UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2016~~March 31, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-34364

GOVERNMENT PROPERTIES INCOME TRUST

(Exact Name of Registrant as Specified in Its Charter)



Maryland		26-4273474
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634

(Address of Principal Executive Offices) (Zip Code)

617-219-1440

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of ~~October~~April 25, ~~2016: 71,178,999~~2017: 71,177,906

GOVERNMENT PROPERTIES INCOME TRUST

FORM 10-Q

~~September 30, 2016~~March 31, 2017

INDEX



PART I	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets — ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016	2

	Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ — Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~	3

	Condensed Consolidated Statements of Cash Flows ~~—Nine~~—Three Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2116

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3628

Item 4.	Controls and Procedures	3729

	Warning Concerning Forward Looking Statements	3830

	Statement Concerning Limited Liability	4133

PART II	Other Information

Item 1A.	Risk Factors	42

~~Item 2.~~	~~Unregistered Sales of Equity Securities~~	4234

Item 6.	Exhibits	4335

	Signatures	4436

References in this Quarterly Report on Form 10-Q to “the Company”, “GOV”, ~~”we”~~“we”, “us” or “our” include Government Properties Income Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

PART I. Financial Information

Item 1. Financial Statements

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)


	September 30,			December 31,			March 31,			December 31,
	2016			2015			2017			2016
ASSETS
Real estate properties:
Land	$	259,416		$	253,058		$	269,410		$	267,855
Buildings and improvements	1,528,585			1,443,074			1,640,096			1,620,905
Total real estate properties, gross	1,788,001			1,696,132			1,909,506			1,888,760
Accumulated depreciation	(285,974		)	(255,879		)	(308,241		)	(296,804		)
Total real estate properties, net	1,502,027			1,440,253			1,601,265			1,591,956

Equity investment in Select Income REIT	491,973			491,369			482,103			487,708
Assets of discontinued operations	12,490			12,468			12,538			12,541
Assets of property held for sale	—			3,098
Acquired real estate leases, net	105,499			118,267			118,065			124,848
Cash and cash equivalents	13,749			8,785			12,808			29,941
Restricted cash	514			1,022			703			530
Rents receivable, net	49,350			45,269			50,459			48,458
Deferred leasing costs, net	20,012			14,299			21,232			21,079
Other assets, net	69,456			33,680			77,877			68,005
Total assets	$	2,265,070		$	2,168,510		$	2,377,050		$	2,385,066

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	25,000		$	117,000		$	160,000		$	160,000
Unsecured term loans, net	547,000			546,490			547,341			547,171
Senior unsecured notes, net	646,551			345,809			647,213			646,844
Mortgage notes payable, net	28,250			136,299			27,415			27,837
Liabilities of discontinued operations	61			54			52			45
Liabilities of property held for sale	—			43
Accounts payable and other liabilities	52,237			50,543			52,762			54,019
Due to related persons	3,974			2,886			3,672			3,520
Assumed real estate lease obligations, net	11,257			12,735			10,025			10,626
Total liabilities	1,314,330			1,211,859			1,448,480			1,450,062

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 100,000,000 shares authorized, 71,178,999 and 71,126,308 shares issued and outstanding, respectively	712			711
Common shares of beneficial interest, $.01 par value: 100,000,000 shares
authorized, 71,177,906 shares issued and outstanding							712			712
Additional paid in capital	1,473,557			1,472,482			1,473,533			1,473,533
Cumulative net income	84,264			38,486			103,744			96,329
Cumulative other comprehensive income (loss)	24,127			(14,867		)
Cumulative other comprehensive income							43,714			26,957
Cumulative common distributions	(631,920		)	(540,161		)	(693,133		)	(662,527		)
Total shareholders’ equity	950,740			956,651			928,570			935,004
Total liabilities and shareholders’ equity	$	2,265,070		$	2,168,510		$	2,377,050		$	2,385,066

See accompanying notes.

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2016			2015			2017			2016

Rental income	$	64,478		$	62,092		$	192,150		$	186,864		$	69,296		$	63,611

Expenses:
Real estate taxes	7,591			7,735			22,810			22,819			8,177			7,653
Utility expenses	5,483			5,194			13,330			13,788			4,606			4,174
Other operating expenses	13,854			12,281			40,031			36,659			13,992			12,911
Depreciation and amortization	18,404			17,161			54,713			51,675			20,505			18,324
Acquisition related costs	147			270			363			459			—			152
General and administrative	3,816			3,714			11,350			11,431			3,962			3,526
Total expenses	49,295			46,355			142,597			136,831			51,242			46,740

Operating income	15,183			15,737			49,553			50,033			18,054			16,871
Dividend income	304			—			667			—			304			—
Interest income	47			2			63			14			61			6
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $805, $360, $2,024 and $1,020, respectively)	(12,608		)	(9,137		)	(32,286		)	(27,894		)
Interest expense (including net amortization of debt premiums and discounts
and debt issuance costs of $807 and $471, respectively)													(13,581		)	(9,364		)
Gain on early extinguishment of debt	—			34			104			34			—			104
Gain (loss) on issuance of shares by Select Income REIT	72			(21		)	88			(42,145		)
Loss on impairment of Select Income REIT investment	—			—			—			(203,297		)
Income (loss) from continuing operations before income taxes
Income from continuing operations before income taxes
and equity in earnings of investees	2,998			6,615			18,189			(223,255		)	4,838			7,617
Income tax (expense) benefit	(13		)	13			(63		)	(49		)
Income tax expense													(18		)	(15		)
Equity in earnings of investees	8,668			10,294			28,002			16,072			2,739			9,934
Income (loss) from continuing operations	11,653			16,922			46,128			(207,232		)
Income from continuing operations													7,559			17,536
Loss from discontinued operations	(154		)	(11		)	(429		)	(390		)	(144		)	(149		)
Income (loss) before gain on sale of property	11,499			16,911			45,699			(207,622		)
Gain on sale of property	79			—			79			—
Net income (loss)	11,578			16,911			45,778			(207,622		)
Net income													7,415			17,387

Other comprehensive income (loss)
Other comprehensive income
Unrealized gain on investment in available for sale securities	8,463			—			28,571			—			12,142			12,871
Equity in unrealized gain (loss) of investees	3,273			(355		)	10,423			(166		)
Other comprehensive income (loss)	11,736			(355		)	38,994			(166		)
Comprehensive income (loss)	$	23,314		$	16,556		$	84,772		$	(207,788	)
Equity in unrealized gain of investees													4,615			4,544
Other comprehensive income													16,757			17,415
Comprehensive income													$	24,172		$	34,802

Weighted average common shares outstanding (basic)	71,054			71,004			71,041			70,589			71,079			71,031
Weighted average common shares outstanding (diluted)	71,084			71,021			71,064			70,589			71,094			71,031

Per common share amounts (basic and diluted):
Income (loss) from continuing operations	$	0.16		$	0.24		$	0.65		$	(2.94	)
Income from continuing operations													$	0.11		$	0.25
Loss from discontinued operations	$	—		$	—		$	(0.01	)	$	(0.01	)	$	—		$	—
Net income (loss)	$	0.16		$	0.24		$	0.64		$	(2.94	)
Net income													$	0.10		$	0.24

See accompanying notes.

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	45,778		$	(207,622	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Net income							$	7,415		$	17,387
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	31,611			29,115			11,576			10,237
Net amortization of debt premiums and discounts and debt issuance costs	2,024			1,020			807			471
Gain on sale of property	(79		)	—
Gain on early extinguishment of debt	(104		)	(34		)	—			(104		)
Straight line rental income	(1,789		)	(2,820		)	(1,300		)	(149		)
Amortization of acquired real estate leases	21,948			21,771			8,672			7,712
Amortization of deferred leasing costs	2,343			1,387			849			709
Other non-cash (income) expense, net	500			1,288
Other non-cash expenses (income), net							5			(105		)
Equity in earnings of investees	(28,002		)	(16,072		)	(2,739		)	(9,934		)
(Gain) loss on issuance of shares by Select Income REIT	(88		)	42,145
Loss on impairment of Select Income REIT investment	—			203,297
Distributions of earnings from Select Income REIT	25,676			18,850			1,875			9,117
Change in assets and liabilities:
Restricted cash	508			950			(173		)	309
Deferred leasing costs	(7,998		)	(2,408		)	(1,075		)	(1,989		)
Rents receivable	(126		)	456			(974		)	(1,215		)
Other assets	(1,466		)	(865		)	2,215			1,849
Accounts payable and accrued expenses	(150		)	(1,037		)	(1,989		)	(4,577		)
Due to related persons	1,088			(368		)	152			1,494
Net cash provided by operating activities	91,674			89,053			25,316			31,212

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and deposits	(83,705		)	—			(12,641		)	(79,244		)
Real estate improvements	(23,357		)	(9,746		)	(9,656		)	(4,964		)
Investment in Select Income REIT	—			(95,821		)
Investment in The RMR Group Inc.	—			(6,467		)
Distributions in excess of earnings from Select Income REIT	11,951			15,721			10,833			3,342
Proceeds from sale of properties, net	263			30,520
Net cash used in investing activities	(94,848		)	(65,793		)	(11,464		)	(80,866		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage notes payable	(107,562		)	(48,476		)	(379		)	(106,849		)
Proceeds from issuance of senior unsecured notes	310,000			—
Borrowings on unsecured revolving credit facility	254,000			165,000			30,000			204,000
Repayments on unsecured revolving credit facility	(346,000		)	(51,000		)	(30,000		)	(10,000		)
Payment of debt issuance costs	(10,229		)	(21		)
Repurchase of common shares	(312		)	(174		)
Distributions to common shareholders	(91,759		)	(91,074		)	(30,606		)	(30,584		)
Net cash provided by (used in) financing activities	8,138			(25,745		)
Net cash (used in) provided by financing activities							(30,985		)	56,567

Increase (decrease) in cash and cash equivalents	4,964			(2,485		)	(17,133		)	6,913
Cash and cash equivalents at beginning of period	8,785			13,791			29,941			8,785
Cash and cash equivalents at end of period	$	13,749		$	11,306		$	12,808		$	15,698

Supplemental cash flow information:
Interest paid $ 32,599
$ 30,107
Income taxes paid $ 94
$ 143
Non-cash investing activities:

Investment in The RMR Group Inc. paid in common shares $ —
$ 13,545
Sale of property $ 3,600
$ —
Mortgage note receivable related to sale of property $ (3,600 ) $ —



Supplemental cash flow information:
Interest paid	$	15,854	$	12,319
Income taxes paid	$	—	$	44

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of Government Properties Income Trust and its subsidiaries, or GOV, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets, impairment of real estate and equity method investments and the valuation of intangible assets.

Note 2. Recent Accounting Pronouncements

On January 1, ~~2016,~~2017, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. ~~2015-02,~~2017-01, ~~Consolidation. Among other things, this update changes how an entity determines~~Clarifying the ~~primary beneficiary~~Definition of a ~~variable interest entity. The~~Business, which provides additional guidance on evaluating whetheratransaction should be accounted for as an acquisition (or disposal) of assets or of a business. This update defines three requirements for a set of assets andactivities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. As a result of the implementation of this update, certain property acquisitions, which under previous guidance were accounted foras business combinations, are now accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensedunder the previous guidance.

On January 1, 2017, we adopted FASB ASU No. 2016-09, Compensation - Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the condensed statement of cash flows. The adoption of ASU No. 2016-09 did not have ana material impact in our condensed consolidated financial statements.

~~On January 1, 2016, we adopted~~In May 2014, the FASB issued ASU No. ~~2015-03,~~2014-09, ~~Simplifying the Presentation of Debt Issuance Costs~~Revenue From Contracts With Customers, which ~~requires debt issuance costs~~outlines a comprehensive model forentities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer ofpromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be ~~presented~~entitled in exchange for those goods orservices.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate orequipment. In August 2015, the FASB provided for a one-year deferral of the effective date for ASU No. 2014-09, which is now effective for us beginning January 1,2018. A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. We arecontinuing to evaluate ASU No. 2014-09 (and related clarifying guidance issued by the FASB); however, we do not expect its adoption to have a significant impact on the timing of our revenue recognition in the ~~balance sheet as~~consolidated financial statements with the exception of profit recognition on real estate sales. Wecurrently have a ~~direct deduction from~~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 ~~associated debt liability, and FASB~~sale but will be recognized in its entirety upon adoption of ASU No. ~~2015-15,~~ ~~Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments~~2014-09. We currently expect to ~~SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses~~adopt the ~~presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in~~standard using the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loans, senior unsecured notes and mortgage notes payable of $3,510, $2,172 and $344, respectively, were reclassified from assets to the associated debt liability in our condensed consolidated balance sheets.modified retrospective approach.

~~On January 1, 2016, we adopted FASB ASU No. 2015-16,~~ ~~Simplifying the Accounting for Measurement-Period Adjustments~~, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes howentities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. ~~Under this~~ ASU No. 2016-01 states that these changes will be recorded through earnings. We are continuing to evaluate this guidance, but ~~we expect~~ the implementation of this guidance will affect ~~how changes in the fair value of available for sale equity investments we hold are presented in our condensed consolidated financial statements.~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02~~

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

how changes in the fair value of available for sale securities we hold are presented in our condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation anddisclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as eitherfinance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classificationwill determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is alsorequired to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a termof 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using anapproach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective forreporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No.2016-02 will have in our condensed consolidated financial statements.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation – Stock Compensation~~, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016. We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact ~~that~~the adoption of ASU No. 2016-15 will have in our condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies how companies should present restricted cash and restrictedcash equivalents. Companies will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the condensed statement of cashflows. The new standard requires a reconciliation of the totals in the condensed statement of cash flows to the related captions in the balance sheets. ASU No. 2016-18 iseffective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impactthe adoption of ASU No. 2016-18 will have in our condensed consolidated financial statements.

Note 3. Weighted Average Common Shares

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):


	For the Three Months		For the Nine Months		For the Three Months
	Ended September 30,		Ended September 30,		Ended March 31,
	2016	2015	2016	2015	2017	2016
Weighted average common shares for basic earnings per share	71,054	71,004	71,041	70,589	71,079	71,031
Effect of dilutive securities: unvested share awards	30	17	23	—	15	—
Weighted average common shares for diluted earnings per share	71,084	71,021	71,064	70,589	71,094	71,031

Note 4. Real Estate Properties

As of ~~September 30, 2016,~~March 31, 2017, we owned 7174 properties ~~(91~~(96 buildings), with an undepreciated carrying value of ~~$1,788,001,~~$1,909,506, excluding one property (one building) classified as discontinued operations with an undepreciated carrying value of $12,260. We generally lease space at our properties on a gross lease or modified gross lease basis pursuant to fixed term contracts expiring between ~~2016~~2017 and 2032. Our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended ~~September 30, 2016,~~March 31, 2017, we entered into 1712 leases for 136,466 rentable square feet, for a weighted (by rentable square feet) average lease term of 6.8 years and we made commitments for approximately $3,428 of leasing related costs. During the nine months ended September 30, 2016, we entered into 51 leases for 1,226,068 rentable square feet, including a 25,579 square foot expansion to be constructed at an existing property, for a weighted (by rentable square feet) average lease term of 10.3 years and we made commitments for approximately $35,033 of leasing related costs. As of September 30, 2016, we have estimated unspent leasing related

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

360,103 rentable square feet, for a weighted (by rentable square feet) average lease term of 10.6 years and we made commitments for $2,241 of leasing related costs. As of March 31, 2017, we have estimated unspent leasing related obligations of ~~$21,580~~$24,800, and we have committed to redevelop and expand an existing property atprior to commencement of the lease with an estimated remaining cost to complete as of ~~approximately $17,990.~~March 31, 2017 of $10,138. During the three months ended March 31, 2017, we capitalized $61 of interest expense related to the redevelopment and expansion of that existing property.

