than the fees we pay RMR LLC under our management agreements, and as a result our expenses may increase.Each of our executive officers is also an officer of RMR LLC. Because our executive officers have duties to RMR LLC as well as to our company, we do not have their undivided attention. They face conflicts in allocating their time and resources between our company and RMR LLC.relationshiprelationships with RMR LLC may restrict our investment activities and RMR LLC’s and its controlling shareholders’ relationships with others may create conflicts of interest, or the perceptionappearance of such conflicts.Trustees controlTrustee, Adam Portnoy, as the current sole trustee of ABP Trust is the controlling shareholder of RMR Inc., which and as the current sole trustee of ABP Trust beneficially owns all the class A membership units of RMR LLC not owned by RMR Inc. Adam Portnoy, is the managing memberdirector, president and chief executive officer of RMR Inc. and controlsan officer of RMR LLC.threefive other NYSE-listedNasdaq listed REITs: HPT, which owns hotels and travel centers; ILPT, which primarily owns industrial and logistics properties; SNH, which primarily owns healthcare, senior living properties and medical office buildings; and SIR, which primarily owns and invests in net leased, single tenant properties.properties; and TRMT, which primarily originates and invests in first mortgage loans secured by middle market and transitional commercial real estate. RMR LLC also provides services to other publicly and privately owned companies, including FVE,including: Five Star, which operates senior living communities; TA, which operates and franchises travel centers, convenience stores and convenience stores;restaurants; and Sonesta, which operates, manages and franchises hotels, resorts and cruise ships. An affiliate of RMR LLC is an investment adviser to the RMR Real Estate Income Fund, or RIF, a closed end investment company listed on the NYSE American, which primarily invests in securities of REITs that are not managed by RMR LLC.to public companiesrelationships and other businessescross ownerships could create competition for the time and efforts of RMR LLC, Adam Portnoy and Messrs. Barryother RMR LLC personnel, including our executive officers, and Adam Portnoy. Also, RMR LLC’s multiple responsibilities to us and to other companies to which it provides management services may give rise to conflicts of interest or the appearance of such conflicts of interest.relatedunrelated parties, and therefore the terms, including the fees payable to RMR LLC, may not be as favorable to us as they would have been if they were negotiated on an arm’s length basis between unrelated parties. Our property management fees are calculated based on rents we receive and construction supervision fees for construction at our propertiesOur Independent Trustees oversee our acquisition and disposition program and capital transactions and regularly review our properties’ results, rents, leasing activities, budgets and construction activities as well as market trends. If we do not effectively manage our investment, disposition and capital transactions and leasing, construction and other property management activities, we may pay increased management fees without proportional benefits to our shareholders.our management agreements withaddition, we pay RMR LLC we acknowledge that RMR LLC may engage in other activities or businesses and act as the manager to any other person or entity (including other REITs) even though such person or entity has 35investment policies and objectives similar to our policies and objectives and we are not entitled to preferential treatment in receiving information, recommendations and other services from RMR LLC. Accordingly, we may lose investment opportunities to, and may compete for tenants with, other businesses managed by RMR LLC. Barry Portnoy is a Managing Director, officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC, and Adam Portnoy is a Managing Director, President, Chief Executive Officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. Adam Portnoy and Barry Portnoy also own class A membership units of RMR LLC through their ownership of ABP Trust. All of the memberssubstantial base management fees regardless of our Board of Trustees, including our Independent Trustees, are members of one or more boards of trustees or directors of other public companiesfinancial results. RMR LLC’s entitlement to which RMR LLC providesa base management services. All of our executive officers are also officers of RMR Inc., RMR LLCfee might reduce its incentive to devote its time and other companieseffort to which RMR LLC provides management services, including our President and Chief Operating Officer, David Blackman, who also serves as President and Chief Operating Officer of SIR. The foregoing individuals may hold equity in RMR Inc. and other public companies to which RMR LLC provides management services. Any such equity ownership or positions could create, or appear to create, conflicts of interest with respect to matters involving us, SIR, the other companies to which RMR LLC provides management services and RMR Inc. and its related parties.The Up-C Transaction and the agreements entered into as part of the Up-C Transaction are among related persons, which increases the risk of allegations of conflicts of interest, and such allegations may impair our ability to realize the benefits we expect from the Up-C Transaction.Because of the various relationships among us, RMR Inc., RMR LLC and the other REITs to which RMR LLC provides management services, the Up-C Transaction and the agreements entered into as part of the Up-C Transaction, including the amendment and extension of our management agreementsseeking investments that provide attractive returns for 20 year terms, are among related persons. The Up-C Transaction and the terms thereof were negotiated and reviewed by a Joint Special Committee comprised solely of our Independent Trustees and the independent trustees of the other REITs to which RMR LLC provides management services, or the Joint Special Committee, and were separately approved and adopted by our Independent Trustee who did not serve as an independent trustee of any of the other REITs, by a Special Committee of our Board of Trustees, comprised solely of our Independent Trustees, or our Special Committee, and by our Board of Trustees. Morgan Stanley & Co. LLC acted as financial advisor to the Joint Special Committee and Reynolds Advisory Partners, LLC acted as financial advisor to our Special Committee. Nonetheless, the Up-C Transaction may not be on terms as favorable to us or the other REITs to which RMR LLC provides management services as it would have been if it was negotiated among unrelated parties. As a result of these relationships, we may be subject to increased risk that our shareholders or the shareholders of the other REITs to which RMR LLC provides management services may challenge the Up-C Transaction and the agreements entered into as part of the Up-C Transaction. Any such challenge could result in substantial costs and a diversion our management’s attention, could have a material adverse effect on our reputation, business and growth and could adversely affect our ability to realize the benefits we expect from the Up-C Transaction, whether or not the allegations have merit or are substantiated.payment ofus to pay a substantial termination fee, including in the case of a termination for unsatisfactory performance, which may limit our ability to end our relationship with RMR LLC.of the agreement, which term depending on the time of termination would be between 19 and 20 years. Additionally, if we terminate a management agreement for a performance reason, as defined in the agreement, we are obligated to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years. These provisions substantially increase the cost to us of terminating the management agreements without cause, which may limit our ability to end our relationship with RMR LLC as our manager. The payment of the termination fee could have a material adverse effect on our financial condition, including our ability to pay dividends to our shareholders.36oura change of control.providesor its subsidiaries provide management services, Barry Portnoy and Adam Portnoy and other related persons of RMR LLC may precipitate such activities. Certain proxy advisory firms which have significant influence over the voting by shareholders of public companies have, in the past, recommended, and in the future may recommend, that shareholders withhold votes for the election of our incumbent Trustees and vote against our say on pay vote or other management proposals. These recommendations may affect the outcome of our Board elections and impact our governance, which may increase shareholder activism and litigation. These activities, if instituted against us, could result in furthersubstantial costs, which could be substantial in amount, and a diversion of our management’s attention, even if the action is unfounded.We have invested approximately $6.0 million in AIC, we have purchased a substantial portion of our property insurance in a program designed by AIC, and we periodically consider the possibilities for expanding our relationship with AIC to other types of insurance. designedarranged and reinsured in part by AIC.AIC and we periodically consider the possibilities for expanding our relationship with AIC to other types of insurance. Our principal reason for investing in AIC and for purchasing insurance in these programs is to seek to improve our financial results by obtaining improved insurance coverages at lower costs than may be otherwise available to us or by participating in any profits which we may realize as an owner of AIC. While we believe we have in the past benefitted from these arrangements, these beneficial financial results may not occur in the future, and we may need to invest additional capital in order to continue to pursue these results. AIC’s business involves the risks typical of an insurance business, including the risk that it may not operate profitably. Accordingly, financial benefits from our business dealings with AIC may not be achieved in the future, and we may experience losses from these dealings.valueprice of our ownership in SIR may decline.2015,2017, the carrying value of our SIR common shares was $491.4$467.5 million, and the market valueprice of those common shares was $493.9$626.2 million based on the closing price of SIR’s common shares on the NYSENasdaq on that day. We have no ability to control theThe market price offor SIR’s common shares.shares will vary. If it appears that the market valueprice of our SIR common shares is persistently below the carrying value of our SIR common shares, we may be required to record an impairment charge with regard to our ownership of the SIR common shares, and the amount of this charge may be material.valueprice or the carrying value of our SIR common shares at the time of sale.27.9%27.8% of SIR’s total outstanding common shares. Because we own such a large number of SIR common shares which represents such a large percentage of SIR’s outstanding common shares, any effort we make to sell our SIR common shares may depress the market valueprice of SIR’s common shares andthetheir carrying value of our SIR common shares because of the significance of our SIR holdings, a reduced market valueprice of SIR common shares or otherwise; we may realize a loss on our investment in SIR common shares.37
SIR’s board of trustees may lower the amount of distributions that SIR pays to its shareholders, including us, which would reduce the cash flow we realize by owning our SIR common shares and could adversely impact our ability to make payments of principal and interest on our indebtedness and future distributions on our common shares.value ormarket price of our investment in SIR. For example:·SIR may incur substantial amounts of indebtedness, which may adversely impact the valueSIR may incur substantial amounts of indebtedness, which may adversely impact the market price of SIR’s common shares, including our SIR common shares;·SIR’s board of trustees may lower the amount of distributions that SIR pays to its shareholders, including us, which would reduce the cash flow we realize by owning our SIR common shares and could adversely impact our ability to make payments of principal and interest on our indebtedness and future distributions on our common shares;··SIR may issue additional common shares at a per share price below the per share carrying value of our SIR common shares, which would dilute the value of our SIR common shares and may require us to recognize losses on our SIR investment;
SIR may issue additional common shares at a per share price below the per share carrying value of our SIR common shares, which may require us to reduce our cost basis for our SIR common shares and recognize losses on our SIR investment;·SIR may incur losses because it is unable to maintain the occupancy or rents it now receives from its properties or because of increased operating expenses or otherwise, and any such losses may reduce the value of our SIR common shares;·SIR’s board of trustees may change or revise SIR’s business plans and policies from time to time without shareholder approval, and any such changes could adversely affect SIR’s financial condition, results of operations, the market price of SIR’s common shares and SIR’s ability to make distributions to its shareholders; and
SIR may incur losses if it is unable to maintain the occupancy or rents it now receives from its properties or its operating expenses increase or otherwise, and any such losses may reduce the market price of our SIR common shares;·Our relationship with SIR may create conflicts of interest or the perception of such conflicts., and certain persons who have been exempted by our Board of Trustees from owning, (directlydirectly and by attribution)attribution, more than 9.8% of the number or value of shares (whichever is more restrictive) of any class or series of our outstanding shares of beneficial interest, including our common shares. This provision of our declaration of trust is intended to, among other purposes, assist with our REIT compliance under the IRC and otherwise to promote our orderly governance. However, this provision may also inhibitsinhibit acquisitions of a significant stake in us and may deter, delay or prevent a change in control of us or unsolicited acquisition proposals that a shareholder may consider favorable. Additionally, provisions contained in our declaration of trust and bylaws or under Maryland law may have a similar impact, including, for example, provisions relating to:·the division of our Trustees into three classes, with the term of one class expiring each year, which could delay a change of control of us;·shareholder voting rights and standards for the election of Trustees and other provisions which require larger majorities for approval of actions which are not approved by our Trustees than for actions which are approved by our Trustees;·the authority of our Board of Trustees, and not our shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board of Trustees;38
the authority of our Board of Trustees, and not our shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board of Trustees;·the fact that only our Board of Trustees, or if there are no Trustees, our officers, may call shareholder meetings and that shareholders are not entitled to act without a meeting;·required qualifications for an individual to serve as a Trustee and a requirement that certain of our Trustees be "Managing Trustees" and other Trustees be "Independent Trustees", as defined in our governing documents;
shareholder voting standards which require a supermajority for approval of certain actions;·limitations on the ability of our shareholders to propose nominees for election as Trustees and propose other business to be considered at a meeting of our shareholders;·limitations on the ability of our shareholders to remove our Trustees; and
the fact that only our Board of Trustees, or if there are no Trustees, our officers, may call shareholder meetings and that shareholders are not entitled to act without a meeting;·the authority of our Board of Trustees to create and issue new classes or series of shares (including shares with voting rights and other rights and privileges that may deter a change in control) and issue additional common shares.ownership,stake in us, from nominating or serving as Trustees, or from taking actions to otherwise control our business.··active and deliberate dishonesty by the Trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.that capacity. However, except with respect to proceedings to enforce rights to indemnification, we will indemnify any person referenced in the previous sentence in connection with a proceeding initiated by such person against us only if such proceeding is authorized by our Board of Trustees or shareholders.those and certain other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former Trustees and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against our present and former Trustees and officers than might otherwise exist absent the provisions in our declaration of trust, bylaws and indemnification agreements or that might exist with other companies, which could limit yourour shareholders' recourse in the event of actions not in yourtheir best interest.declaration of trust and bylaws provide that certain actions by our shareholders against us or against our Trustees and officers, including derivative and class actions,other than disputes, or any portion thereof, regarding the meaning, interpretation or validity of any provision of our declaration of trust or bylaws, may be referred to binding arbitration proceedings. As a 39for these disputes in courts against RMR LLC or our Trustees and officers if thefor disputes were referred to arbitration.arbitration in accordance with our bylaws. In addition, the ability to collect attorneys'attorneys’ fees or other damages may be limited in the arbitration proceedings, which may discourage attorneys from agreeing to represent parties wishing to commence such a proceeding.valueprice of our common shares and our ability to make distributions to our shareholders. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our Board of Trustees may alter or eliminate our current policy on borrowing at any time without shareholder approval. If this policy changed,changes, we could become more highly leveraged, which could result in an increase in our debt service costs. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk.Our bylaws designate the Circuit Court for Baltimore City, Maryland or, if that court does not have jurisdiction, the United States District Court for the DistrictThe loss of our statusfor U.S. federal income tax purposesunder the IRC could have significant adverse consequences.andor most state income taxes.taxes as long as we distribute all of our REIT taxable income and meet other qualifications set forth in the IRC. However, actual qualification for taxation as a REIT under the IRC depends on our satisfying complex statutory requirements, for which there are only limited judicial and administrative interpretations. We believe that we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified and will continue to qualify us to be taxed as a REIT under the IRC as a REIT.IRC. However, we cannot be certainsure that the IRS, upon review or audit, the IRS will agree with this conclusion. Furthermore, there is no guaranteewe cannot be sure that the federal government, or any state or other taxation authority, will not someday eliminatecontinue to afford favorable income tax treatment to REITs or adversely modifyand their taxation under the IRC.40valuemarket price of our common shares likely wouldcould decline. In addition, if we lose or revoke our qualification for taxation as a REIT under the IRC for a taxable year, we will generally be prevented from requalifying for taxation as a REIT for the next four taxable years.rates.rates.rates applicable to “qualified dividends.” Distributions paid by REITs however, generally are not eligibletreated as “qualified dividends” under the IRC and the reduced rates applicable to such dividends do not generally apply. However, for these reduced rates. The moretax years beginning after 2017 and before 2026, REIT dividends paid to noncorporate shareholders are generally taxed at an effective tax rate lower than applicable ordinary income tax rates due to the availability of a deduction under the IRC for specified forms of income from passthrough entities. More favorable rates forwill nevertheless continue to apply to regular corporate “qualified” dividends, which may cause some investors to perceive that an investment in a REIT is less attractive than an investment in a non‑REITnon-REIT entity that pays dividends, thereby reducing the demand and market price of our common shares.federal corporate income tax not to apply to earnings that we distribute.taxation as a REIT under the IRC. To the extent that we satisfy this distribution requirement, federal corporate income tax will not apply to the earnings that we distribute, but if we distribute less than 100% of our REIT taxable income, then we will be subject to federal corporate income tax on our undistributed taxable income. We intend to make distributions to our shareholders to comply with the REIT requirements of the IRC. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under federal tax laws.could be required tomay borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our shareholders’ equity. Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affectcause the valuemarket price of our common shares. qualify and remain qualified for taxation as a REIT under the IRC, we may face other tax liabilities that reduce our cash flow. qualify and remain qualified for taxation as a REIT under the IRC, we may be subject to federal, state and local taxes on our income and assets, including taxes on any undistributed income, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. See “Business—United States Federal Income Tax Considerations—Taxation as a REIT.” For example,Also, some state jurisdictions may in the future limit or eliminate certain favorable income tax deductions, including the dividends paid deduction, which could increase our income tax expense. In addition, in order to meet the requirements for qualification and taxation as a REIT under the IRC, prevent the recognition of particular types of non‑cash non-cashtaxable REIT subsidiariesTRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates. In addition, while we intend that our transactions with our TRSs will be conducted on arm’s length bases, we may be subject to a 100% excise tax on a transaction that the IRS or a court determines was not conducted at arm’s length. Any of these taxes would decrease cash available for distribution to our shareholders. SecuritiesWe cannot assure that we will continue to make distributions to our shareholders and distributions we make may include a return of capital.·our ability to make distributions will be adversely affected if any of the risks described herein, or other significant events, occur;41··any distributions will be made in the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including our results of operations, our financial condition, debt and equity capital available to us, our expectation of our future capital requirements and operating performance, including our funds from operations, or FFO, our normalized funds from operations, or Normalized FFO, restrictive covenants in our financial or other contractual arrangements (including those in our credit agreement), tax law requirements to maintain our qualification for taxation as a REIT, restrictions under Maryland law and our expected needs and availability of cash to pay our obligations.distributions. Also,distributions to our distributions may include a return of capital.market pricevalue of our common shares.mayare subject to change from time to time, including:··the general reputation of REITs and externally managed companies and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate based companies or by other issuers less sensitive to rises in interest rates;
the general reputation of REITs and externally managed companies and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate based companies or by other issuers less sensitive to rises in interest rates;·our underlying asset value;·investor confidence in the stock and bond markets, generally;
our underlying asset value;·market interest rates;·national economic conditions;
investor confidence in the stock and bond markets, generally;·changes in tax laws;·changes in our credit ratings; and
market interest rates;·general market conditions.During 2015, there were periods when there were market expectations of rising interest rates, which temporarily increased market interest rates and resulted in declines in the value of REIT shares generally that exceeded any declines for the general market. InSince December 2015,2016, the U.S. Federal Reserve has raised its benchmark interest rate by a quarter of aone percentage point. Marketpoint, and there are some market expectations that market interest rates may continue to increasewill rise further in the near to intermediate term. If market interest rates continue to increase, or if there iscontinues to be market expectation of such increases, prospective purchasers of REIT equity securities may want to achieve a higher distribution rate. Thus, higher market interest rates, or the expectation of higher interest rates, could cause the market pricevalue of our common sharessecurities to decline.42(togethertogether with our outstanding senior unsecured notes)notes, the Notes, and such Notes are not, and any Notes we may issue in the future may not be guaranteed by any of our subsidiaries. Our2015,2017, our subsidiaries had total indebtedness and other liabilities (excluding security and other deposits and guaranties) of $159.7$238.5 million.Ourholders of Notesnoteholders may lose a portion of or the entire value of their investment in such Notes. Further, the terms of ourthe outstanding Notes permit, and the terms of any Notes we may issue in the future may permit us to incur additional secured indebtedness subject to compliance with certain debt ratios. The Notes that are not secured will be effectively subordinated to any such additional secured indebtedness. As of December 31, 2015,2017, we had $136.6$183.1 million in secured mortgage debt.ismay be no public market for certain of the Notes, and one may not develop, be maintained or be liquid.our outstandingcertain of the Notes on any securities exchange or for quotation of the outstanding Notes on any automatic dealer quotation system, and we may not do so for Notes issued in the future. We can give no assurances concerning the liquidity of any market that may develop for thesuch Notes, the ability of any investorholder to sell thesuch Notes or the price at which investorsholders would be able to sell them.such Notes. If a market for thesuch Notes does not develop, investorsholders may be unable to resell thesuch Notes for an extended period of time, if at all. If a market for thesuch Notes does develop, it may not continue or it may not be sufficiently liquid to allow holders to resell any of thesuch Notes. Consequently, investorsholders of such Notes may not be able to liquidate their investment readily, and lenders may not readily accept thesuch Notes as collateral for loans.tradingmarket prices, regardless of cause, may adversely affect the liquidity and trading markets for the Notes.43valueprice of the Notes and may increase our cost of capital.pricesprice of the Notes and our costs and availability of capital, which could in turn have a material adverse effect on our results of operations and our ability to satisfy our debt service obligations.holders of such Notesnoteholders may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the Notes.2015, excluding one property (one building) classified as discontinued operations,2017, we wholly owned 71108 properties (91(167 buildings) located in 3130 states and the District of Columbia containing approximately 10.717.5 million consolidated rentable square feet and had a noncontrolling ownership interest in two properties (three buildings) containing approximately 0.4 million rentable square feet.feet through two unconsolidated joint ventures in which we own 50% and 51% interests. As of December 31, 2015, 472017, 49 of thoseour consolidated properties (61(64 buildings), with approximately 7.37.8 million rentable square feet, were primarilymajority leased to the U.S. Government, 1821 of thoseour consolidated properties (24(28 buildings), with approximately 2.63.1 million rentable square feet, were primarilymajority leased to 1213 state governments, onethree of thoseour consolidated properties (one building)(three buildings), with 190,044approximately 0.4 million rentable square feet was primarilywere majority leased to a municipal tenant, oneother government tenants, two of thoseour consolidated properties (one building)(four buildings), with 187,060approximately 0.5 million rentable square feet, waswere majority leased to the United Nations, an international intergovernmental organization,government contractor tenants, 31 of our consolidated properties (66 buildings), with approximately 5.5 million rentable square feet, were majority leased to other non-government tenants and two of thoseour consolidated properties (two buildings), with 44319,344 rentable square feet, were primarily leased to non‑government tenants, and two properties (two buildings), with 64,273approximately 0.1 million rentable square feet, were available for lease.excluding one property (one building) classified as discontinued operations, as of December 31, 20152017 (dollars in thousands):23,053 21,446 2,939 21,718 19,851 2,314 212,872 168,458 27,646 68,837 52,482 10,681 141,304 107,622 24,875 48,817 43,636 6,716 142,755 122,969 20,945 32,889 30,419 4,655 15,524 13,348 2,080 75,673 68,012 9,370 13,605 11,916 2,556 13,431 12,551 2,533 157,855 125,830 20,347 82,017 72,509 13,646 18,644 16,094 2,718 39,405 33,379 3,814 25,946 23,766 3,774 25,452 21,022 4,127 17,423 15,154 2,345 44,550 39,650 6,261 2,418 2,190 167,300 147,461 20,888 28,552 26,089 5,093 16,834 14,334 2,060 8,734 7,805 3,111 12,895 8,525 2,192 9,236 8,013 1,108 168,606 161,674 25,303 41,798 32,245 5,481 5,056 3,156 775 5,616 5,055 1,013 10,663 6,663 1,755 1,699,478 1,443,324 243,121 Consolidated Properties Property Location Number of
Properties Number of
Buildings
Carrying
Value (1)
Carrying
Value (1)
Rental
