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GOVERNMENT PROPERTIES INCOME TRUST

FORM 10-Q

September 30, 2012March 31, 2013

INDEX

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GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

amount of lending commitments under our revolving credit facility. Both the interest rate spreadpremium and the facility fee are subject to adjustment based upon changes to our credit ratings. TheAs of March 31, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.7% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.77% and 1.75%1.7% for the three and nine months ended September 30, 2012, respectively.March 31, 2013. As of September 30, 2012March 31, 2013, we had $167,000$27,500 outstanding and $383,000$522,500 available under our revolving credit facility.

On January 12, 2012, we entered intoWe have a five year $350,000 unsecured term loan. Our term loan matures on January 11, 2017, and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. The amount outstanding under ourOur term loan bears interest at a rate of LIBOR plus a spread ofpremium, which was 175 basis points thatas of March 31, 2013. The interest rate premium is subject to adjustment based upon changes to our credit ratings. We usedAs of March 31, 2013, the net proceeds of our term loan to repay amounts outstanding under our revolving credit facility and to fund general business activities.  The weighted average annual interest rate for the amount outstanding under our term loan was 2.02%2.0% and the weighted average interest rate for the amount outstanding under our term loan was 2.0% for the three months ended September 30, 2012 and 2.00% for the period from January 12, 2012 to September 30, 2012.March 31, 2013.

Our revolving credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us and the termination of our business management agreement or property management agreement with Reit Management & Research LLC, or RMR. Our revolving credit facility agreement and our term loan agreement also contain a number of covenants, including covenants that restrict our ability to incur debt in excess of calculated amounts, restrict our abilitydebts or to make distributions under certain circumstances and generally require

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

us to maintain certain financial ratios.ratios and a minimum net worth.  We believe we were in compliance with the terms and conditions of our revolving credit facility agreement and our term loan agreement at September 30, 2012.March 31, 2013.

At September 30, 2012,March 31, 2013, five of our properties with an aggregate net book value of $122,575$121,915 were encumberedsecured by four mortgages with a then aggregate principal amount outstanding of $91,443.mortgage notes. We assumed these mortgage notesmortgages in connection with certain of our acquisitions. Our mortgage notes are non-recourse and do not contain any material financial covenants.

Note 6. Fair Value of Financial Instruments

Our financial instruments at September 30, 2012March 31, 2013 include cash and cash equivalents, restricted cash, rents receivable, amounts due from related persons, mortgage notes payable, accounts payable, our revolving credit facility and our term loan, amounts due to related persons, other accrued expenses and security deposits. At September 30, 2012,March 31, 2013, the fair valuevalues of our financial instruments approximated their carrying values in our condensed consolidated financial statements, except as follows:

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

Note 7. Shareholders’ Equity

Distributions

On February 24, 2012,22, 2013, we paid a distribution to common shareholders in the amount of $0.42$0.43 per share, or $19,762,$23,497, that was declared on January 9, 201210, 2013 and was payable to shareholders of record on January 26, 2012.

On May 24, 2012, we paid a distribution to common shareholders in the amount of $0.42 per share, or $19,778, that was declared on April 9, 2012 and was payable to shareholders of record on April 26, 2012.

On August 22, 2012, we paid a distribution to common shareholders in the amount of $0.42 per share, or $19,782, that was declared on July 9, 2012 and was payable to shareholders of record on July 23, 2012.

On October 9, 2012, we declared a distribution payable to common shareholders of record on October 22, 2012, in the amount of $0.43 per share, or $23,497.  We expect to pay this distribution on or about November 21, 2012.

Share Issuances

As further described in Note 8, under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 29, 2012 we issued 39,141 of our common shares of beneficial interest, $.01 par value per share, or our common shares, to RMR in payment of an incentive fee of approximately $833 for services rendered to us by RMR during 2011.

On May 16, 2012, pursuant to our equity compensation plan, we granted 2,000 of our common shares, valued at $22.43 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees as part of their annual compensation.25, 2013.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

On September 14, 2012, pursuantApril 10, 2013, we declared a distribution payable to common shareholders of record on April 26, 2013, in the amount of $0.43 per share, or $23,506.  We expect to pay this distribution on or about May 24, 2013 using cash on hand and borrowings under our equity compensation plan,revolving credit facility.

Share Issuances

As further described in Note 8, on March 27, 2013, under the terms of our business management agreement with RMR, we granted an aggregate of 43,917issued 20,230 of our common shares valued at $23.76 per share, the closing priceto RMR in payment of our common shares on the NYSE on that day to our officers and certain employees of our manager, RMR.

On October 19, 2012, we issued 7,500,000 common shares in a public offering at a price of $23.25 per share, raising net proceedsan incentive fee of approximately $166,564.  We used the net proceeds of this offering$485 for services rendered to repay amounts outstanding under our revolving credit facility.  We also granted the underwriters of the offering a 30-day option to purchase up to an additional 1,125,000 common shares, which option expires on November 15,us by RMR during 2012.

We have no dilutive securities.

Note 8. Related Person Transactions

We have no employees.  Personnel and various services we require to operate our business are provided to us by RMR.  We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement.  agreement, which relates to our property level operations.

Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, which include CommonWealth REIT, or CWH.  One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR.  Each of our executive officers is also an officer of RMR.  CWH’s executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies.  In addition, officers of RMR serve as officers of those companies.

Pursuant to our business management agreement with RMR, we incurred expenses of $2,742 and $2,015recognized business management fees for the three months ended September 30,March 31, 2013 and 2012 of $2,454 and 2011, respectively, and $7,001 and $5,494 for the nine months ended September 30, 2012 and 2011,$2,231, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated financial statements.  In March 2012,2013, we issued 39,14120,230 of our common shares to RMR in satisfaction offor the incentive fee payable to RMR earned for services provided to us during 2011,2012, in accordance with the terms of our business management agreement.