Acquisition Activities

During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, we acquired an office property (one building) located in ~~Sacramento, CA~~Manassas, VA with ~~337,811~~69,374 rentable square feet. This property was ~~86% leased, of which 71% was~~100% leased to ~~the State of California and occupied by three separate agencies,~~Prince William County on the date of acquisition. This transaction was accounted for as an acquisition of assets. The purchase price was ~~$79,235, excluding~~$12,641, including capitalized acquisition ~~costs.~~costs of $21. Our allocation of the purchase price of this acquisition based on the estimated fair values of the acquired assets and assumed liabilities is presented in the table below.

Number

Buildings

Other

Acquired

Buildings

Other

Acquisition

Properties/

Square

Purchase

and

Assumed

Acquired

Lease

Properties/

Square

Purchase

and

Assumed

Date

Location

Type

Buildings

Feet

Price

Land

Improvements

Assets

Leases

Obligations

Location

Type

Buildings

Feet

Price

Land

Improvements

Assets

January 2016

Sacramento, CA

Office

1 / 1

337,811

79,235

4,688

61,722

2,167

11,245

(587

)

January 2017

Manassas, VA

Office

1/1

69,374

12,641

1,562

8,237

2,842

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

Also in July 2016, we entered an agreement to acquire an office property (one building) located in Manassas, VA with 69,374 rentable square feet for a purchase price of $13,200, excluding acquisition costs. This property is 100% leased to Prince William County.

In August 2016, we entered an agreement to acquire transferable development rights that would allow us to expand a property we own in Washington, D.C. for a purchase price of $2,030, excluding acquisition costs.

~~Our pending acquisitions are~~ This acquisition is subject to conditions; accordingly, we cannot be sure that we will complete ~~these acquisitions or~~this acquisition, that ~~these acquisitions~~this acquisition will not be delayed or ~~the~~that its terms ~~of these acquisitions~~ will not change.

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

Disposition Activities – ~~Continuing Operations~~

~~In July 2016, we sold an office property (one~~ 1 ~~building~~) in Savannah, GA with 35,228 rentable square feet that had a net book value of $2,986 for $4,000, excluding closing costs. In connection with this sale, we provided $3,600 of mortgage financing to the buyer. The mortgage note requires interest to be paid at an annual rate of LIBOR plus 4.0%, subject to a minimum annual interest rate of 5.0%, and requires monthly payments of interest only until maturity on June 30, 2021. This sales transaction did not qualify for full gain recognition under GAAP and is being accounted for under the installment method. Accordingly, we recognized a gain on sale of real estate of $79 during the three months ended September 30, 2016 and recorded a deferred gain of $712, which we currently expect to recognize when the mortgage note is repaid. The mortgage note receivable of $3,600, net of the $712 deferred gain, is included in other assets on our condensed consolidated balance sheet at September 30, 2016.

We classified this property as held for sale as of June 30, 2016. The results of operations for this property were included in continuing operations in our condensed consolidated financial statements up to the date of sale. Summarized balance sheet information for the property as of December 31, 2015 is as follows:

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~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

December 31,
2015
Real estate properties, net $ 3,071
Rents receivable 1
Other assets 26
Assets of property held for sale $ 3,098

Other liabilities $ 43
Liabilities of property held for sale $ 43

~~Disposition Activities –~~ Discontinued Operations

In March 2016, we entered an agreement to sell an office property (one building) in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at ~~September 30, 2016.~~March 31, 2017. In March 2017, we agreed to extend the closing date for this sale to June 1, 2017 and increased the sales price by $150, which we received as a non-refundable deposit. The contract sales price is ~~$13,000,~~now $13,298, excluding closing costs. This sale is subject to ~~conditions, including the purchaser obtaining certain zoning entitlements, and is currently expected to occur in the first quarter of 2017. We~~conditions; accordingly, we cannot be sure that the sale of this property will ~~occur,~~be completed, that the sale will not be delayed or that its terms will not change. ~~We have classified~~Results of operations for this property, which ~~was~~qualified as held for sale prior to our adoption in 2014 of ~~FASB~~ ASU No. ~~2014-08,~~2014-8, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, are classified as a discontinued ~~operation~~operations in our condensed consolidated financial statements.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Summarized balance sheet and income statement information for ~~the~~this property is as follows:

Balance Sheets


	September 30,		December 31,		March 31,		December 31,
	2016		2015		2017		2016
Real estate properties, net	$	12,260	$	12,260	$	12,260	$	12,260
Other assets	230		208		278		281
Assets of discontinued operations	$	12,490	$	12,468	$	12,538	$	12,541

Other liabilities	$	61	$	54	$	52	$	45
Liabilities of discontinued operations	$	61	$	54	$	52	$	45

Statements of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2016			2015			2017			2016
Rental income	$	6		$	28		$	62		$	86		$	7		$	28
Real estate taxes	(27		)	71			(73		)	(69		)	(24		)	(23		)
Utility expenses	(34		)	(46		)	(113		)	(124		)	(46		)	(50		)
Other operating expenses	(70		)	(35		)	(219		)	(197		)	(53		)	(76		)
General and administrative	(29		)	(29		)	(86		)	(86		)	(28		)	(28		)
Loss from discontinued operations	$	(154	)	$	(11	)	$	(429	)	$	(390	)	$	(144	)	$	(149	)

Note 5. Revenue Recognition

We recognize rental income from operating leases that contain fixed contractual rent changes on a straight line basis over the term of the lease agreements. Certain of our leases with government tenants provide the tenant the right to terminate before the lease expiration date if the legislature or other funding authority does not appropriate the funding necessary for the government tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the fully executed term of the lease because we believe the occurrence of early terminations to be remote contingencies based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis.

We increased rental income to record revenue on a straight line basis by ~~$1,205~~$1,300 and ~~$613~~$149 for the three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015, respectively, and $1,789 and $2,820 for the nine months ended September 30, 2016 and 2015,~~

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~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

respectively. Rents receivable include ~~$20,784~~$22,986 and ~~$18,995~~$21,686 of straight line rent receivables, net of allowance for doubtful accounts of $156 and $155, at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively.

Note 6. Concentration

Tenant and Credit Concentration

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. The U.S. Government, 13 state governments, and ~~three~~four other government tenants combined were responsible for ~~approximately 92.4%~~87.9% and 92.8% of our annualized rental income, excluding one property (one building) classified as discontinued operations, as of ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for ~~approximately 63.9%~~60.1% and ~~67.5%~~64.6% of our annualized rental income, excluding one property classified as discontinued operations, as of ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ respectively.

Geographic Concentration

At ~~September 30, 2016,~~March 31, 2017, our 7174 properties ~~(91~~(96 buildings), excluding one property (one building) classified as discontinued operations, were located in 31 states and the District of Columbia. Properties located in Virginia, California, ~~Virginia,~~ the District of Columbia, Georgia, New York, Maryland and Massachusetts were responsible for ~~approximately 14.6%~~14.8%, ~~10.0%~~14.4%, ~~9.9%~~9.5%, ~~9.2%, 8.1%~~8.6%, 7.6%, 7.1% and ~~5.3%~~4.9% of our annualized rental income as of ~~September 30, 2016,~~March 31, 2017, respectively.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 7. Indebtedness

Our principal debt obligations at ~~September 30, 2016~~March 31, 2017 were: (1) ~~$25,000~~$160,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) ~~$550,000~~an aggregate outstanding principal amount of $550,000 of unsecured term loans; (3) an aggregate outstanding principal amount of $660,000 of public issuances of senior unsecured notes; and (4) ~~$27,877~~$27,129 aggregate principal amount of mortgage notes.

Our $750,000 ~~unsecured~~revolving credit facility, our $300,000 term loan and our $250,000 term loan are governed by a credit agreement with a syndicate of institutional lenders that includes a number of features common to all of these credit arrangements. This credit agreement also includes a feature under which the maximum aggregate borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

Our $750,000 revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 31, 2020. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at ~~September 30, 2016,~~March 31, 2017, on borrowings under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at ~~September 30, 2016.~~March 31, 2017. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2016,~~March 31, 2017, the annual interest rate payable on borrowings under our revolving credit facility was ~~1.7%~~2.2% and the weighted average annual interest rate for borrowings under our revolving credit facility was ~~1.7% for both the three~~2.0% and ~~nine months ended September 30, 2016 and 1.4% and 1.5%~~1.6%, respectively, for the three ~~and nine~~ months ended ~~September 30, 2015.~~March 31, 2017 and 2016. As of ~~September 30, 2016~~both March 31, 2017 and ~~October~~April 25, ~~2016,~~2017, we had ~~$25,000 and $15,000~~$160,000 outstanding under our revolving credit ~~facility, respectively.~~facility.

Our $300,000 ~~unsecured~~ term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at a rate of LIBOR plus a premium, which was 140 basis points per annum at ~~September 30, 2016,~~March 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 ~~September 30, 2016,~~March 31, 2017, the annual interest rate for the amount outstanding under our $300,000 term loan was ~~1.9%~~2.4%. The weighted average annual interest rate under our $300,000 term loan was ~~1.9%~~2.2% and 1.8%, respectively, for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 and ~~1.6% for both the three and nine months ended September 30, 2015.~~2016.

Our $250,000 ~~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 ~~September 30, 2016,~~March 31, 2017, on the amount outstanding under our $250,000

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2016,~~March 31, 2017, the annual interest rate for the amount outstanding under our $250,000 term loan was ~~2.3%~~2.8%. The weighted average annual interest rate under our $250,000 term loan was ~~2.3%~~2.6% and 2.2%, respectively, for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 and ~~2.0% for both the three and nine months ended September 30, 2015.~~

Our $750,000 revolving credit facility, our $300,000 term loan and our $250,000 term loan are governed by a credit agreement with a syndicate of institutional lenders that includes a number of features common to all of these credit arrangements. This credit agreement also includes a feature under which the maximum aggregate borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

In May 2016, we issued $300,000 of 5.875% senior unsecured notes due 2046 in an underwritten public offering. In June 2016, the underwriters exercised an option to purchase an additional $10,000 of these notes. The net proceeds from this offering of $299,771, after offering expenses, were used to repay all amounts then outstanding under our revolving credit facility and for general business purposes. These notes require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after May 26, 2021. Our $350,000 of 3.75% senior unsecured notes due 2019 require semi-annual payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium. Both issuances of our senior notes are governed by an indenture and its supplements.2016.

Our credit agreement and senior notes indenture and its supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business ~~manager~~ and property manager. Our credit agreement and our senior notes indenture and its supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, require us to maintain certain financial ratios and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior notes indenture and its supplements at ~~September 30, 2016.~~

In February 2016, we repaid, at par, a $23,473 mortgage note requiring annual interest of 6.21% which was secured by one office property (one building) located in Landover, MD. This mortgage note was scheduled to mature in August 2016. We recorded a loss on extinguishment of debt of $21 in the nine months ended September 30, 2016, which represented unamortized debt issuance costs related to this note.

In March 2016, we repaid, at par, an $83,000 mortgage note requiring annual interest of 5.55% which was secured by one office property (two buildings) located in Reston, VA. This mortgage note was scheduled to mature in April 2016. We recorded a gain on extinguishment of debt of $125 in the nine months ended September 30, 2016, which represented the net unamortized debt premium and debt issuance costs related to this note.31, 2017.

At ~~September 30, 2016,~~March 31, 2017, three of our properties (three buildings) with an aggregate net book value of ~~$53,150~~$51,600 are encumbered by three mortgages for an aggregate principal amount of ~~$27,877.~~$27,129. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

109

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 8. Fair Value of Assets and Liabilities

The table below presents certain of our assets measured at fair value at ~~September 30, 2016,~~March 31, 2017, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:


			Fair Value at Reporting Date Using								Fair Value at Reporting Date Using
			Quoted Prices in				Significant				Quoted Prices in				Significant
	Estimated		Active Markets for		Significant Other		Unobservable		Estimated		Active Markets for		Significant Other		Unobservable
	Fair		Identical Assets		Observable Inputs		Inputs		Fair		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements Assets:
Investment in RMR Inc. ⁽¹⁾	$	46,068	$	46,068	$	—	$	—	$	60,104	$	60,104	$	—	$	—
Non-Recurring Fair Value Measurements Assets:
Property held for sale and classified as discontinued operations ⁽²⁾	$	12,260	$	—	$	—	$	12,260	$	12,260	$	—	$	—	$	12,260

(1)

Our 1,214,225 shares of class A common stock of The RMR Group Inc., or RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $26,888 as of ~~September 30, 2016.~~March 31, 2017. The net unrealized gain of ~~$19,180~~$33,216 for these shares as of ~~September 30, 2016~~March 31, 2017 is included in cumulative other comprehensive income ~~(loss)~~ in our condensed consolidated balance sheets.


(2)	We estimated the fair value of this property at ~~September 30, 2016~~March 31, 2017 based upon broker estimates of value less estimated sale costs (Level 3 inputs as defined in the fair value hierarchy under GAAP).

In addition to the assets described in the table above, our financial instruments include cash and cash equivalents, restricted cash, rents receivable, mortgage note receivable, accounts payable, a revolving credit facility, term loans, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements due to their short term nature or variable interest rates, except as follows:


	As of September 30, 2016				As of December 31, 2015				As of March 31, 2017				As of December 31, 2016
	Carrying Amount ⁽¹⁾		Fair Value		Carrying Amount ⁽¹⁾		Fair Value		Carrying Amount ⁽¹⁾		Fair Value		Carrying Amount ⁽¹⁾		Fair Value
Senior unsecured notes, 3.75% interest rate, due in 2019	$	346,667	$	358,384	$	345,809	$	351,692	$	347,238	$	355,248	$	346,952	$	354,078
Senior unsecured notes, 5.875% interest rate, due in 2046	299,884		320,664		—		—		299,975		310,000		299,892		292,268
Mortgage note payable, 6.21% interest rate, due in 2016 ^{(2) (3)}	—		—		23,476		24,038
Mortgage note payable, 5.55% interest rate, due in 2016 ^{(2) (4)}	—		—		83,375		83,457
Mortgage note payable, 5.88% interest rate, due in 2021 ⁽²⁾	13,894		15,008		14,045		14,678		13,784		14,561		13,841		14,492
Mortgage note payable, 7.00% interest rate, due in 2019 ⁽²⁾	8,872		9,409		9,145		9,645		8,683		9,063		8,778		9,188
Mortgage note payable, 8.15% interest rate, due in 2021 ⁽²⁾	5,484		5,964		6,258		6,711		4,948		5,286		5,218		5,575
	$	674,801	$	709,429	$	482,108	$	490,221	$	674,628	$	694,158	$	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 the encumbered properties. The stated interest rates for these mortgage debts are the contractually stated rates. We recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value premiums, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.


~~(3)~~	~~This mortgage note was repaid, at par, in February 2016.~~


~~(4)~~	~~This mortgage note was repaid, at par, in March 2016.~~

We ~~estimate~~estimated the fair value of our senior unsecured notes due in 2019 using an average of the bid and ask price of the notes as of the measurement date (Level 2 inputs as defined in the fair value hierarchy under GAAP). We ~~estimate~~estimated the fair value of our senior unsecured notes due in 2046 based on the closing price on The NASDAQ Stock Market LLC, or 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.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 9. Shareholders’ Equity

Distributions

On February ~~25, 2016,~~23, 2017, we paid a regular quarterly distribution to common shareholders of record on January ~~22, 2016~~23, 2017 of $0.43 per share, or ~~$30,584.~~ $30,606.