Income (2)Alabama 2 2 $ 23,065 $ 20,421 $ 3,086 Arizona 2 2 22,305 19,446 2,351 California 11 11 302,492 244,081 40,844 Colorado 3 5 68,945 49,118 10,653 District of Columbia 8 8 567,256 526,055 75,416 Florida 2 2 48,817 41,424 6,824 Georgia 5 9 167,163 140,537 23,720 Idaho 1 3 33,218 29,159 4,669 Illinois 1 1 15,340 12,594 1,987 Indiana 1 3 76,880 65,223 9,730 Kansas 1 1 15,171 12,612 2,920 Kentucky 1 1 13,501 12,032 2,554 Maryland 18 43 426,417 384,601 63,419 Massachusetts 4 4 84,436 71,068 13,554 Michigan 1 1 18,990 15,530 2,731 Minnesota 2 2 26,153 22,959 4,327 Mississippi 1 1 25,946 22,487 3,974 Missouri 2 2 26,586 21,080 4,275 New Hampshire 1 1 18,597 15,641 2,433 New Jersey 1 1 45,823 38,874 6,469 New York 4 4 170,369 144,029 18,945 Oregon 1 1 28,761 24,694 5,147 South Carolina 1 3 17,385 13,667 2,192 Tennessee 1 1 9,783 8,349 2,858 Texas 1 1 13,293 8,584 2,993 Vermont 1 1 9,236 7,580 1,118 Virginia 26 46 634,449 615,674 98,962 Washington 2 4 44,001 32,322 5,537 West Virginia 1 1 5,074 2,964 — Wisconsin 1 1 5,587 4,824 801 Wyoming 1 1 10,682 6,244 2,156 Total Consolidated 108 167 $ 2,975,721 $ 2,633,873 $ 426,645 (1) (2) 2015,2017, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.2015, five2017, eight of our consolidated properties (six(eight buildings) with an aggregate undepreciated carrying value of $185.8$375.2 million were encumbered by mortgage notes payableeight mortgages totaling $136.6$183.1 million. The two properties (three buildings) owned by our unconsolidated joint ventures were encumbered by two mortgages totaling $82.0 million at December 31, 2017. See Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for more information regarding our unconsolidated joint ventures.45the NYSENasdaq (symbol: GOV). The following table sets forth for the periods indicated the high and low sale prices for our common shares as reported by the NYSE composite transaction reports:or Nasdaq, as applicable.23.80 22.11 23.15 18.40 19.34 15.10 17.97 15.35 25.41 24.02 26.30 24.77 25.68 21.84 23.64 21.71 High Low 2017 First Quarter $ 21.08 $ 18.84 Second Quarter 22.99 18.26 Third Quarter 18.83 17.36 Fourth Quarter 19.60 17.79 2016 First Quarter $ 17.90 $ 12.33 Second Quarter 23.07 17.59 Third Quarter 24.61 21.82 Fourth Quarter 22.67 17.66 the NYSENasdaq on February 10, 2016,1, 2018, was $13.44$16.92 per common share.10, 2016,1, 2018, there were 155196 shareholders of record of our common shares.declared and paid in the quarter following the quarter to which they relate.0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43 1.72 1.72 All common share distributions shown in the table above have been paid. 2017 2016 First Quarter $ 0.43 $ 0.43 Second Quarter 0.43 0.43 Third Quarter 0.43 0.43 Fourth Quarter 0.43 0.43 Total $ 1.72 $ 1.72 indentureindentures and its supplement)their supplements), tax law requirements to maintain our qualification for taxation as a REIT, restrictions under Maryland law and our expected needs for and availability of cash to pay our obligations. Therefore, we cannot assure yoube sure that we will continue to pay distributions in the future or that the amount of any distributions we do pay will not decrease.In addition to the cash distributions paid to our common shareholders in 2015, on December 14, 2015, we distributed 768,032 shares, or 0.0108 of a share for each of our common shares, of RMR Inc. class A common stock we owned to our shareholders as a special distribution. This distribution resulted in a taxable valuation of this in-kind distribution of $0.1284 for each of our common shares.46consolidated financial statementsConsolidated Financial Statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10‑K.10-K. Amounts are in thousands, except per share data.248,549 251,031 226,910 203,700 168,074 29,906 28,389 25,710 22,485 18,426 17,916 19,369 17,116 15,767 13,918 50,425 45,982 41,134 37,074 29,773 68,696 66,593 55,699 49,070 37,776 2,016 811 1,344 2,439 1,614 3,504 14,826 15,809 12,710 11,924 10,469 182,580 179,502 154,808 137,934 113,866 65,969 71,529 72,102 65,766 54,208 811 14 69 37 29 104 (37,008) (28,048) (16,831) (16,892) (12,057) 34 (1,307) (12,368) (42,145) (53) (203,297) (227,990) 42,190 55,308 48,903 42,255 (86) (117) (133) (159) (203) 18,640 10,963 334 316 139 (209,436) 53,036 55,509 49,060 42,191 (525) 3,498 (889) 900 3,806 (209,961) 56,534 54,620 49,960 45,997 70,700 61,313 54,606 48,558 43,318 70,700 61,399 54,685 48,644 43,391 (2.96) 0.87 1.02 1.01 0.97 (2.96) 0.86 1.02 1.01 0.97 (0.01) 0.06 (0.02) 0.02 0.09 (2.97) 0.92 1.00 1.03 1.06 1.72 1.72 1.72 1.69 1.67 1,696,132 1,682,480 1,568,562 1,467,863 1,288,453 1,440,253 1,462,689 1,380,927 1,311,202 1,149,243 2,174,536 2,427,615 1,632,452 1,562,134 1,368,575 1,151,624 1,085,117 597,727 492,627 440,883 956,651 1,297,449 989,675 1,027,451 891,668 Year Ended December 31, 2017 2016 2015 2014 2013 Income statement data: Rental income $ 316,532 $ 258,180 $ 248,549 $ 251,031 $ 226,910 Expenses: Real estate taxes 37,942 30,703 29,906 28,389 25,710 Utility expenses 20,998 17,269 17,916 19,369 17,116 Other operating expenses 65,349 54,290 50,425 45,982 41,134 Depreciation and amortization 109,588 73,153 68,696 66,593 55,699 Loss on impairment of real estate 9,490 — — 2,016 — Acquisition related costs — 1,191 811 1,344 2,439 General and administrative 18,847 14,897 14,826 15,809 12,710 Total expenses 262,214 191,503 182,580 179,502 154,808 Operating income 54,318 66,677 65,969 71,529 72,102 Dividend income 1,216 971 811 — — Interest income 1,962 158 14 69 37 Interest expense (65,406 ) (45,060 ) (37,008 ) (28,048 ) (16,831 ) Gain (loss) on early extinguishment of debt (1,715 ) 104 34 (1,307 ) — Loss on distribution to common shareholders of The RMR Group Inc. common stock — — (12,368 ) — — Net gain (loss) on issuance of shares by Select Income REIT 72 86 (42,145 ) (53 ) — Loss on impairment of Select Income REIT investment — — (203,297 ) — — Income (loss) from continuing operations before income taxes and equity in earnings of investees and gain on sale of real estate (9,553 ) 22,936 (227,990 ) 42,190 55,308 Income tax expense (101 ) (101 ) (86 ) (117 ) (133 ) Equity in earnings of investees 21,571 35,518 18,640 10,963 334 Income (loss) from continuing operations 11,917 58,353 (209,436 ) 53,036 55,509 Income (loss) from discontinued operations 173 (589 ) (525 ) 3,498 (889 ) Income (loss) before gain on sale of real estate 12,090 57,764 (209,961 ) 56,534 54,620 Gain on sale of real estate — 79 — — — Net income (loss) 12,090 57,843 (209,961 ) 56,534 54,620 Preferred units of limited partnership distributions (275 ) — — — — Net income (loss) available for common shareholders $ 11,815 $ 57,843 $ (209,961 ) $ 56,534 $ 54,620 Weighted average shares outstanding (basic) 84,633 71,050 70,700 61,313 54,606 Weighted average shares outstanding (diluted) 84,653 71,071 70,700 61,399 54,685 Per common share data: Income (loss) from continuing operations (basic) $ 0.14 $ 0.82 $ (2.96 ) $ 0.87 $ 1.02 Income (loss) from continuing operations (diluted) $ 0.14 $ 0.82 $ (2.96 ) $ 0.86 $ 1.02 Income (loss) from discontinued operations (basic and diluted) $ — $ (0.01 ) $ (0.01 ) $ 0.06 $ (0.02 ) Net income (loss) available for common shareholders (basic and diluted) $ 0.14 $ 0.81 $ (2.97 ) $ 0.92 $ 1.00 Common distributions paid $ 1.72 $ 1.72 $ 1.72 $ 1.72 $ 1.72 As of December 31, Balance sheet data: 2017 2016 2015 2014 2013 $ 2,975,721 $ 1,888,760 $ 1,696,132 $ 1,682,480 $ 1,568,562 2,633,873 1,591,956 1,440,253 1,462,689 1,380,927 Total assets 3,703,565 2,385,066 2,168,510 2,419,908 1,630,789 Debt, net 2,245,092 1,381,852 1,145,598 1,077,410 596,063 Shareholders' equity 1,330,043 935,004 956,651 1,297,449 989,675 (1) $0.13$0.1284 per share related to the distribution of shares of RMR Inc. class A common stock to our shareholders on December 14, 2015.(2) operations.47consolidated financial statementsConsolidated Financial Statements and accompanying notes included elsewhere in Part IV, Item 15 of this Annual Report on Form 10‑K.2015,2017, we wholly owned 71108 properties (91(167 buildings), excluding one property (one building) classified as discontinued operations. Our and had a noncontrolling ownership interest in two properties (three buildings) totaling 443,867 rentable square feet through two unconsolidated joint ventures in which we own 50% and 51% interests. As of December 31, 2017, our consolidated properties are located in 3130 states and the District of Columbia and contain approximately 10.7 million17,499,338 rentable square feet, of which 63.5%41.2% was leased to the U.S. Government, 20.1%14.9% was leased to 1213 state governments, 1.7%2.6% was leased to the United Nations, an international intergovernmental organization, 1.0%five other government tenants, 5.8% was leased to two municipalgovernment contractor tenants, 8.2%29.7% was leased to various non‑governmentalother non-governmental organizations and 5.5%5.8% was available for lease as of December 31, 2015.lease. The U.S. Government, 1213 state governments the United Nations, and two municipalfive other government tenants combined were responsible for 92.8%62.6% and 93.0%87.9% of our annualized rental income as defined below, as of December 31, 20152017 and 2014, 2016, respectively.2015,2017, we also owned 24,918,421 common shares, or approximately 27.9%27.8% of the then outstanding common shares, of SIR. SIR is a REIT that iswhich primarily focused on owning and investing inowns single tenant, net leased single tenant properties. See Notes 67 and 1112 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for more information regarding our investment in SIR. We account for our investment in SIR under the equity method.2015, excluding2017, 94.2% of our consolidated rentable square feet was leased, compared to 95.1% of our consolidated rentable square feet as of December 31, 2016, which excludes one property (one building) classified as discontinued operations 94.5% of our rentable square feet were leased, compared to 94.9% of our rentable square feet as of Decemberwhich was sold on August 31, 2014.2017. Occupancy data for our consolidated properties as of December 31, 20152017 and 2014 is2016 was as follows (square feet in thousands):71 72 67 67 91 92 86 86 10,701 11,037 9,971 9,969 94.5% 94.9% 94.2% 94.5% Comparable December 31, December 31, 2017 2016 2017 2016 Total properties 108 73 69 69 Total buildings 167 95 89 89 17,499 11,443 10,572 10,583 94.2 % 95.1 % 94.9 % 95.4 % (1) 20152017 and 2014,2016, respectively, and excludes one property (one building) classified as discontinued operations.(2) 20152017 and which we owned continuously since January 1, 2014, and excludes one property (one building) classified as discontinued operations.2016. Our comparable properties increaseddecreased from 6370 properties (79(90 buildings) at December 31, 2014 to 67 properties (86 buildings)2016 as a result of our acquisition of five properties (eight buildings) during the year ended December 31, 2013 and the sale of one property (one building) during the year ended December 31, 2015.(3) modest changes when space is re-measured or re-configured for tenants.(4) 48annualannualized effective rental rate per square foot for our consolidated properties for the years ended December 31, 20152017 and 20142016 are as follows:24.73 24.57 24.52 24.35 Year Ended December 31, 2017 2016 $ 25.99 $ 25.26 $ 25.37 $ 25.04 (1) annualannualized 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) 20152017 and 2014,2016, respectively, and excludes one property (one building) classified as discontinued operations.(3) 20152017 and which we owned continuously since January 1, 2014, and excludes one property (one building) classified as discontinued operations.20152017, changes in rentable square feet leased and available for lease at our consolidated properties, excluding one property (one building) classified as discontinued operations which was sold on August 31, 2017, were as follows:10,473,975 562,768 11,036,743 (337,500) (337,500) (832,664) 832,664 625,520 (625,520) 185,670 (185,670) 1,721 1,721 10,115,001 585,963 10,700,964 Year Ended December 31, 2017 Available for Lease Total Beginning of year 10,881,289 561,224 11,442,513 Changes resulting from: Acquisition of properties 5,655,477 441,969 6,097,446 Disposition of properties — (29,045 ) (29,045 ) Lease expirations (1,664,210 ) 1,664,210 — 1,468,301 (1,468,301 ) — 136,482 (136,482 ) — — (11,576 ) (11,576 ) End of year 16,477,339 1,021,999 17,499,338 (1) Rentable square footage excludes an expansion being constructed at an existing property we own prior to the commencement of the lease. (2) Based on leases entered into during the year ended December 31, 2015.2017.(2)(3) SubjectRentable square footage is subject to modest changes when space is re-measured or re-configured for tenants.Excluding one property (one building) classified as discontinued operations, leases832,6641,664,210 rentable square feet expired during the year ended December 31, 2015.2017. During the year ended December 31, 2015,2017, we entered into leases totaling 811,1901,604,783 rentable square feet, which includesincluding lease renewals of 625,5201,468,301 rentable square feet. The weighted (by rentable square feet) average rental rates for leases of 628,2891,232,389 rentable square feet entered into with government tenants during the year ended December 31, 2015 decreased2017 increased by 2.6%4.9% when compared to the weighted (by rentable square feet) average prior rents previously charged for the same space. The weighted (by rentable square feet) average rental rates for leases of 182,901372,394 rentable square feet entered into with non-government tenants during the year ended December 31, 20152017 decreased by 1.8%2.1% when compared to the weighted (by rentable square feet) average rental rates previously charged for the same space.2015,2017, changes in effective rental rates per square foot achieved for new leases and lease renewals at our consolidated properties that commenced during the year ended December 31, 2015,2017, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows:49 Year Ended December 31, 2017 Old Effective New Effective Rent Per Rent Per Rentable Square Feet New leases $ 22.76 $ 22.25 142,665 Lease renewals $ 23.42 $ 23.87 1,320,675 Total leasing activity $ 23.35 $ 23.71 1,463,340 22.97 21.61 136,087 19.50 20.49 682,659 20.08 20.68 818,746 (1) 2015,2017, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our consolidated properties were as follows:628,289 182,901 811,190 15,544 5,027 20,571 24.74 27.49 25.36 7.7 6.7 7.5 3.21 4.09 3.39 Year Ended December 31, 2017 Government Non-Government Leases Leases Total Rentable square feet leased during the year 1,232,389 372,394 1,604,783 $ 11,062 $ 7,187 $ 18,249 $ 8.98 $ 19.30 $ 11.37 Weighted (by square feet) average lease term (years) 8.4 5.0 7.6 $ 1.07 $ 3.87 $ 1.50 (1) 20152017 and 2014,2016, amounts capitalized at our consolidated properties, excluding propertiesone property (one building) classified as discontinued operations which was sold on August 31, 2017, for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (dollars in thousands):7,802 10,038 5,166 1,977 9,407 7,727 2,414 2,139 Year Ended December 31, 2017 2016 $ 16,050 $ 15,856 $ 5,796 $ 9,949 $ 15,435 $ 11,261 $ 21,553 $ 7,818 (1) (2) (3) (4) major 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) major capital expenditure projects that reposition a property or result in new sources of revenue.pressures may cause an increased demand for leased space bymethodology, spending priorities and the current U.S. presidential administration's views on the size and scope of government tenants, as opposed to governments acquiring buildings or constructing new buildings. However, these same budgetary pressuresemployment have also resulted in a decrease in government employment, government tenants improvingreducing their space utilization per employee and consolidation of government tenants 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, relocationefforts to reduce space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy. Also, our government tenants' desires to reconfigure leased office space to reduce utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations have become more prevalent ifthan our past experiences in instances where efforts by government tenants to improvereduce their space utilization require a significant reconfiguration of currently leased space. Accordingly,Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations recently has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals. At present, 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.Excluding one(one building) classified as discontinued operations,located in Fresno, CA in 2021. The IRS lease for this property, which accounted for approximately 2.0% of our annualized rental income as of December 31, 2015,2017, expires in the fourth quarter of 2021. The IRS has also publicly stated that it plans to discontinue its paper 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 the Covington, KY operations. This IRS lease, which accounted for approximately 0.6% of our annualized rental income as of December 31, 2017, expires in the second quarter of 2022 but is subject to possible early termination by our tenant. Despite its public announcements, the IRS has not provided us any official notices of its intentions regarding these properties.1,133,5531,666,566 rentable square feet that were scheduled to expire through December 31, 2016.during 2018. As of February 16, 2016,23, 2018, tenants with leases totaling 172,303630,788 rentable square feet that are scheduled to expire through December 31, 2016,during 2018 have notified us that they do not plan to renew their leases upon expiration and we can provide no assurancecannot be sure as to whether additionalother tenants may or may not renew their leases upon expiration. Based upon current market conditions and tenant negotiations for leases scheduled to expire through December 31, 2016,2018, we expect that the rental rates we are likely to achieve on new or renewed leases for space under leases expiring leases through December 31, 20162018 will, in the aggregate and on a weighted (by annualized revenues) 50 at or modestly lower than the rates currently being paid, thereby generally resulting in lower revenue from the same space. However, we can provide no assurance thatWe cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new leases we expect will occur or thatmay enter; also, we will notmay experience material declines in our rental income due to vacancies upon lease expirations.expirations or early terminations. Prevailing market conditions and government and other tenants' needs at the time we negotiate and concludeenter leases or lease renewals will generally determine rental rates and demand for leased space inat our properties, and market conditions and government and other tenants' needs are beyond our control.2015,2017, lease expirations at our consolidated properties excluding one property (one building) classified as discontinued operations, by year are as follows (dollars in thousands):51 1,133,553 11.2% 11.2% 37,621 15.5% 15.5% 41 892,161 8.8% 20.0% 18,414 7.6% 23.1% 40 1,161,801 11.5% 31.5% 32,085 13.2% 36.3% 33 1,856,044 18.3% 49.8% 46,423 19.1% 55.4% 35 1,324,433 13.1% 62.9% 31,000 12.8% 68.2% 18 880,579 8.7% 71.6% 17,418 7.2% 75.4% 12 694,233 6.9% 78.5% 14,945 6.1% 81.5% 14 549,129 5.4% 83.9% 12,675 5.2% 86.7% 7 664,512 6.6% 90.5% 11,138 4.6% 91.3% 18 958,556 9.5% 100.0% 21,402 8.7% 100.0% 269 10,115,001 100.0% 243,121 100.0% Number Expirations Annualized of of Leased Cumulative Rental Cumulative Tenants Square Percent Percent Income Percent Percent Expiring of Total of Total Expiring of Total of Total 2018 128 1,666,566 10.1 % 10.1 % $ 48,215 11.3 % 11.3 % 2019 97 2,567,338 15.6 % 25.7 % 73,723 17.3 % 28.6 % 2020 110 2,415,770 14.7 % 40.4 % 63,570 14.9 % 43.5 % 2021 90 1,728,712 10.5 % 50.9 % 34,102 8.0 % 51.5 % 2022 91 1,630,325 9.9 % 60.8 % 36,985 8.7 % 60.2 % 2023 46 1,173,462 7.1 % 67.9 % 34,434 8.1 % 68.3 % 2024 40 1,405,259 8.5 % 76.4 % 35,541 8.3 % 76.6 % 2025 34 1,090,044 6.6 % 83.0 % 25,023 5.9 % 82.5 % 2026 27 820,395 5.0 % 88.0 % 23,621 5.5 % 88.0 % 2027 and thereafter 48 1,979,468 12.0 % 100.0 % 51,431 12.0 % 100.0 % Total 711 16,477,339 100.0 % $ 426,645 100.0 % Weighted average remaining lease term (in years) 4.8 4.7 (1) 2015,2017, government tenants occupying approximately 9.2%8.6% of our consolidated rentable square feet and responsible for approximately 7.2%6.8% of our annualized rental income as of December 31, 20152017 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, 2024, 2025, 2026 and 20232027, early termination rights become exercisable by other tenants who currently occupy an additional approximately 6.0%2.2%, 3.1%5.2%, 1.3%7.2%, 4.7%1.4%, 2.9%3.4%, 2.1%0.5%, 0.2%, 0.1%, 0.6% and 1.4%0.4% of our consolidated rentable square feet, respectively, and contribute an additional approximately 5.5%3.6%, 2.6%4.9%, 7.0%, 1.4%, 5.2%, 2.9%, 1.5%0.6%, 0.3%, 0.2%, 0.8% and 1.2%0.4% of our annualized rental income, respectively, as of December 31, 2015.2017. In addition, as of December 31, 2015, 152017, 26 of our government tenants have currently exercisable rights to terminate their leases if their respectivethe legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 1526 tenants occupy approximately 15.5%12.9% of our consolidated rentable square feet and contribute approximately 16.1%approximately12.3% of our annualized rental income as of December 31, 2015.(2) 2015,2017, 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 modest changes when space is re-measured or re-configured for new tenants.(3) Annualized rental income is calculated usingLeased square footage excludes an expansion being constructed at an existing property we own prior to the annualized contractual base rents from our tenants pursuant to our lease agreements ascommencement of December 31, 2015, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. and Disposition Activities (dollar amounts in thousands)2016,2017, we acquired an office property (one building) located in Sacramento, CAManassas, VA with 338,79669,374 rentable square feet for a purchase price of $79,765,$12,620, excluding capitalized acquisition costs of $37, using cash on hand and borrowings under our revolving credit facility. We acquired this property at a capitalization rate of 8.6%. 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 that we expect to pay 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 related costs. Thisis majority leasedwe own in Washington, D.C. for a purchase price of $2,030, excluding acquisition costs.the State of California. In February 2015, one of our U.S. Government tenants exercised its option to acquire thethat transaction, we acquired 35 office property (one building) it leased from us located in Riverdale, MDproperties (72 buildings) with 337,500 rentable square feet. The sale price was $30,600, excluding closing costs. In May 2015, we began marketing for sale an office property (one building) located in Savannah, GA with 35,2286,028,072 rentable square feet, and two properties (three buildings) with 443,867 rentable square feet owned by joint ventures in which we acquired FPO's 50% and 51% interests. The total consideration for our acquisition of FPO was $1,370,888.net book value of $3,071 as of December 31, 2015. We are marketing for sale anvacant office property (one building) located in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at December 31, 2015.51
In October 2017, we sold a vacant office property (one building) located in Albuquerque, NM with 29,045 rentable square feet and a net book value of $1,885, as of the sale date for $2,000, excluding closing costs.can provide no assuranceare marketing or plan to market for sale 28 properties (61 buildings) including properties acquired as part of the FPO Transaction, with a carrying value of $658,190 as of December 31, 2017. We cannot be sure we will sell any properties or sell them for prices in excess of our carrying values.sell the properties we are marketing for salecomplete these transactions or whatthat these transactions will not be delayed or the terms of any such sale would be.“Business—“Business—Acquisition Policies” and “Business —Disposition —Disposition Policies” in Part 1, Item 1 of this Annual Report on Form 10-K and Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.On March 4, 2015, we acquired 3,418,421 SIR common shares for a cash purchase price equal to $95,203, excluding acquisition related costs.On June 5, 2015, we acquired 1,541,201 shares of class A common stock of RMR Inc. for $17,462, excluding transaction costs. As payment for the RMR Inc. shares, we issued 700,000 of our common shares valued at $13,545 and paid the remainder of the purchase price in cash. On December 14, 2015, we distributed 768,032 of the RMR Inc. shares we acquired to our shareholders as a special non-cash distribution. On that date, we also received a special non-cash distribution of 441,056 shares of RMR Inc. class A common stock from SIR.For more information about these transactions with respect to SIR common shares and RMR Inc. common stock, see Notes 6, 10 and 11 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. that are primarily leased to government tenants and our equity method investment in SIR.522015,2017, Compared to Year Ended December 31, 2014227,699 229,996 (2,297) (1.0) 19,317 11,240 1,533 9,795 248,549 251,031 (2,482) (1.0) 27,596 26,158 1,438 5.5 2,104 816 206 1,415 29,906 28,389 1,517 5.3 17,417 18,254 (837) (4.6) 401 268 98 847 17,916 19,369 (1,453) (7.5) 46,835 42,908 3,927 9.2 3,249 1,586 341 1,488 50,425 45,982 4,443 9.7 91,848 87,320 4,528 5.2 5,754 2,670 645 3,750 98,247 93,740 4,507 4.8 135,851 142,676 (6,825) (4.8) 13,563 8,570 888 6,045 150,302 157,291 (6,989) (4.4) 68,696 66,593 2,103 3.2 2,016 (2,016) 811 1,344 (533) (39.7) 14,826 15,809 (983) (6.2) 84,333 85,762 (1,429) (1.7) 65,969 71,529 (5,560) (7.8) 811 811 14 69 (55) (79.7) (37,008) (28,048) (8,960) 31.9 34 (1,307) 1,341 (12,368) (12,368) (42,145) (53) (42,092) (203,297) (203,297) (227,990) 42,190 (270,180) (640.4) (86) (117) 31 (26.5) 18,640 10,963 7,677 70.0 (209,436) 53,036 (262,472) (494.9) (525) 3,498 (4,023) (209,961) 56,534 (266,495) 70,700 61,313 9,387 15.3 70,700 61,399 9,301 15.1 (2.96) 0.87 (3.83) (2.96) 0.86 (3.82) (0.01) 0.06 (0.07) (2.97) 0.92 (3.89) (209,961) 56,534 68,696 66,593 2,016 56,105 24,677 (18,620) (10,876) (2,344) (774) (103,780) 135,826 811 1,344 1,307 12,368 42,145 53 203,297 70,012 26,898 (56,105) (24,677) (34) 168,714 140,751 (1.47) 2.22 (1.47) 2.21 2.39 2.30 2.39 2.29
2016 Year Ended Year Ended Consolidated Results Year Ended December 31, December 31, December 31, Year Ended December 31, $ % $ % 2017 2016 Change Change 2017 2016 2017 2016 2017 2016 Change Change Rental income $ 253,197 $ 249,429 $ 3,768 1.5 % $ 63,335 $ 8,751 $ — $ — $ 316,532 $ 258,180 $ 58,352 22.6 % Operating expenses: Real estate taxes 30,814 29,725 1,089 3.7 % 7,128 978 — — 37,942 30,703 7,239 23.6 % Utility expenses 16,535 16,652 (117 ) (0.7 %) 4,463 617 — — 20,998 17,269 3,729 21.6 % Other operating expenses 54,027 52,129 1,898 3.6 % 11,173 1,936 149 225 65,349 54,290 11,059 20.4 % Total operating expenses 101,376 98,506 2,870 2.9 % 22,764 3,531 149 225 124,289 102,262 22,027 21.5 % $ 151,821 $ 150,923 $ 898 0.6 % $ 40,571 $ 5,220 $ (149 ) $ (225 ) 192,243 155,918 36,325 23.3 % Other expenses: Depreciation and amortization 109,588 73,153 36,435 49.8 % Loss on impairment of real estate 9,490 — 9,490 nm Acquisition related costs — 1,191 (1,191 ) nm General and administrative 18,847 14,897 3,950 26.5 % Total other expenses 137,925 89,241 48,684 54.6 % Operating income 54,318 66,677 (12,359 ) (18.5 %) Dividend income 1,216 971 245 25.2 % Interest income 1,962 158 1,804 nm Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $3,420 and $2,832, respectively) (65,406 ) (45,060 ) (20,346 ) 45.2 % Gain (loss) on early extinguishment of debt (1,715 ) 104 (1,819 ) nm Net gain on issuance of shares by Select Income REIT 72 86 (14 ) (16.3 %) Income (loss) from continuing operations before income taxes, equity in earnings of investees and gain on sale of real estate (9,553 ) 22,936 (32,489 ) (141.7 %) Income tax expense (101 ) (101 ) — — % Equity in earnings of investees 21,571 35,518 (13,947 ) (39.3 %) Income from continuing operations 11,917 58,353 (46,436 ) (79.6 %) Income (loss) from discontinued operations 173 (589 ) 762 nm Income before gain on sale of real estate 12,090 57,764 (45,674 ) (79.1 %) Gain on sale of real estate — 79 (79 ) nm Net income 12,090 57,843 (45,753 ) (79.1 %) Preferred units of limited partnership distributions (275 ) — (275 ) nm Net income available for common shareholders $ 11,815 $ 57,843 $ (46,028 ) (79.6 %) Weighted average common shares outstanding (basic) 84,633 71,050 13,583 19.1 % Weighted average common shares outstanding (diluted) 84,653 71,071 13,582 19.1 % Per common share amounts (basic and diluted): Income from continuing operations $ 0.14 $ 0.82 $ (0.68 ) (82.9 %) Income (loss) from discontinued operations $ — $ (0.01 ) $ 0.01 — % Net income available for common shareholders $ 0.14 $ 0.81 $ (0.67 ) (82.7 %) Reconciliation of Net Income Available for Common Shareholders to Consolidated Property NOI: Net income available for common shareholders $ 11,815 $ 57,843 Preferred units of limited partnership distributions 275 — Net income 12,090 57,843 Gain on sale of real estate — (79 ) Income before gain on sale of real estate 12,090 57,764 (Income) loss from discontinued operations (173 ) 589 Income from continuing operations 11,917 58,353 Equity in earnings of investees (21,571 ) (35,518 ) Income tax expense 101 101 Net gain on issuance of shares by SIR (72 ) (86 ) (Gain) loss on early extinguishment of debt 1,715 (104 ) Interest expense 65,406 45,060 Interest income (1,962 ) (158 ) Dividend income (1,216 ) (971 ) Operating income 54,318 66,677 General and administrative 18,847 14,897 Acquisition related costs — 1,191 Loss on impairment of real estate 9,490 — Depreciation and amortization 109,588 73,153 Net operating income $ 192,243 $ 155,918 2017 2016 Net income available for common shareholders $ 11,815 $ 57,843 Plus: Depreciation and amortization: Consolidated properties 109,588 73,153 Unconsolidated joint venture properties 2,185 — Plus: FFO attributable to Select Income REIT investment 58,279 71,227 Plus: Loss on impairment of real estate 9,490 — Less: Equity in earnings from Select Income REIT (21,584 ) (35,381 ) Less: Increase in carrying value of property included in discontinued operations (619 ) — Less: Gain on sale of real estate — (79 ) Funds from operations available for common shareholders 169,154 166,763 Plus: Acquisition related costs — 1,191 Plus: Normalized FFO attributable to Select Income REIT investment 58,580 71,313 Less: FFO attributable to Select Income REIT investment (58,279 ) (71,227 ) Less: (Gain) loss on early extinguishment of debt 1,715 (104 ) Less: Net gain on issuance of shares by Select Income REIT (72 ) (86 ) Normalized funds from operations available for common shareholders $ 171,098 $ 167,850 Funds from operations per common share available for common shareholders (basic and diluted) $ 2.00 $ 2.35 Normalized funds from operations per common share available for common shareholders (basic and diluted) $ 2.02 $ 2.36 (1) 6769 consolidated properties (86(89 buildings) we owned on December 31, 20152017 and which we owned continuously since January 1, 2014, and excludes one property (one building) classified as discontinued operations.(2) four39 consolidated properties (78 buildings) we acquired since January 1, 2016. In October 2017, we acquired 35 of these properties (72 buildings) in connection with the FPO Transaction. We acquired one of these properties (one building) in a separate transaction during 2017. The remaining three properties (five buildings) we owned on December 31, 2015,were acquired during 2016.(3) Disposed properties consist of one consolidated property (one building) which we acquiredsold during the period from January 1, 2014 to December 31, 2015.(3)Disposed property consists of2016 and one consolidated property (one building) we sold during the year ended December 31, 2015.