In connection with our property management agreement with RMR we incurredrecognized aggregate property management and construction supervision fees of $1,829 and $1,352 for the three months ended September 30,March 31, 2013 and 2012 of $1,816 and 2011, respectively, and $5,034 and $3,716 for the nine months ended September 30, 2012 and 2011,$1,590, respectively.  These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

CWH organized us as a 100% owned subsidiary.  One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of CWH.  Our other Managing Trustee, Mr. Adam Portnoy, is a managing trustee and the President of CWH.  RMR provides management services to both us and CWH.

In 2009, we completed our initial public offering, or the GOV IPO, pursuant to which we ceased to be a majority owned subsidiary of CWH.  In connection with the GOVour IPO, we and CWH entered into a transaction agreement whichthat governs our separation from and relationship with CWH.  Pursuant to this transaction agreement, among other things, CWH granted us a right of first refusal to acquire any property owned by CWH that CWH determines to divest if the property is then majority leased to a government tenant, including 15which right of first refusal will also apply in the event of an indirect sale of any such properties that we boughtresulting from CWH during 2010.a change of control of CWH.

Until March 15, 2013, CWH iswas our largest shareholder and, as of the date of this report,shareholder.  On March 15, 2013, CWH ownedsold all 9,950,000 of our common shares or approximately 18.2%it owned in a public offering.  In connection with this public offering, on March 11, 2013, we entered into a registration agreement with CWH under which CWH agreed to pay all expenses incurred by us relating to the registration and sale of our outstanding common shares.  One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of CWH.  Our other Managing Trustee, Mr. Adam Portnoy, is a managing trustee andshares owned by CWH in the President of CWH.  RMR provides management servicesoffering. In addition, under the registration agreement, CWH agreed to bothindemnify us and CWH.our officers, Trustees and controlling persons, and we agreed to indemnify CWH, its officers, trustees and controlling persons, against certain liabilities related to the public offering, including liabilities under the Securities Act of 1933, as amended, or the Securities Act; and we and CWH agreed to reimburse payments that the other may make in respect of those liabilities. As of March 31, 2013, we recorded $286 of amounts due from CWH related to this agreement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

We, RMR, CWH and five other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.

As of March 31, 2013, we have invested $5,194 in AIC since we became an equity owner of AIC in December 2009.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,677$5,816 and $5,409$5,747 as of September 30, 2012March 31, 2013 and December 31, 2011,2012, respectively.  We recognized income of $115 and $28 forFor the three months ended September 30,March 31, 2013 and 2012, we recognized income of $76 and 2011, respectively, and $236 and $111 for the nine months ended September 30, 2012 and 2011,$45, respectively, related to this investment.our investment in AIC.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2012 for a one year term, and we paid a premium, including

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

taxes and fees, of $410 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in thatthis program.  We are also currently investigatingperiodically consider the possibilities to expandfor expanding our insurance relationships with AIC to include other types of insurance.insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-ratapro rata share of any profits of this insurance business.

For further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part I, Item 2 and “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated February 23, 2012, or our Proxy Statement, and our other filings with the Securities and Exchange Commission, or SEC, including Note 5 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with our related parties, including our business management agreement and property management agreement with RMR, various agreements we have with CWH and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

Note 9.   Pro Forma Information

During the nine months ended September 30, 2012, we purchased 11 properties for an aggregate purchase price of $181,051, excluding acquisition costs.  In January 2012, we entered into a $350,000 unsecured term loan to, among other things, repay amounts outstanding under our unsecured revolving credit facility.  During 2011, we purchased 16 properties for an aggregate purchase price of $444,050, including the assumption of $49,395 of mortgage debt and excluding acquisition costs.  Also in 2011, we amended our $500,000 revolving credit facility, to, among other things, increase maximum borrowings under the facility to $550,000 and we issued 6,500,000 of our common shares.  The following table presents our pro forma results of operations as if these acquisitions and financing activities were completed on January 1, 2011. This pro forma data is not necessarily indicative of what our actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period. Differences could result from various factors, including but not limited to, additional property acquisitions, property sales, changes in interest rates and changes in our debt or equity capital structure, and such differences could be significant.

During the nine months ended September 30, 2012 and 2011, we recognized revenues of $42,234 and $10,580 respectively, and operating income of $13,560 and $1,820 respectively, arising from our 2011 and 2012 acquisitions.

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effect at the acquisition date, less estimated annual property operating expenses, excluding depreciation and amortization expense, to (y) the acquisition purchase price, including assumed debt and excluding acquisition costs.  For more information about these acquisitions, please see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In October 2012, we entered an agreement to acquire an office property located in Windsor Hill, MD with 78,131 rentable square feet.  This property is 100% leased to two tenants, of which 97% is leased to the U.S. Government and occupied by the Centers for Medicare and Medicaid.  The contract purchase price is $14,450, excluding acquisition costs.  This pending acquisition is subject to our satisfactory completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will acquire this property.

Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. WeAlthough we did not acquire any properties during the three month period ended March 31, 2013, and we currently have no properties under contract to acquire, we continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants; however, we can provide no assurancecannot assure that we will reach agreementsany agreement to acquire such properties, or that if we do reach any such agreementsagreement, that we will complete the acquisitionsacquisitions.

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RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Three Months Ended September 30, 2012,March 31, 2013, Compared to Three Months Ended September 30, 2011March 31, 2012