On ~~May 23, 2016, we paid a regular quarterly distribution to common shareholders of record on~~ April ~~25, 2016 of $0.43 per share, or $30,585. On August 22, 2016, we paid a regular quarterly distribution to common shareholders of record on July 22, 2016 of $0.43 per share, or $30,590. On October~~ 11, ~~2016,~~2017, we declared a regular quarterly distribution payable to common shareholders of record on ~~October~~April 21, ~~2016~~2017 of $0.43 per share, or ~~$30,607.~~$30,606. We expect to pay this ~~amount~~distribution on or about ~~November 21, 2016~~May 22, 2017 using cash on hand and borrowings under our revolving credit facility.

~~Share Issuances and Purchases~~

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

On September 15, 2016, pursuant to our 2009 Incentive Share Award Plan, we granted an aggregate of 53,400 of our common shares to our officers and certain other employees of our manager, RMR LLC, valued at $22.16 per share, the closing price of our common shares on The NASDAQ Stock Market LLC, or Nasdaq, on that day.

On September 26, 2016, we purchased an aggregate of 13,209 of our common shares valued at $23.63 per common share, the closing price of our common shares on the Nasdaq on that day, from our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares.

Cumulative Other Comprehensive Income ~~(Loss)~~

Cumulative other comprehensive income ~~(loss)~~ represents the unrealized gain on the RMR Inc. shares we own and our share of the comprehensive income ~~(loss)~~ of our equity method investees, Select Income REIT, or SIR, and Affiliates Insurance Company, or AIC. The following table presents changes in the amounts we recognized in cumulative other comprehensive income ~~(loss)~~ by component for the three ~~and nine~~ months ended ~~September 30, 2016:~~March 31, 2017:

Three Months Ended September 30, 2016
Unrealized Gain Equity in
(Loss) on Investment Unrealized Gain
in Available for (Loss) of
Sale Securities Investees Total
Balance at June 30, 2016 $ 10,717
$ 1,674
$ 12,391
Other comprehensive income before reclassifications 8,463
3,235
11,698
Amounts reclassified from cumulative other comprehensive income (loss) to net income ⁽¹⁾
—
38
38
Net current period other comprehensive income 8,463
3,273
11,736
Balance at September 30, 2016 $ 19,180
$ 4,947
$ 24,127



	Three Months Ended March 31, 2017
	Unrealized Gain		Equity in
	on Investment		Unrealized Gain
	in Available for		of
	Sale Securities		Investees		Total
Balance at December 31, 2016	$	21,074	$	5,883	$	26,957
Other comprehensive income before reclassifications	12,142		4,599		16,741
Amounts reclassified from cumulative other comprehensive income to net income ⁽¹⁾	—		16		16
Net current period other comprehensive income	12,142		4,615		16,757
Balance at March 31, 2017	$	33,216	$	10,498	$	43,714

Nine Months Ended September 30, 2016
Unrealized Gain Equity in
(Loss) on Investment Unrealized Gain
in Available for (Loss) of
Sale Securities Investees Total
Balance at December 31, 2015 $ (9,391 ) $ (5,476 ) $ (14,867 )
Other comprehensive income before reclassifications 28,571
10,382
38,953
Amounts reclassified from cumulative other comprehensive income (loss) to net income⁽¹⁾
—
41
41
Net current period other comprehensive income 28,571
10,423
38,994
Balance at September 30, 2016 $ 19,180
$ 4,947
$ 24,127


(1)	Amounts reclassified from cumulative other comprehensive income ~~(loss)~~ are included in equity in earnings ~~(losses)~~ of investees in our condensed consolidated statements of comprehensive ~~income (loss).~~income.

Note 10. Business and Property Management Agreements with RMR LLC

We have no employees. The personnel 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.

Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $2,704 and $2,508 for the three months ended March 31, 2017 and 2016, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,466 and $2,109 for the three months ended March 31, 2017 and 2016, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants. We reimbursed RMR LLC $3,391 and $2,944 for property management related expenses for the three months ended March 31, 2017 and 2016, respectively, which amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC’s costs for providing our internal audit function. The amount recognized as expense for internal audit costs was $67 for both the three months ended March 31, 2017 and 2016, which is included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

1211

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note ~~10.~~11. Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., SIR, AIC and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. ~~For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.~~

~~RMR LLC~~: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $2,572 and $2,438 for the three months ended September 30, 2016 and 2015, respectively, and $7,614 and $7,482 for the nine months ended September 30, 2016 and 2015, respectively. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

In accordance with the terms of our business management agreement, we issued 23,222 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,249 and $1,930 for the three months ended September 30, 2016 and 2015, respectively, and $6,636 and $5,861 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

~~We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf.~~ Our ~~property level operating expenses are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by~~Manager, RMR LLC. We reimbursed RMR LLC $3,221 and $3,011 for property management related expenses for the three months ended September 30, 2016 and 2015, respectively, and $9,132 and $8,478 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income (loss).

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plan. In September 2016 and 2015, we awarded annual share grants of 53,400 and 53,100 of our common shares, respectively, to our officers and to other employees of RMR LLC. In September 2016, we purchased 13,209 of our common shares, at the closing price of our common shares on the Nasdaq on the date of purchase, from our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $504 and $292 for the three months ended September 30, 2016 and 2015, respectively, and $1,239 and $725 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).

~~We lease office space to RMR LLC in certain of our properties for its property management offices. Pursuant to our lease~~two agreements with RMR LLC ~~we recognized rental income from~~to provide management services to us. See Note 10 for further information regarding our management agreements with RMR LLC for leased office space of $90 and $111 for the three months ended September 30, 2016 and 2015, respectively, and $277 and $278 for the nine months ended September 30, 2016 and 2015, respectively.LLC.

RMR Inc.: ~~In connection with our June 2015 acquisition~~RMR LLC is a subsidiary of ~~shares~~RMR Inc. and RMR Inc. is the managing member of ~~class A common stock~~RMR LLC. The controlling shareholder of RMR Inc., ~~we recorded a liability for the amount~~ABP Trust, is owned by ~~which the estimated fair value of these shares exceeded the price we paid for these shares. This liability is included in accounts payable and other liabilities in~~ our condensed consolidated balance sheets. This liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management and property management fee expense. We amortized $272 and $281 of this liability for the three months ended September 30, 2016 and 2015, respectively, and $815 and $346 of this liability for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods.Managing Trustees. As of ~~September 30, 2016, the remaining unamortized amount of this liability was $20,938.~~

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

~~As of September 30, 2016,~~March 31, 2017, we owned 1,214,225 shares of class A common stock of RMR Inc. ~~We receive dividends on~~See Note 8 for further information regarding our RMR Inc. class A common shares as declared and paid by RMR Inc. to all holders of its class A common shares. We received a dividend of $363 on our RMR Inc. class A common shares during the three months ended June 30, 2016, which was for the period from December 14, 2015 through March 31, 2016. We received a dividend of $304 on our RMR Inc. class A common shares during the three months ended September 30, 2016 which was for the period from April 1, 2016 through June 30, 2016. On October 11, 2016, RMR Inc. declared a regular quarterly dividend of $0.25 per class A common share payable to shareholders of record on October 21, 2016. RMR Inc. has stated that it expects to pay this dividend on or about November 17, 2016.

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

SIR:. As of ~~September 30, 2016,~~March 31, 2017, we owned 24,918,421 of SIR's common shares, ~~of SIR,~~ or approximately 27.9% of ~~SIR's~~its outstanding common shares. ~~We receive distributions on~~Our Managing Trustees also serve as managing trustees of SIR, and our President and Chief Operating Officer also serves as the president and chief operating officer of SIR. RMR LLC provides management services to SIR ~~common shares as declared~~ and paid by SIR to all holders of its common shares. We received distributions of $12,708 and $12,459 on our SIR common shares during the three months ended September 30, 2016 and 2015, respectively, and $37,627 and $34,571 during the nine months ended September 30, 2016 and 2015, respectively. On October 11, 2016, SIR declared a regular quarterly distribution of $0.51 per common share payable to shareholders of record on October 21, 2016. SIR has stated that it expects to pay this distribution on or about November 17, 2016. We accountus. See Note 12 for further information regarding our investment in ~~SIR common shares under the equity method. For additional information about our ownership of SIR common shares and how we account for this investment, see Note 11.~~SIR.

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

As of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, our investment in AIC had a carrying value of ~~$7,229~~$7,485 and ~~$6,946,~~$7,235, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income ~~(loss) of $13 and ($24)~~ related to our investment in AIC, ~~for the three months ended September 30, 2016 and 2015, respectively, and $107 and $70 for the nine months ended September 30, 2016 and 2015, respectively.~~which is presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income ~~(loss)~~ includes our proportionate part of unrealized gains ~~(losses)~~ on securities which are owned by ~~AIC of $81~~AIC.

For further information about these and ~~($72) for the three months ended September 30, 2016 and 2015, respectively, and $175 and ($91) for the nine months ended September 30, 2016 and 2015, respectively.~~

~~Directors’ and Officers’ Liability Insurance:~~ ~~We, RMR Inc., RMR LLC~~other such relationships and certain ~~companies~~other related person transactions, refer to which RMR LLC provides management services participate in a combined directors’ and officers’ liability insurance policy. In September 2016, we participated in a one year extension of this combined directors’ and officers’ insurance policy through September 2018. Our premium for this policy extension was approximately $106.our Annual Report.

Note ~~11.~~12. Equity Investment in Select Income REIT

As described in Note 11, as of ~~September 30, 2016,~~March 31, 2017, we owned 24,918,421, or approximately 27.9%, of the then outstanding SIR common shares. SIR is a real estate investment trust which owns properties that isare primarily ~~focused on owning and investing in net~~ leased to single ~~tenant properties.~~tenants.

We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our condensed consolidated statements of comprehensive ~~income (loss).~~income. We recorded ~~$8,655~~$2,611 and ~~$10,318~~$9,857 of equity in the earnings of SIR for the three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015, respectively, and $27,895 and $16,002 for the nine months ended September 30, 2016 and 2015,~~ respectively. Our other comprehensive income ~~(loss)~~ includes our proportionate share of SIR’s unrealized gains ~~(losses)~~ of ~~$3,192~~$4,492 for both the three months ended March 31, 2017 and 2016.

~~Table~~The adjusted GAAP cost basis of ~~Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars~~our investments in ~~thousands, except per~~SIR was less than our proportionate share ~~data)~~

~~(unaudited)~~

~~($283)~~of SIR’s total shareholders’ equity book value on the dates we acquired the shares. As of March 31, 2017, our remaining basis difference was $89,449 and as required under GAAP, we are accreting this basis difference to earnings over the estimated remaining useful lives of certain real estate assets and intangible assets and liabilities owned by SIR. This accretion increased our equity in the earnings of SIR by $736 and $740 for the three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015, respectively, and $10,248 and ($75) for the nine months ended September 30, 2016 and 2015,~~ respectively.

As of ~~September 30, 2016,~~March 31, 2017, our investment in SIR had a carrying value of ~~$491,973~~$482,103 and a market value, based on the closing price of SIR common shares on the Nasdaq on ~~September 30, 2016,~~March 31, 2017, of ~~$670,306.~~$642,646. We periodically evaluate our equity investment in SIR for possible indicators of other than temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. These indicators may include the length of time the market value of our investment is below our cost basis, the financial condition of SIR, our intent and ability to be a long term holder of the investment and other considerations. If the decline in fair value is judged to be other than temporary, we may record an impairment charge to adjust the basis of the investment to its fair value.

During the three and nine months ended September 30, 2016, SIR issued 53,400 and 65,900 common shares, respectively. During the three and nine months ended September 30, 2015, SIR issued 45,389 and 29,414,279 common shares, respectively. We recognized a gain (loss) on issuance of shares by SIR of $72 and ($21) during the three months ended September 30, 2016 and 2015, respectively, and a gain (loss) of $88 and ($42,145) during the nine months ended September 30, 2016 and 2015, respectively, as a result of the per share issuance price of these SIR common shares being above (below) the then average per share carrying value of our SIR common shares.

The cost of our investments in SIR exceeded our proportionate share of SIR’s total shareholders’ equity book value on their dates of acquisition by an aggregate of $166,272. As required under GAAP, we were amortizing this difference to equity in earnings of investees over the average remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of the respective dates of our acquisitions. This amortization decreased our equity in the earnings of SIR by zero and $4,742 for the three and nine months ended September 30, 2015, respectively. We recorded a loss on impairment of our SIR investment during the three months ended June 30, 2015 resulting in the carrying value of our SIR investment being less than our proportionate share of SIR’s total shareholders’ equity book value as of June 30, 2015. As a result, the previous basis difference was eliminated and we are currently accreting a basis difference of ($95,089) to earnings over the estimated remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of June 30, 2015. This accretion increased our equity in the earnings of SIR by $740 and $2,219 for the three and nine months ended September 30, 2016, respectively, and by $1,893 for the three and nine months ended September 30, 2015.

We received cash distributions from SIR totaling $12,708 and $12,459 during the three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015, respectively, and $37,627 and $34,571 during the nine months ended September 30, 2016 and 2015,~~ respectively.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

The following are summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2016,~~March 31, 2017, or the SIR Quarterly Report. References in our condensed consolidated financial statements to the SIR Quarterly Report are included as references to the source of the data only, and the information in the SIR Quarterly Report is not incorporated by reference into our condensed consolidated financial statements.

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

Condensed Consolidated Balance Sheets


	September 30,		December 31,		March 31,		December 31,
	2016		2015		2017		2016
Real estate properties, net	$	3,913,589	$	3,954,889	$	3,881,945	$	3,899,792
Acquired real estate leases, net	519,952		566,195		486,932		506,298
Cash and cash equivalents	16,697		17,876		18,101		22,127
Rents receivable, net	117,163		99,307		111,688		124,089
Other assets, net	89,855		46,078		115,399		87,376
Total assets	$	4,657,256	$	4,684,345	$	4,614,065	$	4,639,682

Unsecured revolving credit facility	$	297,000	$	303,000	$	342,000	$	327,000
Unsecured term loan, net	348,249		347,876		348,497		348,373
Senior unsecured notes, net	1,429,247		1,426,025		1,431,368		1,430,300
Mortgage notes payable, net	286,102		286,706		245,418		245,643
Assumed real estate lease obligations, net	79,833		86,495		75,411		77,622
Other liabilities	124,891		137,283		120,168		136,782
Shareholders' equity	2,091,934		2,096,960		2,051,203		2,073,962
Total liabilities and shareholders' equity	$	4,657,256	$	4,684,345	$	4,614,065	$	4,639,682

Condensed Consolidated Statements of Income


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2016			2015			2017			2016
Rental income	$	96,037		$	94,745		$	290,512		$	267,389		$	97,344		$	97,860
Tenant reimbursements and other income	18,999			17,197			56,660			46,182			18,950			19,372
Total revenues	115,036			111,942			347,172			313,571			116,294			117,232

Real estate taxes	10,755			9,871			31,565			27,247			10,843			10,288
Other operating expenses	14,394			11,313			39,987			30,121			12,867			12,958
Depreciation and amortization	33,366			33,070			100,240			90,179			33,740			33,469
Acquisition related costs	13			402			71			21,720			—			58
General and administrative	7,553			6,328			21,903			19,488			14,888			6,976
Reserve for straight line rent receivable, net													12,517			—
Loss on asset impairment													4,047			—
Total expenses	66,081			60,984			193,766			188,755			88,902			63,749
Operating income	48,955			50,958			153,406			124,816			27,392			53,483

Dividend income	397			—			872			—			397			—
Interest expense	(20,690		)	(20,034		)	(61,883		)	(53,710		)	(21,087		)	(20,609		)
Loss on early extinguishment of debt	—			—			—			(6,845		)
Income before income tax expense and equity in earnings (loss) of an investee	28,662			30,924			92,395			64,261
Income before income tax expense and equity in earnings of an investee													6,702			32,874
Income tax expense	(107		)	(98		)	(370		)	(324		)	(102		)	(139		)
Equity in earnings (loss) of an investee	13			(25		)	107			70
Equity in earnings of an investee													128			77
Net income	28,568			30,801			92,132			64,007			6,728			32,812
Net income allocated to noncontrolling interest	—			(46		)	(33		)	(135		)	—			(33		)
Net income attributed to SIR	$	28,568		$	30,755		$	92,099		$	63,872		$	6,728		$	32,779

Weighted average common shares outstanding (basic)	89,308			89,267			89,295			85,827			89,331			89,286
Weighted average common shares outstanding (diluted)	89,334			89,274			89,318			85,837			$	89,348		$	89,295
Net income attributed to SIR per common share (basic and diluted)	$	0.32		$	0.34		$	1.03		$	0.74		$	0.08		$	0.37

1613

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note ~~12.~~13. Segment Information

We operate in two separate reportable business segments: ownership of properties that are primarily leased to government tenants and our equity method investment in SIR.