(4) We calculate NOI, as shown above. The calculationcalculations of net operating income,Consolidated Property Net Operating Income, or NOI, excludesexclude certain components of net income (loss)available for common shareholders in order to provide results that are more closely related to our consolidated property level results of operations. We define Consolidated Property NOI as consolidated income from our rental of real estate less our consolidated property operating expenses. Consolidated Property NOI excludes amortization of capitalized tenant improvement costs and leasing commissions.commissions that we record as depreciation and amortization. We consider 53(loss)available for common shareholders because it may help both investors and management to understand the operations of our consolidated properties. We use Consolidated Property NOI to evaluate individual and company wide consolidated property level performance, and we believe that Consolidated Property 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. Consolidated Property NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternativealternatives to net income, (loss),net income available for common shareholders or operating income or cash flow fromas indicators of our operating activities determined in accordance with GAAP,performance or as an indicatormeasures of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs.liquidity. This measure should be considered in conjunction with net income, (loss),net income available for common shareholders and operating income and cash flow from operating activities as presented in our consolidated statements of comprehensive income (loss) and consolidated statements of cash flows.. Other real estate companies and REITs may calculate Consolidated Property NOI differently than we do.(5) NAREIT,Nareit, which is net income (loss),available for common shareholders calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties 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,and increases in the carrying value adjustments of real estate assets, held for sale, any gain or loss on sale of properties,real estate, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO available for common shareholders differs from NAREIT'sNareit's definition of FFO available for common shareholders because we include the difference between FFO andSIR's Normalized FFO attributable to our equity investment in SIR (net of FFO attributable to our equity investment in SIR), we include estimated 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 be payable when all contingencies for determining such fees are known at the end of the calendar year and we exclude acquisition related costs expensed under GAAP, gains or losses on early extinguishment of debt, loss on impairment of SIR investment,and losses on issuance of shares by SIR and lossgains and losses on distribution to common shareholdersearly extinguishment of shares of class A common stock of RMR Inc.debt. We consider FFO available for common shareholders and Normalized FFO available for common shareholders to be appropriate supplemental measures of operating performance for a REIT, along with net income, (loss),net income available for our common shareholders and operating income and cash flow from operating activities.income. We believe that FFO available for common shareholders and Normalized FFO available for common shareholders provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO available for common shareholders and Normalized FFO available for common shareholders may facilitate a comparison of our operating performance between periods and with other REITs. FFO available for common shareholders and Normalized FFO available for common shareholders 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 for and availability of cash to pay our obligations. FFO available for common shareholders and Normalized FFO available for common shareholders do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, (loss),net income available for common shareholders or operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financialoperating performance or liquidity, nor are theseas measures necessarily indicative of sufficient cash flow to fund all of our needs.liquidity. These measures should be considered in conjunction with net income, (loss),net income available for common shareholders and operating income and cash flow from operating activities as presented in our consolidated statements of comprehensive income (loss) and consolidated statements of cash flows.. Other real estate companies and REITs may calculate FFO available for common shareholders and Normalized FFO available for common shareholders differently than we do.6769 consolidated properties (86(89 buildings) we owned on December 31, 20152017 and which we have owned continuously since January 1, 2014, excluding one property (one building) classified as discontinued operations,2016 as comparable properties. We refer to the four39 consolidated properties (five(78 buildings) that we owned as of December 31, 2015, which we acquired during the period from January 1, 20142016 to December 31, 2015,2017 as the acquired properties. We refer to the one property (one building) thattwo properties (two buildings) we sold during the period from January 1, 20142016 to December 31, 20152017 as the disposed property.(loss) for the year ended December 31, 20152017 include the operating results of thethree acquired properties (five buildings) for the entire year, as we acquired those properties prior to January 1, 2015, and the disposed property for less than the entire year, as that property was sold during 2015. Our consolidated statements of comprehensive income (loss) for the year ended December 31, 20142016, include the operating results of the acquired36 properties (73 buildings) for less than the entire year, as we acquired those properties during 2017, exclude the year, and theoperating results of one disposed property (one building) for the entire period,year, as we sold that property in 2015.2015,2017, compared to the year ended December 31, 2014.decreaseincrease in rental income reflects the net effect of acquired and disposed properties and a decreasean increase in rental income for comparable properties. Rentalproperties and the rental income from the acquired properties increased $8,077. Rental income from the disposed property declined $8,262.properties. Rental income for comparable properties declined $2,297increased $3,768 due primarily to decreasesincreases in rental rates and occupied space at certain of our properties during 2015.in 2017. Rental income increased $54,584 as a result of the acquired properties. Rental income includes non-cash straight line rent adjustments totaling $3,978$5,582 in 20152017 and $4,501$2,691 in 2014,2016, and amortization of acquired leases and assumed lease obligations totaling ($1,155)2,764) in 20152017 and ($868)1,457) in 2014.2016. net effect of acquired and disposed properties and an increase in real estate taxes for comparable properties. Real estateproperties and the taxes from thefor acquired properties increased $1,288. Real estate taxes from the disposed property declined $1,209.properties. Real estate taxes for comparable properties increased $1,438$1,089 due primarily to the effect of higher real estate tax valuation assessments at certain of our properties in 2015.2017. Real estate taxes increased $6,150 as a result of the acquired properties. 54decreaseincrease in utility expenses primarily reflects the net effect of acquired and disposed properties and a decrease in utility expenses for comparable properties. Utilityproperties, offset by the utility expenses fromof the acquired properties increased $133. Utility expense from the disposed property declined $749.properties. Utility expenses at comparable properties decreased $837declined $117 primarily due primarily to colder than normal temperatures experienceda decrease in electricity usage and rates at certain partsof our properties during 2017. Utility expenses increased $3,846 as a result of the United States during the winter of 2014.acquired properties. the net effect of acquired and disposed properties and an increase in expenses for comparable properties. Other operating expenses fromproperties and the net effect of the acquired properties increased $1,663. Other operating expenses fromand the disposed property declined $1,147.properties. Other operating expenses at comparable properties increased $3,927$1,898 primarily as a result of increases in salaries and benefits and repairhigher repairs and maintenance costs at certainin 2017. Other operating expenses increased $9,237 as a result of our propertiesthe acquired properties. We also realized a decrease of $76 in 2015.other operating expenses as a result of the disposed properties.netdepreciation and amortization from the acquired properties and the effect of property acquisitions and dispositions and improvements made to certain of our comparable properties, since January 1, 2014. Depreciation and amortization frompartially offset by the acquired properties increased $4,304. Depreciation and amortization from the disposed property declined $2,029.effect of certain assets becoming fully depreciated. Depreciation and amortization at comparable properties decreased $172,increased $1,477 due primarily to certain depreciable leasing related assets becoming fully depreciated in 2014 and 2015, partially offset by depreciation and amortization of improvements made to certain of our properties after January 1, 2014.2016, partially offset by certain leasing related assets becoming fully depreciated in 2016 and 2017. Depreciation and amortization increased $34,958 as a result of the acquired properties.LossWe recorded a $9,490 loss on asset impairment relates to the adjustmentof real estate in 2017 to reduce the carrying value of one property (one building) classified as held for sale during 2014two properties (two buildings) to itstheir estimated fair value less costs to sell.value. in both 2015 and 2014 include legal and due diligence costs incurred in connection with our 2016 property acquisitions and other investment activity.acquisition activities that were expensed in accordance with GAAP. Pursuant to changes in GAAP, beginning in 2017, we generally capitalize our property acquisition related costs. net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares discussed above (see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K), 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 decrease in general and administrative expenses is due primarily to lower business management fee expense due to the amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above, lower expense recognized under our equity compensation plan and a decrease in professional fees in 2015. Dividend income. The increase in dividend income is a result of dividends received from our investment in RMR Inc. in December 2015.Interest income. The decrease in interest and other income is primarily the result of a lower amount of investable cash in 2015 compared to 2014.Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on those borrowings during 2015 compared to 2014.Gain (loss) on earlyextinguishment of debt. We recorded a $34 gain on early extinguishment of debt in 2015 in connection with the repayment of a mortgage note. We recorded a $1,307 loss on early extinguishment of debt in 2014 in connection with our debt refinancing activities.Loss on distribution to common shareholders of RMR Inc. common shares. We recorded a $12,368 loss on the distribution of RMR Inc. shares we distributed to our shareholders in December 2015, which represents the difference between our carrying value and the fair value of the RMR Inc. shares on the distribution date. Loss on issuance of shares by SIR. Loss on issuance of shares by SIR is a result of the issuance of common shares by SIR during the 2015 and 2014 periods at prices below our then per share carrying value of our SIR common shares.Loss on impairment of SIR investment. We recorded a $203,297 loss on impairment in 2015 to reduce the carrying value of our SIR investment to its estimated fair value.55Income tax expense. The decrease in income tax expense reflects lower operating income in certain jurisdictions in 2015 compared to 2014.Equity in earnings of investees. Equity in earnings of investees primarily represents our proportionate share of earnings from our investments in SIR and AIC.Income (loss) from discontinued operations. Income (loss) from discontinued operations reflects operating results of two properties (two buildings) sold during 2014, and one property (one building) included in discontinued operations and held for sale as of December 31, 2015. Income (loss) from discontinued operations for 2014 includes a $2,344 increase in the carrying value of one property (one building) included in discontinued operations and a $774 gain from the sale of one property (one building) included in discontinued operations.Net income (loss). We experienced a net loss in 2015 compared to net income in 2014 as a result of the changes noted above.56Year Ended December 31, 2014, Compared to Year Ended December 31, 2013226,358 223,979 2,379 1.1 24,673 2,931 251,031 226,910 24,121 10.6 26,537 25,497 1,040 4.1 1,852 213 28,389 25,710 2,679 10.4 18,176 16,920 1,256 7.4 1,193 196 19,369 17,116 2,253 13.2 41,887 40,626 1,261 3.1 4,095 508 45,982 41,134 4,848 11.8 86,600 83,043 3,557 4.3 7,140 917 93,740 83,960 9,780 11.6 139,758 140,936 (1,178) (0.8) 17,533 2,014 157,291 142,950 14,341 10.0 66,593 55,699 10,894 19.6 2,016 2,016 1,344 2,439 (1,095) (44.9) 15,809 12,710 3,099 24.4 85,762 70,848 14,914 21.1 71,529 72,102 (573) (0.8) 69 37 32 86 (28,048) (16,831) (11,217) 66.6 (1,307) (1,307) (53) (53) 42,190 55,308 (13,118) (23.7) (117) (133) 16 (12.0) 10,963 334 10,629 53,036 55,509 (2,473) (4.5) 3,498 (889) 4,387 56,534 54,620 1,914 3.5 61,313 54,606 6,707 12.3 61,399 54,685 6,714 12.3 0.87 1.02 (0.15) (14.7) 0.86 1.02 (0.16) (15.8) 0.06 (0.02) 0.08 0.92 1.00 (0.08) (8.0) 56,534 54,620 66,593 55,699 1,025 2,016 10,142 24,677 (10,876) (2,344) (774) (8,168) 135,826 113,318 1,344 2,439 1,307 53 26,898 (24,677) 140,751 115,757 2.22 2.08 2.21 2.07 2.30 2.12 2.29 2.12 (1)Comparable properties consist of 63 properties (79 buildings) we owned on December 31, 2014 and which we owned continuously since January 1, 2013, and exclude properties classified as discontinued operations.(2)Acquired properties consist of nine properties (13 buildings) and five properties (eight buildings), which five properties are included in the previously referenced nine properties, we owned on December 31, 2014 and December 31, 2013, respectively, and which we acquired during the period from January 1, 2013 to December 31, 2014.(3)See footnote (4) on page 53 for the definition of NOI.(4)See footnote (5) on page 54 for the definition of FFO and Normalized FFO.We refer to the 63 properties (79 buildings) we owned on December 31, 2014 and which we have owned continuously since January 1, 2013, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the nine properties (13 buildings) we owned as of December 31, 2014, which we acquired during the period from January 1, 2013 to December 31, 2014, as acquired properties. Our consolidated statement of income for the year ended December 31, 2014 includes the operating results of five acquired properties (eight buildings) for the entire year and four acquired properties 57(five buildings) for less than the entire year, as we acquired those five properties (eight buildings) prior to January 1, 2014 and we acquired those four properties (five buildings) during 2014. Our consolidated statement of comprehensive income (loss) for the year ended December 31, 2013 includes the operating results of five acquired properties (eight buildings) for less than the entire year, as those properties were acquired during 2013.References to changes in the income and expense categories below relate to the comparison of consolidated results for the year ended December 31, 2014, compared to the year ended December 31, 2013.Rental income. The increase in rental income reflects the effects of acquired properties and an increase in rental income for comparable properties. Rental income increased $11,240 from properties acquired after December 31, 2013 and $10,502 from properties acquired during 2013. Rental income for comparable properties increased $2,379 due primarily to higher average occupancy during 2014. Rental income includes non-cash straight line rent adjustments totaling $4,501 in 2014 and $2,739 in 2013 and amortization of acquired leases and assumed lease obligations totaling ($868) in 2014 and ($1,123) in 2013.Real estate taxes. The increase in real estate taxes reflects the effects of acquired properties and an increase in real estate taxes for comparable properties. Real estate taxes increased $815 from properties acquired after December 31, 2013 and $824 from properties acquired during 2013. Real estate taxes for comparable properties increased $1,040 due primarily to the effect of higher tax assessments at certain of our properties.Utility expenses. The increase in utility expenses reflects the effects of acquired properties and an increase in utility expense for comparable properties. Utility expenses increased $269 from properties acquired after December 31, 2013 and $728 from properties acquired during 2013. Utility expenses at comparable properties increased $1,256 due primarily to colder than normal temperatures experienced in certain parts of the United States during the winter of 2014.Other operating expenses. Other operating expenses consist of property management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating our properties. The increase in other operating expenses reflects the effects of acquired properties and an increase in expenses for comparable properties. Other operating expenses increased $1,586 from properties acquired after December 31, 2013 and $2,001 from properties acquired during 2013. Other operating expenses at comparable properties increased $1,261 primarily as a result of increases in repair and maintenance costs, partially offset by a decrease in property insurance expenses at certain of our properties.Depreciation and amortization. The increase in depreciation and amortization reflects the effect of property acquisitions and improvements made to certain of our properties since January 1, 2013. Depreciation and amortization increased $6,085 from properties acquired after December 31, 2013 and $4,609 from properties acquired during 2013. Depreciation and amortization at comparable properties increased $200 due primarily to improvements made to certain of our properties after January 1, 2013, partially offset by certain depreciable leasing related assets becoming fully depreciated in 2013 and 2014.Loss on impairment of real estate. We recorded a $2,016 loss on impairment of real estate in 2014 to reduce the carrying value of one property (one building) classified as held for sale to its estimated fair value less costs to sell.Acquisition related costs. Acquisition related costs in both 2014 and 2013 include legal and due diligence costs incurred in connection with our property acquisitions and other investment activity.General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement with RMR LLC, 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 andreflects the result of an increase in amounts due under our business management agreement due tofees in 2017 resulting from our property acquisitions since January 1, 2013acquisition activity, increases in accounting expense, higher stock compensation and an increase in audit, insurance and other administrative expensesprofessional service costs.2014.RMR Inc.and other income is primarily the result of a higher average amount of investable cash balances in 2014 compared2017 due to 2013.our financing activities related to the FPO Transaction.58those borrowings during 2014 compared to 2013.in 2017.$1,307 loss on early extinguishment of debt of $1,715 in 20142017 in connection with the termination of the bridge loan facility described in Note 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. We recorded a $104 gain on early extinguishment of debt refinancing activities.in 2016 in connection with the prepayment of two mortgage notes. LossNet gain on issuance of shares by SIR. LossNet gain on issuance of shares by an equity investee representsSIR is a result of the issuance of common shares by SIR duringat prices which were in the period July 9, 2014, the date we acquiredaggregate above our then per share carrying value of our SIR common shares, to December 31, 2014 at prices below our per share carrying value.shares. The decrease in incomeIncome tax expense reflects loweris the result of operating income we earned in certain jurisdictions in 2014 comparedthat is subject to 2013.state income taxes.primarily represents our proportionate share of earnings from our investment in AIC for all of 2014 and 2013 and our proportionate share of earnings from our investmentinvestments in SIR, for the period July 9, 2014 to December 31, 2014.AIC and two unconsolidated joint ventures.of two properties (two buildings) sold during 2013, two properties (two buildings) sold during 2014 andfor one property (one building) held for sale and classified asincluded in discontinued operations asoperations. During 2017, we recorded an adjustment of December 31, 2014. Income (loss) from discontinued operations in 2014 includes a $2,344$619 to increase in the carrying value of onethis property (one building) and ato its estimated fair value less costs to sell. We sold this property on August 31, 2017.of $774recognized from the sale of one propertyof the disposed properties (one building). Income (loss) from discontinued operations during 2016.2013 includes a $10,142 lossPart IV, Item 15 of this Annual Report on asset impairmentForm 10-K for two properties (two buildings)more information regarding these preferred units of limited partnership.a gain of $8,168 from the sale of two properties (two buildings).Net income. net income available for common shareholders.Our net income, increasednet income available for common shareholders and net income available for common shareholders per basic and diluted common share decreased in 20142017 compared to 20132016 primarily as a result of the changes noted above. The percentage decrease in net income available for common shareholders per common share (basic and diluted) is higher primarily as a result of the higher number of weighted average common shares outstanding as result of our issuance of common shares in an underwritten public offering during 2017. Year Ended December 31, Year Ended December 31, Consolidated Results Year Ended December 31, Year Ended December 31, $ % $ % 2016 2015 Change Change 2016 2015 2016 2015 2016 2015 Change Change Rental income $ 249,430 $ 246,747 $ 2,683 1.1 % $ 8,750 $ — $ — $ 1,802 $ 258,180 $ 248,549 $ 9,631 3.9 % Operating expenses: Real estate taxes 29,757 29,633 124 0.4 % 918 — 28 273 30,703 29,906 797 2.7 % Utility expenses 16,667 17,750 (1,083 ) (6.1 %) 578 — 24 166 17,269 17,916 (647 ) (3.6 %) Other operating expenses 52,212 49,946 2,266 4.5 % 2,019 — 59 479 54,290 50,425 3,865 7.7 % Total operating expenses 98,636 97,329 1,307 1.3 % 3,515 — 111 918 102,262 98,247 4,015 4.1 % $ 150,794 $ 149,418 $ 1,376 0.9 % $ 5,235 $ — $ (111 ) $ 884 155,918 150,302 5,616 3.7 % Other expenses: Depreciation and amortization - consolidated properties 73,153 68,696 4,457 6.5 % Acquisition related costs 1,191 811 380 46.9 % General and administrative 14,897 14,826 71 0.5 % Total other expenses 89,241 84,333 4,908 5.8 % Operating income 66,677 65,969 708 1.1 % Dividend income 971 811 160 19.7 % Interest income 158 14 144 nm Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $2,832, and $1,376, respectively) (45,060 ) (37,008 ) (8,052 ) 21.8 % Gain on early extinguishment of debt 104 34 70 nm Loss on distribution to common shareholders of The RMR Group Inc. common stock — (12,368 ) 12,368 nm Net gain (loss) on issuance of shares by Select Income REIT 86 (42,145 ) 42,231 nm Loss on impairment of Select Income REIT investment — (203,297 ) 203,297 nm Income (loss) from continuing operations before income taxes, equity in earnings of investees and gain on sale of real estate 22,936 (227,990 ) 250,926 nm Income tax expense (101 ) (86 ) (15 ) 17.4 % Equity in earnings of investees 35,518 18,640 16,878 90.5 % Income (loss) from continuing operations 58,353 (209,436 ) 267,789 nm Loss from discontinued operations (589 ) (525 ) (64 ) 12.2 % Income (loss) before gain on sale of real estate 57,764 (209,961 ) 267,725 nm Gain on sale of real estate 79 — 79 nm Net income (loss) $ 57,843 $ (209,961 ) $ 267,804 nm Weighted average common shares outstanding (basic) 71,050 70,700 350 0.5 % Weighted average common shares outstanding (diluted) 71,071 70,700 371 0.5 % Per common share amounts (basic and diluted): Income (loss) from continuing operations $ 0.82 $ (2.96 ) $ 3.78 nm Loss from discontinued operations $ (0.01 ) $ (0.01 ) $ — — % Net income (loss) $ 0.81 $ (2.97 ) $ 3.78 nm Reconciliation of Net Income (Loss) to Consolidated Property NOI: Net income (loss) $ 57,843 $ (209,961 ) Gain on sale of real estate (79 ) — Income (loss) before gain on sale of real estate 57,764 (209,961 ) Loss from discontinued operations 589 525 Income (loss) from continuing operations 58,353 (209,436 ) Equity in earnings of investees (35,518 ) (18,640 ) Income tax expense 101 86 Loss on impairment of SIR investment — 203,297 Net (gain) loss on issuance of shares by SIR (86 ) 42,145 Loss on distribution to common shareholders of The RMR Group Inc. common stock — 12,368 Gain on early extinguishment of debt (104 ) (34 ) Interest expense 45,060 37,008 Interest income (158 ) (14 ) Dividend income (971 ) (811 ) Operating income 66,677 65,969 General and administrative 14,897 14,826 Acquisition related costs 1,191 811 Depreciation and amortization 73,153 68,696 Consolidated Property NOI $ 155,918 $ 150,302 2016 2015 Net income (loss) $ 57,843 $ (209,961 ) Plus: Depreciation and amortization - consolidated properties 73,153 68,696 Plus: FFO attributable to Select Income REIT investment 71,227 56,105 Less: Equity in earnings from Select Income REIT (35,381 ) (18,620 ) Less: Gain on sale of real estate (79 ) — Funds from operations 166,763 (103,780 ) Plus: Acquisition related costs 1,191 811 Plus: Loss on distribution to common shareholders of The RMR Group Inc. common stock — 12,368 Plus: Net 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 71,313 70,012 Less: FFO attributable to Select Income REIT investment (71,227 ) (56,105 ) Less: Gain on early extinguishment of debt (104 ) (34 ) Less: Net gain on issuance of shares by Select Income REIT (86 ) — Normalized funds from operations $ 167,850 $ 168,714 Funds from operations (basic and diluted) $ 2.35 $ (1.47 ) Normalized funds from operations (basic and diluted) $ 2.36 $ 2.39 (1) Comparable properties consist of 70 consolidated properties (90 buildings) we owned on December 31, 2016 and which we owned continuously since January 1, 2015, and excludes one property (one building) classified as discontinued operations. (2) Acquired properties consist of three consolidated properties (five buildings) we acquired during the year ended December 31, 2016. (3) Disposed properties consist of one consolidated property (one building) we sold during the year ended December 31, 2015 and one consolidated property (one building) we sold during the year ended December 31, 2016. (4) See footnote (4) on page 60 for the definition of NOI. (5) See footnote (5) on page 60 for the definition of FFO and Normalized FFO. sourcesources of funds to meet operating and capital expenses, debt service obligations and pay distributions on our common shares isare the operating cash flowflows we generate as rental income from our properties, the distributions we receive from our investmentinvestments in SIR and RMR Inc. and borrowings under our unsecured 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 cost increases at our properties;