	Three Months Ended September 30, 2016											Three Months Ended March 31, 2017
	Investment			Investment								Investment			Investment
	in Real Estate			in SIR		Corporate			Consolidated			in Real Estate			in SIR		Corporate			Consolidated
Rental income	$	64,478		$	—	$	—		$	64,478		$	69,296		$	—	$	—		$	69,296

Expenses:
Real estate taxes	7,591			—		—			7,591			8,177			—		—			8,177
Utility expenses	5,483			—		—			5,483			4,606			—		—			4,606
Other operating expenses	13,854			—		—			13,854			13,992			—		—			13,992
Depreciation and amortization	18,404			—		—			18,404			20,505			—		—			20,505
Acquisition related costs	147			—		—			147
General and administrative	—			—		3,816			3,816			—			—		3,962			3,962
Total expenses	45,479			—		3,816			49,295			47,280			—		3,962			51,242

Operating income (loss)	18,999			—		(3,816		)	15,183			22,016			—		(3,962		)	18,054
Dividend income	—			—		304			304			—			—		304			304
Interest income	—			—		47			47			46			—		15			61
Interest expense	(429		)	—		(12,179		)	(12,608		)	(432		)	—		(13,149		)	(13,581		)
Gain on issuance of shares by Select Income REIT	—			72		—			72
Income (loss) from continuing operations before
income taxes and equity in earnings of investees	18,570			72		(15,644		)	2,998			21,630			—		(16,792		)	4,838
Income tax expense	—			—		(13		)	(13		)	—			—		(18		)	(18		)
Equity in earnings of investees	—			8,655		13			8,668			—			2,611		128			2,739
Income (loss) from continuing operations	18,570			8,727		(15,644		)	11,653			21,630			2,611		(16,682		)	7,559
Loss from discontinued operations	(154		)	—		—			(154		)	(144		)	—		—			(144		)
Income (loss) before gain on sale of property	18,416			8,727		(15,644		)	11,499
Gain on sale of property	79			—		—			79
Net income (loss)	$	18,495		$	8,727	$	(15,644	)	$	11,578		$	21,486		$	2,611	$	(16,682	)	$	7,415



	As of March 31, 2017
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Total Assets	$	1,811,545	$	482,103	$	83,402	$	2,377,050

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)


	Nine Months Ended September 30, 2016											Three Months Ended March 31, 2016
	Investment			Investment								Investment			Investment
	in Real Estate			in SIR		Corporate			Consolidated			in Real Estate			in SIR		Corporate			Consolidated
Rental income	$	192,150		$	—	$	—		$	192,150		$	63,611		$	—	$	—		$	63,611

Expenses:
Real estate taxes	22,810			—		—			22,810			7,653			—		—			7,653
Utility expenses	13,330			—		—			13,330			4,174			—		—			4,174
Other operating expenses	40,031			—		—			40,031			12,911			—		—			12,911
Depreciation and amortization	54,713			—		—			54,713			18,324			—		—			18,324
Acquisition related costs	363			—		—			363			152			—		—			152
General and administrative	—			—		11,350			11,350			—			—		3,526			3,526
Total expenses	131,247			—		11,350			142,597			43,214			—		3,526			46,740

Operating income (loss)	60,903			—		(11,350		)	49,553			20,397			—		(3,526		)	16,871
Dividend income	—			—		667			667
Interest income	—			—		63			63			—			—		6			6
Interest expense	(1,953		)	—		(30,333		)	(32,286		)	(1,095		)	—		(8,269		)	(9,364		)
Gain on early extinguishment of debt	104			—		—			104			104			—		—			104
Gain on issuance of shares by Select Income REIT	—			88		—			88
Income (loss) from continuing operations before
Income (loss) from continuing operations before income
income taxes and equity in earnings of investees	59,054			88		(40,953		)	18,189			19,406			—		(11,789		)	7,617
Income tax expense	—			—		(63		)	(63		)	—			—		(15		)	(15		)
Equity in earnings of investees	—			27,895		107			28,002			—			9,857		77			9,934
Income (loss) from continuing operations	59,054			27,983		(40,909		)	46,128			19,406			9,857		(11,727		)	17,536
Loss from discontinued operations	(429		)	—		—			(429		)	(149		)	—		—			(149		)
Income (loss) before gain on sale of property	58,625			27,983		(40,909		)	45,699
Gain on sale of property	79			—		—			79
Net income (loss)	$	58,704		$	27,983	$	(40,909	)	$	45,778		$	19,257		$	9,857	$	(11,727	)	$	17,387

As of September 30, 2016
Investment Investment
in Real Estate in SIR Corporate Consolidated
Total Assets $ 1,699,658
$ 491,973
$ 73,439
$ 2,265,070



	As of December 31, 2016
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Total Assets	$	1,807,560	$	487,708	$	89,798	$	2,385,066

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

Three Months Ended September 30, 2015
Investment Investment
in Real Estate in SIR Corporate Consolidated
Rental income $ 62,092
$ —
$ —
$ 62,092

Expenses:

Real estate taxes 7,735
—
—
7,735
Utility expenses 5,194
—
—
5,194
Other operating expenses 12,281
—
—
12,281
Depreciation and amortization 17,161
—
—
17,161
Acquisition related costs 270
—
—
270
General and administrative —
—
3,714
3,714
Total expenses 42,641
—
3,714
46,355

Operating income (loss) 19,451
—
(3,714 ) 15,737
Interest income

—
2
2
Interest expense (1,727 ) —
(7,410 ) (9,137 )
Gain on early extinguishment of debt 34
—
—
34
Loss on issuance of shares by Select Income REIT —
(21 ) —
(21 )
Income (loss) from continuing operations before

income taxes and equity in earnings (losses) of investees 17,758
(21 ) (11,122 ) 6,615
Income tax benefit —
—
13
13
Equity in earnings (losses) of investees —
10,318
(24 ) 10,294
Income (loss) from continuing operations 17,758
10,297
(11,133 ) 16,922
Loss from discontinued operations (11 ) —
—
(11 )
Net income (loss) $ 17,747
$ 10,297
$ (11,133 ) $ 16,911

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share data)~~

~~(unaudited)~~

Nine Months Ended September 30, 2015
Investment Investment
in Real Estate in SIR Corporate Consolidated
Rental income $ 186,864
$ —
$ —
$ 186,864

Expenses:

Real estate taxes 22,819
—
—
22,819
Utility expenses 13,788
—
—
13,788
Other operating expenses 36,659
—
—
36,659
Depreciation and amortization 51,675
—
—
51,675
Acquisition related costs 459
—
—
459
General and administrative —
—
11,431
11,431
Total expenses 125,400
—
11,431
136,831

Operating income (loss) 61,464
—
(11,431 ) 50,033
Interest income —
—
14
14
Interest expense (21,618 ) —
(6,276 ) (27,894 )
Gain on early extinguishment of debt 34
—
—
34
Loss on issuance of shares by Select Income REIT —
(42,145 ) —
(42,145 )
Loss on impairment of Select Income REIT investment —
(203,297 ) —
(203,297 )
Income (loss) from continuing operations before income

income taxes and equity in earnings of investees 39,880
(245,442 ) (17,693 ) (223,255 )
Income tax expense —
—
(49 ) (49 )
Equity in earnings of investees —
16,002
70
16,072
Income (loss) from continuing operations 39,880
(229,440 ) (17,672 ) (207,232 )
Loss from discontinued operations (390 ) —
—
(390 )
Net income (loss) $ 39,490
$ (229,440 ) $ (17,672 ) $ (207,622 )

As of December 31, 2015
Investment Investment
in Real Estate in SIR Corporate Consolidated
Total Assets $ 1,639,462
$ 491,369
$ 37,679
$ 2,168,510

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form

10-K for the year ended December 31, ~~2015,~~2016, or our Annual Report.

OVERVIEW

We are a real estate investment trust, or REIT, organized under Maryland law. As of ~~September 30, 2016,~~March 31, 2017, we owned 7174 properties ~~(91~~(96 buildings), excluding one property (one building) classified as discontinued operations. Our properties are located in 31 states and the District of Columbia and contain approximately 1111.5 million rentable square feet, of which ~~61.1%~~58.2% was leased to the U.S. Government, ~~22.3%~~21.7% was leased to 13 state governments, ~~2.8%~~3.2% was leased to ~~three~~four other government tenants, ~~8.8%~~3.6% was leased to government contractor tenants, 8.4% was leased to various other non-governmental organizations and ~~5.0%~~4.9% was available for lease as of ~~September 30, 2016.~~March 31, 2017. The U.S. Government, 13 state governments and ~~three~~four other government tenants combined were responsible for ~~92.4%~~87.9% and 92.8% of our annualized rental income as of ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ respectively. The term annualized rental income as used in this section is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

As of ~~September 30, 2016,~~March 31, 2017, we also owned 24,918,421 common shares, or approximately 27.9% of the then outstanding common shares, of Select Income REIT, or SIR. SIR is a REIT which owns properties that isare primarily ~~focused on owning and investing in net~~ leased to single ~~tenant properties.~~tenants. See Notes 1011 and 1112 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our investment in SIR. We account for our investment in SIR under the equity method.

Property Operations

As of ~~September 30, 2016,~~March 31, 2017, excluding one property (one building) classified as discontinued operations, ~~95.0%~~95.1% of our rentable square feet was leased, compared to ~~93.5%~~94.9% of our rentable square feet as of ~~September 30, 2015.~~March 31, 2016. Occupancy data for our properties as of ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ is as follows (square feet in thousands):


					Comparable								Comparable
	All Properties⁽¹⁾				Properties ⁽²⁾				All Properties⁽¹⁾				Properties ⁽²⁾
	September 30,				September 30,				March 31,				March 31,
	2016		2015		2016		2015		2017		2016		2017		2016
Total properties	71		71		70		70		74		72		70		70
Total buildings	91		91		90		90		96		92		90		90
Total square feet ⁽³⁾	10,950		10,701		10,612		10,666		11,512		10,985		10,612		10,612
Percent leased ⁽³⁾⁽⁴⁾	95.0	%	93.5	%	95.2	%	93.8	%
Percent leased ⁽⁴⁾									95.1	%	94.9	%	95.1	%	95.4	%


(1)	Based on properties we owned on ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ respectively, and excludes one property (one building) classified as discontinued operations.

(2)

Based on properties we owned on ~~September 30, 2016~~March 31, 2017 and which we owned continuously since January 1, ~~2015,~~2016, and excludes one property (one building) classified as discontinued operations. Our comparable properties ~~increased~~decreased from 6771 properties ~~(86~~(91 buildings) at ~~September 30, 2015~~March 31, 2016 as a result of ~~our acquisition of four properties (five buildings) during the year ended December 31, 2014, offset by~~ the sale of one property (one building) during the ~~nine months~~year ended ~~September 30,~~December 31, 2016.


(3)	Subject to changes when space is re-measured or re-configured for tenants.


(4)	Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.

The average annualized effective rental rate per square foot for our properties for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2016		2015		2016		2015		2017		2016
Average annualized effective rental rate per square foot ⁽¹⁾:
All properties ⁽²⁾	$	25.31	$	24.97	$	25.15	$	24.72	$	25.55	$	25.04
Comparable properties ⁽³⁾	$	25.09	$	24.98	$	24.94	$	24.70	$	25.14	$	24.88


(1)	Average annualized effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified. Excludes one property (one building) classified as discontinued operations.


(2)	Based on properties we owned on ~~September 30,~~March 31, 2017 and 2016, respectively, and excludes one property (one building) classified as discontinued operations.


(3)	Based on properties we owned on ~~September 30, 2016~~March 31, 2017 and which we owned continuously since ~~July 1, 2015 and~~ January 1, ~~2015, respectively,~~2016 and excludes one property (one building) classified as discontinued operations.

During the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, changes in rentable square feet leased and available for lease at our properties, excluding one property (one building) classified as discontinued operations, were as follows:


	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016						Three Months Ended March 31, 2017
			Available						Available						Available
	Leased		for Lease		Total		Leased		for Lease		Total		Leased		for Lease		Total
Beginning of period	10,347,357		638,010		10,985,367		10,115,001		585,963		10,700,964		10,881,289		561,224		11,442,513
Changes resulting from:
Acquisition of properties	—		—		—		290,878		46,933		337,811		69,374		—		69,374
Disposition of properties	—		(35,228	)	(35,228	)	—		(35,228	)	(35,228	)
Lease expirations	(82,030	)	82,030		—		(1,204,575	)	1,204,575		—		(360,147	)	360,147		—
Lease renewals ⁽¹⁾	75,895		(75,895	)	—		1,017,982		(1,017,982	)	—		345,541		(345,541	)	—
New leases ⁽¹⁾⁽²⁾	60,571		(60,571	)	—		182,507		(182,507	)	—
Re-measurements ⁽³⁾	—		—		—		—		(53,408	)	(53,408	)
New leases ⁽¹⁾													14,562		(14,562	)	—
End of period	10,401,793		548,346		10,950,139		10,401,793		548,346		10,950,139		10,950,619		561,268		11,511,887


(1)	Based on leases entered into during the three ~~and nine~~ months ended ~~September 30, 2016.~~


~~(2)~~	Rentable square footage of new leases for the nine months ended September 30, 2016 excludes a 25,579 square foot expansion to be constructed at an existing property prior to the commencement of the lease.


~~(3)~~	~~Rentable square footage is subject to changes when space is re-measured or re-configured for tenants.~~March 31, 2017.

Leases at our properties totaling ~~82,030 and 1,204,575~~360,147 rentable square feet expired during the three ~~and nine~~ months ended ~~September 30, 2016, respectively.~~March 31, 2017. During the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, we entered into leases totaling ~~136,466 and 1,226,068~~360,103 rentable square feet, including ~~a 25,579 square foot expansion to be constructed at an existing property, and~~ lease renewals of ~~75,895 and 1,017,982~~345,541 rentable square ~~feet, respectively.~~feet. The weighted (by rentable square feet) average rental rates for leases of ~~62,552 and 1,038,052~~324,127 rentable square feet entered into with government tenants ~~(which includes the 25,579 square foot expansion referenced above)~~ during the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 increased by ~~10.5% and 9.6%, respectively,~~4.5% when compared to the weighted (by rentable square feet) average prior rents for the same space. The weighted (by rentable square feet) average rental rates for leases of ~~73,914 and 188,016~~35,976 rentable square feet entered into with non-government tenants during the three ~~and nine~~ months ended ~~September 30, 2016 decreased~~March 31, 2017 increased by ~~3.8% and 2.0%, respectively,~~7.1% when compared to the weighted (by rentable square feet) average rental rates previously charged for the same space.