our ability to maintain or increase the occupancy of, and the rental rates 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 ability to control operating expenses at our properties;·our receipt of distributions from our investment in SIR.availablepurchase opportunities which come to our attention and upon our ability to successfully acquire and operate such properties.complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.20152017 compared to the prior year were as follows: (i) cash provided by operating activities decreasedincreased from $130,725$124,258 in 20142016 to $115,357$133,047 in 2015;2017; (ii) cash used in investing activities decreasedincreased from $748,759$215,157 in 20142016 to $66,602$1,186,213 in 2015;2017; and (iii) cash flows from financing activities changed from $624,162 of cash provided by financing activities increased from $112,055 in 20142016 to $53,761 cash used$1,039,794 in financing activities in 2015.decreaseincrease in cash provided by operating activities for the year ended December 31, 20152017 as compared to the prior year was due primarily reflects increased payments for interest on borrowings, a decreaseto an increase in consolidated property net operating incomeNOI and unfavorablefavorable changes in working capital, in 2015, partially offset by an increasea decrease in distributions received from our investment in 59SIR common shares in 2015.SIR. The decreaseincrease in cash used in investing activities for the year ended December 31, 20152017 as compared to the prior year was due primarily to the decreaseFPO Transaction in our property acquisitions and the investment2017. The increase in SIR common shares in 2015. The change in cash (used in) provided by financing activities for the year ended December 31, 20152017 as compared to the prior year was due primarily to our FPO Transaction related financing activities during 2017, including issuances of common shares and senior unsecured notes in 2014. unsecured revolving credit facility is January 31, 2019 and, subject to theour payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date of our unsecured revolving credit facility by one year to January 31, 2020. We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at December 31, 20152017, on borrowingsthe amount outstanding under our unsecured revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility, which was 25 basis points per annum at December 31, 2015.2017. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, and repay and re-borrowreborrow funds available under our unsecured revolving credit facility until maturity, and no principal repayment is due until maturity. As of December 31, 2015,2017, the annual interest rate payable on borrowings under our unsecured revolving credit facility was 1.6%2.7%. As of December 31, 20152017 and February 16, 2016,23, 2018, we had $117,000$570,000 and $221,000,$595,000, respectively, outstanding and $633,000 and $529,000, respectively, available to borrow under our unsecured revolving credit facility. $750,000 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 unsecured 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 December 31, 2015 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 December 31, 2015, the annual interest rate for the amount outstanding under our $300,000 term loan was 1.8%.·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 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 December 31, 2015 on the amount outstanding under our $250,000Our $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 December 31, 2017, 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 December 31, 2015, the annual interest rate for the amount outstanding under our $250,000 term loan was 2.2%. for our unsecured revolving credit facility and term loans provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under the unsecured 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.thethat indenture and require semi-annual payments of interest only through maturity. $135,441$183,147 in mortgage debts generally require semi-annualmonthly payments of principal and interest through maturity.2015,2017, we have estimated unspent leasing related obligations of $12,653. Our$31,310.maturities (other than our unsecured revolving credit facility) are as follows: $107,933of $1,715.2016, $1,549 inFPO's operating partnership that was not liquidated on the effective date of the FPO Transaction was exchanged on a one-for-one basis for 5.5% Series A Cumulative Preferred Units of the surviving subsidiary. As of December 31, 2017, $1,671 inthere were 1,814 of 5.5% Series A Cumulative Preferred Units outstanding. Beginning on October of each year and ending January 15 of the following year, with the first such period beginning October 1, 2019, holders have the right to redeem their 5.5% Series A Cumulative Preferred Units for cash at $11.15 per unit. Beginning on April 1 of each year and ending June 30 of that year, with the first such period beginning April 1, 2018, $359,439 in 2019, $301,619 in 2020 and $263,230 thereafter. we have the right to redeem all or any portion of the outstanding 5.5% Series A Cumulative Preferred60 unsecured revolving credit facility, net proceeds from our property sales, distributions received from our investmentinvestments in SIR and RMR Inc., 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 unsecured revolving credit facilityfacilities or the maturity datematurities of our unsecured revolving credit facility, term loans, mortgages or our other debtsindebtedness approach, we intendexpect to explore alternatives for repaying or refinancing such amounts.alternatives. Such alternatives may include incurring additional term debt, issuing equity or debt securities, extending the maturity date of our unsecured revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisition of propertiesacquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot provide assurancebe 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.provide assurancebe sure that we will be able to successfully carry out this intention.each of February 26, 2015,23, 2017 and May 25, 2015, August 24, 2015 and November 23, 2015,22, 2017, we paid a regular quarterly distribution to common shareholders of record on January 23, 2017 and April 21, 2017, of $0.43 per share, or $30,606 on each of those dates. On August 21, 2017, we paid a regular quarterly distribution to our common shareholders in the amount of $30,252, $30,256, $30,568 and $30,584, respectively.record on July 24, 2017, of $0.43 per share, or $41,364. On November 20, 2017, we paid a regular quarterly distribution payable to common shareholders of record on October 23, 2017 of $0.43 per share, or $42,633. We funded these distributions using cash on hand and borrowings under our unsecured revolving credit facility. On January 11, 2016,19, 2018, we declared a distribution payable to common shareholders of record on January 22, 201629, 2018 in the amount of $0.43 per share, or approximately $30,584.$42,633. We expect to pay this distribution on or about February 25, 201626, 2018 using cash on hand and borrowings under our unsecured revolving credit facility.In2015,5, 2017, we repaid,sold 25,000,000 of our common shares at par, a $47,083 mortgage note requiring interest at 5.73% which was secured by a property (two buildings) located in Indianapolis, IN using cash on hand and borrowings under our unsecured revolving credit facility. This mortgage note was scheduled to mature in October 2015.In January 2016, we acquired an office property (one building) located in Sacramento, CA with 338,796 rentable square feet for a purchase price of $79,765, excluding acquisition related costs, using cash on hand and borrowings under$18.50 per share in an underwritten public offering. On August 3, 2017, we sold 2,907,029 of our unsecured revolving credit facility. This property is majority leasedcommon shares at a price of $18.50 per share pursuant to an overallotment option granted to the Stateunderwriters for the July offering. The aggregate net proceeds from these offerings were $493,866, after payments of California.In January 2016,the underwriters' discounts and other offering expenses.gave noticeissued $300,000 of 4.000% senior unsecured notes due 2022 in an underwritten public offering. The net proceeds from this offering were $295,399, after payments of the underwriters' discounts and other offering expenses.repay, at par, an $83,000 mortgage note requiring interest at 5.55% which is secured by one office property (two buildings) locatedfinance, in Reston, VA using cash on hand and borrowings under our unsecured revolving credit facility. We expect to repay this mortgage in March 2016. This mortgage note is scheduled to mature in April 2016.In February 2016, we repaid, at par, a $23,473 mortgage note requiring interest at 6.21% which was secured by a property (one building) located in Landover, MD using cash on hand and borrowings under our unsecured revolving credit facility. This mortgage note was scheduled to mature in August 2016.612015,2017, our contractual obligations were as follows:1,152,441 107,933 3,219 778,059 263,230 12,653 11,185 490 348 630 116,906 29,270 49,644 31,258 6,734 1,282,000 148,388 53,353 809,665 270,594 Payments Due by Period Less than 1-3 3-5 More than Contractual Obligations Total 1 Year Years Years 5 Years Long term debt obligations $ 2,263,147 $ 3,672 $ 1,269,974 $ 589,938 $ 399,563 31,311 21,867 6,861 2,583 — 4,893 1,543 3,211 139 — 683,284 85,549 112,834 75,471 409,430 Total $ 2,982,635 $ 112,631 $ 1,392,880 $ 668,131 $ 808,993 (1) includeincludes leasing commissions and tenant improvements and are based on leases in effect as of December 31, 2015.(2) Reflects the lease obligations we assumed related to FPO's former corporate headquarters, net of sublease income. (3) Projected interest expense is attributable to only our debt obligations at existing rates as of December 31, 20152017 and is not intended to project future interest costs which may result from debt prepayments, additional borrowings under our unsecured revolving credit facility, new debt issuances or changes in interest rates. In additionamounts discussed above,extent of our proportionate ownership percentage, to fund any capital shortfalls or commitments from properties owned through the unconsolidated joint ventures.also have businessacquired 50% and property management agreements with continuing 20 year terms,51% interests in two unconsolidated joint ventures which require usown two properties (three buildings). The properties owned by these joint ventures are encumbered by an aggregate $82,000 of mortgage indebtedness. We do not control the activities that are most significant to pay management fees to RMR LLC.these joint ventures and, as a result, we account for our investment in these joint ventures under the equity method of accounting. See Note 65 to the Notes to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.Off Balance Sheet ArrangementsAs10-K for more information on the financial condition and results of operations of these joint ventures. Other than these joint ventures, as of December 31, 2015,2017, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.20152017 consisted of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan, our $250,000 unsecured term loan, $350,000an aggregate outstanding principal amount of publicly issued$960,000 of public issuances of senior unsecured notes and fiveeight secured mortgage loansnotes with an aggregate outstanding principal amount of $183,147 that were assumed in connection with certain of our acquisitions. We assumed five of the secured mortgage notes in connection with the FPO Transaction. Also, the two properties (three buildings) acquired in the FPO Transaction which are owned by joint ventures secure two additional mortgage notes. Our publicly issued senior unsecured notes are governed by an indenture.indentures and their supplements. Our senior unsecured notes indentureindentures and its supplementtheir supplements and our credit agreement for our unsecured 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 RMR LLC ceasing to act as our business manager and property manager. Our senior unsecured notes indentureindentures and its supplementtheir 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 underto our shareholders in certain circumstances. Our mortgage loansnotes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. As of December 31, 2015,2017, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentureindentures and its supplement and our credit agreement.indentureindentures and its supplementtheir supplements contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement our highest senior unsecured 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.indentureindentures and its supplementtheir supplements contain cross default provisions to any other debts of more than $25,000. (dollars in thousands)example,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 our business management agreements,agreement and property management agreement with RMR LLC; RMR Inc. is the managing member of RMR LLC.LLC; ABP Trust, which is ownedcontrolled by its current sole trustee, our Managing Trustees,Trustee, is the controlling shareholder of RMR Inc. We; and we own shares of class A common stock of RMR Inc. We also have relationships and historical and continuing transactions with other companies to which RMR LLC provides 6220152017 and February 16, 201626, 2018, owned approximately 27.9%27.8% of the outstanding SIR common shares; and AIC, of which we, ABP Trust, SIR and fivefour other companies to which RMR LLC provides management services each own approximately 14.3%. We and the other six shareholders of AIC participatewhich arranges and insures or reinsures in part a combined property insurance program arrangedfor us and reinsured in part by AIC. its six other shareholders.please see Notes 6, 7 and 1112 to the Notes toour Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference and our other filings with the SEC including our definitive Proxy Statement for our 20162018 Annual Meeting of Shareholders, andor our other filingsdefinitive Proxy Statement, to be filed with the SEC. In addition, please seeSEC within 120 days after the section captioned "Business" above in Part I, Item 1 of this Annual Report on Form 10-K.fiscal year ended December 31, 2017. For morefurther information about these transactions and relationships and about the risks that may arise as a result of these and other related person transactions and relationships, please see elsewhere in this Annual Report on Form 10-K, including "Warning“Warning Concerning Forward Looking Statements,"” Part I, Item 1, “Business” and Part I, Item 1A, "Risk“Risk Factors."” Our filings with the SEC and copies of certain of our agreements with these related parties,persons, including our business management agreement and property management agreement with RMR LLC and our shareholders agreement with AIC and its six other shareholders, are publicly available as exhibits to our public filings with the SEC and accessible at the SEC'sSEC’s website, www.sec.gov.www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its affiliatessubsidiaries provide management services.arehave been and will be consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property and equity securities. These policies affect our:•amongbetween various asset categories, including allocations to above and below market leases for properties qualifying as acquired businesses under FASB Accounting Standards Codification 805, Business Combinations, and the related impact on the recognition of rental income and depreciation and amortization expenses; and• acquired, we record building, land and improvements, and, if applicable, the value of in place leases, the fair market value of above or below market leases and customer relationships at fair value. WeFor transactions that qualify as business combinations, we allocate the excess, if any, of the consideration over the fair value of assets acquired to goodwill. We base purchase price allocations and the determination of useful lives on our estimates and, under some circumstances, studies from independent real estate appraisal firmsappraisers to provide market information and evaluations that are relevant to management’sour purchase price allocations and determinations of useful lives; however, our management is ultimately responsible for the purchase price allocations and determination of useful lives.63modest.modest, but recently there have been indications of inflation in the U.S. economy and some market forecasts indicate an expectation of increased inflation in the near to intermediate term. Future inflation might have both positive and negative impacts on our business. Inflation might cause the value of our real estate assets to increase. Inflation might also cause our costs of equity and debt capital and operating costs to increase. An increase in our capital costs or in our operating costs may result in decreased earnings unless it is offset by increased revenues. Our government leases generally provide for annual rent increases based on a cost of living index calculation which may help mitigate against anythe impact upon us of increased costs as a result of inflation. Further, inflation may permit us to increase rents upon renewal or enter into new leases for the leased space for increased rent amounts. current political debate about climate change has resulted in various treaties, laws and regulations which are intended to limit carbon emissions. We believe these laws being enacted or proposed may cause energy costs at our properties to increase in the future. In an effort to reduce the effects of any increased energy costs in the future, we and RMR LLC continuously study ways to improve the energy efficiency at all of our properties. RMR LLC is a member of the Energy Star Partner program, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy which is focused on promoting energy efficiency at commercial properties through its “Energy Star” certification program, and a member of the U.S. Green Building Council, a nonprofit organization focused on promoting energy efficiency at commercial properties through its LEED®, green building program. We do not expect the direct impact of these possible increases in energy costs resulting from laws designed to address climate change to be material to our results of operations because the increased costs either may be the responsibility of our tenants directly or in large part passed through by us to our tenants as additional rent. AlthoughAlso, although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our buildings obsolete or cause us to make material investments in our properties which could materially and adversely affect our financial condition and results of operations.There have recently been activities in different parts of the country that some observers believeworld over the last few years is evidence of global climate change. Such severeSevere weather that may result from climate changehave an adverse effect on certain properties we own. Rising sea levels could cause flooding at some of our properties, which may have an adverse effect on individual properties we own. We mitigate these risks by owning a geographically diversified portfolio of properties and by procuring or requiring tenants to procure insurance coverage we believe adequate to protect us from material damages and losses resulting from such activities.the consequences of losses caused by climate change. However, there canwe cannot be no assurancesure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change or otherwise could not have a material adverse effect on our business.financial results.2015,2017, our outstanding fixed rate debt for our consolidated properties consisted of the following:350,000 3.75 13,307 83,000 5.55 4,670 23,499 6.21 1,480 14,160 5.88 844 8,729 7.00 620 6,052 8.15 500 485,440 21,421 Annual Annual Interest Principal Interest Interest Payments Debt Maturity Due Senior unsecured notes $ 350,000 3.750 % $ 13,125 2019 Semi-annually Senior unsecured notes 310,000 5.875 % 18,213 2046 Quarterly Senior unsecured notes 300,000 4.000 % 12,000 2022 Semi-annually Mortgage note (one property (one building) in Tampa, FL) 8,221 7.000 % 583 2019 Monthly Mortgage note (one property (one building) in Washington, DC) 34,474 5.720 % 1,999 2020 Monthly Mortgage note (one property (one building) in Chesapeake, VA) 3,173 4.260 % 137 2020 Monthly Mortgage note (one property (one building) in Lakewood, CO) 4,045 8.150 % 334 2021 Monthly Mortgage note (one property (one building) in Fairfax, VA) 13,693 5.877 % 816 2021 Monthly Mortgage note (one property (one building) in Washington, DC) 27,870 4.220 % 1,192 2022 Monthly Mortgage note (one property (one building) in Washington, DC) 24,891 4.800 % 1,211 2023 Monthly Mortgage note (one property (one building) in Washington, DC) 66,780 4.050 % 2,742 2030 Monthly $ 1,143,147 $ 52,352 (1) determined pursuant tostated in the contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. For more information, see Notes 89 and 910 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.$4,904.2015,2017, and discounted cash flow analysisanalyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate 100 basis point increase in interest rates would change the fair value of those obligations by approximately $7,144.2015,2017, we have 50% and 51% interests in two joint venture arrangements which own two properties (three buildings) that are secured by fixed rate debt consisting of the following mortgage notes: Our JV Annual Annual Interest Ownership Principal Interest Interest Payments Debt Interest Maturity Due Mortgage note one property (one building) in Washington, DC 50% $ 32,000 3.920 % $ 1,254 2024 Monthly Mortgage note one property (two buildings) in Fairfax, VA 51% 50,000 3.910 % 1,955 2029 Monthly $ 82,000 $ 3,209 (1) The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, recorded interest expense may differ from these amounts because of market conditions at the time we acquired the joint venture interests. (2) Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the part of the joint venture arrangement interests we do not own. $117,000 outstanding$570,000 of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan and our $250,000 unsecured term loan. Our unsecured revolving credit facility matures in January 2019 and, subject to our meeting certain conditions, including ourthe payment of an extension fee and our meeting other conditions, we have the option to extend the stated maturity by one year to January 2020. No principal repayments are required under our unsecured revolving credit facility or our term loans prior to maturity, and repaymentswe can borrow, repay and reborrow funds available under our unsecured revolving credit facility, may be made, and redrawn subject to conditions, at any time without penalty. Our $300,000 unsecured term loan matures on March 31, 2020. Our $250,000 unsecured term loan matures on March 31, 2022. Amounts outstanding under our unsecured term loans may be repaid without penalty at any time, but after they are repaid amounts may not be redrawn. Our $300,000 unsecured term loan may be repaid without penalty at any time. If our $250,000 unsecured term loan is repaid prior to November 21, 2016, a prepayment premium of 1.0% of the amount repaid would be incurred. Subsequent to November 21, 2016, no prepayment premium would be incurred.unsecured$750,000 revolving credit facility and term loans are in U.S. dollars and require interest to be paid at a rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of our unsecured revolving credit facility or term loans, we are vulnerable to increases in interest rate premiums due to market conditions or our 652015:1.9 667,000 12,849 0.18 2.9 667,000 19,612 0.28 Impact of Changes in Interest Rates Annual Outstanding Total Interest Annual Earnings Debt Expense Per Year At December 31, 2017 2.9 % $ 1,120,000 $ 32,931 $ 0.39 100 bps increase 3.9 % $ 1,120,000 $ 44,287 $ 0.52 (1) unsecured revolving credit facility and term loans as of December 31, 2015.(2) 2015.20152017 if we were fully drawn on our unsecured revolving credit facility and our term loans remained outstanding:1.8 1,300,000 23,725 0.34 2.8 1,300,000 36,906 0.52 Impact of Changes in Interest Rates Annual Outstanding Total Interest Annual Earnings Debt Expense Per Year At December 31, 2017 2.9 % $ 1,300,000 $ 38,224 $ 0.45 100 bps increase 3.9 % $ 1,300,000 $ 51,404 $ 0.61 (1) unsecured revolving credit facility (assuming fully drawn) and term loans as of December 31, 2015. (2) 2015.2015.2017. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our unsecured revolving credit facility, our existing term loans or our other floating rate debt.debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.10‑K.10-K. Treasurer and Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Exchange Act Rules 13a‑15 and 15d‑15.Act. Based upon that evaluation, our then Managing Trustees, our President and our Treasurer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.20152017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.662015.2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control—Integrated Framework. Based on ourthis assessment, we believe that, as of December 31, 2015,2017, our internal control over financial reporting is effective.2015 consolidated financial statements2017 Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10‑K,10-K, has issued an attestation report on our internal control over financial reporting. Its report appears elsewhere herein.67all our representatives, including our officers and trusteesTrustees, RMR Inc. and employeesRMR LLC, senior level officers of RMR LLC, senior level officers and directors of RMR Inc. and certain other officers and employees of RMR LLC. Our Code of Conduct is posted on our website, www.govreit.com. A printed copy of our Code of Conduct is also available free of charge to any person who requests a copy by writing to our Secretary, Government Properties Income Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458‑1634.02458-1634. We intend to disclose any amendments or waivers to our Code of Conduct applicable to our principal executive officer, principal financial officer, principal accounting officer or controller (or any person performing similar functions) on our website. our common shares to our officers and other employees of RMR LLC under our equity compensation plan adopted in 2009 Incentive Share Award Plan, or the 2009 Plan. In addition, each of our Trustees receives common shares under the 2009 Plan as part of his or her annual compensation for serving as a trustee.Trustee and such shares are awarded under the 2009 Plan. The terms of grantsawards made under the 2009 Plan are determined by the Compensation Committee of our Board of Trustees, at the time of the grant.awards. The following table is as of December 31, 2015.2017.Plan category Weighted‑average(a)(b)(b) (c) security holders—securityholders—2009 Plan...............None.None. 1,605,7031,493,119 (1)security holders...........................None.None. None. ...........................................................................................................None.None. 1,605,7031,493,119 (1)(1)Consists of shares available for issuance pursuant to the terms of the 2009 Plan. Share awards that are forfeited will be added to the shares available for issuance under the 2009 Plan.(1) 1011 to ourthe Notes to Consolidated Financial Statements included in Part IV, Item 515 of this Annual Report on Form 10‑K.10-K. The remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement.68(a)Index to Financial Statements and Financial Statement Schedules(a) Index to Financial Statements and Financial Statement Schedules F‑1F‑3F‑4F‑5F‑6F‑8S‑1ExhibitNumberDescription3.1 Description 2.1 3.1 3.2 Amended and Restated Bylaws of the Company, adopted July 31, 2015. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.2017.)4.1 3.24.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 8.1 6910.1 10.2 10.3 10.4 10.5 10.6 10.7 10.7 10.810.8 10.9Form of Restricted Share Agreement.(+) (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 17, 2010.)10.9 10.10 10.11 10.12 10.13 10.13 12.1Voting and Standstill Agreement, dated as of August 30, 2014, among Cole Corporate Income Trust, Inc., the Company and American Realty Capital Properties, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 30, 2014.)10.14 Share Purchase Agreement, dated as of February 28, 2015, among the Company, Lakewood Capital Partners, LP, the other parties named therein and, for the purpose of specified sections, Select Income REIT. (Incorporated by reference to the Company’s Current Report on Form 8-K dated February 28, 2015.)12.1 21.1 23.1 23.2 31.1 31.2 7031.3 31.4 32.1Rule 13a‑14(a) Certification. (Filed herewith.)32.1 99.1 99.2 99.3 101.1 99.4101.1 The following materials from the Company’s Annual Report on Form 10‑K10-K for the year ended December 31, 20152017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)71“Company”)Company) as of December 31, 20152017 and 2014, and2016, the related consolidated statements of comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included2017, and the related notes and the financial statement schedule listed in the Index at Itemitem 15(a) (collectively referred to as the “consolidated financial statements”). TheseIn our opinion, the consolidated financial statements and schedule arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statementsCompany at December 31, 2017 and schedule based on our audits.conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2018 expressed an unqualified opinion thereon.misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLP We have served as the Company's auditor since 2008. the financial statements referred to above present fairly,Government Properties Income Trust’s (the Company) maintained, in all material respects, the consolidatedeffective internal control over financial positionreporting as of Government Properties Income Trust at December 31, 2015 and 2014, and2017, based on the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.As discussed in Note 5 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective July 1, 2014.Government Properties Income Trust’s internal control over financial reportingthe consolidated balance sheets of the Company as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by2017 and 2016, the Committeerelated consolidated statements of Sponsoring Organizationscomprehensive income (loss), shareholders’ equity and cash flows for each of the Treadway Commission (2013 framework)three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at item 15(a), and our report dated February 18, 201626, 2018 expressed an unqualified opinion thereon./s/ Ernst & Young LLPBoston, MassachusettsFebruary 18, 2016F-1Report of Independent Registered Public Accounting FirmTo the Trustees and Shareholders of Government Properties Income TrustWe have audited Government Properties Income Trust’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Government Properties Income Trust’sThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Assessment of Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.In our opinion, Government Properties Income Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of Government Properties Income Trust and our report dated February 18, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP 18, 201626, 2018F-2253,058 254,008 1,443,074 1,428,472 1,696,132 1,682,480 (255,879) (219,791) 1,440,253 1,462,689 491,369 680,137 12,468 13,165 3,098 32,797 118,267 150,080 8,785 13,791 1,022 2,280 45,269 36,239 14,299 11,450 9,875 12,782 29,831 12,205 2,174,536 2,427,615 117,000 550,000 550,000 347,981 347,423 136,643 187,694 54 150 43 343 50,543 26,471 2,886 2,161 12,735 15,924 1,217,885 1,130,166 711 703 1,472,482 1,457,631 38,486 248,447 (14,867) 37 (540,161) (409,369) 956,651 1,297,449 2,174,536 2,427,615 As of December 31, 2017 2016 ASSETS Real estate properties: Land $ 627,108 $ 267,855 Buildings and improvements 2,348,613 1,620,905 Total real estate properties, gross 2,975,721 1,888,760 Accumulated depreciation (341,848 ) (296,804 ) Total real estate properties, net 2,633,873 1,591,956 Equity investment in Select Income REIT 467,499 487,708 Investment in unconsolidated joint ventures 50,202 — Assets of discontinued operations — 12,541 Acquired real estate leases, net 351,872 124,848 Cash and cash equivalents 16,569 29,941 Restricted cash 3,111 530 Rents receivable, net 61,429 48,458 Deferred leasing costs, net 22,977 21,079 Other assets, net 96,033 68,005 Total assets $ 3,703,565 $ 2,385,066 LIABILITIES AND SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ 570,000 $ 160,000 Unsecured term loans, net 547,852 547,171 Senior unsecured notes, net 944,140 646,844 Mortgage notes payable, net 183,100 27,837 Liabilities of discontinued operations — 45 Accounts payable and other liabilities 89,440 54,019 Due to related persons 4,859 3,520 Assumed real estate lease obligations, net 13,635 10,626 Total liabilities 2,353,026 1,450,062 Commitments and contingencies Preferred units of limited partnership 20,496 — Shareholders’ equity: Common shares of beneficial interest, $.01 par value: 150,000,000 and 100,000,000 shares authorized, respectively, 99,145,921 and 71,177,906 shares issued and outstanding, respectively 991 712 Additional paid in capital 1,968,217 1,473,533 Cumulative net income 108,144 96,329 Cumulative other comprehensive income 60,427 26,957 Cumulative common distributions (807,736 ) (662,527 ) Total shareholders’ equity 1,330,043 935,004 Total liabilities and shareholders’ equity $ 3,703,565 $ 2,385,066 F-3248,549 251,031 226,910 29,906 28,389 25,710 17,916 19,369 17,116 50,425 45,982 41,134 68,696 66,593 55,699 2,016 811 1,344 2,439 14,826 15,809 12,710 182,580 179,502 154,808 65,969 71,529 72,102 811 14 69 37 (37,008) (28,048) (16,831) 34 (1,307) (12,368) (42,145) (53) (203,297) (227,990) 42,190 55,308 (86) (117) (133) 18,640 10,963 334 (209,436) 53,036 55,509 (525) 3,498 (889) (209,961) 56,534 54,620 (9,391) (5,513) (12) (50) (14,904) (12) (50) (224,865) 56,522 54,570 70,700 61,313 54,606 70,700 61,399 54,685 (2.96) 0.87 1.02 (2.96) 0.86 1.02 (0.01) 0.06 (0.02) (2.97) 0.92 1.00 Year Ended December 31, 2017 2016 2015 Rental income $ 316,532 $ 258,180 $ 248,549 Expenses: Real estate taxes 37,942 30,703 29,906 Utility expenses 20,998 17,269 17,916 Other operating expenses 65,349 54,290 50,425 Depreciation and amortization 109,588 73,153 68,696 Loss on impairment of real estate 9,490 — — Acquisition related costs — 1,191 811 General and administrative 18,847 14,897 14,826 Total expenses 262,214 191,503 182,580 Operating income 54,318 66,677 65,969 Dividend income 1,216 971 811 Interest income 1,962 158 14 Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $3,420, $2,832 and $1,376, respectively) (65,406 ) (45,060 ) (37,008 ) Gain (loss) on early extinguishment of debt (1,715 ) 104 34 Loss on distribution to common shareholders of The RMR Group Inc. common stock — — (12,368 ) Net gain (loss) on issuance of shares by Select Income REIT 72 86 (42,145 ) Loss on impairment of Select Income REIT investment — — (203,297 ) Income (loss) from continuing operations before income taxes, equity in earnings of investees and gain on sale of real estate (9,553 ) 22,936 (227,990 ) Income tax expense (101 ) (101 ) (86 ) Equity in earnings of investees 21,571 35,518 18,640 Income (loss) from continuing operations 11,917 58,353 (209,436 ) Income (loss) from discontinued operations 173 (589 ) (525 ) Income (loss) before gain on sale of real estate 12,090 57,764 (209,961 ) Gain on sale of real estate — 79 — Net income (loss) 12,090 57,843 (209,961 ) Other comprehensive income (loss): Unrealized gain (loss) on investment in available for sale securities 24,042 30,465 (9,391 ) Equity in unrealized gain (loss) of investees 9,428 11,359 (5,513 ) Other comprehensive income (loss) 33,470 41,824 (14,904 ) Comprehensive income (loss) $ 45,560 $ 99,667 $ (224,865 ) Net income (loss) $ 12,090 $ 57,843 $ (209,961 ) Preferred units of limited partnership distributions (275 ) — — Net income (loss) available for common shareholders $ 11,815 $ 57,843 $ (209,961 ) Weighted average common shares outstanding (basic) 84,633 71,050 70,700 Weighted average common shares outstanding (diluted) 84,653 71,071 70,700 Per common share amounts (basic and diluted): Income (loss) from continuing operations $ 0.14 $ 0.82 $ (2.96 ) Income (loss) from discontinued operations $ — $ (0.01 ) $ (0.01 ) Net income (loss) available for common shareholders $ 0.14 $ 0.81 $ (2.97 ) F-454,643,888 547 1,103,982 137,293 99 (214,470) 1,027,451 78,130 1,697 1,697 (50) (50) 54,620 54,620 (94,043) (94,043) 54,722,018 547 1,105,679 191,913 49 (308,513) 989,675 15,563,559 155 350,558 350,713 63,650 1 1,394 1,395 (12) (12) 56,534 56,534 (100,856) (100,856) 70,349,227 703 1,457,631 248,447 37 (409,369) 1,297,449 723,222 7 14,039 14,046 65,600 1 984 985 (11,741) (172) (172) (5,513) (5,513) (9,391) (9,391) (209,961) (209,961) (121,660) (121,660) (9,132) (9,132) 71,126,308 711 1,472,482 38,486 (14,867) (540,161) 956,651 Number of Shares Common Shares Additional Paid In Capital Total Balance at December 31, 2014 70,349,227 $ 703 $ 1,457,631 $ 248,447 $ 37 $ (409,369 ) $ 1,297,449 Issuance of shares, net 723,222 7 14,039 — — — 14,046 Share grants 65,600 1 984 — — — 985 Share repurchases (11,741 ) — (172 ) — — — (172 ) Equity in unrealized loss of investees — — — — (5,513 ) — (5,513 ) Unrealized loss on investment in available for sale of securities — — — — (9,391 ) — (9,391 ) Net loss available for common shareholders — — — (209,961 ) — — (209,961 ) Distributions to common shareholders — — — — — (130,792 ) (130,792 ) Balance at December 31, 2015 71,126,308 711 1,472,482 38,486 (14,867 ) (540,161 ) 956,651 Share grants 65,900 1 1,388 — — — 1,389 Share repurchases (14,302 ) — (337 ) — — — (337 ) Equity in unrealized gain of investees — — — — 11,359 — 11,359 Unrealized gain on investment in available for sale of securities — — — — 30,465 — 30,465 Net income available for common shareholders — — — 57,843 — — 57,843 Distributions to common shareholders — — — — — (122,366 ) (122,366 ) Balance at December 31, 2016 71,177,906 712 1,473,533 96,329 26,957 (662,527 ) 935,004 Issuance of shares, net 27,907,029 279 493,587 493,866 Share grants 75,350 1,361 — — — 1,361 Share repurchases (14,364 ) (264 ) — — — (264 ) Equity in unrealized gain of investees — — — — 9,428 — 9,428 Unrealized gain on investment in available for sale of securities — — — — 24,042 — 24,042 Net income available for common shareholders — — — 11,815 — — 11,815 Distributions to common shareholders — — — — — (145,209 ) (145,209 ) Balance at December 31, 2017 99,145,921 $ 991 $ 1,968,217 $ 108,144 $ 60,427 $ (807,736 ) $ 1,330,043 F-5(209,961) 56,534 54,620 38,987 37,671 34,694 1,376 1,310 1,340 (34) 1,307 (3,978) (4,495) (3,067) 28,624 27,713 21,608 2,349 2,145 1,599 817 2,181 1,268 2,016 10,142 (2,344) (774) (8,168) (18,640) (10,963) (334) 42,145 53 12,368 203,297 21,882 17,046 1,258 (591) (136) (4,741) (3,326) (4,279) (2,729) (337) (1,565) 515 (419) (1,063) 1,097 6,400 2,492 725 (402) (760) 115,357 130,725 108,391 (56,350) (112,574) (19,163) (21,635) (23,252) (95,821) (689,969) (7,226) (825) 25,148 3,594 30,460 16,426 18,319 (66,602) (748,759) (117,507) (48,908) (2,221) (1,933) 349,787 347,217 1,050,000 (850,000) 195,000 344,500 216,500 (78,000) (501,500) (109,000) (21) (12,765) (172) (121,660) (100,856) (94,043) (53,761) 624,162 11,524 (5,006) 6,128 2,408 13,791 7,663 5,255 8,785 13,791 7,663 Year Ended December 31, 2017 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 12,090 $ 57,843 $ (209,961 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation 52,427 42,489 38,987 Net amortization of debt premiums and discounts and debt issuance costs 3,420 2,832 1,376 Gain on sale of real estate — (79 ) — (Gain) loss on early extinguishment of debt 1,715 (104 ) (34 ) Straight line rental income (5,582 ) (2,691 ) (3,978 ) Amortization of acquired real estate leases 56,174 29,003 28,624 Amortization of deferred leasing costs 3,802 3,265 2,349 Other non-cash expenses, net 300 284 817 Loss on impairment of real estate 9,490 — — Increase in carrying value of property included in discontinued operations (619 ) — — Equity in earnings of investees (21,571 ) (35,518 ) (18,640 ) Net (gain) loss on issuance of shares by Select Income REIT (72 ) (86 ) 42,145 Loss on distribution to common shareholders of The RMR Group Inc. common stock — — 12,368 Loss on impairment of Select Income REIT investment — — 203,297 Distributions of earnings from Select Income REIT 18,640 32,425 21,882 Change in assets and liabilities: Restricted cash (1,563 ) 492 1,258 Deferred leasing costs (5,017 ) (10,196 ) (4,741 ) Rents receivable (4,990 ) 1,670 (2,729 ) Other assets 1,368 25 515 Accounts payable and accrued expenses 11,696 1,970 1,097 Due to related persons 1,339 634 725 Net cash provided by operating activities 133,047 124,258 115,357 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions and deposits (1,188,030 ) (200,331 ) — Real estate improvements (45,940 ) (32,999 ) (19,163 ) Investment in Select Income REIT — — (95,821 ) Investment in The RMR Group Inc. — — (7,226 ) Distributions in excess of earnings from Select Income REIT 32,192 17,910 25,148 Distributions in excess of earnings from our unconsolidated joint ventures 482 — — Proceeds from sale of properties, net 15,083 263 30,460 Net cash used in investing activities (1,186,213 ) (215,157 ) (66,602 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of mortgage notes payable (11,909 ) (107,933 ) (48,908 ) Proceeds from issuance of senior notes, after discounts 297,954 300,235 — Proceeds from issuance of common shares, net 493,866 — — Borrowings on unsecured revolving credit facility 645,000 399,000 195,000 Repayments on unsecured revolving credit facility (235,000 ) (356,000 ) (78,000 ) Payment of debt issuance costs (4,644 ) (544 ) (21 ) Repurchase of common shares (264 ) (337 ) (172 ) Distributions to common shareholders (145,209 ) (122,366 ) (121,660 ) Net cash provided by (used in) financing activities 1,039,794 112,055 (53,761 ) Increase (decrease) in cash and cash equivalents (13,372 ) 21,156 (5,006 ) Cash and cash equivalents at beginning of year 29,941 8,785 13,791 Cash and cash equivalents at end of year $ 16,569 $ 29,941 $ 8,785 F-635,500 21,334 15,336 143 126 169 13,545 (97,524) 5,244 97,524 (9,132) Year Ended December 31, 2017 2016 2015 Supplemental cash flow information: Interest paid $ 55,048 $ 41,139 $ 35,500 Income taxes paid $ 117 $ 111 $ 143 Non-cash investing activities: Investment in The RMR Group Inc. paid in common shares $ — $ — $ 13,545 Sale of real estate $ — $ 3,600 $ — Mortgage note receivable related to sale of real estate $ — $ (3,600 ) $ — Distribution of The RMR Group Inc. common stock received from Select Income REIT $ — $ — $ 5,244 Working capital assumed $ (1,596 ) $ — $ — Non-cash financing activities: Assumption of mortgage debt $ 167,548 $ — $ — Distribution to common shareholders of The RMR Group Inc. common stock $ — $ — $ (9,132 ) Preferred units of limited partnership issued $ 20,221 $ — $ — F-72015, excluding one property (one building) classified as discontinued operations,2017, we wholly owned 71108 properties (91(167 buildings), or our Properties,consolidated properties, located in 3130 states and the District of Columbia containing approximately 10.717.5 million rentable square feet and had a noncontrolling ownership interest in two unconsolidated joint ventures that own properties (three buildings) totaling an additional 0.4 million rentable square feet. As of December 31, 2015,2017, we also owned 24,918,421 common shares of beneficial interest, par value $0.01 per share, or approximately 27.9%27.8%, of the then outstanding common shares of Select Income REIT, or SIR.Equity Method Investments. We account for our investments in Affiliates Insurance Company, or AIC, and SIR using the equity method of accounting. Significant influence is present through common representation on the boards of trustees or directors of us, AIC and SIR and our significant ownership interest in SIR. Our Managing Trustees are also the managing trustees of SIR. Our Managing Trustees are also directors, officers and controlling shareholders (through ABP Trust (formerly known as Reit Management & Research Trust)) of The RMR Group Inc., or RMR Inc. Substantially all of the business of RMR Inc. is conducted by its majority owned subsidiary, The RMR Group LLC, or RMR LLC, which is the manager of us, AIC and SIR. Each of our Trustees is a director of AIC and one of our Independent Trustees is also an independent trustee of SIR. See Notes 6 and 11 for a further discussion of our investments in AIC and SIR.We periodically evaluate our equity method investments 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 and the extent to which the market value of our investment is below our carrying value, the financial condition of our investees, 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 record an impairment charge to adjust the basis of the investment to its estimated fair value. We recorded a $203,297 loss on impairment of our SIR investment in 2015. See Note 11 for more information on this impairment.Available for Sale Securities. As of December 31, 2015, we owned 1,214,225 common shares of RMR Inc. This investment is accounted for as available for sale securities and recorded at fair value based on its quoted market price at the end of each reporting period. The unrealized gains (losses) on our investment in available for sale securities is recorded as a component of cumulative other comprehensive income (loss) in shareholders’ equity. See Notes 6 and 9 for further information regarding our investment in RMR Inc.We evaluate our investments in available for sale securities to determine if a decline in the fair value below our carrying value is other than temporary. We consider the severity and the duration of the decline, and our ability and intent to hold the investment until recovery when making this assessment. If a decline in fair value is determined to be other than temporary, an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized in earnings. F-8GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)For properties qualifying as acquired businesses under Accounting Standards Codification 805, Business Combinations, weWe allocate a portion of the purchase price of our properties to above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective leases. We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase. We allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to the accompanying consolidated financial statements. In making these allocations, we consider factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us. If the value of tenant relationships becomes material in the future, we may separately allocate those amounts and amortize the allocated amounts over the estimated life of the relationships.$1,155, $868,$2,764, $1,457 and $1,123$1,157 during the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. We amortize the value of acquired in place leases (included in acquired real estate leases in our consolidated balance sheets), exclusive of the value of above market and below market acquired in place leases, over the terms of the associated leases. Such amortization, which is included in depreciation and amortization expense, amounted to $27,467, $26,844,$53,410, $27,546, and $20,482$27,467 during the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. When a lease is terminated prior to its stated expiration, we write off the unamortized amounts relating to that lease.$37,875$46,096 and $39,040$39,261 as of December 31, 20152017 and 2014,2016, respectively, net of accumulated amortization of $21,469$27,259 and $18,288,$22,753, respectively. Capitalized below market lease values were $25,553$25,973 and $26,605$20,603 as of December 31, 20152017 and 2014,2016, respectively, net of accumulated amortization of $12,818$12,338 and $10,681,$9,977, respectively.were $188,471was $472,928 and $198,157$203,368 as of December 31, 20152017 and 2014,2016, respectively, net of accumulated amortization of $86,610$139,893 and $68,829,$95,028, respectively. As of December 31, 2015,2017, the weighted average amortization periods for capitalized above market leases, lease origination value and capitalized below market lease values were 5.14.0 years, 5.75.6 years and 7.35.7 years, respectively. Future amortization of net intangible lease assets and liabilities, to be recognized over the current terms of the associated leases as of December 31, 20152017 are estimated to be $25,997$97,114 in 2016, $23,7312018, $70,790 in 2017, $19,4582019, $49,230 in 2018, $14,4062020, $36,321 in 2019, $6,9392021, $27,313 in 20202022 and $15,001$58,263 thereafter.F-9GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)$20,300$32,990 and $15,401$28,039 at December 31, 20152017 and 2014,2016, respectively, and accumulated amortization of deferred leasing costs totaled $6,001$10,013 and $3,951$6,960 at December 31, 20152017 and 2014,2016, respectively. Future amortization of deferred leasing costs to be recognized during the current terms of our existing leases as of December 31, 2015,2017 are estimated to be $2,866 in 2016, $2,376 in 2017, $2,128$4,282 in 2018, $2,018$4,091 in 2019, $1,871$3,275 in 2020, $2,670 in 2021, $2,186 in 2022 and $3,040$6,473 thereafter.Deferred Financing FeesAvailable for Sale Securities. As of December 31, 2017, we owned 1,214,225 common shares of class A common stock of RMR Inc. Our investment in RMR Inc. is classified as an available for sale security. Available for sale securities are recorded at fair value based on their quoted market price at the end of each reporting period. Unrealized gains and losses on available for sale securities are recorded as a component of cumulative other comprehensive income (loss) in shareholders’ equity. As further described in Note 7, we initially acquired 1,541,201 shares of class A common stock of RMR Inc. on June 5, 2015 for cash and share consideration of $17,462. We concluded, for accounting purposes, that the cash and share consideration we paid for our investment in these shares represented a discount to the fair value of these shares. We initially accounted for this investment under the cost method of accounting and recorded this investment at its estimated fair value of $39,833 as of June 5, 2015 using Level 3 inputs, as defined in the fair value hierarchy under U.S. generally accepted accounting principles, or GAAP. As a result, 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 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 $1,087, $1,087 and $618 of this liability during the years ended December 31, 2017, 2016 and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods. As of December 31, 2017, the remaining unamortized amount of this liability was $19,580. Future amortization of this liability as of December 31, 2017 is estimated to be $1,087 in 2018, $1,087 in 2019, $1,087 in 2020, $1,087 in 2021, $1,087 in 2022 and $14,145 thereafter.Deferred financing feesDebt issuance costs include capitalized issuance or assumption costs related to borrowings, and we amortize those costs aswhich are amortized to interest expense over the terms of the respective loans. Deferred financing fees totaled $13,692 and $14,055 atDebt issuance costs, net of accumulated amortization, for our revolving credit facility are included in other assets in our consolidated balance sheets. As of December 31, 20152017 and 2014, respectively,2016, debt issuance costs for our revolving credit facility were $5,234 and accumulated amortization of deferred financing fees totaled $3,817debt issuance costs for our revolving credit facility were $3,849 and $1,273 at$2,617, respectively. Debt issuance costs, net of accumulated amortization, for our unsecured term loans, senior unsecured notes and mortgage notes payable are presented as a direct deduction from the associated debt liability in our consolidated balance sheets. As of December 31, 20152017 and 2014,2016, debt issuance costs, net of accumulated amortization, for our unsecured term loans, senior unsecured notes, and mortgage notes payable totaled $15,750 and $14,725, respectively. Future amortization of deferred financing feesdebt issuance costs to be recognized with respect to our revolving credit facility, unsecured term loans, senior unsecured notes and mortgage notes as of December 31, 20152017 are estimated to be $2,637 in 2016, $2,552 in 2017, $2,552$3,469 in 2018, $1,296$2,217 in 2019, $450$1,357 in 2020, $1,217 in 2021, $826 in 2022 and $388$8,049 thereafter.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. We increased rental income by $3,978, $4,501 and $2,739 to record revenue on a straight line basis during the years ended December 31, 2015, 2014 and 2013, respectively. Rents receivable include $18,995 and $15,017 of straight line rent receivables at December 31, 2015 and 2014, respectively.Certain of our leases with government tenants provide the tenant the right to terminate its lease if its respective legislature or other funding authority does not appropriate the funding necessary for the government tenant to meet its lease obligations. We have determined the fixed non-cancelable lease term of these leases to be the fully executed term of the lease because we believe the occurrence of termination to be a remote contingency based on both our historical experience and our assessment of the likelihood of lease cancellation on a separate lease basis. Income (Loss).Income. Cumulative other comprehensive income (loss) consistsrepresents the unrealized gain on the RMR Inc. shares we own and our share of unrealized gains and losses related tothe cumulative comprehensive income of our investments inequity method investees, SIR RMR Inc. and AIC. See Notes 62, 7 and 1112 for further information regarding these investments.F-10 U.S. generally accepted accounting principles, or GAAP requires us to make estimates and assumptions that may affect the amounts reported in these consolidated financial statements and related notes. The actual results could differ from these estimates. or common shares, or our common shares, outstanding during the period. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares and the related impact on earnings, are considered when calculating diluted earnings per share. that are primarily leased to government tenants and our equity method investment in SIR.70,700 61,313 54,606 86 79 70,700 61,399 54,685 For the Year Ended December 31, 2017 2016 2015 Weighted average common shares for basic earnings per share 84,633 71,050 70,700 Effect of dilutive securities: unvested share awards 20 21 — Weighted average common shares for diluted earnings per share 84,653 71,071 70,700 RecentNew Accounting PronouncementsIn February 2015,On January 1, 2017, we adopted the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2015-02,2017-01, ConsolidationClarifying the Definition of a Business. Among other things, thisThis update changes howprovides additional guidance on evaluating whether a transaction should be accounted for as an entity determines the primary beneficiaryacquisition (or disposal) of assets or of a variable interest entity.business. This update is effectivedefines three requirements for interima set of assets and annual periods beginning after December 15, 2015, with early adoption permitted. Theactivities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. As a result of the implementation of this update, is not expectedcertain property acquisitions, which under previous guidance were accounted for as business combinations, are now accounted for as acquisitions of assets. In an asset acquisition, certain acquisition costs are capitalized as opposed to have a material impact on our consolidated financial statements.In April 2015, the FASB issued 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. In August 2015, the FASB clarified theexpensed under previous ASU and issued ASU No. 2015-15, guidance.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. These updates are effective for interim and annual reporting periods beginning after December 15, 2015 and require retrospective application. The implementation of these updates is not expected to cause any material changes to our consolidated financial statements other than the reclassification of certain debt issuance costs from assets to contra liabilities on our consolidated balance sheets. Debt issuance costs related to our unsecured revolving credit facility will remain classified as assets in accordance with ASU No. 2015-15. When these updates are adopted, deferred financing costs of $6,025 and $7,718 as of December 31, 2015 and December 31, 2014, respectively, will be reclassified from assets to the related debt obligations on our consolidated balance sheets. F-11GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)This ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While this ASU No. 2014-09 specifically references contracts with customers, it may also apply to certain other transactions such as the sale of real estate.estate or equipment. In JulyAugust 2015, the FASB approvedprovided for a one yearone-year deferral of the effective date for this ASU to interim and annual reporting periodsNo. 2014-09, which is now effective for us beginning after December 15, 2017. We are continuing to evaluate this guidance; however, we do not expect its adoption to have a material impact on our consolidated financial statements, as aJanuary 1, 2018. A substantial portion of our revenue consists of rental income from leasing arrangements, which areis specifically excluded from this ASU.In September 2015, the FASB issued ASU No. 2015-16, Simplifying2014-09. We have evaluated ASU No. 2014-09 (and related clarifying guidance issued by the Accounting for Measurement-Period Adjustments, which eliminatesFASB) and 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 that would have been recorded in previous periods if the accounting had been completed at the acquisition date. This update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The implementation of this update iswill not expected to have a material impact on the amount or timing of our revenue recognition in our consolidated financial statements.statements with the exception of profit recognition on real estate sales. We2017, with early adoption permitted subject2017. We expect to certain conditions. We are continuingrecord an adjustment of $45,117 on January 1, 2018 to evaluate this guidance; however, we expect the implementation of this guidance will change our accounting for our available for sale equity investments. Currently,reclassify historical changes in the fair value of theseour available for sale equity investments are recorded throughfrom other comprehensive income (loss). Under this ASU, theseto retained earnings. Future changes in the fair value of our equity investments will be recorded through earnings.earnings in accordance with ASU No. 2016-01.2015,2017, we wholly owned 71108 properties (91(167 buildings), with an undepreciated carrying value of $1,699,478 excluding one property (one building) classified as discontinued operations with an undepreciated carrying value of $12,260.$2,975,721 and had a noncontrolling ownership interest in two unconsolidated joint ventures that own two properties (three buildings). We generally lease space inat our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leasescontracts expiring between 20162018 and 2030.2034. Our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the year ended December 31, 2015,2017, we entered into 5175 leases for 811,1901,604,783 rentable square feet for a weighted (by rentable square feet) average lease term of 7.57.6 years and we made commitments for approximately $20,571$18,249 of leasing related costs. WeAs of December 31, 2017, we have estimated unspent leasing related obligations of $12,653 as of$31,310. During the year ended December 31, 2015.2017, we capitalized $511 of interest expense related to the redevelopment and expansion of an existing property.F-12
FPO TransactionTotal Purchase Price: Cash consideration $ 1,175,140 Acquisition related costs 9,575 Total cash consideration 1,184,715 20,221 Acquired net working capital (1,596 ) Assumed mortgage notes 167,548 Non-cash portion of purchase price 186,173 Gross purchase price $ 1,370,888 Purchase Price Allocation: Land $ 360,909 Buildings and improvements 681,340 283,498 Investment in unconsolidated joint ventures 51,305 Cash 11,191 Restricted cash 1,018 Rents receivable 2,672 Other assets 3,640 Total assets 1,426,694 (167,936 ) (5,776 ) Accounts payable and accrued expenses (10,640 ) Rents collected in advance (1,436 ) Security deposits (4,849 ) Net assets acquired 1,204,936 Assumed working capital (1,596 ) Assumed principal balance of debt 167,548 Gross purchase price $ 1,370,888 (1) Pursuant to the terms of the FPO Transaction, each unit of limited partnership interest in FPO's operating partnership that was not liquidated on the closing date was exchanged on a one-for-one basis for 5.5% Series A Cumulative Preferred Units of the surviving subsidiary. As of December 31, 2017, there are 1,814 of 5.5% Series A Cumulative Preferred Units outstanding. Beginning on October of each year and ending January 15 of the following year, with the first such period beginning October 1, 2019, holders have the right to redeem their 5.5% Series A Cumulative Preferred Units for cash equal to $11.15 per unit. Beginning on April 1 of each year and ending June 30 of that year, with the first such period beginning April 1, 2018, we have the right to redeem all or any portion of the outstanding 5.5% Series A Cumulative Preferred Units for cash at $11.15 per unit. As of December 31, 2017, the carrying value of (2) As of the date acquired, the weighted average amortization periods for capitalized above market lease values, lease origination value and capitalized below market lease values were 3.2 years, 3.1 years and 3.8 years, respectively. (3) Includes fair value adjustments totaling $388 on $167,936 principal amount of mortgage notes we assumed in connection with the FPO Transaction. Year Ended December 31, 2017 2016 Rental income $ 437,101 $ 412,245 Net income (loss) (25,898 ) 11,630 Net income (loss) per share $ (0.26 ) $ 0.12 Joint Venture GOV Ownership GOV Carrying Value of Investment at December 31, 2017 Property Type Number of Buildings Location Square Feet Prosperity Metro Plaza 51% $ 27,888 Office 2 Fairfax, VA 328,456 1750 H Street, NW 50% 22,314 Office 1 Washington, DC 115,411 Total $ 50,202 3 443,867 Joint Venture Maturity Date Principal Balance at December 31, 2017 Prosperity Metro Plaza 4.09% 12/1/2029 $ 50,000 1750 H Street, NW 3.69% 8/1/2024 32,000 Weighted Average/Total 3.93% $ 82,000 (1) Includes the effect of mark to market purchase accounting. Number of Buildings Other Acquisition Properties/ Square Purchase and Assumed Date Location Type Buildings Feet Price Land Improvements Assets Jan-17 Manassas, VA Office 1/1 69,374 $ 12,657 $ 1,562 $ 8,253 $ 2,842 Number of Buildings Other Acquired Acquisition Properties/ Square Purchase and Assumed Acquired Lease Date Location Type Buildings Feet Land Improvements Assets Leases Obligations Jan-16 Office 1/1 337,811 $ 79,508 $ 4,688 $ 61,995 $ 2,167 $ 11,245 $ (587 ) Jul-16 Land — — 1,670 1,670 — — — — Dec-16 Office 1/1 82,896 13,943 1,466 8,797 — 3,680 — Dec-16 Office 1/3 409,478 104,183 6,966 74,214 — 23,003 — 3/5 830,185 $ 199,304 $ 14,790 $ 145,006 $ 2,167 $ 37,928 $ (587 ) (1) Excludes acquisition costs. (2) Accounted for as a business combination. (3) On July 6, 2016, we acquired a land parcel adjacent to on our existing properties for $1,623. We accounted for this transaction as an asset acquisition and capitalized acquisition related costs of $47. As of December 31, 2016 Real estate properties, net $ 12,260 Other assets 281 Assets of discontinued operations $ 12,541 Other liabilities $ 45 Liabilities of discontinued operations $ 45 Year Ended December 31, 2017 2016 2015 Rental income $ 17 $ 68 $ 114 Real estate taxes (88 ) (97 ) (92 ) Utility expenses (97 ) (146 ) (161 ) Other operating expenses (202 ) (300 ) (272 ) General and administrative (76 ) (114 ) (114 ) Increase in carrying value of property included in discontinued operations 619 — — Income (loss) from discontinued operations $ 173 $ (589 ) $ (525 ) excluding one property (one building) classified as discontinued operations, and estimated real estate tax and other expense reimbursements scheduled to be received during the current terms of the existing leases as of December 31, 20152017 are as follows:215,342 188,941 161,162 133,898 93,792 235,064 1,028,199 2018 $ 367,883 2019 330,792 2020 258,847 2021 220,758 2022 180,558 Thereafter 564,621 $ 1,923,459 2015, excluding one property (one building) classified as discontinued operations,2017, government tenants who currently represent approximately 5.2%4.5% of our total future minimum lease payments have currently exercisable rights to terminate their leases before the stated terms of their leases expire. In 2016, 2017, 2018, 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026 and 2023,2027, early termination rights become exercisable by other government tenants who currently represent an additional approximately 5.8%0.8%, 3.2%5.6%, 1.6%10.3%, 9.5%2.3%, 6.8%5.5%, 4.1%1.0%, 0.5%, 0.6%, 2.3% and 2.1%1.8% of our total future minimum lease payments, respectively. In addition, as of December 31, 2015, 152017, 26 of our government tenants have the currently exercisable right to terminate their leases if theirthe respective legislature or other funding authority does not appropriate the funding necessary for the government tenant to meet its lease obligations.obligation. These 1526 tenants represent approximately 17.2%11.7% of our total future minimum lease payments as of December 31, 2015.Acquisition ActivitiesIn2017.2016, we acquired an office property (one building) located in Sacramento, CA with 338,796 rentable square feet31, 2021. We sublease a portion of the space, which sublease expires on January 31, 2021. Rent expense incurred under the lease, net of sublease revenue, was $374 for a purchase price of $79,765, excluding acquisition related costs. This property is majority leased to the State of California.Disposition Activities – Continuing OperationsIn February 2015, one of our U.S. Government tenants exercised its option to acquire the office property (one building) it leased from us located in Riverdale, MD with 337,500 rentable square feet. The sale price was $30,600, excluding closing costs. We recognized no gain or loss on this sale.In May 2015, we began marketing for sale an office property (one building) located in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 as ofyear ended December 31, 2015. We can provide no assurance that the sale of this property will occur or what the terms for any such sale would be. We have classified this property as held for sale as of F-132015.2017 are summarized as follows:2018 $ 1,543 2019 1,584 2020 1,627 2021 139 $ 4,893 resultspersonnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations. See Note 7 for further information regarding our relationship, agreements and transactions with RMR LLC.◦ the sum of (a) 0.5% of the average aggregate historical cost of the real estate assets acquired from a REIT to which RMR LLC provided business management or property management services, or the Transferred Assets, plus (b) 0.7% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets up to $250,000, plus (c) 0.5% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets exceeding $250,000; and ◦ the sum of (a) 0.7% of the average closing price per share of our common shares on the stock exchange on which such shares are principally traded during such period, multiplied by the average number of our common shares outstanding during such period, plus the daily weighted average of the aggregate liquidation preference of each class of our preferred shares outstanding during such period, plus the daily weighted average of the aggregate principal amount of our consolidated indebtedness during such period, or, together, our Average Market Capitalization, up to $250,000, plus (b) 0.5% of our Average Market Capitalization exceeding $250,000. operations for this property are included in continuing operations inour real estate investments includes our consolidated financial statements. Summarized balance sheet informationassets invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and costs which may be allocated to intangibles or are unallocated), all before reserves for this propertydepreciation, amortization, impairment charges or bad debts or other similar non-cash reserves; provided, however, we do not include our ownership of SIR common shares as part of our real estate investments for purposes of calculating our base management fee due to RMR LLC since SIR pays separate business management fees to RMR LLC.