During the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, changes in effective rental rates per square foot achieved for new leases and lease renewals that commenced during the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 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:


	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016						Three Months Ended March 31, 2017
	Old Effective		New Effective				Old Effective		New Effective				Old Effective		New Effective
	Rent Per		Rent Per		Rentable		Rent Per		Rent Per		Rentable		Rent Per		Rent Per		Rentable
	Square Foot ⁽¹⁾		Square Foot ⁽¹⁾		Square Feet		Square Foot ⁽¹⁾		Square Foot ⁽¹⁾		Square Feet		Square Foot ⁽¹⁾		Square Foot ⁽¹⁾		Square Feet
New leases	$	32.58	$	22.48	$	89,116	$	29.02	$	22.93	$	159,851	$	24.24	$	21.64	$	45,114
Lease renewals	$	26.83	$	26.27	$	72,504	$	25.05	$	26.37	$	991,120	$	7.76	$	8.12	$	331,465
Total leasing activity	$	30.00	$	24.18	$	161,620	$	25.60	$	25.90	$	1,150,971	$	9.74	$	9.74	$	376,579


(1)	Effective rental rate includes contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excluding lease value amortization.

During the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows:


	Government		Non-Government				Government		Non-Government
Three Months Ended September 30, 2016	Leases		Leases		Total
Three Months Ended March 31, 2017							Leases		Leases		Total
Rentable square feet leased during the period	62,552		73,914		136,466		324,127		35,976		360,103
Tenant leasing costs and concession commitments ⁽¹⁾ (in thousands)	$	1,087	$	2,341	$	3,428	$	879	$	1,362	$	2,241
Tenant leasing costs and concession commitments per rentable square foot ⁽¹⁾	$	17.38	$	31.67	$	25.12	$	2.71	$	37.87	$	6.22
Weighted (by square feet) average lease term (years)	6.9		6.6		6.8		10.9		7.1		10.6
Total leasing costs and concession commitments per rentable square foot per year ⁽¹⁾	$	2.50	$	4.77	$	3.71	$	0.25	$	5.36	$	0.59

	Government		Non-Government
Nine Months Ended September 30, 2016	Leases		Leases		Total
Rentable square feet leased during the period ⁽²⁾	1,038,052		188,016		1,226,068
Tenant leasing costs and concession commitments ⁽¹⁾⁽³⁾ (in thousands)	30,100		4,933		35,033
Tenant leasing costs and concession commitments per rentable square foot ⁽¹⁾⁽³⁾	$	29.00	$	26.24	$	28.57
Weighted (by square feet) average lease term (years)	11.1		6.3		10.3
Total leasing costs and concession commitments per rentable square foot per year ⁽¹⁾⁽³⁾	$	2.62	$	4.15	$	2.76


(1)	Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.


~~(2)~~	~~Rentable square footage includes a 25,579 square foot expansion to be constructed at an existing property prior to the commencement of the lease.~~


~~(3)~~	~~Excludes the estimated cost to complete of $17,990 to redevelop and expand an existing property prior to the commencement of the lease.~~

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ amounts capitalized at our properties, excluding one property (one building) classified as discontinued operations, for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (dollars in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2016		2015		2016		2015		2017		2016
Tenant improvements ⁽¹⁾	$	5,636	$	2,213	$	12,306	$	5,039	$	2,403	$	1,989
Leasing costs ⁽²⁾	$	655	$	439	$	8,002	$	2,876	$	1,087	$	4,312
Building improvements ⁽³⁾	$	3,009	$	2,210	$	8,691	$	4,151	$	1,778	$	3,033
Development, redevelopment and other activities ⁽⁴⁾	$	1,292	$	946	$	4,221	$	1,167	$	6,281	$	768


(1)	Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.


(2)	Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements.


(3)	Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.


(4)	Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property, and (ii) capital expenditure projects that reposition a property or result in new sources of revenue.

As of ~~September 30, 2016,~~March 31, 2017, we have estimated unspent leasing related obligations of ~~$21,580~~$24,800 and have committed to redevelop and expand an existing property atprior to commencement of the lease with an estimated remaining cost to complete as of ~~approximately $17,990.~~March 31, 2017 of $10,138.

We believe that current government budgetary pressures have resulted in a decrease in government employment, government tenants reducing their space utilization per employee and consolidation 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, efforts 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 in renewing their leases for less space than they currently occupy. Further, the need to reconfigure leased office space to reduce utilization per employee may require us to spend increased amounts for tenant improvements, and relocation has become more prevalent in instances where efforts by government tenants to reduce their space utilization ~~requires~~require a significant reconfiguration of currently leased space. Moreover, uncertainty with respect to government agency budgets and a lack of adequate funding to implement relocations, consolidations and reconfigurations have resulted in delayed space decisions and reliance on short term lease renewals by government tenants. Accordingly, we are unable to reasonably project what the financial impact of market conditions or changing government financial circumstances will be on our financial results for future periods.

The Internal Revenue Service, or IRS, has publicly stated that it plans to discontinue its tax return processing operations at our property located in Fresno, CA in 2021. The IRS lease for this property, which accounted for approximately ~~3.3%~~3.1% of our annualized rental income as of ~~September 30, 2016,~~March 31, 2017, expires in 2021. The IRS has also publicly stated that it plans to

discontinue its tax return processing operations in Covington, KY in 2019. Our property located in Florence, KY is leased to the IRS and we believe it is used to support ~~these~~the Covington, KY operations. This IRS lease, which accounted for approximately ~~1.0%~~0.9% of our

annualized rental income as of ~~September 30, 2016,~~March 31, 2017, expires in 2022 but is subject to early termination rights beginning in June 2017. The IRS has not notified us of its intentions regarding ~~these~~the Fresno, CA or Covington, KY properties.

As of ~~September 30, 2016,~~March 31, 2017, we had leases totaling ~~970,781~~360,147 rentable square feet that were scheduled to expire through ~~September 30, 2017.~~March 31, 2018. As of ~~October~~April 25, ~~2016,~~2017, tenants with leases totaling ~~138,936~~116,281 rentable square feet that are scheduled to expire through ~~September 30, 2017,~~March 31, 2018, have notified us that they do not plan to renew their leases upon expiration and we ~~can provide no assurance~~cannot be sure as to whether ~~additional~~other tenants may or may not renew their leases upon expiration. Based upon current market conditions and tenant negotiations for leases scheduled to expire through ~~September 30, 2017,~~March 31, 2018, we expect that the rental rates we are likely to achieve on new or renewed leases for space under leases expiring ~~leases~~ through ~~September 30, 2017~~March 31, 2018 will, in the aggregate and on a weighted (by annualized revenues) average basis, be ~~modestly higher~~lower than the rates currently being paid, thereby generally resulting in ~~higher~~lower revenue from the same space. We ~~can provide no assurance regarding~~cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new leases we may enter into; also, we may experience material declines in our rental income due to vacancies upon lease ~~expirations.~~expirations or early terminations. Prevailing market conditions and government and other tenants' needs at the time we negotiate and enter leases 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.

As of ~~September 30, 2016,~~March 31, 2017, lease expirations at our properties, excluding one property (one building) classified as discontinued operations, by year are as follows (dollars in thousands):


		Number	Expirations						Annualized							Number	Expirations						Annualized
		of	of Leased				Cumulative		Rental				Cumulative			of	of Leased				Cumulative		Rental				Cumulative
		Tenants	Square		Percent		Percent		Income		Percent		Percent			Tenants	Square		Percent		Percent		Income		Percent		Percent
Year ⁽¹⁾		Expiring	Feet ⁽²⁾		of Total		of Total		Expiring		of Total		of Total			Expiring	Feet ⁽²⁾		of Total		of Total		Expiring		of Total		of Total
2016		20	494,157		4.8	%	4.8	%	$	21,738	8.5	%	8.5	%
2017		36	796,454		7.7	%	12.5	%	16,755		6.5	%	15.0	%		34	865,354		7.9	%	7.9	%	$	19,397	7.1	%	7.1	%
2018		39	1,067,705		10.3	%	22.8	%	29,612		11.6	%	26.6	%		40	904,342		8.3	%	16.2	%	34,221		12.5	%	19.6	%
2019		38	1,644,650		15.8	%	38.6	%	43,215		16.9	%	43.5	%		42	1,908,746		17.4	%	33.6	%	57,922		21.1	%	40.7	%
2020		33	1,307,618		12.6	%	51.2	%	31,072		12.1	%	55.6	%		34	1,309,087		12.0	%	45.6	%	31,038		11.3	%	52.0	%
2021		37	1,058,636		10.2	%	61.4	%	20,759		8.1	%	63.7	%		35	1,059,534		9.7	%	55.3	%	20,648		7.5	%	59.5	%
2022		16	710,006		6.8	%	68.2	%	15,414		6.0	%	69.7	%		24	913,979		8.3	%	63.6	%	21,894		8.0	%	67.5	%
2023		14	536,625		5.2	%	73.4	%	12,326		4.8	%	74.5	%		16	600,877		5.5	%	69.1	%	13,789		5.0	%	72.5	%
2024		13	960,838		9.2	%	82.6	%	21,841		8.5	%	83.0	%		15	991,572		9.1	%	78.2	%	22,636		8.2	%	80.7	%
2025 and thereafter		33	1,825,104	⁽³⁾	17.4	%	100.0	%	43,349		17.0	%	100.0	%
2025																12	601,162		5.5	%	83.7	%	11,539		4.2	%	84.9	%
2026 and thereafter																26	1,795,966	⁽³⁾	16.3	%	100.0	%	41,639		15.1	%	100.0	%
Total		279	10,401,793		100.0	%			$	256,081	100.0	%				278	10,950,619		100.0	%			$	274,723	100.0	%

Weighted average remaining lease term (in years)	Weighted average remaining lease term (in years)		5.0						4.8						Weighted average remaining lease term (in years)		5.1						4.7

(1)

The year of lease expiration is pursuant to current contract terms. Some government tenants have the right to vacate their space before the stated expirations of their leases. As of ~~September 30, 2016,~~March 31, 2017, government tenants occupying approximately ~~11.1%~~11.7% of our rentable square feet and responsible for approximately ~~8.6%~~9.2% of our annualized rental income as of ~~September 30, 2016~~March 31, 2017 have currently exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in ~~2016,~~ 2017, 2018, 2019, 2020, 2021, 2022, 2023, 2026 and 2027, early termination rights become exercisable by other tenants who currently occupy an additional approximately ~~1.6%~~2.3%, ~~2.5%~~2.2%, ~~1.6%~~4.9%, ~~4.5%, 6.3%~~7.0%, 0.7%, ~~2.5%~~2.9%, ~~2.0%~~1.9%, 0.9% and 0.6% of our rentable square feet, respectively, and contribute an additional approximately ~~1.8%~~1.7%, ~~1.9%~~2.8%, ~~1.6%~~5.1%, ~~4.8%~~7.4%, ~~6.9%~~0.6%, ~~0.7%~~2.3%, 1.7%~~, 1.8%~~, 1.2% and ~~0.7%~~0.6% of our annualized rental income, respectively, as of ~~September 30, 2016.~~March 31, 2017. In addition, as of ~~September 30, 2016,~~March 31, 2017, 15 of our government tenants have currently exercisable rights to terminate their leases if the legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 15 tenants occupy approximately ~~18.1%~~17.2% of our rentable square feet and contribute approximately ~~17.9%~~16.8% of our annualized rental income as of ~~September 30, 2016.~~March 31, 2017.

(2)

Leased square feet is pursuant to leases existing as of ~~September 30, 2016,~~March 31, 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 changes when space is re-measured or re-configured for new tenants.


(3)	Leased square footage excludes a 25,579 square foot expansion to be constructed at an existing property prior to the commencement of the lease.

Acquisition and Disposition Activities (dollar amounts in thousands)

OnIn January ~~29, 2016,~~2017, we acquired an office property (one building) located in ~~Sacramento, CA~~Manassas, VA with ~~337,811~~69,374 rentable square feet for a purchase price of ~~$79,235,~~$12,620, excluding capitalized acquisition costs of $21, using cash on hand and borrowings under our revolving credit facility. We acquired this property at a capitalization rate of ~~7.2%~~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 as of the acquisition date, excluding depreciation and amortization expense, to (y) the acquisition purchase price, including the principal amount of assumed debt, if any, and excluding acquisition costs.

In March 2016, we entered an agreement to sell an office property ( one building) in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at September 30, 2016. The contract sales price is $13,000, excluding closing costs. This sale is subject to conditions, including the purchaser obtaining certain zoning entitlements, and is currently expected to occur in the first quarter of 2017.

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

Also in July 2016, we sold an office property (one building) in Savannah, GA with 35,228 rentable square feet and a net book value of $2,986 at September 30, 2016 for $4,000, excluding closing costs. In connection with this sale, we provided $3,600 of mortgage financing to the buyer.

In March 2016, we entered an agreement to sell an office property (one building) in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at March 31, 2017. In March 2017, we agreed to extend the closing date for this sale to June 1, 2017 and increased the sales price by $150, which we received as a non-refundable deposit. The contract sales price is now $13,298, excluding closing costs.

Our pending ~~acquisitions~~acquisition and ~~dispositions~~disposition are subject to conditions; accordingly, we cannot be sure that we will complete these ~~acquisitions and dispositions~~transactions or that ~~these acquisitions and dispositions~~they will not be delayed or ~~the~~that their terms ~~of these acquisitions and dispositions~~ will not change.

Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants and government contractor tenants; however, we cannot be sure that we will reach any agreement to acquire such properties, or that if we do reach any such agreement, that we will complete any acquisitions. Although we have not identified properties for disposition other than the property described above, we expect to periodically identify properties for sale based on future changes in market conditions, changes in property performance, our expectation regarding lease renewals, our plans with regard to particular properties or alternative opportunities we may wish to pursue. Our plans for particular properties and other strategic considerations may cause us to change our acquisition and disposition strategies, and we may do so at any time and without shareholder approval.

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

Three Months Ended ~~September 30, 2016,~~March 31, 2017, Compared to Three Months Ended ~~September 30, 2015~~March 31, 2016


											Acquired Property				Disposed Property																										Acquired Properties				Disposed Property
											Results ⁽²⁾				Results ⁽³⁾																										Results ⁽²⁾				Results ⁽³⁾
		Comparable Properties Results ⁽¹⁾									Three Months Ended				Three Months Ended						Consolidated Results												Comparable Properties Results ⁽¹⁾								Three Months Ended				Three Months Ended					Consolidated Results
		Three Months Ended September 30,									September 30,				September 30,						Three Months Ended September 30,												Three Months Ended March 31,								March 31,				March 31,					Three Months Ended March 31,
						$			%																		$			%							$		%																	$			%
		2016		2015		Change			Change		2016		2015		2016			2015			2016			2015			Change			Change			2017		2016		Change		Change		2017		2016		2017		2016			2017			2016			Change			Change
Rental income		$	62,298	$	62,072	$	226		0.4	%	$	2,180	$	—	$	—		$	20		$	64,478		$	62,092		$	2,386		3.8	%		$	62,872	$	62,079	$	793	1.3	%	$	6,424	$	1,532	$	—	$	—		$	69,296		$	63,611		$	5,685		8.9	%
Operating expenses:
Real estate taxes		7,391		7,722		(331		)	(4.3	%)	205		—		(5		)	13			7,591			7,735			(144		)	(1.9	%)		7,540		7,511		29		0.4	%	637		127		—		15			8,177			7,653			524			6.8	%
Utility expenses		5,268		5,178		90			1.7	%	213		—		2			16			5,483			5,194			289			5.6	%		4,153		4,065		88		2.2	%	453		98		—		11			4,606			4,174			432			10.3	%
Other operating expenses		13,271		12,252		1,019			8.3	%	579		—		4			29			13,854			12,281			1,573			12.8	%		12,929		12,538		391		3.1	%	1,063		346		—		27			13,992			12,911			1,081			8.4	%
Total operating expenses		25,930		25,152		778			3.1	%	997		—		1			58			26,928			25,210			1,718			6.8	%		24,622		24,114		508		2.1	%	2,153		571		—		53			26,775			24,738			2,037			8.2	%
Net operating income ⁽⁴⁾		$	36,368	$	36,920	$	(552	)	(1.5	%)	$	1,183	$	—	$	(1	)	$	(38	)	37,550			36,882			668			1.8	%		$	38,250	$	37,965	$	285	0.8	%	$	4,271	$	961	$	—	$	(53	)	42,521			38,873			3,648			9.4	%

Other expenses:
Depreciation and amortization																					18,404			17,161			1,243			7.2	%																			20,505			18,324			2,181			11.9	%
Acquisition related costs																					147			270			(123		)	(45.6	%)																			—			152			(152		)	(100.0	%)
General and administrative																					3,816			3,714			102			2.7	%																			3,962			3,526			436			12.4	%
Total other expenses																					22,367			21,145			1,222			5.8	%																			24,467			22,002			2,465			11.2	%
Operating income																					15,183			15,737			(554		)	(3.5	%)																			18,054			16,871			1,183			7.0	%
Dividend income																					304			—			304			nm																				304			—			304			nm
Interest income																					47			2			45			nm																				61			6			55			nm
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $805 and $360, respectively)																					(12,608		)	(9,137		)	(3,471		)	38.0	%
Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $807 and $471, respectively)																																Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $807 and $471, respectively)																		(13,581		)	(9,364		)	(4,217		)	45.0	%
Gain on early extinguishment of debt	Gain on early extinguishment of debt																				—			34			(34		)	nm		Gain on early extinguishment of debt																		—			104			(104		)	(100.0	%)
Gain (loss) on issuance of shares by Select Income REIT																					72			(21		)	93			nm
Income from continuing operations before income taxes and equity in earnings of investees	Income from continuing operations before income taxes and equity in earnings of investees																				2,998			6,615			(3,617		)	(54.7	%)	Income from continuing operations before income taxes and equity in earnings of investees																		4,838			7,617			(2,779		)	(36.5	%)
Income tax (expense) benefit																					(13		)	13			(26		)	nm
Income tax expense																																Income tax expense																		(18		)	(15		)	(3		)	20.0	%
Equity in earnings of investees	Equity in earnings of investees																				8,668			10,294			(1,626		)	(15.8	%)	Equity in earnings of investees																		2,739			9,934			(7,195		)	(72.4	%)
Income from continuing operations	Income from continuing operations																				11,653			16,922			(5,269		)	(31.1	%)	Income from continuing operations																		7,559			17,536			(9,977		)	(56.9	%)
Loss from discontinued operations	Loss from discontinued operations																				(154		)	(11		)	(143		)	nm		Loss from discontinued operations																		(144		)	(149		)	5			(3.4	%)
Income before gain on sale of property																					11,499			16,911			(5,412		)	(32.0	%)
Gain on sale of property																					79			—			79			nm
Net income	Net income																				$	11,578		$	16,911		$	(5,333	)	(31.5	%)	Net income																		$	7,415		$	17,387		$	(9,972	)	(57.4	%)

Weighted average common shares outstanding (basic)	Weighted average common shares outstanding (basic)																				71,054			71,004			50			0.1	%	Weighted average common shares outstanding (basic)																		71,079			71,031			48			0.1	%
Weighted average common shares outstanding (diluted)	Weighted average common shares outstanding (diluted)																				71,084			71,021			63			0.1	%	Weighted average common shares outstanding (diluted)																		71,094			71,031			63			0.1	%

Per common share amounts (basic and diluted):	Per common share amounts (basic and diluted):																															Per common share amounts (basic and diluted):
Income from continuing operations	Income from continuing operations																				$	0.16		$	0.24		$	(0.08	)	(33.3	%)	Income from continuing operations																		$	0.11		$	0.25		$	(0.14	)	(56.0	%)
Loss from discontinued operations	Loss from discontinued operations																				$	—		$	—		$	—		—%		Loss from discontinued operations																		$	—		$	—		$	—		—	%
Net income	Net income																				$	0.16		$	0.24		$	(0.08	)	(33.3	%)	Net income																		$	0.10		$	0.24		$	(0.14	)	(58.3	%)

Calculation of Funds From Operations and Normalized Funds From Operations ⁽⁵⁾

Reconciliation of Net Income to NOI: ⁽⁴⁾																																Reconciliation of Net Income to NOI: ⁽⁴⁾
Net income	Net income																				$	11,578		$	16,911							Net income																		$	7,415		$	17,387
Plus: Depreciation and amortization																					18,404			17,161
Plus: FFO attributable to Select Income REIT investment																					17,264			17,780
Less: Equity in earnings from Select Income REIT																					(8,655		)	(10,318		)
Less: Gain on sale of property																					(79		)	—
Funds from operations																					38,512			41,534
Plus: Acquisition related costs																					147			270
Plus: Loss on issuance of shares by Select Income REIT																					—			21
Plus: Loss on impairment of Select Income REIT investment																					—			—
Plus: Normalized FFO attributable to Select Income REIT investment																					17,267			17,892
Less: FFO attributable to Select Income REIT investment																					(17,264		)	(17,780		)
Less: Gain on early extinguishment of debt																					—			(34		)
Less: Gain on issuance of shares by Select Income REIT																					(72		)	—
Normalized funds from operations																					$	38,590		$	41,903

Funds from operations per common share (basic and diluted)																					$	0.54		$	0.58
Normalized funds from operations per common share (basic and diluted)																					$	0.54		$	0.59
Loss from discontinued operations																																Loss from discontinued operations																		144			149
Income from continuing operations																																Income from continuing operations																		7,559			17,536
Equity in earnings of investees																																Equity in earnings of investees																		(2,739)			(9,934)
Income tax expense																																Income tax expense																		18			15
Gain on early extinguishment of debt																																Gain on early extinguishment of debt																		—			(104		)
Interest expense																																Interest expense																		13,581			9,364
Interest income																																Interest income																		(61)			(6)
Dividend income																																Dividend income																		(304)			—
Operating income																																Operating income																		18,054			16,871
General and administrative																																General and administrative																		3,962			3,526
Acquisition related costs																																Acquisition related costs																		—			152
Depreciation and amortization																																Depreciation and amortization																		20,505			18,324
NOI																																NOI																		$	42,521		$	38,873



Reconciliation of Net Income to Funds From Operations and Normalized Funds From Operations ⁽⁵⁾
	2017			2016
Net income	$	7,415		$	17,387
Plus: Depreciation and amortization	20,505			18,324
Plus: FFO attributable to Select Income REIT investment	12,404			18,458
Less: Equity in earnings from Select Income REIT	(2,611		)	(9,857		)
Funds from operations	37,713			44,312
Plus: Acquisition related costs	—			152
Plus: Normalized FFO attributable to Select Income REIT investment	14,590			18,475
Less: FFO attributable to Select Income REIT investment	(12,404		)	(18,458		)
Less: Gain on early extinguishment of debt	—			(104		)
Normalized funds from operations	$	39,899		$	44,377

Funds from operations per common share (basic and diluted)	$	0.53		$	0.62
Normalized funds from operations per common share (basic and diluted)	$	0.56		$	0.62


(1)	Comparable properties consist of 70 properties (90 buildings) we owned on ~~September 30, 2016~~March 31, 2017 and which we owned continuously since ~~July~~January 1, ~~2015,~~2016, and excludes one property (one building) classified as discontinued operations.


(2)	Acquired ~~property consists~~properties consist of ~~one property (one building)~~four properties (six buildings) we acquired ~~during the three months ended March 31,~~since January 1, 2016.


(3)	Disposed property consists of one property (one building) we sold ~~during the three months ended September 30,~~in July 2016.

(4)

The calculation of net operating income, or NOI, excludes certain components of net income ~~(loss)~~ in order to provide results that are more closely related to our property level results of operations. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions because we record those amounts as depreciation and amortization. We consider NOI to be an appropriate supplemental measure to net income ~~(loss)~~ because it may help both investors and management to understand the operations of our properties. We use NOI to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to net income ~~(loss)~~ or operating income as an indicator of our operating performance or as a measure of our liquidity. This measure should be considered in conjunction with net income ~~(loss)~~ and operating income as presented in our Condensed Consolidated Statements of Comprehensive ~~Income (Loss).~~Income. Other REITs and real estate companies may calculate NOI differently than we do.

(5)

We calculate funds from operations, or FFO, and normalized funds from operations, or Normalized FFO, as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income, ~~(loss),~~ calculated in accordance with GAAP, plus real estate depreciation and amortization and the difference between FFO attributable to an equity investment and equity in earnings of an equity investee but excluding impairment charges on real estate assets, any gain or loss on sale of properties, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT's definition of FFO because we include the difference between FFO and Normalized FFO attributable to our equity investment in SIR, we include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will ~~ultimately~~ be payable when all contingencies for determining ~~any~~ such fees are determined at the end of the calendar year, and we exclude acquisition related costs and gains ~~or losses~~ on early extinguishment of debt ~~loss on impairment of SIR investment and gains or losses on issuance of shares by SIR.~~. We consider FFO and Normalized FFO to be appropriate supplemental measures of operating performance for a REIT, along with net income ~~(loss)~~ and operating income. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, our receipt of distributions from SIR and our expected needs and availability of cash to pay our obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income ~~(loss)~~ or operating income as an indicator of our operating performance or as a measure of our liquidity. These measures should be considered in conjunction with net income ~~(loss)~~ and operating income as presented in our Condensed Consolidated Statements of Comprehensive ~~Income (Loss).~~Income. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.

We refer to the 70 properties (90 buildings) we owned on ~~September 30, 2016~~March 31, 2017 and which we have owned continuously since ~~July~~January 1, ~~2015,~~2016, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the ~~one property (one building)~~four properties (six buildings) which we acquired ~~during the three months ended March 31,~~since January 1, 2016 as the acquired ~~property.~~properties. We refer to the one property (one building) we sold ~~during the three months ended September 30,~~in July 2016 as the disposed property.

Our condensed consolidated statements of comprehensive income for the three months ended ~~September 30, 2016~~March 31, 2017 include the operating results of three acquired properties (five buildings) for the entire period, as we acquired those properties prior to January 1, 2017, and include the operating results of one acquired property (one building) for less than the entire period, as we acquired that property during the 2017 period and exclude the operating results of one disposed property for the entire period, as we ~~acquired this~~sold that property prior to ~~July~~January 1, ~~2016, and include the operating results of the disposed property for less than the entire period, as that property was sold during the period.~~2017. Our condensed consolidated statements of comprehensive income for the three months ended ~~September 30, 2015 exclude~~March 31, 2016 include the operating results of ~~the~~one acquired property (one building) for less than the entire period, as we acquired that property ~~after September 30, 2015,~~during the 2016 period and include the operating results of the one disposed property for the entire period, as we sold that property after ~~September 30, 2015.~~March 31, 2016.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended ~~September 30, 2016,~~March 31, 2017, compared to the three month period ended ~~September 30, 2015.~~March 31, 2016.

Rental income. The increase in rental income reflects an increase in rental income for comparable properties and the effect of the acquired property partially offset by the effect of the disposed property. Rental income increased $2,180 as a result of the acquired property. Rental income decreased $20 as a result of the disposed property.properties. Rental income for comparable properties increased ~~$226~~$793 due primarily to ~~an increase~~increases in rental rates and occupied space at certain of our properties in the ~~2016~~2017 period. Rental income increased $4,892 as a result of the acquired properties. Rental income includes non-cash straight line rent adjustments totaling ~~$1,205~~$1,300 in the ~~2016~~2017 period and ~~$613~~$149 in the ~~2015~~2016 period, and amortization of acquired leases and assumed lease obligations totaling ($~~370)~~627) in the ~~2016~~2017 period and ($~~298)~~307) in the ~~2015~~2016 period.

Real estate taxes. The ~~decrease~~increase in real estate taxes reflects ~~a decrease~~an increase in real estate taxes for comparable properties ~~partially offset by~~and the net effect of the acquired ~~property~~properties and ~~the disposed property. Real estate taxes increased $205 as a result of the acquired property. Real estate taxes decreased $18 as a result of~~ the disposed property. Real estate taxes for comparable properties ~~decreased $331~~increased $29 due primarily to the effect of ~~lower~~higher real estate tax valuation assessments at certain of our properties in the ~~2016~~2017 period. Real estate taxes increased $510 as a result of the acquired properties, partially offset by a decrease of $15 as a result of the disposed property.

Utility expenses. The increase in utility expenses reflects an increase in utility expenses for comparable properties and the net effect of the acquired ~~property~~properties and ~~the disposed property. Utility expenses increased $213 as a result of the acquired property. Utility expenses declined $14 as a result of~~ the disposed property. Utility expenses at comparable properties increased ~~$90~~$88 primarily due to an increase in electricity usage at certain of our buildings during the ~~2016 period compared to~~2017 period. Utility expenses increased $355 as a result of the ~~2015 period.~~acquired properties, partially offset by a decrease of $11 as a result of the disposed property.

Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees, net of amortization of the liability we recorded in connection with our June 2015 acquisition of shares of Class A common stock of The RMR Group Inc., or RMR Inc. (see Note 10 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q).fees. The increase in other operating expenses reflects an increase in expenses for comparable properties and the net effect of the acquired ~~property~~properties and ~~the disposed property. Other operating expenses increased $579 as a result of the acquired property. Other operating expenses declined $25 as a result of~~ the disposed property. Other operating expenses at comparable properties increased ~~$1,019~~$391 primarily as a result of higher ~~salaries, cleaning and~~ repairs and maintenance costs at certain of our properties during the ~~2016~~2017 period, partially offset by lower snow removal costs at certain of our properties during the 2017 period. Other operating expenses increased $717 as a result of the acquired properties, offset by a decrease of $27 as a result of the disposed property.

Depreciation and amortization. The increase in depreciation and amortization reflects the effect of ~~the property acquisition and~~ improvements made to certain of our comparable properties, partially offset by the effect of certain assets becoming fully ~~depreciated. Depreciation~~depreciated and ~~amortization increased $1,255 as a result of~~ the acquired ~~property.~~properties. Depreciation and amortization at comparable properties ~~declined $12~~increased $413 due primarily to ~~certain depreciable leasing related assets becoming fully depreciated after July 1, 2015, partially offset by~~ depreciation and amortization of improvements made to certain of our properties after ~~July~~January 1, ~~2015.~~2016, partially offset by certain leasing related assets becoming fully depreciated after January 1, 2016. Depreciation and amortization increased $1,768 as a result of the acquired properties.

Acquisition related costs. Acquisition related costs ~~in both the 2016 and 2015 periods~~ include legal and ~~due~~ diligence costs incurred in connection with our property acquisition ~~activity.~~activities that were expensed in accordance with GAAP.

General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares (see Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The increase in general and administrative expenses is primarily as a result of an increase in ~~stock~~business management fees due to our acquisitions and an increase in our equity compensation expense ~~partially offset by a decrease in other professional fees~~ during the ~~2016~~2017 period.

Dividend income. Dividend income consists of dividends received from our investment in RMR Inc. ~~during the 2016 period.~~

Interest income. The increase in interest income in the 2017 period is primarily the result of interest earned from the mortgage financing we provided to the purchaser of one of our properties ~~during the 2016 period. For more information, see Note 4 to our condensed consolidated financial statements included~~ in ~~Part 1, Item 1 of this Quarterly Report on Form 10-Q.~~July 2016.

Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on borrowings during the ~~2016~~2017 period compared to the ~~2015~~2016 period.

Gain on early extinguishment of debt. We recorded a ~~$34~~net $104 gain on early extinguishment of debt in the ~~2015~~2016 period in

connection with the ~~repayment~~prepayment of atwo mortgage ~~note.~~

~~Gain (loss) on issuance of shares by Select Income REIT.~~ ~~Gain (loss) on issuance of shares by SIR is a result of the issuance of common shares by SIR at prices above or (below) our then per share carrying value of our SIR common shares.~~notes.