◦ An amount, subject to a cap based on the value of our common shares outstanding, equal to 12% of the product of: December 31,– 2015Real estate properties, net$3,071Rents receivable1Other assets26Assetsour equity market capitalization on the last trading day of property heldthe year immediately prior to the relevant three year measurement period (or, for sale$3,098Other liabilities$43Liabilitiespurposes of property heldcalculating any incentive fee for sale$432015, our equity market capitalization on December 31, 2013), and Disposition Activities – Discontinued OperationsWe are marketing for sale an office property (one building) located in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at December 31, 2015. We can provide no assurance that the sale of this property will occur or what the terms for any such sale would be.Results of operations for two properties (two buildings) we sold in 2013, two properties (two buildings) we sold in 2014 and the Falls Church, VA property (one building) disclosed above which qualified as held for sale prior to our adoption in 2014 of ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, are classified as discontinued operations in our consolidated financial statements. Summarized balance sheet and income statement information for the properties classified as discontinued operations is as follows:Balance Sheets:12,260 12,260 782 208 123 12,468 13,165 54 150 54 150 Statements of Operations:114 1,673 4,580 (92) (427) (678) (161) (226) (539) (272) (459) (966) (1,025) (114) (181) (287) (10,142) 2,344 774 8,168 (525) 3,498 (889) F-14– the amount (expressed as a percentage) by which the total return per share, as defined in the business management agreement and further described below, of our common shareholders (i.e., share price appreciation plus dividends) exceeds the total shareholder return of the SNL U.S. REIT Equity Index, or the benchmark return per share, for the relevant measurement period. ◦ The calculation of the incentive management fee (including the determinations of our equity market capitalization and the total return per share of our common shareholders) is subject to adjustments if additional common shares are issued during the measurement period. ◦ No incentive management fee is payable by us unless our total return per share during the measurement period is positive. ◦ The measurement periods are three year periods ending with the year for which the incentive management fee is being calculated. ◦ If our total return per share exceeds 12% per year in any measurement period, the benchmark return per share is adjusted to be the lesser of the total shareholder return of the SNL U.S. REIT Equity Index for such measurement period and 12% per year, or the adjusted benchmark return per share. In instances where the adjusted benchmark return per share applies, the incentive management fee will be reduced if our total return per share is between 200 basis points and 500 basis points below the SNL U.S. REIT Equity Index by a low return factor, as defined in the business management agreement, and there will be no incentive management fee paid if, in these instances, our total return per share is more than 500 basis points below the SNL U.S. REIT Equity Index. ◦ The incentive management fee is subject to a cap. The cap is equal to the value of the number of our common shares which would, after issuance, represent 1.5% of the number of our common shares then outstanding multiplied by the average closing price of our common shares during the 10 consecutive trading days having the highest average closing prices during the final 30 trading days of the relevant measurement period. ◦ Incentive management fees we paid to RMR LLC for any period may be subject to “clawback” if our financial statements for that period are restated due to material non-compliance with any financial reporting requirements under the securities laws as a result of the bad faith, fraud, willful misconduct or gross negligence of RMR LLC and the amount of the incentive management fee we paid was greater than the amount we would have paid based on the restated financial statements. 6.7. Related Person Transactionsadopted written Governance Guidelines that describe the considerationrelationships and approvalhistorical and continuing transactions with RMR LLC, RMR Inc. and others related to them. RMR LLC is a subsidiary of related person transactions. Under these Governance Guidelines, we may not enter into a transaction in which anyRMR Inc. Our Managing Trustee, or executive officer, any member of the immediate family of any Trustee or executive officer or other related person, has or will have a direct or indirect material interest unless that transaction has been disclosed or made known to our Board of Trustees and our Board of Trustees reviews and approves or ratifies the transaction by the affirmative vote of a majority of the disinterested Trustees, even if the disinterested Trustees constitute less than a quorum. If there are no disinterested Trustees, the transaction must be reviewed, authorized and approved or ratified by both (i) the affirmative vote of a majority of our Board of Trustees and (ii) the affirmative vote of a majority of our Independent Trustees. In determining whether to approve or ratify a transaction, our Board of Trustees, or disinterested Trustees or Independent Trustees,Adam Portnoy, as the case may be, also act in accordance with any applicable provisionscurrent sole trustee of our declaration of trust and bylaws, consider all ofABP Trust is the relevant facts and circumstances and approve only those transactions that they determine are fair and reasonable to us. All related person transactions described below were reviewed and approved or ratified by a majority of the disinterested Trustees or otherwise in accordance with our policies, declaration of trust and bylaws, each as described above. In the case of transactions with us by employeescontrolling shareholder of RMR Inc. and its subsidiaries who are subject to our Codeas the current sole trustee of Business Conduct and Ethics but who areABP Trust beneficially owns all the class A membership units of RMR LLC not Trustees or executive officers of us, the employee must seek approval from an executive officer who has no interest in the matter for which approval is being requested. Copies of our Governance Guidelines and Code of Business Conduct and Ethics are available on our website, www.govreit.com.Our Manager, RMR LLC. We have no employees. The personnel and various services we require to operate our business are provided to usowned by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (i) a business management agreement, which relates to our business generally, and (ii) a property management agreement, which relates to our property level operations, both of which are described below in this Note under “—Management Agreements with RMR LLC.”One of our Managing Trustees, Mr. BarryInc. Adam Portnoy is a Managing Director,the managing director, president and chief executive officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. OurBarry Portnoy was our other Managing Trustee Mr. Adam Portnoy, is a Managing Director, President, and Chief Executive Officer and a controlling shareholder (through ABP Trust) of RMR Inc.director and an officer of RMR LLC. ABP Trust is owned by Messrs. Barry and Adam Portnoy. Messrs. Barry and Adam Portnoy also own class A membership units of RMR LLC through their ownership of ABP Trust.Inc. until his death on February 25, 2018. Each of our executive officers is also an officer of RMR LLC. Our Independent Trustees also serve as independent directors or independent trustees of other companies to which RMR LLC or its affiliatessubsidiaries provide management services. Mr. Barry Portnoy serves as a director, managing director, trustee or managing trustee of those companies and Mr. Adam Portnoy serves as a managing director trustee or managing trustee of a majorityalmost all of those companies.the public companies to which RMR LLC or its subsidiaries provide management services. In addition, officers of RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its affiliatessubsidiaries provide management services.ourRMR LLC, Our Manager. On June 5, 2015, we and three other real estate investment trusts, orRMR managed REITs to which RMR LLC provides management services—- Hospitality Properties Trust, or HPT, SIR and Senior Housing Properties Trust, or SNH, and collectively, with HPT and SIR, the Other REITs—REITs - participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired shares of class A common stock of RMR Inc.by and among us, our manager, RMR LLC, itsABP Trust (RMR LLC’s then sole member, ABP Trust,member) and RMR Inc. and similar transaction agreements that each Other REIT entered into with RMR LLC, ABP Trust and RMR Inc. Pursuant to theseAs part of the Up-C Transaction and concurrently with entering into the transaction agreements: weagreements, on June 5, 2015, among other things: to RMR Inc. 700,000 of our common shares and $3,917 in cash; HPT contributedcash to RMR Inc. 1,490,000 of its common shares and $12,622 in cash; SIR contributed 880,000 of its common shares and $15,880 in cash; SNH contributed to RMR Inc. 2,345,000 of its common shares and $13,967 in cash; ABP Trust contributed to RMR Inc. $11,520 in cash, which RMR Inc. contributed to RMR LLC; F-15GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)RMR LLC issued 1,000,000 of its class B membership units to RMR Inc.; RMR Inc. issued 1,541,201 shares of its class A common stock to us, 5,019,121us. its class A common stock to HPT, 3,166,891 shares of its class A common stock to SIR, 5,272,787 shares of its class A common stock to SNH, and 1,000,000 shares of its class B-1 common stock and 15,000,000 shares of its class B-2 common stock to ABP Trust; ABP Trust delivered 15,000,000 of the 30,000,000 class A membership units of RMR LLC which ABP Trust then owned to RMR Inc.; and RMR Inc. delivered to ABP Trust our common shares, the common shares of the Other REITs and the cash which had been contributed by us and the Other REITs to RMR Inc.The class A common stock and class B-1 common stock of RMR Inc. share ratably as a single class in dividends and other distributions of RMR Inc. when and if declared by the board of directors of RMR Inc. and have the same rights in a liquidation of RMR Inc. The class B-1 common stock of RMR Inc. is convertible into class A common stock of RMR Inc. onissued to us in the Up-C Transaction to our shareholders as a 1:1 basis. Thespecial distribution.has one vote per share. The class B-1 common stock of RMR Inc. has 10 votes per share. The class B-2 common stock of RMR Inc. has no economic interestissued to us in RMR Inc., but has 10 votes per share and is paired with the class A membership units of RMR LLC owned by ABP Trust. Upon request by ABP Trust, RMR LLC is required to redeem the class A membership units of RMR LLC owned by ABP Trust for class A common stock of RMR Inc. on a 1:1 basis, or if RMR Inc. elects, for cash. Under the governing documents of RMR Inc., upon the redemption of a class A membership unit of RMR LLC, the share of class B-2 common stock of RMR Inc. “paired” with the class A membership unit being redeemed is cancelled for no additional consideration.As part of the Up-C Transaction, pursuant to which we received demand and concurrentlypiggyback registration rights, subject to certain limitations.enteringABP Trust, Adam Portnoy and Barry Portnoy pursuant to which they agreed not to transfer the transaction agreements,700,000 of our common shares ABP Trust received in the Up-C Transaction for a 10 year period ending on June 5, 2015:
2025 and we granted them certain registration rights, subject, in each case, to certain exceptions.·We entered into an amended and restated business management agreement with RMR LLC and an amended and restated property management agreement with RMR LLC. The amendments made by these agreements are described below in this Note under “—Management Agreements with RMR LLC.” Each Other REIT also entered amended and restated business and property management agreements with RMR LLC, which made similar amendments to their management agreements with RMR LLC.·We entered into a registration rights agreement with RMR Inc. covering the class A common stock of RMR Inc. that we receivedEach Other REIT participated in the Up-C Transaction in a similar manner. After giving effect to the Up-C Transaction, pursuant to which we received demand and piggyback registration rights, subject to certain limitations. Each Other REIT entered into a similar registration rights agreement with RMR Inc.·We entered into a lock up and registration rights agreement with ABP Trust and Messrs. Barry and Adam Portnoy pursuant to which ABP Trust and Messrs. Barry and Adam Portnoy agreed not to transfer the 700,000 of our common shares ABP Trust received in the Up-C Transaction for a period of 10 years and we granted them certain registration rights, subject to certain limited exceptions. Each Other REIT also entered into a similar lock up and registration rights agreement with ABP Trust and Messrs. Barry and Adam Portnoy.As a result of the Up-C Transaction: RMR LLC became a subsidiary of RMR Inc.; and RMR Inc. became the managing member of RMR LLC; through our ownership of class A common stock of RMR Inc., we became a holder of an indirect economic interest in RMR LLC; and through their ownership of class A common stock of RMR Inc., HPT, SIR and SNH also became holders of indirect economic interests in RMR LLC. Through its ownership of class B-1 common stock of RMR Inc., class B-2 common stock of RMR Inc. and class A membership units of RMR LLC, ABP Trust holds, directly and indirectly, a 51.6% economic interest in RMR LLC and controls 91.4% of the voting power of outstanding capital stock of RMR Inc.F-16GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)we receivedissued to us in the Up-C Transaction; each Other REIT also distributed approximately half of the shares of class A common stock of RMR Inc. they receivedissued to it in the Up-C Transaction to theirits respective shareholders. As a shareholder of SIR we received 441,056 class A common shares of RMR Inc. included in such shares that SIR distributed to its shareholders. RMR Inc. facilitated this distributionthese distributions by filing a registration statement with the Securities and Exchange CommissionSEC to register the shares of class A common stock of RMR Inc. being distributed and by listing those shares on The NASDAQ Stock Market LLC. Following this distribution, we currently hold 1,214,225 shares of class A common stock of RMR Inc., including 441,056 shares of class A common stock we received as a result of our ownership of SIR common shares, and HPT, SIR and SNH currently hold 2,503,777, 1,586,836 and 2,637,408 shares of class A common stock of RMR Inc., respectively.Nasdaq. In connection with this distribution, we recognized a non-cash loss of $12,368 in the fourth quarter of 2015 as a result of the closing price of RMR Inc.’sthe class A common stock of RMR Inc. being lower than our carrying amount per RMR Inc. share on the distribution date.On December 15, 2015, See Notes 2 and 10 for information regarding the fair value of our investment in RMR Inc. paid a cash dividend to holders of its class A common stock and class B-1 common stock as of November 25, 2015 of $0.5260 per share to cover the period from and including June 5, 2015 up to but not including December 14, 2015. As a result of our31, 2017.we received a cash dividendclass B-1 common stock of $811 from RMR Inc.The transactions contemplated by the transaction agreement, class B-2 common stock of RMR Inc. and the terms thereof were negotiatedclass A membership units of RMR LLC, as of December 31, 2017, our then Managing Trustees, Adam Portnoy and reviewed by a Joint Special Committee comprised solely of our Independent TrusteesBarry Portnoy, in aggregate held, directly and the independentindirectly (including as trustees of the Other REITs, or the Joint Special Committee,ABP Trust), a 51.9% economic interest in RMR LLC and were separately approved and adopted by our Independent Trustee who did not serve as an independent trustee of anycontrol 91.4% of the Other REITs, by a Special Committeevoting power of our Boardoutstanding capital stock of Trustees, comprised solely of our Independent Trustees, or our Special Committee, and by our Board of Trustees. Morgan Stanley & Co. LLC acted as financial advisor to the Joint Special Committee and Reynolds Advisory Partners, LLC acted as financial advisor to our Special Committee. Accounting for Investment in RMR Inc.. We concluded, for accounting purposes, that the cash and share consideration of $17,462 we paid for our investment in 1,541,201currently hold 1,214,225 shares of class A common stock of RMR Inc. represented a discount to the fair value, including 441,056 shares of these shares. We initially accounted for this investment under the cost method of accounting and recorded this investment at its estimated fair value of $39,833 as of June 5, 2015 using Level 3 inputs as defined in the fair value hierarchy under GAAP. As a result, we recorded a liability for the amount by which the estimated fair value exceeded the price we paid for these shares and we are amortizing this amount as described below. As of December 31, 2015, the unamortized balance of this liability was $21,754. This liability for our investment in class A common stock of RMR Inc. is included in accounts payable and other liabilities in our consolidated balance sheet and is being amortized onthat SIR distributed to us as a straight line basis through December 31, 2035, the then 20 year termresult of the business and property management agreements, as an allocated reduction to business management fees and property management fees, which are included in general and administrative and other operating expenses, respectively, in our consolidated statements of comprehensive income (loss). Amortization of this liability, which is included in general and administrative expense and other operating expenses, for the year ended December 31, 2015 totaled $618.Management Agreements with RMR LLC. For 2013, our business management agreement provided for the base business management fee to be paid to RMR LLC at an annual rate equal to the sum of (a) 0.5% of the historical cost of the real estate assets acquired from a REIT to which RMR LLC provided business management or property management services, or the Transferred Assets, plus (b) with respect to other properties we acquired excluding the Transferred Assets, 0.7% of our aggregate cost of those properties up to and including $250,000, and 0.5% thereafter. In addition, for 2013, our business management agreement also provided for RMR LLC to be paid an incentive fee equal to 15% of the product of (i) the weighted average of our common shares outstanding on a fully diluted basis during a fiscal year and (ii) the excess, if any, of the FFO Per Share, as defined in that business management agreement, for such fiscal year over the FFO Per Share for the preceding fiscal year. This incentive fee was payable in common shares and it was subject to a cap on the value of the incentive fee being no greater than $0.02 per share of our total shares outstanding.F-17GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)On December 23, 2013, we and RMR LLC amended and restated our business management agreement, effective with respect to services performed on or after January 1, 2014. After these amendments, our business management agreement provided that:·Revised Base Management Fee. The annual amount of the base management fee to be paid to RMR LLC by us for each applicable period is equal to the lesser of:othe sum of (a) 0.5% of the average aggregate historical cost of the Transferred Assets, plus (b) 0.7% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets up to $250,000, plus (c) 0.5% of the average historical cost of our real estate investments excluding the Transferred Assets exceeding $250,000; andothe sum of (a) 0.7% of the average closing price per share of our common shares on the New York Stock Exchange, or the NYSE, during such period, multiplied by the average number of our common shares outstanding during such period, plus the daily weighted average of the aggregate liquidation preference of each class of our preferred shares outstanding during such period, plus the daily weighted average of the aggregate principal amount of our consolidated indebtedness during such period, or, together, our Average Market Capitalization, up to $250,000, plus (b) 0.5% of our Average Market Capitalization exceeding $250,000. The average aggregate historical cost of our real estate investments includes our consolidated assets invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and costs which may be allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar noncash reserves; provided, however, we do not include our ownership of SIR shares as part of our real estate investments for purposes of calculating our base management fee due to RMR LLC since SIR pays its separate management fees to RMR LLC.·Revised Incentive Fee.SIR. The incentive fee which may be earned by RMR LLC for an annual period is an amount, subject to a cap based on the value of our outstanding common shares, equal to 12% of the product of (a) our equity market capitalization on the last trading day on the year immediately prior to the relevant measurement period and (b) the amount (expressed as a percentage) by which the total returns per share realized by the holders of our common shares (i.e., share price appreciation plus dividends) exceeds the total shareholder return of the SNL US REIT Equity Index (in each case subject to certain adjustments) for the relevant measurement period. The measurement periods are generally three-year periods ending with the year for which the incentive fee is being calculated, with shorter periods applicable in the case of the calculation of the incentive fee for 2014 ( one year) and 2015 ( two years). The terms of the revised incentive fee were developed by our Compensation Committee, which is comprised solely of Independent Trustees, in consultation with FTI Consulting, Inc., a nationally recognized compensation consultant experienced in REIT compensation programs.·Partial Payment in Common Shares. The base management fee would be paid monthly to RMR LLC, 90% in cash and 10% in our common shares, which are fully vested when issued. The number of our common shares to be issued in payment of the base management fee for each month would equal the value of 10% of the total base management fee for that month divided by the average daily closing price of our common shares during that month. The incentive fee would be payable in our common shares, with one-third of our common shares issued in payment of an incentive fee vested on the date of issuance, and the remaining two-thirds vesting thereafter in two equal annual installments. All common shares issued in payment of the incentive fee would be fully vested upon termination of the business management agreement, subject to certain exceptions. In addition, RMR LLC would, in certain circumstances, be required to return to us or forfeit some or all of the common shares paid or payable to it in payment of the incentive management fee. RMR LLC and certain eligible transferees of our common shares issued in payment of the base management fee or incentive fee would be entitled to demand registration rights, exercisable not more frequently than twice per year, and to "piggy-back" registration rights, with certain expenses to be paid by us. We and applicable selling shareholders also indemnify each other (and their officers, trustees, directors and controlling persons) against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or the Securities Act, in connection with any such registration.·Elimination of Right of First Offer. The right of first offer was eliminated. That right of first offer had required that, with certain exceptions, if we determined to offer for sale or other disposition any real property that, at such time, is of a type within the investment focus of another REIT to which RMR LLC provides management services, we would first offer that property for purchase or disposition to that REIT and negotiate in good faith for such purchase or disposition. Under our business management agreement, we acknowledge that RMR LLC may engage in other activities or businesses and act as the manager to any other person or entity (including other REITs) even though such person or entity has investment policies and objectives similar to ours and we are not entitled to preferential treatment in receiving information, recommendations and other services from RMR LLC.On May 9, 2014, we and RMR LLC entered into the following amendments to our business management agreement and property management agreement:·Revised RMR LLC Termination Right. RMR LLC’s right to terminate the business management and property management agreements was changed to 120 days’ written notice from the previous 60 days’ written notice for the business management agreement and five business days’ notice if we underwent a change of control for the property management agreement.·RMR LLC Termination Fee. We agreed that if we terminate or elect not to renew the business management agreement other than for cause, as defined, we would pay RMR LLC a termination fee equal to 2.75 times the sum of the annual base management fee and the annual internal audit services expense, which amounts are based on averages during the 24 consecutive calendar months prior to the date of notice of nonrenewal or termination. In addition, we agreed that if we terminate or elect not to renew the property management agreement other than for cause, as defined, within 12 months prior to or following our giving notice of termination or non-renewal of the business management agreement other than for cause, we would pay RMR LLC a termination fee equal to 12 times the average monthly property management fee for the six months prior to the effective date of the nonrenewal or termination.·Transitional Services. RMR LLC agreed to provide certain transition services to us for 120 days following an applicable termination by us or notice of termination by RMR LLC, including cooperating with us and using commercially reasonable efforts to facilitate the orderly transfer of the management and real estate investment services provided under the business management agreement and to facilitate the orderly transfer of management of the managed properties, as applicable.As part of the Up-C Transaction described above, on June 5, 2015, we and RMR LLC amended and restated our business management agreement and our property management agreement. As a result of these amendments, effective as of June 5, 2015:F-18GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)·Extended Term. Our management agreements have terms that end on December 31, 2036, and automatically extend on December 31st of each year for an additional year, so that the terms of the agreements thereafter end on the 20th anniversary of the date of the extension.·Payment of Fees in Cash. All base management and incentive fees under our management agreements are payable in cash.·Revised Termination Rights. We have the right to terminate each management agreement: (i) at any time on 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined therein, (iii) on 60 days’ written notice given within 60 days after the end of an applicable calendar year for a performance reason, as defined therein, and (iv) by written notice during the 12 months following a change of control of RMR LLC, as defined therein. RMR LLC has the right to terminate the management agreements for good reason, as defined therein.·Revised Termination Fee. If we terminate one or both of our management agreements for convenience, or if RMR LLC terminates one or both of our management agreements for good reason, as defined therein, we have agreed to pay RMR LLC a termination fee in an amount equal to the sum of the present values of the monthly future fees, as defined therein, for the terminated management agreement(s) for the remaining term prior to termination, which depending on the time of termination would be between 19 and 20 years. If we terminate one or both of our management agreements for a performance reason, as defined therein, we have agreed to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years prior to termination. We are not required to pay any termination fee if we terminate our management agreements for cause, as defined therein or as a result of a change of control of RMR LLC, as defined therein.Our Board of Trustees has given our Compensation Committee, which is comprised exclusively of our Independent Trustees, authority to act on our behalf with respect to our management agreements with RMR LLC. Our Governance Guidelines and the charter of our Compensation Committee together require the committee to annually review the terms of these agreements, evaluate RMR LLC’s performance under the agreements and determine whether to terminate the management agreements.The 2013 and 2014 amendments to the business and property management agreements described above were negotiated, reviewed, approved and adopted by our Compensation Committee and the 2015 amendments to the business and property management agreements described above were negotiated and reviewed by the Joint Special Committee, and were approved and adopted by our Compensation Committee.RMR LLC Management Fees and Reimbursements. Pursuant to our business management agreement with RMR LLC, we recognized business management fees of $9,934, $10,226 and $9,341 for 2015, 2014 and 2013, respectively. The business management fees we recognized for 2015, 2014 and 2013 are included in general and administrative expenses in our consolidated financial statements. The business management fee recognized for 2015 reflects a reduction of $372 for the amortization of the liability we recorded in connection with the Up-C Transaction, as further described above in this Note under “—Accounting for Investment in RMR Inc.” In accordance with the terms of our business management agreement, we issued, in aggregate, 19,339 of our common shares to RMR LLC as payment for a portion of the base business management fee we recognized for the period from January 1, 2015 to June 5, 2015, and 42,442 of our common shares to RMR LLC as payment for a portion of the base business management fee we recognized for 2014. No incentive fee was payable to RMR LLC under our business management agreement for 2015, 2014 or 2013. In March 2013, we issued 20,230 of our common shares to RMR LLC for the incentive fees for 2012, pursuant to our business management agreement.F-19GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)Our property management agreement with RMR LLC provides for management fees equal to 3.0% of gross collected rents and construction supervision fees equal to 5.0% of construction costs. The aggregate property management and construction supervision fees we recognized were $7,977, $8,203 and $7,877 for 2015, 2014 and 2013, respectively. These amounts are included in operating expenses or have been capitalized, as appropriate, in our consolidated financial statements.generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating costs are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. The total of these property management related reimbursements paid to RMR LLC for the years ended December 31, 2015, 2014 and 2013 were $9,641, $7,982 and $6,822, respectively, and these amounts are included in property operating expenses in our consolidated financial statements for these periods. We are generally not responsible for payment of RMR LLC's employment, office or administration expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC’s employees assigned to work exclusively or partly at our owned properties, our share of the wages, benefits and other related costs of centralized accounting personnel and our share of the staff employed by RMR LLC who perform our internal audit function.We have historically awarded share grants to certain RMR LLC employees under our equity compensation plan. During the years ended December 31, 2015, 2014 and 2013, we made annual share grants to RMR LLC employees of 53,100, 51,150 and 48,350 of our common shares, respectively. Those grants had aggregate values of $841, $1,191 and $1,142, respectively, based upon the closing price of our common shares on the NYSE on the dates of grant. One fifth of those restricted shares vested on the grant dates and one fifth vests on each of the next four anniversaries of the grant dates. These share grants to RMR LLC employees are in addition to the fees we paid RMR LLC. In September 2015, we purchased 10,721 of our common shares, at the closing price for our common shares on the NYSE on the date of purchase, from certain of 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. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services, which amounts are subject to approval by our Compensation Committee. Our Audit Committee appoints our Director of Internal Audit. The aggregate amounts accrued for share grants to RMR LLC employees and internal audit costs for the years ended December 31, 2015, 2014 and 2013 were $937, $1,287 and $1,165, respectively, and these amounts are included in our general and administrative expenses for these periods.On occasion, we have entered into arrangements with former employees of RMR LLC in connection with the termination of their employment with RMR LLC, providing for the acceleration of vesting of restricted shares previously granted to them under our equity compensation plan. Additionally, each of our executive officers received grants of restricted shares of other companies to which RMR LLC provides management services in their capacities as officers of RMR LLC.Pursuant to our business management agreement, RMR LLC may from time to time negotiate on our behalf with certain third party vendors and suppliers for the procurement of goods and services to us. As part of this arrangement, we may enter agreements with RMR LLC and other companies to which RMR LLC provides management services for the purpose of obtaining more favorable terms from such vendors and suppliers.We lease office space to RMR LLC in certain of our properties for its property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of approximately $341, $61 and $31 for the years ending December 31, 2015, 2014 and 2013, respectively. Our office space leases with RMR LLC are terminable by RMR LLC if our management agreements with RMR LLC are terminated. We may enter additional leases with RMR LLC for its regional offices in the future.F-20GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)EQC. We were formerly a 100% owned subsidiary of Equity Commonwealth, or EQC. In 2009, we completed our IPO, pursuant to which we ceased to be a majority owned subsidiary of EQC. One of our Managing Trustees, Mr. Barry Portnoy, was a managing trustee of EQC until March 25, 2014. Our other Managing Trustee, Mr. Adam Portnoy, was the president of EQC until May 23, 2014 and a managing trustee of EQC until March 25, 2014. RMR LLC provided business and property management services to EQC until EQC terminated its business and property management agreements with RMR LLC on September 30, 2014. After that termination, RMR LLC’s services to EQC were limited to management services in respect of EQC’s Australian assets and certain transition services, which terminated on October 31, 2015.On March 15, 2013, EQC sold all 9,950,000 of our common shares it owned in a public offering. In connection with this public offering, on March 11, 2013, we entered into a registration agreement with EQC under which EQC agreed to pay all expenses incurred by us relating to the registration and sale of our common shares owned by EQC in the offering, pursuant to which EQC paid us $310. In addition, under the registration agreement, EQC agreed to indemnify us and our officers, Trustees and controlling persons, and we agreed to indemnify EQC and its officers, trustees and controlling persons, against certain liabilities related to the public offering, including liabilities under the Securities Act.On July 8, 2014, we and RMR LLC entered into a stock purchase agreement, or the purchase agreement, with EQC, pursuant to which, on July 9, 2014, we acquired from EQC 21,500,000 common shares of SIR, and RMR LLC acquired from EQC 500,000 SIR common shares. Our cash purchase price was equal to approximately $677,500, or $31.51 per share, plus approximately $11,300, or $0.53 per share, of accrued dividends as defined in the purchase agreement, for a total of approximately $688,800, before acquisition related costs. RMR LLC purchased its 500,000 SIR common shares on the same terms, including for the same per share amounts that we paid. In addition, we and RMR LLC agreed, among other things, to indemnify EQC for certain claims related to the acquisition. In connection with the indemnity, we and RMR LLC entered into an allocation agreement with regard to our respective liabilities in the event of a claim for indemnification. On July 23, 2014, we and EQC agreed to terminate the provisions of a transaction agreement that we entered in 2009 with EQC in connection with our IPO. The agreement had placed restrictions on both our and EQC’s investments in real property and provided certain rights of first refusal with respect to properties which we or EQC determined to divest. Since March 25, 2014, we have not considered EQC to be a related party of ours.SIR. We are SIR'sSIR’s largest shareholder, owning approximately 27.9%27.8% of SIR’sthe outstanding SIR common shares as of December 31, 2015. Concurrently with the execution and delivery of the merger agreement, or the Merger Agreement, for the acquisition by SIR of Cole Corporate Income Trust, Inc., a Maryland corporation, or CCIT, we entered into a voting and standstill agreement with CCIT and VEREIT, Inc. (formerly known as American Realty Capital Properties, Inc.), a Maryland corporation and parent of the advisor of CCIT, or VEREIT, or the Voting Agreement. SIR’s acquisition of CCIT pursuant to the Merger Agreement was completed on January 29, 2015. Pursuant to the Voting Agreement, we agreed to vote all of the SIR common shares beneficially owned by us in favor of the issuance of SIR common shares to the stockholders of CCIT as contemplated by the Merger Agreement, upon and subject to the terms and conditions of the Voting Agreement and the Merger Agreement. The Voting Agreement also contains standstill provisions pursuant to which VEREIT has agreed, among other things, not to make unsolicited proposals to acquire us or SIR for a period of 36 months. Concurrently with our entering into the Voting Agreement,2017. RMR LLC which also provides management services to SIR,both us and Messrs. Barry Portnoy andSIR. Our Managing Trustee, Adam Portnoy, RMR LLC’s principals, our Managing Trustees andis also the managing trusteestrustee of SIR, also entered into a voting and standstill agreement on terms and conditions substantially similar to the Voting Agreement that also includes a standstill in respect of SNH.SIR. One of our Independent Trustees also serves as an independent trustee of SIR two of our Independent Trustees also serve as independent trustees of SNH and our President and Chief Operating Officer also serves as the president and chief operating officer of SIR.F-21GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)theand certain other related persons, who are members of a group with Lakewood, or together with Lakewood, the Lakewood Parties, and, for the purpose of specificspecified sections, us,SIR, pursuant to which, on March 4, 2015, we acquired from Lakewood 3,418,421 of SIR’sSIR common shares, representing approximately 3.9% of SIR’sthe then outstanding SIR common shares, for an aggregate cash purchase price of approximately $95,203.Messrs. BarryAdam Portnoy and AdamBarry Portnoy, entered into similar separate share purchase agreements with the Lakewood Parties with provisions similar to the SIR Purchase Agreement, pursuant to which, on March 4, 2015, Messrs.Adam Portnoy and Barry Portnoy acquired 87,606 and Adam Portnoy acquired 107,606 and 87,606 of SIR’sSIR common shares, respectively, from Lakewood and, on March 5, 2015, Messrs.Adam Portnoy and Barry Portnoy and Adam Portnoyeach acquired 2,429 and 2,429 of SIR’sSIR common shares respectively, from Mr. William H. Lenehan, one of the Lakewood Parties. Concurrently with entering into the agreements among us, Messrs. Barry Portnoy and Adam Portnoy and the Lakewood Parties, Lakewood withdrew its nomination of Mr. Lenehan for election to SIR’s Board of Trustees at SIR's 2015 Annual Meeting of Shareholders.The SIR Purchase Agreement contains (i) standstill provisions, pursuant to which the Lakewood Parties agreed not to take certain actions with respect to our securities, or those of SIR, for a 50-year period and (ii) voting provisions, pursuant to which the Lakewood Parties agreed to cause our securities, or those of SIR, that they or any of their affiliates own as of a record date for a meeting of our or SIR’s shareholders to be present and voted at such meeting in favor of all actions recommended by the board of trustees of such company. Concurrently with entering into the SIR Purchase Agreement, Lakewood withdrew its nomination of Mr. Lenehan for election to SIR’s board of trustees at SIR’s 2015 Annual Meeting of Shareholders.In connection with our purchases of SIR’s common shares as referenced above, and in light of the fact that we would own greater than 10% of our outstanding common shares following such purchases, SIR’s disinterested trustees adopted resolutions exempting us and our affiliates (as defined in the Maryland General Corporation Law), including RMR LLC, and Messrs. Barry and Adam Portnoy from being “interested stockholders” of SIR under the Maryland Business Combination Act.an amended and restateda shareholders agreement regarding AIC. On May 9, 2014, as a result of a change in control of EQC, as defined in the amended and restated shareholders agreement, we and the other AIC shareholders purchased pro rata the AIC shares EQC owned in accordance with the terms of that agreement. Pursuant to that purchase, we purchased 2,857 AIC shares from EQC for $825. Following these purchases, we and the other remaining six shareholders each owns approximately 14.3% of AIC. As of December 31, 2015, we have invested $6,019 in AIC since we became an equity owner of AIC in 2009. The shareholders agreement among us, the other shareholders of AIC and AIC includes arbitration provisions for the resolution of disputes.of AIC have historically participatedparticipate in a combined property insurance program arranged and insured or reinsured in part by AIC providing $500,000AIC. We paid aggregate annual premiums, including taxes and fees, of coverage$757, $1,032 and with respect to which AIC is a reinsurer of certain coverage amounts. In June 2015, we and the other shareholders of AIC renewed our participation$1,277 in this program. In connection with that renewal, we purchased a three year combined propertythis insurance policy providing $500,000 of coverage annually with the premiums to be paid annually and a one year combined policy providing certain other coverage. Our annual premiumsprogram forF-22GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)this property insurance were $1,277, $526 and $1,161 as of the renewal of the policies in June 2015, 2014 and 2013, respectively. The premiums are adjusted throughout the policy years ending June 30, 2018, 2017 and 2016, respectively, which amount for property acquisitionsthe current policy year ending June 30, 2018 may be adjusted from time to time as we acquire or dispositions we make. Although we own less than 20%dispose of AIC, we use the equity method to account forproperties that are included in this investment because we believe that we have significant influence over AIC as allinsurance program. Trustees are also directors of AIC. Our investment in AIC had a carrying value of $8,304, $7,235 and $6,946, $6,946 and $6,031 as of December 31, 2015, 2014 and 2013, respectively, whichrespectively. These amounts are included in other assets onin our consolidated balance sheets. We recognized income of $20, $87$608, $137 and $334$20 related to our investment in AIC for the years ended December 31, 2017, 2016 and 2015, 2014respectively. These amounts are presented as equity in earnings of an investee in our consolidated statements of comprehensive income. Our other comprehensive income (loss) includes our proportionate part of unrealized gains (losses) on securities which are owned and 2013, respectively.We periodically consider the possibilitiesheld for expandingsale by AIC of $461, $152 and ($20) related to our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange. We may invest additional amountsinvestment in AIC infor the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.Directors'years ended December 31, 2017, 2016 and Officers'2015, respectively.providesor its subsidiaries provide management services, including SIR, participate in a combined directors'directors’ and officers'officers’ liability insurance policy. This combined policy currently provides for $10,000 of combined primary coverage, and expires in September 2017. In August 2015, we also obtained separate non-combined directors’ and officers’ liability insurance policies providing $20,000 of aggregate excess coverage plus $5,000 of excess non-indemnifiable coverage, which policies expire in September 2016.2019. We paid aggregate premiums of $91, $106 and $316 $529in 2017, 2016 and $333 in 2015, 2014 and 2013, respectively, for these policies. The premiums for the combined policies were allocated among the insured companies after consultation with the insurance broker and approval by each company’s board and independent trustees or directors as applicable.7.8. Concentration1213 state governments, two municipaland five other government tenants and the United Nations combined were responsible for approximately 92.8%62.6%, 93.0%87.9% and 92.6%92.8% of our annualized rental income excluding properties classified as discontinued operations, as of December 31, 2015, 20142017, 2016 and 2013,2015, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 67.0%43.5%, 69.0%60.6% and 69.0% of our annualized rental income, excluding properties classified as discontinued operations, as of December 31, 2015, 2014 and 2013, respectively.Geographic ConcentrationAt December 31, 2015, 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 11.4%, 10.4%, 10.2%, 8.6%, 8.6%, 8.4% and 5.6%67.0% of our annualized rental income as of December 31, 2017, 2016 and 2015, respectively.F-23GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)Note 8. Indebtedness20152017, our 108 wholly owned properties (167 buildings) were located in 30 states and 2014,the District of Columbia. Consolidated properties located in Virginia, the District of Columbia, Maryland, California, Georgia, New York, and Massachusetts were responsible for approximately 23.2%, 17.7%, 14.9%, 9.6%, 5.6%, 4.4% and 3.2% of our annualized rental income as of December 31, 2017, respectively. Consolidated properties located in the metropolitan Washington, D.C. market area were responsible for approximately 43.3% of our annualized rental income as of December 31, 2017.indebtedness consistedborrowings under our $750,000 unsecured revolving credit facility; (2) $550,000 aggregate outstanding principal amount of the following:117,000 300,000 300,000 250,000 250,000 347,981 347,423 83,441 85,167 23,499 23,833 14,160 14,374 9,199 9,563 6,344 7,339 47,418 1,151,624 1,085,117 (1)We assumed these mortgages in connection with our acquisitions of certain 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.(2)We gave notice in January 2016 to repay this mortgage at par in March 2016.(3)This mortgage was repaid at par in February 2016.(4)This mortgage was repaid at par in July 2015. unsecured revolving credit facility, our $300,000 term loan and our $250,000 term loan are governed by a credit agreement, or our credit agreement, with a syndicate of institutional lenders that includes a number of features common to all of these credit arrangements. ThisOur 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. unsecured revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our unsecured revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date of our unsecured revolving credit facility by one year to January 31, 2020. We can borrow, repay and reborrow funds available under our 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 December 31, 20152017, on borrowings under our unsecured revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility, which was 25 basis points per annum at December 31, 2015.2017. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of December 31, 2015,2017, the annual interest rate payable on borrowings under our revolving credit facility was 1.6%. The2.7% and the weighted average annual interest rate for borrowings under our unsecured revolving credit facility was 1.5%2.4%, 1.7% and 1.7%1.5%, respectively, for the years ended December 31, 2015, 20142017, 2016 and 2013.2015. As of December 31, 20152017 and February 16, 2015,23, 2018, we had $117,000$570,000 and $221,000$595,000 outstanding under our unsecured revolving credit facility, respectively. 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 December 31, 20152017, 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 December 31, 2015,2017, the annual interest rate for the amount outstanding under our F-24GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)$300,000$300,000 term loan was 1.8%3.0%. The weighted average annual interest rate under our $300,000 term loan was 2.5%, 1.9% and 1.6%, for the yearyears ended December 31,201531, 2017, 2016 and 1.9% for the period from November 21, 2014, the date we entered into the credit agreement, to December 31, 2014. unsecured term loan, which matures on March 31, 2022, is prepayable without penalty 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 December 31, 20152017, 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 December 31, 2015,2017, the annual interest rate for the amount outstanding under our $250,000 term loan was 2.2%3.4%. The weighted average annual interest rate under our $250,000 term loan was 2.9%, 2.3% and 2.0%, for the yearyears ended December 31, 2017, 2016 and 2015, and 2.3% for the period from November 21, 2014, the date we entered into the credit agreement, to December 31, 2014.Our $350,000 of 3.75% senior unsecured notes due in 2019 are governed by an indenture and a supplement to the indenture, and require semi-annual payments of interest only through maturity. The outstanding amount of these notes may be prepaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.indentureindentures and its supplementtheir 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 RMR LLC ceasing to act as our business manager and property manager. Our credit agreement and our senior unsecured notes indentureindentures and its supplement and our credit agreementtheir 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 unsecured notes indentureindentures and its supplement and our credit agreement their supplements at December 31, 2015.2015,2017, we repaid, at par, a $47,083 mortgage note requiring interest at 5.73% which was secured by a property (two buildings) located in Indianapolis, IN with cash on hand and borrowings under our unsecured revolving credit facility. This mortgage note was scheduled to mature in October 2015. Asthe lenders terminated this commitment letter and bridge loan facility as a result of ourrepayment,sale), and we recordedrecognized a gainloss on extinguishment of debt of $34 for the year ended December 31, 2015, which represented the unamortized debt premium and deferred finance fees related to this note.In January 2016, we gave notice to repay, at par, an $83,000 mortgage note requiring interest at 5.55% which is secured by one office property (two buildings) located in Reston, VA. We expect to repay this mortgage note in March 2016. This mortgage note is scheduled to mature in April 2016.atof 6.21% which was secured by aone office property (one building) located in Landover, MD. This mortgage note was scheduled to mature in August 2016.2015, five2017, eight of our consolidated properties (six(eight buildings) with an aggregate net book value of $198,685 secured five mortgage notes that were assumed in connection with the acquisition$432,562 are encumbered by eight mortgages for an aggregate principal amount of such properties.$183,147. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.Year Principal payment 2018 $ 3,672 2019 931,541 2020 338,433 2021 14,420 2022 575,518 Thereafter 399,563 $ 2,263,147 (1) Total consolidated debt outstanding as of December 31, 2017, net of unamortized premiums, discounts and certain issuance costs totaling $18,055 was $2,245,092. 9.10. Fair Value of Assets and Liabilities 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: $ 72,005 $ 72,005 $ — $ — Non-Recurring Fair Value Measurements Assets: $ 19,667 $ — $ 19,667 $ — (1) Our 1,214,225 shares of class A common stock of RMR Inc., which are included in other assets in our consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs as defined in the fair value hierarchy under GAAP). Our historical cost basis for these shares is $26,888 as of December 31, 2017. The net unrealized gain of $45,117 for these shares as of December 31, 2017 is included in cumulative other comprehensive income (loss) in our consolidated balance sheets. (2) We estimated the fair value of a property we agreed to sell located in Minneapolis, MN at December 31, 2017 based upon the selling price agreed to with a third party (Level 2 inputs as defined in the fair value hierarchy under GAAP). See Note 5 for further details. notesnote receivable, accounts payable, accounts payable,a revolving credit facility, term loans, senior unsecured notes, an unsecured revolving credit facility, unsecured term loans,mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At December 31, 20152017 and December 31, 2014,2016, the fair F-25GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)347,981 351,692 347,423 356,129 83,441 83,457 85,167 85,171 23,499 24,038 23,833 25,394 14,160 14,678 14,374 15,249 9,199 9,645 9,563 10,275 6,344 6,711 7,339 7,956 47,418 48,233 484,624 490,221 535,117 548,407 As of December 31, 2017 As of December 31, 2016 Fair Value Fair Value Senior unsecured notes, 3.750% interest rate, due in 2019 $ 348,096 $ 354,993 $ 346,952 $ 354,078 Senior unsecured notes, 5.875% interest rate, due in 2046 300,232 320,416 299,892 292,268 Senior unsecured notes, 4.000% interest rate, due in 2022 295,812 302,655 — — 64,293 65,198 — — 36,085 36,332 — — 27,906 28,432 — — 25,501 25,904 — — 13,620 14,565 13,841 14,492 8,391 8,555 8,778 9,188 4,111 4,340 5,218 5,575 3,193 3,216 — — $ 1,127,240 $ 1,164,606 $ 674,681 $ 675,601 (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 certainthe 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) In connection with the FPO Transaction, we assumed five fixed rate mortgage notes with an aggregate principal balance of $167,548. We recorded these mortgage notes at their estimated fair value aggregating $167,936 on the date of acquisition. estimateestimated the fair value of our senior unsecured notes due in 2019 and 2022 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 estimateestimated the fair value of our senior unsecured notes due in 2046 based on the closing price on Nasdaq (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated 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.The table below presents certain of our assets measured at fair value at December 31, 2015, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:17,497 12,260 12,260 (1)Our 1,214,225 shares of RMR Inc. which are included in other assets in our 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 December 31, 2015. The unrealized loss of $9,391 for these shares as of December 31, 2015 is included in cumulative other comprehensive income (loss) in our consolidated balance sheets.We evaluated the decline in the fair value of the RMR Inc. shares and determined that based on the severity and duration of the decline, and our ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider the investment to be other-than-temporarily impaired at December 31, 2015.(2) We estimated the fair value of this property at December 31, 2015 and 2014, based upon broker estimates of value less estimated sales costs (Level 3 inputs as defined in the fair value hierarchy under GAAP).F-26GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)10.11. Shareholders’ EquityCommon Awards6,7, we awardedgranted common sharesshare awards to our officers and certain other employees of RMR LLC in 2013, 20142017, 2016 and 2015. We also awardedgranted each of our then six Trustees 3,000 common shares in 2017 with an aggregate value of $392 ($65 per Trustee), each of our then five Trustees 2,500 common shares in 2016 with an aggregate value of $244 ($49 per Trustee) and each of our then five Trustees 2,500 common shares in 2015 with an aggregate market value of $247 ($49 per Trustee), 2,500 common shares in 2014 with an aggregate market value of $318 ($64 per Trustee) and 2,000 common shares in 2013 with an aggregate market value of $266 ($53 per Trustee) as part of their annual compensation. The values of the share grants were based upon the closing price of our common shares trading on Nasdaq or the NYSENew York Stock Exchange, as applicable, on the date of grant. The common shares awarded to ourawardedgranted to our officers and certain other employees of RMR LLC vest in five equal annual installments beginning on the date of grant.vestedunvested under the terms of ourthe 2009 Plan for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, is as follows:90,338 85,451 76,104 65,600 63,650 58,350 (1,020) (450) (58,193) (58,763) (48,553) 96,725 90,338 85,451 2017 2016 2015 Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Unvested shares, beginning of year 98,970 $20.59 96,725 $20.11 90,338 $23.40 Shares granted 75,350 19.36 65,900 21.66 65,600 16.59 Shared forfeited — — — — (1,020 ) 23.41 Shares vested (70,070 ) 20.80 (63,655 ) 20.97 (58,193 ) 21.20 Unvested shares, end of year 104,250 $19.56 98,970 $20.59 96,725 $20.11 96,725104,250 unvested shares as of December 31, 20152017 are scheduled to vest as follows: 36,475 shares in 2016, 29,100 shares in 2017, 20,530 40,120shares in 2018, and 10,620 31,230shares in 2019.2019,21,630shares in 2020 and11,270shares in 2021. These unvested shares are re-measured at fair value on a recurring basis using quoted market prices of the underlying shares. As of December 31, 2015,2017, the estimated future compensation expense for the unvested shares was $1,535$1,933 based on the closing share price of our common shares on the NYSENasdaq on December 31, 20152017 of $15.87.$18.54. The weighted average period over which the compensation expense will be recorded is approximately 2221 months. During the years ended December 31, 2015, 20142017, 2016 and 2013,2015, we recorded $932, $1,165 $1,377, $1,371and $1,269,$932, respectively, of compensation expense related to ourthe 2009 Plan. At December 31, 2015, 1,605,703 2017,1,493,119of our common shares remained available for issuance under ourthe 2009 Plan.DistributionsOn February 26, 2015, May 25, 2015, August 24, 2015 and November 23, 2015 we paid a $0.43 per share distribution to our common shareholders. On January 11, 2016, we declared a dividend payable to common shareholders of record on January 22, 2016 in the amount of $0.43 per share. We expect to pay this distribution on or about February 25, 2016 using cash on hand and borrowings under our unsecured revolving credit facility.F-27GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts) per share paid or payable by us to our common shareholders for each of the years ended December 31, 2015, 2014,2017, 2016 and 20132015 were $1.72.