Income tax ~~(expense) benefit.~~expense. The ~~change~~increase in income tax ~~(expense) benefit~~expense reflects higher operating income in certain jurisdictions in the ~~2016~~2017 period that is subject to state income ~~taxes, compared to a decrease in our accrued state income tax liability in the 2015 period due to lower estimated operating income in certain jurisdictions.~~taxes.

Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and Affiliates Insurance Company, or AIC. The decrease in the 2017 period is primarily the result of a decline in SIR's net income for the 2017 period.

Loss from discontinued operations. Loss from discontinued operations reflects operating results for one property (one building) included in discontinued operations during the ~~2016~~2017 and ~~2015~~2016 periods.

~~Gain on sale of property.~~ Gain on sale of property represents the portion of the gain recognized from the sale of a property accounted for under the installment method during the 2016 period. For more information, see Note 4 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Net income. Our net income decreased in the ~~2016~~2017 period compared to the ~~2015 period as a result of the changes noted above.~~

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

~~Nine Months Ended September 30,~~ 2016 ~~Compared to Nine Months Ended September 30, 2015~~

Acquired Property Disposed Properties

Results ⁽²⁾

Results ⁽³⁾

Comparable Properties Results ⁽¹⁾
Nine Months Ended Nine Months Ended Consolidated Results
Nine Months Ended September 30, September 30, September 30, Nine Months Ended September 30,
$ % $ %
2016 2015 Change Change 2016 2015 2016 2015 2016 2015 Change Change
Rental income $ 186,297
$ 185,062
$ 1,235
0.7 % $ 5,852
$ —
$ 1
$ 1,802
$ 192,150
$ 186,864
$ 5,286
2.8 %
Operating expenses:

Real estate taxes 22,259
22,575
(316 ) (1.4 %) 524
—
27
244
22,810
22,819
(9 ) (0.0 %)
Utility expenses 12,889
13,635
(746 ) (5.5 %) 417
—
24
153
13,330
13,788
(458 ) (3.3 %)
Other operating expenses 38,534
36,224
2,310
6.4 % 1,438
—
59
435
40,031
36,659
3,372
9.2 %
Total operating expenses 73,682
72,434
1,248
1.7 % 2,379
—
110
832
76,171
73,266
2,905
4.0 %
Net operating income ⁽⁴⁾
$ 112,615
$ 112,628
$ (13 ) (0.0 %) $ 3,473
$ —
$ (109 ) $ 970
115,979
113,598
2,381
2.1 %

Other expenses:

Depreciation and amortization 54,713
51,675
3,038
5.9 %
Acquisition related costs 363
459
(96 ) (20.9 %)
General and administrative 11,350
11,431
(81 ) (0.7 %)
Total other expenses

66,426
63,565
2,861
4.5 %
Operating income

49,553
50,033
(480 ) (1.0 %)
Dividend income

667
—
667
nm
Interest income

63
14
49
350.0 %
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $2,024 and $1,020, respectively) (32,286 ) (27,894 ) (4,392 ) 15.7 %
Gain on early extinguishment of debt 104
34
70
205.9 %
Gain (loss) on issuance of shares by Select Income REIT 88
(42,145 ) 42,233
nm
Loss on impairment of Select Income REIT investment —
(203,297 ) 203,297
nm
Income (loss) from continuing operations before income taxes and equity in earnings of investees 18,189
(223,255 ) 241,444
(108.1 %)
Income tax expense (63 ) (49 ) (14 ) 28.6 %
Equity in earnings of investees 28,002
16,072
11,930
74.2 %
Income (loss) from continuing operations 46,128
(207,232 ) 253,360
nm
Loss from discontinued operations (429 ) (390 ) (39 ) 10.0 %
Income (loss) before gain on sale of property 45,699
(207,622 ) 253,321
nm
Gain on sale of property 79
—
79
nm
Net income (loss) $ 45,778
$ (207,622 ) $ 253,400
nm

Weighted average common shares outstanding (basic) 71,041
70,589
452
0.6 %
Weighted average common shares outstanding (diluted) 71,064
70,589
475
0.7 %

Per common share amounts (basic and diluted):

Income (loss) from continuing operations $ 0.65
$ (2.94 ) $ 3.59
nm
Loss from discontinued operations $ (0.01 ) $ (0.01 ) $ —
nm
Net income (loss) $ 0.64
$ (2.94 ) $ 3.58
nm

Calculation of Funds From Operations and Normalized Funds From Operations ⁽⁵⁾

Net income (loss)

$ 45,778
$ (207,622 )
Plus: Depreciation and amortization 54,713
51,675

Plus: FFO attributable to Select Income REIT investment 53,609
43,961

Less: Equity in earnings from Select Income REIT (27,895 ) (16,002 )
Less: Gain on sale of property (79 ) —

Funds from operations 126,126
(127,988 )
Plus: Acquisition related costs 363
459

Plus: Loss on issuance of shares by Select Income REIT —
42,145

Plus: Loss on impairment of Select Income REIT investment —
203,297

Plus: Normalized FFO attributable to Select Income REIT investment 53,629
51,177

Less: FFO attributable to Select Income REIT investment (53,609 ) (43,961 )
Less: Gain on early extinguishment of debt (104 ) (34 )
Less: Gain on issuance of shares by Select Income REIT (88 ) —

Normalized funds from operations $ 126,317
$ 125,095

Funds from operations per common share (basic and diluted) $ 1.78
$ (1.81 )
Normalized funds from operations per common share (basic and diluted) $ 1.78
$ 1.77


~~(1)~~	Comparable properties consist of 70 properties (90 buildings) we owned on September 30, 2016 and which we owned continuously since January 1, 2015, and excludes one property (one building) classified as discontinued operations.


~~(2)~~	~~Acquired property consists of one property (one building) we acquired during the nine months ended September 30, 2016.~~


~~(3)~~	Disposed properties consist of one property (one building) we sold during the nine months ended September 30, 2015 and one property (one building) we sold during the nine months ended September 30, 2016.


~~(4)~~	~~See footnote (4) on page 27 for a definition of NOI.~~


~~(5)~~	~~See footnote (5) on page 27 for a definition of FFO and Normalized FFO.~~

We refer to the 70 properties (90 buildings) we owned on September 30, 2016 and which we have owned continuously since January 1, 2015, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the one property (one building) we acquired during the nine months ended September 30, 2016 as the acquired property. We refer to the one property (one building) we sold during the nine months ended September 30, 2015 and the one property (one building) we sold during the nine months ended September 30, 2016 as the disposed properties.

Our condensed consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2016 include the operating results of the acquired property for less than the entire period, as we acquired this property during the 2016 period, include the operating results of one disposed property for less than the entire period, as we sold that property during the period, and exclude the operating results of one disposed property for the entire period, as we sold that property prior to January 1, 2016. Our condensed consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2015 exclude the operating results of the acquired property for the entire period, as we acquired that property after September 30, 2015, include the operating results of one disposed property for the entire period, as we sold that property after September 30, 2015, and include the operating results of one disposed property for less than the entire period, as we sold that property during the 2015 period.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine month period ended September 30, 2016, compared to the nine month period ended September 30, 2015.

~~Rental income.~~ The increase in rental income reflects an increase in rental income for comparable properties and the net effect of the acquired property and the disposed properties. Rental income increased $5,852 as a result of the acquired property. Rental income declined $1,801 as a result of the disposed properties. Rental income for comparable properties increased $1,235 due primarily to an increase in occupied space at certain of our properties in the 2016 period. Rental income includes non-cash straight line rent adjustments totaling $1,789 in the 2016 period and $2,820 in the 2015 period, and amortization of acquired leases and assumed lease obligations totaling ($1,103) in the 2016 period and ($862) in the 2015 period.

~~Real estate taxes.~~ The decrease in real estate taxes reflects the decrease in real estate taxes for comparable properties partially offset by the net effect of the acquired property and the disposed properties. Real estate taxes increased $524 as a result of the acquired property. Real estate taxes declined $217 as a result of the disposed properties. Real estate taxes for comparable properties declined $316 due primarily to the effect of lower real estate tax valuation assessments at certain of our properties in the 2016 period.

~~Utility expenses.~~ The decrease in utility expenses reflects a decrease in utility expenses for comparable properties partially offset by the net effect of the acquired property and the disposed properties. Utility expenses increased $417 as a result of the acquired property. Utility expenses declined $129 as a result of the disposed properties. Utility expenses at comparable properties declined $746 primarily due to milder temperatures experienced in certain parts of the United States during the 2016 period compared to the 2015 period.

~~Other operating expenses.~~ The increase in other operating expenses reflects an increase in expenses for comparable properties and the net effect of the acquired property and the disposed properties. Other operating expenses increased $1,438 as a result of the acquired property. Other operating expenses declined $376 as a result of the disposed properties. Other operating expenses at comparable properties increased $2,310 primarily as a result of higher salaries, cleaning and insurance costs at certain of our properties partially offset by lower snow removal costs at certain of our properties during the 2016 period.

~~Depreciation and amortization.~~ The increase in depreciation and amortization reflects the effect of the property acquisition and improvements made to certain of our properties, partially offset by the effect of certain assets becoming fully depreciated. Depreciation and amortization increased $3,343 as a result of the acquired property. Depreciation and amortization at comparable properties declined $305 due primarily to certain depreciable leasing related assets becoming fully depreciated after January 1, 2015, partially offset by depreciation and amortization of improvements made to certain of our properties after January 1, 2015.

~~Acquisition related costs.~~ ~~Acquisition related costs in both the 2016 and 2015 periods include legal and due diligence costs incurred in connection with our property acquisition activity.~~

~~General and administrative.~~ The decrease in general and administrative expenses primarily reflects a decrease in other professional fees and services partially offset by an increase in stock compensation expense during the 2016 period.

~~Dividend income.~~ ~~Dividend income consists of dividends received from our investment in RMR Inc. during the 2016 period.~~

~~Interest income.~~ The increase in interest income is primarily the result of interest earned from the mortgage financing we provided to the purchaser of one of our properties during the 2016 period. For more information, see Note 4 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

~~Interest expense.~~ ~~The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on borrowings during the 2016 period compared to the 2015 period.~~

~~Gain on early extinguishment of debt~~. We recorded a net $104 gain on early extinguishment of debt in the 2016 period in connection with the prepayment of two mortgage notes. We recorded a $34 gain on early extinguishment of debt in the 2015 period in connection with the repayment of a mortgage note.

~~Loss on impairment of Select Income REIT investment.~~ ~~We recorded a $203,297 loss on impairment in the 2015 period to reduce the carrying value of our SIR investment to its estimated fair value.~~

~~Income tax expense.~~ ~~The increase in income tax expense reflects higher operating income in certain jurisdictions in the 2016 period that is subject to state income taxes.~~

~~Equity in earnings of investees.~~ ~~Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and AIC.~~

~~Loss from discontinued operations.~~ ~~Loss from discontinued operations reflects operating results for one property (one building) included in discontinued operations during the 2016 and 2015 periods.~~

~~Net income (loss).~~ ~~We recognized net income in the 2016 period compared to a net loss in the 2015~~ period as a result of the changes noted above.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollar amounts in thousands)

Our principal sources of funds to meet operating and capital expenses, debt service obligations and pay distributions on our common shares are the operating cash flows we generate as rental income from our properties, the distributions we receive from our ~~investment~~investments in SIR and RMR Inc. and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses and debt service obligations and pay distributions on our common shares for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:

our ability to maintain or increase the occupancy of, and the rental rates at, our properties;

our ability to control operating expenses at our properties;

our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating expenses; and

our receipt of distributions from our ~~investment~~investments in ~~SIR.~~SIR and RMR Inc.

Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully ~~conclude~~complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.

Our changes in cash flows for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 compared to the same period in ~~2015~~2016 were as follows: (i) cash provided by operating activities ~~increased~~decreased from ~~$89,053~~$31,212 in ~~2015~~2016 to ~~$91,674~~$25,316 in ~~2016;~~2017; (ii) cash used in investing activities ~~increased~~decreased from ~~$65,793~~$80,866 in ~~2015~~2016 to ~~$94,848~~$11,464 in ~~2016;~~2017; and (iii) cash flows from financing activities changed from ~~$25,745~~$56,567 of cash provided by financing activities in the 2016 period to $30,985 of cash used in financing activities in ~~2015 to $8,138 of cash provided by financing activities in 2016.~~the 2017 period.

The ~~increase~~decrease in cash provided by operating activities for the ~~nine~~three month period ended September 30, 2016 as compared to the corresponding prior year period primarily reflects an increase in property net operating income and an increase in distributions of earnings received from our investment in SIR common shares, partially offset by changes in working capital in the 2016 period. The increase in cash used in investing activities for the nine month period ended September 30, 2016March 31, 2017 as compared to the corresponding prior year period was due primarily to a decrease in the amount of the distributions we received from our ~~real estate acquisition~~investments in SIR and RMR Inc. common shares classified as an operating activity in the ~~2016~~2017 period ~~versus disposition activity~~and an increase in interest paid in the ~~2015 period, partially offset by our investment in SIR in the 2015~~2017 period. The ~~change~~decrease in cash ~~provided by (used in) financing~~used in investing activities for the ~~nine~~three month period ended ~~September 30, 2016~~March 31, 2017 as compared to the corresponding prior year period was due primarily to a decrease in our real estate acquisition activity and an increase in the amount of the distributions we received from our investments in SIR and RMR Inc. common shares classified as an investing activity in the 2017 period, partially offset by an increase in real estate improvements made in the 2017 period. The change in cash (used in) provided by financing activities for the three month period ended March 31, 2017 as compared to the corresponding prior year period was due primarily to higher net borrowings in the 2016 ~~period, including our issuance of senior unsecured notes.~~period.

Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share and per square foot amounts)

In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 unsecured revolving credit facility. The maturity date of our revolving credit facility is January 31, 2019 and, subject to our payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 31, 2020. We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at ~~September 30, 2016,~~March 31, 2017, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at ~~September 30, 2016.~~March 31, 2017. Both the interest rate premium and the

facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of ~~September 30, 2016,~~March 31, 2017, the annual interest rate payable on borrowings under our revolving credit facility was ~~1.7%~~2.2%. As of ~~September 30, 2016~~both March 31, 2017 and ~~October~~April 25, ~~2016,~~2017, we had ~~$25,000 and $15,000, respectively,~~$160,000 outstanding under our revolving credit facility.

Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders, which also governs our two unsecured term loans:

Our $300,000 term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at LIBOR plus a premium, which was 140 basis points per annum at ~~September 30, 2016,~~March 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 ~~September 30, 2016,~~March 31, 2017, the annual interest rate for the amount outstanding under our $300,000 term loan was ~~1.9%~~2.4%.

Our $250,000 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 would be payable. Subsequent to November 21, 2016, no prepayment premium would be payable. We are required to pay interest at LIBOR plus a premium, which was 180 basis points per annum at ~~September 30, 2016,~~March 31, 2017, on the amount outstanding under our $250,000 term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2016,~~March 31, 2017, the annual interest rate for the amount outstanding under our $250,000 term loan was ~~2.3%~~2.8%.

Our credit agreement also includes a feature under which the maximum borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

Our credit agreement for our revolving credit facility and term loans provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under the revolving credit facility and term loans only if that subsidiary has

separately incurred debt (other than nonrecourse debt), within the meaning specified in the credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.

Our $350,000 of 3.75% senior unsecured notes due 2019 are governed by an indenture and a supplement to that indenture and require semi-annual payments of interest only through maturity in August 2019 and may be repaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.

~~In May 2016, we issued $300,000~~Our $310,000 of 5.875% senior unsecured notes due 2046 inare governed by an ~~underwritten public offering. In June 2016, the underwriters exercised an option~~indenture and a supplement to ~~purchase an additional $10,000~~that indenture and require quarterly payments of ~~these notes. The net proceeds from this offering of $299,771,~~interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after ~~offering expenses, were used to repay all amounts then outstanding under our revolving credit facility and for general business purposes.~~May 26, 2021.