$1.72 per share or $145,209, $122,366 and $121,660, respectively. As described in Note 6,7, on December 14, 2015, we distributed 768,032, or 0.0108 of a share for each of our common shares, of RMR Inc. shares of class A common stock we ownedowed to our common shareholders as a special distribution. This distribution resulted in a taxable in-kind distribution of $0.1284 for each of our common shares. The characterization of our distributions paid or accrued in 2017 was 50.65% ordinary income and 49.35% return of capital. The characterization of our distributions paid in 2016 was 62.74% ordinary income, 36.21% return of capital and 1.05% qualified dividend. The characterization of our distributions paid in 2015 was 47.44% ordinary income, 37.12% return of capital, 12.90% capital gain, 1.61% IRC Section 1250 gain and 0.93% qualified dividend. The characterizationdistributions paid or accrued in 2014 was 55.12% ordinary income, 41.94% returnrevolving credit facility.capital, 2.94% IRC Section 1250 gain. The characterization of our distributions paid or accrued in 2013 was 82.92% ordinary income and 9.55% return of capital, 7.01% capital gain and 0.52% IRC Section 1250 gain.Share Issuances and RepurchasesDuring the year ended December 31, 2015,Shares:issued 23,222sold 25,000,000 of our common shares to RMR LLC, as partat a price of the business management fee payable by us under our business management agreement with RMR LLC. See Note 6 for further information regarding this agreement.June 5, 2015,August 3, 2017, we issued 700,000sold 2,907,029 of our common shares at a price of $18.50 per share pursuant to an overallotment option granted to the underwriters for the July offering. The aggregate net proceeds from these sales of $493,866, after payment of the underwriters' discount and other offering expenses, were used to finance, in connection with our acquisition of an interest in RMR Inc. as further described in Note 6. RMR Inc. ispart, the parent company of RMR LLC, our manager.September 24, 2015,May 17, 2017, we purchased an aggregate of 10,721withheld 450 of our common shares for $16.12awarded to one of our Trustees to fund that Trustee's resulting minimum required tax withholding obligation. The aggregate value of the withheld shares was $10, which is reflected as a decrease to shareholders' equity in our consolidated balance sheets.NYSEdate of purchase, from our officers and certain otherthat day,the closing price of our common shares on Nasdaq, on the date of purchase, from a former officer of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.restrictedour common shares.lossgain (loss) on the RMR Inc. shares we own and our share of the comprehensive income (loss) of our equity method investees, SIR and AIC. The following table presents a roll forward ofchanges in the amounts we recognized in cumulative other comprehensive income (loss) by component for the years ended December 31, 2015, 20142017, 2016 and 2013:2015: Total Balance at December 31, 2014 $ — $ 37 $ 37 Other comprehensive loss before reclassifications (9,391 ) (5,592 ) (14,983 ) Amounts reclassified from cumulative other — 79 79 Net current period other comprehensive loss (9,391 ) (5,513 ) (14,904 ) Balance at December 31, 2015 (9,391 ) (5,476 ) (14,867 ) Other comprehensive income before reclassifications 30,465 11,254 41,719 Amounts reclassified from cumulative other — 105 105 Net current period other comprehensive income 30,465 11,359 41,824 Balance at December 31, 2016 21,074 5,883 26,957 Other comprehensive income before reclassifications 24,042 9,462 33,504 Amounts reclassified from cumulative other — (34 ) (34 ) Net current period other comprehensive income 24,042 9,428 33,470 Balance at December 31, 2017 $ 45,116 $ 15,311 $ 60,427 (1) Amounts reclassified from cumulative other comprehensive income (loss) is included in equity in earnings of investees in our consolidated statements of comprehensive income (loss). F-28GOVERNMENT PROPERTIES INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except per share amounts)99 99 (40) (40) (10) (10) (50) (50) 49 49 37 37 (49) (49) (12) (12) 37 37 (9,391) (5,592) (14,983) 79 79 (9,391) (5,513) (14,904) (9,391) (5,476) (14,867) (1)Amounts reclassified from cumulative other comprehensive income (loss) is included in equity in earnings of investees in our consolidated statements of income and comprehensive income (loss).11.12. Equity Investment in Select Income REIT6,7, as of December 31, 2015,2017, we owned 24,918,421, or approximately 27.9%27.8%, of the then outstanding SIR common shares. SIR is a REIT that iswhich primarily focused on owning and investing inowns single tenant, net leased single tenant properties. ForDuring the yearyears ended December 31, 20152017, 2016 and during the period from July 9, 2014, the date of our initial investment in SIR, to December 31, 2014,2015, we recorded $21,882$21,584, $35,381 and $17,113$21,882 of equity in the earnings of SIR, respectively.As of December 31, 2015 and 2014, our investment in SIR had a carrying value of $491,369 and $680,137, respectively, and a market value, based on the closing price of SIR common shares on the NYSE on December 31, 2015 and 2014, of $493,884 and $524,815, respectively. During the year ended December 31, 2015 and the period from July 9, 2014 to December 31, 2014, SIR issued 29,414,279 and 67,947 common shares, respectively. We recognized a loss on issuance of shares by an equity investee of $42,145 and $53, respectively, during the year ended December 31, 2015 and the period from July 9, 2014 to December 31, 2014 as a result of the per share issuance price of these SIR common shares being below the average per share carrying value of our SIR common shares.F-29In performingperiodic evaluationproportionate share of other than temporary impairmentSIR’s unrealized gains (losses) of our investment in SIR during$8,967, $11,207 and ($5,493) for the second quarter ofyears ended December 31, 2017, 2016 and 2015, we determined, based on the length of time and the extent to which the market value of our SIR investment was below our carrying value, that the decline in fair value was other than temporary. Accordingly, we recorded a $203,297 loss on impairment to reduce the carrying value of our SIR investment to its estimated fair value during the second quarter of 2015. We estimated fair value using the closing price of SIR common shares on the NYSE as of June 30, 2015.acquisition.acquisitions. This amortization decreased our equity in the earnings of SIR by $4,742 for the year ended December 31, 2015, and $6,237 for the period from July 9, 2014 to December 31, 2014. Recording the2015. We recorded a loss on impairment noted above resultedof $203,297 of our SIR investment during the second quarter of 2015 resulting in the carrying value of our SIR investment to bebeing less than our proportionate share of SIR’s total shareholders’ equity book equityvalue as of June 30, 2015. As a result, the previous basis difference was eliminated and as of December 31, 2017, we are currently amortizingaccreting a basis difference of ($95,035)87,137) 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 amortizationaccretion increased our equity in the earnings of SIR by $2,944 and $2,956 for the yearyears ended December 31, 2015 by $1,480.the yearyears ended December 31, 20152017, 2016 and during the period from July 9, 2014 to December 31, 2014,2015, we received cash distributions from SIR totaling $47,030$50,832, $50,335 and $20,640,$47,030, respectively. In addition, onduring the year ended December 14,31, 2015, we received from SIR a non-cash distribution of 441,056 shares of RMR Inc. class A common stock valued at $5,244.2015,2017, or the SIR Annual Report, includes the financial position and results of operations for periods prior to July 9, 2014 (the date on which we acquired our initial interest in SIR).Report. References in our consolidated financial statements to the SIR Annual Report are included as references to the source of the data only, and the information in the SIR Annual Report is not incorporated by reference into our consolidated financial statements.Consolidated Balance Sheets:3,954,889 1,772,510 566,195 120,700 17,876 13,504 99,307 68,385 57,850 18,132 4,696,117 1,993,231 303,000 77,000 350,000 350,000 1,435,632 286,747 18,816 86,495 26,475 137,283 40,493 2,096,960 1,480,447 4,696,117 1,993,231 F-30Statements of Income:364,139 189,743 159,011 64,226 32,937 29,312 428,365 222,680 188,323 37,460 22,202 20,271 41,953 18,597 16,111 122,906 41,054 31,091 21,987 7,348 2,002 25,859 14,881 12,423 250,165 104,082 81,898 178,200 118,598 106,425 1,666 (73,885) (12,974) (13,763) (6,845) 243 (23,717) 75,419 105,867 92,662 (515) (175) 96 20 87 334 74,924 105,779 93,092 116 74,924 105,895 93,092 (176) 74,748 105,895 93,092 86,699 55,964 44,539 86,708 56,035 44,592 0.86 1.89 2.09 F-31 As of December 31, 2017 2016 Real estate properties, net $ 3,905,616 $ 3,899,792 Properties held for sale 5,829 — Acquired real estate leases, net 477,577 506,298 Cash and cash equivalents 658,719 22,127 Rents receivable, net 127,672 124,089 Other assets, net 127,617 87,376 Total assets $ 5,303,030 $ 4,639,682 Unsecured revolving credit facility $ — $ 327,000 ILPT revolving credit facility 750,000 — Unsecured term loan, net 348,870 348,373 Senior unsecured notes, net 1,777,425 1,430,300 Mortgage notes payable, net 210,785 245,643 Assumed real estate lease obligations, net 68,783 77,622 Other liabilities 155,348 136,782 Shareholders' equity 1,991,819 2,073,962 Total liabilities and shareholders' equity $ 5,303,030 $ 4,639,682 Year Ended December 31, 2017 2016 2015 Rental income $ 392,285 $ 387,015 $ 364,139 Tenant reimbursements and other income 75,818 74,992 64,226 Total revenues 468,103 462,007 428,365 Real estate taxes 44,131 42,879 37,460 Other operating expenses 55,567 52,957 41,953 Depreciation and amortization 137,672 133,762 122,906 Acquisition and transaction related costs 1,075 306 21,987 General and administrative 54,818 28,602 25,859 Write-off of straight line rents receivable, net 12,517 5,484 — Loss on asset impairment 4,047 — — Loss on impairment of real estate assets 229 — — Total expenses 310,056 263,990 250,165 Operating income 158,047 198,017 178,200 Dividend income 1,587 1,268 1,666 Interest expense (92,870 ) (82,620 ) (73,885 ) Loss on early extinguishment of debt — — (6,845 ) Loss on distribution to common shareholders of The RMR Group Inc. common stock — — (23,717 ) Income before income tax expense and equity in earnings of an investee 66,764 116,665 75,419 Income tax expense (466 ) (448 ) (515 ) Equity in earnings of an investee 608 137 20 Net income 66,906 116,354 74,924 Net income allocated to noncontrolling interest — (33 ) (176 ) Net income attributed to SIR $ 66,906 $ 116,321 $ 74,748 Weighted average common shares outstanding (basic) 89,351 89,304 86,699 Weighted average common shares outstanding (diluted) 89,370 89,324 $ 86,708 Net income attributed to SIR per common share (basic and diluted) $ 0.75 $ 1.30 $ 0.86 12.13. Segment Information that are primarily leased to government tenants and our equity method investment in SIR:248,549 248,549 29,906 29,906 17,916 17,916 50,425 50,425 68,696 68,696 561 250 811 14,826 14,826 167,504 15,076 182,580 81,045 (15,076) 65,969 811 811 10 4 14 (7,908) (29,100) (37,008) 34 34 (12,368) (12,368) (42,145) (42,145) (203,297) (203,297) 73,181 (245,442) (55,729) (227,990) (86) (86) 18,620 20 18,640 73,181 (226,822) (55,795) (209,436) (525) (525) 72,656 (226,822) (55,795) (209,961) 1,639,806 491,369 43,361 2,174,536 F-32 Year Ended December 31, 2017 Corporate Consolidated Rental income $ 316,532 $ — $ — $ 316,532 Expenses: Real estate taxes 37,942 — — 37,942 Utility expenses 20,998 — — 20,998 Other operating expenses 65,349 — — 65,349 Depreciation and amortization 109,588 — — 109,588 Loss on impairment of real estate 9,490 — — 9,490 General and administrative — — 18,847 18,847 Total expenses 243,367 — 18,847 262,214 Operating income (loss) 73,165 — (18,847 ) 54,318 Dividend income — — 1,216 1,216 Interest income 196 — 1,766 1,962 Interest expense (3,209 ) — (62,197 ) (65,406 ) Loss on early extinguishment of debt — — (1,715 ) (1,715 ) Gain on issuance of shares by Select Income REIT — 72 — 72 Income (loss) from continuing operations before income taxes, equity in earnings (losses) of investees and gain on sale of real estate 70,152 72 (79,777 ) (9,553 ) Income tax expense — — (101 ) (101 ) Equity in earnings (losses) of investees (621 ) 21,584 608 21,571 Income (loss) from continuing operations 69,531 21,656 (79,270 ) 11,917 Income from discontinued operations 173 — — 173 Net income (loss) 69,704 21,656 (79,270 ) 12,090 Preferred units of limited partnership distributions — — (275 ) (275 ) Net income (loss) available for common shareholders $ 69,704 $ 21,656 $ (79,545 ) $ 11,815 As of December 31, 2017 Corporate Consolidated Total Assets $ 3,138,764 $ 467,499 $ 97,302 $ 3,703,565 251,031 251,031 28,389 28,389 19,369 19,369 45,982 45,982 66,593 66,593 2,016 2,016 1,344 1,344 15,809 15,809 163,693 15,809 179,502 87,338 (15,809) 71,529 69 69 (7,820) (20,228) (28,048) (1,307) (1,307) (53) (53) 79,518 (53) (37,275) 42,190 (117) (117) 10,876 87 10,963 79,518 10,823 (37,305) 53,036 3,498 3,498 83,016 10,823 (37,305) 56,534 1,714,130 680,137 33,348 2,427,615 F-33 Year Ended December 31, 2016 Corporate Consolidated Rental income $ 258,180 $ — $ — $ 258,180 Expenses: Real estate taxes 30,703 — — 30,703 Utility expenses 17,269 — — 17,269 Other operating expenses 54,290 — — 54,290 Depreciation and amortization 73,153 — — 73,153 Acquisition related costs 1,191 — — 1,191 General and administrative — — 14,897 14,897 Total expenses 176,606 — 14,897 191,503 Operating income (loss) 81,574 — (14,897 ) 66,677 Dividend income — — 971 971 Interest income 124 — 34 158 Interest expense (2,375 ) — (42,685 ) (45,060 ) Gain on early extinguishment of debt 104 — — 104 Net gain on issuance of shares by Select Income REIT — 86 — 86 Income (loss) from continuing operations before income taxes, equity in earnings (losses) of investees and gain on sale of real estate 79,427 86 (56,577 ) 22,936 Income tax expense — — (101 ) (101 ) Equity in earnings of investees — 35,381 137 35,518 Income (loss) from continuing operations 79,427 35,467 (56,541 ) 58,353 Loss from discontinued operations (589 ) — — (589 ) Income (loss) before gain on sale of real estate 78,838 35,467 (56,541 ) 57,764 Gain on sale of real estate 79 — — 79 Net income (loss) 78,917 35,467 (56,541 ) 57,843 Preferred units of limited partnership distributions — — — — Net income (loss) available for common shareholders $ 78,917 $ 35,467 $ (56,541 ) $ 57,843 As of December 31, 2016 Corporate Consolidated Total Assets $ 1,807,560 $ 487,708 $ 89,798 $ 2,385,066 Year Ended December 31, 2015 Investment
in Real Estate Investment
in SIR Corporate Consolidated Rental income $ 248,549 $ — $ — $ 248,549 Expenses: Real estate taxes 29,906 — — 29,906 Utility expenses 17,916 — — 17,916 Other operating expenses 50,425 — — 50,425 Depreciation and amortization 68,696 — — 68,696 Acquisition related costs 561 — 250 811 General and administrative — — 14,826 14,826 Total expenses 167,504 — 15,076 182,580 Operating income (loss) 81,045 — (15,076 ) 65,969 Dividend income — — 811 811 Interest income 10 — 4 14 Interest expense (7,908 ) — (29,100 ) (37,008 ) Gain on early extinguishment of debt 34 — — 34 Loss on distribution to common shareholders of The RMR Group Inc. common stock (12,368 ) (12,368 ) Net 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 taxes, equity in earnings (losses) of investees and gain on sale of real estate 73,181 (245,442 ) (55,729 ) (227,990 ) Income tax expense — — (86 ) (86 ) Equity in earnings of investees — 18,620 20 18,640 Income (loss) from continuing operations 73,181 (226,822 ) (55,795 ) (209,436 ) Loss from discontinued operations (525 ) — — (525 ) Net income (loss) 72,656 (226,822 ) (55,795 ) (209,961 ) Preferred units of limited partnership distributions — — — — Net income (loss) available for common shareholders $ 72,656 $ (226,822 ) $ (55,795 ) $ (209,961 ) As of December 31, 2015 Investment
in Real Estate Investment
in SIR Corporate Consolidated Total Assets $ 1,639,462 $ 491,369 $ 37,679 $ 2,168,510 13.14. Selected Quarterly Financial Data (Unaudited)20152017 and 2014.62,659 62,113 62,092 61,685 (33,370) (191,163) 16,911 (2,339) (0.47) (2.71) 0.24 (0.03) 0.43 0.43 0.43 0.56 (1) The fourth quarter of 2015 includes a non-cash loss of $12,368 related to the distribution of RMR Inc. shares as discussed in Note 6.(2)The fourth quarter of 2015 includes a non-cash distribution of $0.13 per share related to the distribution of RMR Inc. shares to our shareholders on December 14, 2015.59,820 62,428 64,158 64,625 15,190 14,608 12,622 14,114 0.28 0.27 0.19 0.20 0.43 0.43 0.43 0.43 F-34 2017 Rental income $ 69,296 $ 69,887 $ 70,179 $ 107,170 Net income (loss) available for common shareholders per common share $ 7,415 $ 11,677 $ 10,989 $ (18,266 ) Net income (loss) available for common shareholders per common share (basic and diluted) $ 0.10 $ 0.16 $ 0.11 $ (0.18 ) Common distributions declared $ 0.43 $ 0.43 $ 0.43 $ 0.43 2016 First
Quarter Second
Quarter Third
Quarter Fourth
QuarterRental income $ 63,611 $ 64,061 $ 64,478 $ 66,030 Net income available for common shareholders $ 17,387 $ 16,813 $ 11,578 $ 12,065 Net income available for common shareholders per common share (basic and diluted) $ 0.24 $ 0.24 $ 0.16 $ 0.17 Common distributions declared $ 0.43 $ 0.43 $ 0.43 $ 0.43 2015920 9,084 16 920 9,100 10,020 (1,024) 1,374 11,658 1,374 11,658 13,032 (583) 1,917 7,416 28 1,917 7,444 9,361 (248) 460 11,708 189 460 11,897 12,357 (1,619) 7,276 61,118 58 7,277 61,175 68,452 (20,438) 562 16,923 562 16,923 17,485 (917) 1,550 12,263 1,491 1,550 13,754 15,304 (2,285) 1,450 9,465 1,523 1,450 10,988 12,438 (1,157) 2,290 35,891 4,163 2,290 40,054 42,344 (5,939) 5,250 10,549 3,736 5,250 14,285 19,535 (2,180) 4,269 18,316 957 4,347 19,195 23,542 (9,159) 685 5,530 1,526 685 7,056 7,741 (1,872) 563 5,470 563 5,470 6,033 (467) 494 152 6,457 495 6,608 7,103 (2,926) 6,344 2,640 23,777 1,045 2,640 24,822 27,462 (3,675) 2,886 27,537 3,849 2,887 31,385 34,272 (9,754) 12,008 51,528 20,956 12,228 72,265 84,493 (29,531) 26,000 25,955 4,856 26,000 30,808 56,808 (4,149) 4,800 30,592 383 4,800 30,975 35,775 (3,619) 9,199 1,100 11,773 169 1,100 11,942 13,042 (1,562) 4,047 20,017 1 4,048 20,017 24,065 (1,710) 3,996 29,762 4,921 3,996 34,683 38,679 (9,274) S-1 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Cost amount carried at Close of Period Property Location Land Buildings
and
Equipment Impairments/
Writedowns Land Buildings
and
Equipment
Depreciation (3) Date(s)
Acquired Original
Construction
Date(s)1 131 Clayton Street Montgomery, AL $ — $ 920 $ 9,084 $ 29 $ — $ 920 $ 9,113 $ 10,033 $ (1,479 ) 6/22/2011 2007 2 4344 Carmichael Road Montgomery, AL — 1,374 11,658 — — 1,374 11,658 13,032 (1,166 ) 12/17/2013 2009 3 15451 North 28th Avenue Phoenix, AZ — 1,917 7,416 456 — 1,917 7,872 9,789 (628 ) 9/10/2014 1996 4 711 S 14th Avenue Safford, AZ — 460 11,708 348 — 460 12,056 12,516 (2,232 ) 6/16/2010 1992 5 5045 East Butler Street Fresno, CA — 7,276 61,118 58 — 7,276 61,176 68,452 (23,497 ) 8/29/2002 1971 6 10949 N. Mather Boulevard Rancho Cordova, CA — 562 16,923 101 — 562 17,024 17,586 (1,769 ) 10/30/2013 2012 7 11020 Sun Center Drive Rancho Cordova, CA — 1,466 8,797 408 — 1,466 9,205 10,670 (237 ) 12/20/2016 1983 8 801 K Street Sacramento, CA — 4,688 61,995 4,915 — 4,688 66,910 71,598 (3,608 ) 1/29/2016 1989 9 9800 Goethe Road Sacramento, CA — 1,550 12,263 949 — 1,550 13,212 14,762 (2,598 ) 12/23/2009 1993 10 9815 Goethe Road Sacramento, CA — 1,450 9,465 1,523 — 1,450 10,988 12,438 (1,731 ) 9/14/2011 1992 11 Capitol Place Sacramento, CA — 2,290 35,891 7,032 — 2,290 42,923 45,213 (8,331 ) 12/17/2009 1988 12 4181 Ruffin Road San Diego, CA — 5,250 10,549 4,294 — 5,250 14,843 20,093 (3,332 ) 7/16/2010 1981 13 4560 Viewridge Road San Diego, CA — 4,269 18,316 4,195 — 4,347 22,433 26,780 (9,882 ) 3/31/1997 1996 14 9174 Sky Park Centre San Diego, CA — 685 5,530 2,653 — 685 8,183 8,868 (2,684 ) 6/24/2002 1986 15 603 San Juan Avenue Stockton, CA — 563 5,470 — — 563 5,470 6,033 (741 ) 7/20/2012 2012 16 16194 West 45th Street Golden, CO — 494 152 6,495 — 494 6,647 7,141 (3,316 ) 3/31/1997 1997 17 12795 West Alameda Parkway Lakewood, CO 4,111 2,640 23,777 1,065 — 2,640 24,842 27,482 (4,931 ) 1/15/2010 1988 18 Corporate Center Lakewood, CO — 2,887 27,537 3,898 — 2,887 31,435 34,322 (11,581 ) 10/11/2002 1980 19 20 Massachusetts Avenue Washington, DC — 12,009 51,528 21,245 — 12,231 72,551 84,782 (33,237 ) 3/31/1997 1996 20 625 Indiana Avenue Washington, DC — 26,000 25,955 6,555 — 26,000 32,510 58,510 (6,374 ) 8/17/2010 1989 21 11 Dupont Circle, NW Washington, DC 64,293 28,255 44,743 1,299 — 28,255 46,042 74,297 (316 ) 10/2/2017 1974 22 1211 Connecticut Avenue, NW Washington, DC 27,906 30,388 24,667 220 — 30,388 24,887 55,275 (176 ) 10/2/2017 1967 23 1401 K Street, NW Washington, DC 25,501 29,215 34,656 1,194 — 29,215 35,850 65,065 (291 ) 10/2/2017 1929 24 440 First Street, NW Washington, DC — 27,903 38,624 683 — 27,903 39,307 67,210 (241 ) 10/2/2017 1982 25 500 First Street, NW Washington, DC — 30,478 15,660 — — 30,478 15,660 46,138 (112 ) 10/2/2017 1969 26 840 First Street, NE Washington, DC 36,085 42,727 73,249 — — 42,727 73,249 115,976 (458 ) 10/2/2017 2003 27 7850 Southwest 6th Court Plantation, FL — 4,800 30,592 383 — 4,800 30,975 35,775 (5,224 ) 5/12/2011 1999 28 8900 Grand Oak Circle Tampa, FL 8,391 1,100 11,773 169 — 1,100 11,942 13,042 (2,169 ) 10/15/2010 1994 20151,521 11,826 3,872 1,521 15,698 17,219 (3,829) 10,250 27,933 231 10,250 28,164 38,414 (3,021) 1,390 19,635 7 1,390 19,642 21,032 (1,677) 3,390 29,026 474 3,391 29,499 32,890 (2,470) 1,450 13,160 914 1,450 14,074 15,524 (2,177) 4,170 68,888 2,615 4,170 71,503 75,673 (7,662) 640 9,932 3,033 640 12,965 13,605 (1,689) 1,698 11,722 10 1,698 11,732 13,430 (880) 5,100 17,293 984 5,100 18,277 23,377 (2,377) 1,050 31,086 118 1,050 31,204 32,254 (4,365) 2,700 9,199 573 2,700 9,772 12,472 (1,174) 1,670 11,035 1,209 1,670 12,244 13,914 (1,592) 900 8,097 3,339 901 11,435 12,336 (3,703) 2,305 9,890 499 2,347 10,347 12,694 (4,765) 23,499 4,110 36,371 483 4,110 36,854 40,964 (5,364) 3,251 29,258 7,318 3,248 36,579 39,827 (14,092) 3,349 11,152 206 3,349 11,358 14,707 (651) 1,598 10,219 8 1,598 10,227 11,825 (789) 3,735 21,509 261 3,735 21,770 25,505 (2,662) 630 18,002 12 630 18,014 18,644 (2,550) 3,990 18,186 9,068 3,990 27,254 31,244 (3,378) 672 6,045 1,444 672 7,489 8,161 (2,648) 2,776 12,070 237 2,776 12,307 15,083 (993) 1,443 6,193 2,734 1,780 8,590 10,370 (3,436) S-2 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Cost amount carried at Close of Period Property Location Land Buildings
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Equipment Impairments/
Writedowns Land Buildings
and
Equipment
Depreciation (3) Date(s)
Acquired Original
Construction
Date(s)29 181 Spring Street NW Atlanta, GA $ — 5,717 $ 20,017 136 $ — 5,717 20,153 25,871 (2,719 ) 7/25/2012 2007 30 Corporate Square Atlanta, GA — 3,996 29,762 27,321 — 3,996 57,083 61,079 (11,541 ) 7/16/2004 1967 31 Executive Park Atlanta, GA — 1,521 11,826 4,003 — 1,521 15,829 17,350 (5,127 ) 7/16/2004 1972 32 One Georgia Center Atlanta, GA — 10,250 27,933 3,581 — 10,250 31,514 41,764 (4,576 ) 9/30/2011 1968 33 4712 Southpark Boulevard Ellenwood, GA — 1,390 19,635 74 — 1,390 19,709 21,099 (2,661 ) 7/25/2012 2005 34 1185, 1249 & 1387 S. Vinnell Way Boise, ID — 3,390 29,026 802 — 3,390 29,828 33,218 (4,059 ) 9/11/2012 1996; 1997; 2002 35 2020 S. Arlington Heights Arlington Heights, IL — 1,450 13,160 730 — 1,450 13,890 15,340 (2,746 ) 12/29/2009 1988 36 Intech Park Indianapolis, IN — 4,170 68,888 3,822 — 4,170 72,710 76,880 (11,657 ) 10/14/2011 2000; 2001; 2008 37 400 State Street Kansas City, KS — 640 9,932 4,599 — 640 14,531 15,171 (2,559 ) 6/16/2010 1971 38 7125 Industrial Road Florence, KY — 1,698 11,722 81 — 1,698 11,803 13,501 (1,468 ) 12/31/2012 1980 39 251 Causeway Street Boston, MA — 5,100 17,293 1,752 — 5,100 19,045 24,145 (3,427 ) 8/17/2010 1987 40 75 Pleasant Street Malden, MA — 1,050 31,086 159 — 1,050 31,245 32,295 (5,970 ) 5/24/2010 2008 41 25 Newport Avenue Quincy, MA — 2,700 9,199 1,297 — 2,700 10,496 13,196 (1,662 ) 2/16/2011 1985 42 One Montvale Avenue Stoneham, MA — 1,670 11,035 2,095 — 1,670 13,130 14,800 (2,308 ) 6/16/2010 1945 43 Annapolis Commerce Center Annapolis, MD — 4,057 7,665 — — 4,057 7,665 11,722 (55 ) 10/2/2017 1989 44 4201 Patterson Avenue Baltimore, MD — 901 8,097 3,976 — 901 12,073 12,974 (4,520 ) 10/15/1998 1989 45 Ammendale Commerce Center Beltsville, MD — 4,879 9,498 — — 4,879 9,498 14,377 (70 ) 10/2/2017 1987 46 Indian Creek Technology Park Beltsville, MD — 8,796 12,093 24 — 8,796 12,117 20,913 (86 ) 10/2/2017 1988 47 Gateway 270 West Clarksburg, MD — 12,104 9,688 — — 12,104 9,688 21,792 (64 ) 10/2/2017 2002 48 Hillside Center Columbia, MD — 3,437 4,228 — — 3,437 4,228 7,665 (25 ) 10/2/2017 2001 49 Snowden Center Columbia, MD — 7,955 10,128 54 — 7,955 10,182 18,137 (63 ) 10/2/2017 1982 50 TenThreeTwenty Columbia, MD — 3,126 16,361 118 — 3,126 16,479 19,605 (103 ) 10/2/2017 1982 51 20400 Century Boulevard Germantown, MD — 2,305 9,890 1,282 — 2,347 11,130 13,477 (5,296 ) 3/31/1997 1995 52 Cloverleaf Center Germantown, MD — 11,890 4,639 — — 11,890 4,639 16,529 (39 ) 10/2/2017 2000 53 3300 75th Avenue Landover, MD — 4,110 36,371 1,045 — 4,110 37,416 41,526 (7,271 ) 2/26/2010 1985 54 1401 Rockville Pike Rockville, MD — 3,248 29,258 16,534 — 3,248 45,792 49,040 (17,237 ) 2/2/1998 1986 55 2115 East Jefferson Street Rockville, MD — 3,349 11,152 328 — 3,349 11,480 14,829 (1,229 ) 8/27/2013 1981 56 Metro Park North Rockville, MD — 11,159 7,624 — — 11,159 7,624 18,783 (59 ) 10/2/2017 2001 2015440 25,458 48 440 25,506 25,946 (2,180) 3,000 14,052 371 3,000 14,423 17,423 (2,269) 5,000 38,203 1,347 5,000 39,550 44,550 (4,901) 710 1,651 57 710 1,708 2,418 (228) 4,405 18,899 4,980 4,485 23,799 28,284 (9,555) 790 6,400 790 6,400 7,190 (560) 6,530 17,711 1,770 6,530 19,481 26,011 (2,033) 36,800 66,661 2,353 36,800 69,014 105,814 (7,691) 6,510 17,973 4,069 6,510 22,042 28,552 (2,463) 1,439 11,143 4,253 1,439 15,396 16,835 (2,500) 1,630 5,645 1,459 1,630 7,104 8,734 (929) 2,030 8,708 2,157 2,060 10,835 12,895 (4,369) 1,478 9,594 235 1,478 9,829 11,307 (566) 2,964 12,840 11 2,963 12,852 15,815 (563) 14,160 2,529 21,386 182 2,529 21,568 24,097 (1,185) 83,441 9,066 78,658 798 9,066 79,456 88,522 (3,118) 2,614 15,930 573 2,614 16,503 19,117 (634) 2,090 7,465 193 2,090 7,658 9,748 (864) 700 8,416 120 700 8,536 9,236 (1,223) 3,360 15,376 1,211 3,360 16,587 19,947 (1,373) 3,970 17,035 845 4,042 17,808 21,850 (8,181) 945 4,539 132 945 4,671 5,616 (562) 906 3,886 263 922 4,133 5,055 (1,900) 1,915 8,217 531 1,950 8,713 10,663 (4,000) 950 2,376 20 950 2,396 3,346 (275) 3,519 15,098 4,065 (10,423) 3,044 9,215 12,259 (1)Includes the unamortized balance of the fair value adjustments. (2)Excludes value of real estate intangibles. Aggregate cost for federal income tax purposes is approximately $1,906,441.(3)Depreciation on building and improvements is provided for periods ranging up to 40 years and on equipment up to 12 years. S-3 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Cost amount carried at Close of Period Property Location Land Buildings
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Equipment Impairments/
Writedowns Land Buildings
and
Equipment
Depreciation (3) Date(s)
Acquired Original
Construction
Date(s)57 Redland 520/530 Rockville, MD — 12,714 61,377 1,217 — 12,714 62,594 75,308 (384 ) 10/2/2017 2008 58 Redland 540 Rockville, MD — 10,740 17,714 2,028 — 10,740 19,742 30,482 (111 ) 10/2/2017 2003 59 Rutherford Business Park Windsor Mill, MD — 1,598 10,219 10 — 1,598 10,229 11,827 (1,299 ) 11/16/2012 1972 60 Meadows Business Park Woodlawn, MD — 3,735 21,509 2,187 — 3,735 23,696 27,431 (3,907 ) 2/15/2011 1973 61 11411 E. Jefferson Avenue Detroit, MI — 630 18,002 358 — 630 18,360 18,990 (3,460 ) 4/23/2010 2009 62 330 2nd Avenue South Minneapolis, MN — 3,991 18,186 (4,246 ) (9,260 ) 1,489 16,442 17,931 — 7/16/2010 1980 63 Rosedale Corporate Plaza Roseville, MN — 672 6,045 1,505 — 672 7,550 8,222 (3,194 ) 12/1/1999 1987 64 1300 Summit Street Kansas City, MO — 2,776 12,070 253 — 2,776 12,323 15,099 (1,614 ) 9/27/2012 1998 65 4241-4300 NE 34th Street Kansas City, MO — 1,443 6,193 3,851 — 1,780 9,707 11,487 (3,893 ) 3/31/1997 1995 66 1220 Echelon Parkway Jackson, MS — 440 25,458 48 — 440 25,506 25,946 (3,459 ) 7/25/2012 2009 67 10-12 Celina Avenue Nashua, NH — 3,000 14,052 1,545 — 3,000 15,597 18,597 (2,956 ) 8/31/2009 1979 68 50 West State Street Trenton, NJ — 5,000 38,203 2,620 — 5,000 40,823 45,823 (6,948 ) 12/30/2010 1989 69 138 Delaware Avenue Buffalo, NY — 4,405 18,899 5,226 — 4,485 24,045 28,530 (11,064 ) 3/31/1997 1994 70 Airline Corporate Center Colonie, NY — 790 6,400 32 — 790 6,432 7,222 (881 ) 6/22/2012 2004 71 5000 Corporate Court Holtsville, NY — 6,530 17,711 2,477 — 6,530 20,188 26,718 (3,183 ) 8/31/2011 2000 72 305 East 46th Street New York, NY — 36,800 66,661 4,438 — 36,800 71,099 107,899 (11,212 ) 5/27/2011 1928 73 4600 25th Avenue Salem, OR — 6,510 17,973 4,278 — 6,510 22,251 28,761 (4,066 ) 12/20/2011 1957 74 Synergy Business Park Columbia, SC — 1,439 11,143 4,803 — 1,439 15,946 17,385 (3,718 ) 5/10/2006;9/17/2010 1982; 1985 75 One Memphis Place Memphis, TN — 1,630 5,645 2,508 — 1,630 8,153 9,783 (1,434 ) 9/17/2010 1985 76 701 Clay Road Waco, TX — 2,030 8,708 2,555 — 2,060 11,233 13,293 (4,708 ) 12/23/1997 1997 77 14660, 14672 & 14668 Lee Road Chantilly, VA — 6,966 74,214 294 — 6,966 74,508 81,474 (1,856 ) 12/22/2016 1998; 2002; 2006 78 1408 Stephanie Way Chesapeake, VA — 1,403 2,555 — — 1,403 2,555 3,958 (21 ) 10/2/2017 1998 79 1434 Crossways Chesapeake, VA — 3,617 19,527 276 — 3,617 19,803 23,420 (135 ) 10/2/2017 1998 80 1441 Crossways Boulevard Chesapeake, VA — 2,485 10,189 — — 2,485 10,189 12,674 (73 ) 10/2/2017 1988 81 535 Independence Parkway Chesapeake, VA 3,193 2,465 5,801 — — 2,465 5,801 8,266 (41 ) 10/2/2017 1987 82 Crossways Chesapeake, VA — 6,522 40,267 — — 6,522 40,267 46,789 (318 ) 10/2/2017 1989 83 Crossways II Chesapeake, VA — 1,633 8,035 153 — 1,633 8,188 9,821 (57 ) 10/2/2017 1989 84 Greenbrier Circle Corporate Center Chesapeake, VA — 4,489 15,149 14 — 4,489 15,163 19,652 (126 ) 10/2/2017 1981 2015 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Cost amount carried at Close of Period Property Location Land Buildings
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Equipment Impairments/
Writedowns Land Buildings
and
Equipment
Depreciation (3) Date(s)
Acquired Original
Construction
Date(s)85 Greenbrier Technology Center I Chesapeake, VA — 2,514 6,102 — — 2,514 6,102 8,616 (51 ) 10/2/2017 1987 86 Greenbrier Technology Center II Chesapeake, VA — 2,084 5,581 3 — 2,084 5,584 7,668 (47 ) 10/2/2017 1987 87 Greenbrier Towers Chesapeake, VA — 3,437 11,241 27 — 3,437 11,268 14,705 (94 ) 10/2/2017 1985 88 Enterchange at Meadowville Chester, VA — 1,478 9,594 283 — 1,478 9,877 11,355 (1,060 ) 8/28/2013 1999 89 3920 Pender Drive Fairfax, VA 13,620 2,963 12,840 12 — 2,963 12,852 15,815 (1,204 ) 3/21/2014 1981 90 Pender Business Park Fairfax, VA — 2,529 21,386 193 — 2,529 21,579 24,108 (2,312 ) 11/4/2013 2000 91 3201 Jermantown Road Fairfax, VA — 5,991 25,619 329 — 5,991 25,948 31,939 (213 ) 10/2/2017 1984 92 7987 Ashton Avenue Manassas, VA — 1,562 8,253 333 — 1,562 8,586 10,148 (210 ) 1/3/2017 1989 93 Gateway II Norfolk, VA — 1,194 1,563 — — 1,194 1,563 2,757 (13 ) 10/2/2017 1984 94 Norfolk Business Center Norfolk, VA — 2,134 5,430 — — 2,134 5,430 7,564 (45 ) 10/2/2017 1985 95 Norfolk Commerce Park II Norfolk, VA — 3,116 10,709 34 — 3,116 10,743 13,859 (76 ) 10/2/2017 1990 96 1759 & 1760 Business Center Drive Reston, VA — 9,066 78,658 2,413 — 9,066 81,071 90,137 (7,185 ) 5/28/2014 1987 97 1775 Wiehle Avenue Reston, VA — 4,138 26,120 29 — 4,138 26,149 30,287 (163 ) 10/2/2017 2001 98 9960 Mayland Drive Richmond, VA — 2,614 15,930 1,844 — 2,614 17,774 20,388 (1,550 ) 5/20/2014 1994 99 Aquia Commerce Center Stafford, VA — 2,090 7,465 730 — 2,090 8,195 10,285 (1,308 ) 6/22/2011 1988; 1999 100 Atlantic Corporate Park Sterling, VA — 5,752 29,323 — — 5,752 29,323 35,075 (183 ) 10/2/2017 2008 101 Sterling Business Park Lots 8 & 9 Sterling, VA — 9,178 44,324 — — 9,178 44,324 53,502 (277 ) 10/2/2017 2016 102 Sterling Park Business Center Sterling, VA — 18,935 21,191 63 — 18,935 21,254 40,189 (154 ) 10/2/2017 1990 103 65 Bowdoin Street S. Burlington, VT — 700 8,416 120 — 700 8,536 9,236 (1,656 ) 4/9/2010 2009 104 840 North Broadway Everett, WA — 3,360 15,376 1,829 — 3,360 17,205 20,565 (2,504 ) 6/28/2012 1985 105 Stevens Center Richland, WA — 3,970 17,035 2,431 — 4,042 19,394 23,436 (9,176 ) 3/31/1997 1995 106 11050 West Liberty Drive Milwaukee, WI — 945 4,539 103 — 945 4,642 5,587 (763 ) 6/9/2011 2006 107 882 TJ Jackson Drive Falling Waters, WV — 906 3,886 282 — 922 4,152 5,074 (2,110 ) 3/31/1997 1993 108 5353 Yellowstone Road Cheyenne, WY — 1,915 8,217 550 — 1,950 8,732 10,682 (4,438 ) 3/31/1997 1995 $ 183,100 $ 628,698 $ 2,153,005 $ 194,018 $ (9,260 ) $ 627,108 $ 2,348,613 $ 2,975,721 $ (341,848 ) 1,467,863 156,661 103,413 33,688 (2,714) (2,714) 1,568,562 187,635 151,316 37,671 (7,058) (5,071) (444) (444) (29,896) 1,682,480 219,791 19,622 38,987 (2,624) (2,624) (3,346) (275) 1,696,132 255,879 S-4 Real Estate Properties Accumulated Depreciation Balance at December 31, 2014 $ 1,682,480 $ 219,791 Additions 19,622 38,987 Disposals (2,624 ) (2,624 ) Reclassification of assets held for sale (3,346 ) (275 ) Balance at December 31, 2015 1,696,132 255,879 Additions 194,107 42,404 Disposals (1,479 ) (1,479 ) Balance at December 31, 2016 1,888,760 296,804 Additions 1,100,138 45,315 Loss on asset impairment (9,490 ) — Disposals (3,687 ) (271 ) Balance at December 31, 2017 $ 2,975,721 $ 341,848 GOVERNMENT PROPERTIES INCOME TRUST Dated: February 18, 201626, 2018SignatureTitleDateSignature Title Date /s/ David M. Blackman David M. Blackman18, 2016/s/ Mark L. Kleifges Mark L. KleifgesTreasurer and Chief Financial Officer and Treasurer (principal financial officer and18, 2016/s/ Adam D. Portnoy Managing Trustee February 26, 2018 Adam D. Portnoy Managing TrusteeFebruary 18, 2016/s/ Barry M. PortnoyBarry M. PortnoyManaging TrusteeFebruary 18, 2016Independent Trustee February 26, 2018 Barbara D. Gilmore /s/ John L. Harrington Independent Trustee February 26, 2018 John L. Harrington Independent TrusteeFebruary 18, 2016/s/ Barbara D. GilmoreBarbara D. GilmoreIndependent TrusteeFebruary 18, 2016Independent Trustee February 26, 2018 Elena Poptodorova /s/ Jeffrey P. Somers Independent Trustee February 26, 2018 Jeffrey P. Somers Independent TrusteeFebruary 18, 2016