Our debt maturities (other than our revolving credit facility) are as follows: ~~$369 in 2016, $1,549~~$1,170 in 2017, $1,671 in 2018, $359,439 in 2019, $301,619 in 2020, $13,230 in 2021 and ~~$573,230~~$560,000 thereafter.

None of our debt obligations require sinking fund payments prior to their maturity dates. Our ~~$27,877~~$27,129 in mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of ~~September 30, 2016,~~March 31, 2017, we have estimated unspent leasing related obligations of ~~$21,580~~$24,800 and have committed to redevelop and expand an existing property atprior to the commencement of the lease with an estimated remaining cost to complete of approximately ~~$17,990.~~$10,138.

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from our property sales, distributions received from our ~~investment~~investments 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 revolving credit facility or the ~~maturity date~~maturities of our ~~revolving credit facility, term loans, senior notes, mortgage notes or our other debts~~indebtedness approach, we ~~intend~~expect 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 revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisition of properties or elect to place new mortgages on properties we own as a source of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to operate our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner which will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention.

On February ~~25, 2016, we paid a regular quarterly distribution to common shareholders of $0.43 per share, or approximately $30,584. On May~~ 23, ~~2016, we paid a regular quarterly distribution to common shareholders of $0.43 per share, or approximately $30,585. On August 22, 2016,~~2017, we paid a regular quarterly distribution to common shareholders of record on ~~July 22, 2016~~January 23, 2017 of $0.43 per share, or ~~$30,590.~~ $30,606. We funded this distribution using cash on hand and borrowings under our revolving credit facility.

On ~~October~~April 11, ~~2016,~~2017, we declared a regular quarterly distribution payable to common shareholders of record on ~~October~~April 21, ~~2016~~2017 of $0.43 per share, or ~~approximately $30,607.~~$30,606. We expect to pay this ~~amount~~distribution on or about ~~November 21, 2016~~May 22, 2017 using cash on hand and borrowings under our revolving credit facility.

In February 2016, we repaid, at par, a $23,473 mortgage note requiring annual interest at 6.21% which was secured by one office property (one building) located in Landover, MD using cash on hand and borrowings under our revolving credit facility. This mortgage note was scheduled to mature in August 2016.

In March 2016, we repaid, at par, an $83,000 mortgage note requiring annual interest at 5.55% which was secured by one office property (two buildings) located in Reston, VA using cash on hand and borrowings under our revolving credit facility. This mortgage note was scheduled to mature in April 2016.

Off Balance Sheet Arrangements

As of ~~September 30, 2016,~~March 31, 2017, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants (dollars in thousands)

Our principal debt obligations at ~~September 30, 2016~~March 31, 2017 consisted of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 term loan, our $250,000 term loan, an aggregate outstanding principal amount of $660,000 of public issuances of senior unsecured notes and three secured mortgage notes that were assumed in connection with certain of our acquisitions. Our publicly issued senior unsecured notes are governed by an ~~indenture.~~indenture and its supplements. Our senior unsecured notes indenture and its supplements and the credit agreement for our revolving credit facility and our two term loans provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business ~~manager~~ and property manager. Our senior unsecured notes indenture and its supplements and our credit agreement also contain a number of covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain various financial ratios, and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. As of ~~September 30, 2016,~~March 31, 2017, we believe we were in compliance with the terms and conditions of our respective covenants under our senior unsecured notes indenture and its supplements and our credit agreement.

Neither our credit agreement nor our senior unsecured notes indenture and its supplements contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded by certain credit rating agencies, our interest expense and related costs under our credit agreement would increase.

Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indenture and its supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances).

Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, ~~SIR~~RMR Inc. and others related to them. For ~~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 and property management ~~agreements;~~agreements with RMR LLC; RMR Inc. is the managing member of RMR ~~LLC~~LLC; ABP Trust, which is owned by our Managing Trustees, is the controlling shareholder of RMR Inc.; and we own shares of class A common stock of RMR Inc.; We also have relationships and ~~the controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees~~historical and ~~ABP Trust also owns an equity interest in RMR LLC. Also, we own common shares of SIR; and we and six~~continuing transactions with other companies to which RMR LLC provides 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, owning, at March 31, 2017, approximately 27.9% of the outstanding SIR common shares; and AIC, of which we, SIR, ABP Trust and four other companies to which RMR LLC provides management services each own 14.3% and which arranges and reinsures in ~~equal amounts AIC, an insurance company, and we participate in~~part a combined property insurance program ~~arranged~~for us and ~~reinsured in part by AIC.~~its six other shareholders. For further

information about these and other such relationships and related person transactions, ~~please~~ see Notes 1011 and 1112 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our ~~2016~~2017 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, ~~please~~ see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related ~~parties~~persons, including our business and property management agreements 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’s website, ~~www.sec.gov.~~www.sec.gov. We may engage in additional transactions with related persons, including ~~RMR LLC and companies~~businesses to which RMR LLC or its affiliates provide management services.

Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands)

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, ~~2015.~~2016. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

Fixed Rate Debt

At ~~September 30, 2016,~~March 31, 2017, our outstanding fixed rate debt consisted of the following:


			Annual		Annual			Interest			Annual		Annual			Interest
	Principal		Interest		Interest			Payments	Principal		Interest		Interest			Payments
Debt	Balance ⁽¹⁾		Rate ⁽¹⁾		Expense ⁽¹⁾		Maturity	Due	Balance ⁽¹⁾		Rate ⁽¹⁾		Expense ⁽¹⁾		Maturity	Due
Senior unsecured notes	$	350,000	3.750	%	$	13,125	2019	Semi-annually	$	350,000	3.750	%	$	13,125	2019	Semi-annually
Senior unsecured notes	310,000		5.875	%	18,213		2046	Quarterly	310,000		5.875	%	18,213		2046	Quarterly
Mortgage note	13,993		5.877	%	834		2021	Monthly	13,873		5.877	%	827		2021	Monthly
Mortgage note	8,546		7.000	%	607		2019	Monthly	8,420		7.000	%	598		2019	Monthly
Mortgage note	5,338		8.150	%	441		2021	Monthly	4,836		8.150	%	400		2021	Monthly
	$	687,877			$	33,220			$	687,129			$	33,163

(1)

The principal balances and interest rates are the amounts determined pursuant to 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 7 and 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our $350,000 senior unsecured notes require semi-annual interest payments through maturity and our $310,000 senior unsecured notes require quarterly interest payments through maturity. Our mortgages generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are 100 basis points higher or lower than shown above, our per annum interest cost would increase or decrease, respectively, by approximately ~~$7,097.~~$7,091.

Changes in market interest rates would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at ~~September 30, 2016,~~March 31, 2017, and discounted cash flow analyses 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 ~~$50,096.~~$46,627.

Some of our fixed rate secured debt arrangements allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.

Floating Rate Debt

At ~~September 30, 2016,~~March 31, 2017, our floating rate debt consisted of ~~$25,000~~$160,000 of borrowings under our $750,000 revolving credit facility, our $300,000 term loan and our $250,000 term loan. Our revolving credit facility matures in January 2019 and, subject to the 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 revolving credit facility or our term loans prior to maturity, and we can borrow, repay and reborrow funds available under our revolving credit facility, subject to conditions, at any time without penalty. Our $300,000 term loan matures on March 31, 2020. Our $250,000 term loan matures on March 31, 2022. Amounts outstanding under our term loans may be repaid without penalty at any time, but after they are repaid amounts may not be redrawn. Our $300,000 term loan may be repaid 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 would be incurred. Subsequent to November 21, 2016, no prepayment premium would be incurred.

Borrowings under our $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

revolving credit facility or term loans, we are vulnerable to increases in interest rate premiums due to market conditions or our 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.

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of ~~September 30, 2016:~~March 31, 2017:


	Impact of Changes in Interest Rates								Impact of Changes in Interest Rates
	Annual		Outstanding		Total Interest		Annual Earnings		Annual		Outstanding		Total Interest		Annual Earnings
	Interest Rate ⁽¹⁾		Debt		Expense Per Year		Per Share Impact ⁽²⁾		Interest Rate ⁽¹⁾		Debt		Expense Per Year		Per Share Impact ⁽²⁾
At September 30, 2016	2.1	%	$	575,000	$	12,243	$	0.17
At March 31, 2017									2.5	%	$	710,000	$	17,997	$	0.25
100 bps increase	3.1	%	$	575,000	$	18,073	$	0.25	3.5	%	$	710,000	$	25,195	$	0.35


(1)	Weighted based on the respective interest rates and outstanding borrowings under our revolving credit facility and term loans as of ~~September 30, 2016.~~March 31, 2017.


(2)	Based on the weighted average shares outstanding (diluted) for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017.

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of ~~September 30, 2016~~March 31, 2017 if we were fully drawn on our revolving credit facility and our term loans remained outstanding:


	Impact of Changes in Interest Rates								Impact of Changes in Interest Rates
	Annual		Outstanding		Total Interest		Annual Earnings		Annual		Outstanding		Total Interest		Annual Earnings
	Interest Rate ⁽¹⁾		Debt		Expense Per Year		Per Share Impact ⁽²⁾		Interest Rate ⁽¹⁾		Debt		Expense Per Year		Per Share Impact ⁽²⁾
At September 30, 2016	1.9	%	$	1,300,000	$	25,043	$	0.35
At March 31, 2017									2.4	%	$	1,300,000	$	31,633	$	0.44
100 bps increase	2.9	%	$	1,300,000	$	38,224	$	0.54	3.4	%	$	1,300,000	$	44,814	$	0.63


(1)	Weighted based on the respective interest rates and outstanding borrowings under our revolving credit facility (assuming fully drawn) and our term loans as of ~~September 30, 2016.~~March 31, 2017.


(2)	Based on the weighted average shares outstanding (diluted) for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017.

The foregoing tables show the impact of an immediate change in floating interest rates as of ~~September 30, 2016.~~March 31, 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 revolving credit facility, our term loans or our other floating rate 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.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended ~~September 30, 2016~~March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “WILL”, “MAY” AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

OUR ACQUISITIONS AND SALES OF PROPERTIES,

OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,

THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT OR BE NEGATIVELY AFFECTED BY CYCLICAL ECONOMIC CONDITIONS OR GOVERNMENT BUDGET CONSTRAINTS,

THE LIKELIHOOD THAT OUR TENANTS WILL RENEW OR EXTEND THEIR LEASES AND NOT EXERCISE EARLY TERMINATION OPTIONS PURSUANT TO THEIR LEASES OR THAT WE WILL OBTAIN REPLACEMENT TENANTS,

OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,

OUR EXPECTATION THAT WE BENEFIT FINANCIALLY FROM OUR OWNERSHIP INTEREST IN SIR,

OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,

THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,

OUR EXPECTATION THAT THERE WILL BE OPPORTUNITIES FOR US TO ACQUIRE, AND THAT WE WILL ACQUIRE, ADDITIONAL PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS OR GOVERNMENT CONTRACTOR TENANTS,

OUR EXPECTATIONS REGARDING DEMAND FOR LEASED SPACE BY THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,

OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,

OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,

OUR ABILITY TO APPROPRIATELY BALANCE OUR USE OF DEBT AND EQUITY CAPITAL,

OUR CREDIT RATINGS,

OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF RMR INC.,

OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AIC AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,

THE CREDIT QUALITIES OF OUR TENANTS,

OUR QUALIFICATION FOR TAXATION AS A REIT, AND

OTHER MATTERS.

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, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,

COMPETITION WITHIN THE REAL ESTATE INDUSTRY, PARTICULARLY WITH RESPECT TO THOSE MARKETS IN WHICH OUR PROPERTIES ARE LOCATED AND WITH RESPECT TO GOVERNMENT TENANCIES,

THE IMPACT OF CHANGES IN THE REAL ESTATE NEEDS AND FINANCIAL CONDITIONS OF THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,

COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,

ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES, RMR LLC, RMR INC., SIR, AIC AND OTHERS AFFILIATED WITH THEM,

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.

FOR EXAMPLE:

OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO MAKE PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS ~~AND TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS~~ DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, THE CAPITAL COSTS WE INCUR TO LEASE OUR PROPERTIES, OUR WORKING CAPITAL REQUIREMENTS AND OUR RECEIPT OF DISTRIBUTIONS FROM ~~SIR,~~

SIR. WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS OR TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS ON OUR COMMON SHARES AND FUTURE DISTRIBUTIONS MAY BE REDUCED OR ELIMINATED,

OUR ABILITY TO GROW OUR BUSINESS AND INCREASE DISTRIBUTIONS TO OUR SHAREHOLDERS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND LEASE THEM FOR RENTS, LESS PROPERTY OPERATING EXPENSES, THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING OR LEASE TERMS FOR NEW PROPERTIES,

SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO OBTAIN NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,

SOME GOVERNMENT TENANTS MAY EXERCISE THEIR RIGHTS TO VACATE THEIR SPACE BEFORE THE STATED EXPIRATION OF THEIR LEASES, AND WE MAY BE UNABLE TO OBTAIN NEW TENANTS TO MAINTAIN THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,

RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,

CONTINGENCIES IN OUR ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING ACQUISITIONS AND SALES MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE,

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,

ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY ~~AND~~OR OTHER FLOATING RATE CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF ~~OTHER~~ FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES,

WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,

THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS MAY BE INCREASED TO UP TO $2.5 BILLION ON A COMBINED BASIS IN CERTAIN CIRCUMSTANCES; HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,

WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING OTHER ~~CONDITIONS.~~CONDITIONS, HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET,

THE BUSINESS ~~MANAGEMENT~~ AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE CONTINUING 20 YEAR TERMS. HOWEVER, THOSE AGREEMENTS INCLUDE TERMS WHICH PERMIT EARLY TERMINATION IN CERTAIN CIRCUMSTANCES. ACCORDINGLY, WE CANNOT BE SURE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR CONTINUING 20 YEAR TERMS OR FOR SHORTER TERMS,

WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING RMR LLC, RMR INC., SIR, AIC AND OTHERS AFFILIATED WITH THEM MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. HOWEVER, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE,

THE PREMIUMS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY AND TERM LOANS AND THE FACILITY FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR CREDIT RATINGS. FUTURE CHANGES IN OUR CREDIT RATINGS MAY CAUSE THE INTEREST AND FEES WE PAY TO INCREASE,

SIR MAY REDUCE THE AMOUNT OF ITS DISTRIBUTIONS TO ITS SHAREHOLDERS, INCLUDING US,

WE MAY BE UNABLE TO SELL OUR SIR COMMON SHARES FOR AN AMOUNT EQUAL TO OUR CARRYING VALUE OF THOSE SHARES AND ANY SUCH SALE MAY BE AT A DISCOUNT TO MARKET PRICE BECAUSE OF THE LARGE SIZE OF OUR SIR HOLDINGS OR OTHERWISE; WE MAY REALIZE A LOSS ON OUR INVESTMENT IN OUR SIR SHARES, AND

WE CURRENTLY EXPECT TO SPEND, ~~APPROXIMATELY $18.0~~AS OF MARCH 31, 2017, AN ADDITIONAL $10.1 MILLION TO COMPLETE ~~OUR~~THE REDEVELOPMENT AND EXPANSION OF ~~AN EXISTING~~A PROPERTY ~~IN CONNECTION WITH A NEW~~WE OWN PRIOR TO THE COMMENCEMENT OF THE LEASE ~~AGREEMENT.~~FOR THAT PROPERTY. IN ADDITION, AS OF ~~SEPTEMBER 30, 2016,~~MARCH 31 2017, WE HAVE ESTIMATED UNSPENT LEASING RELATED OBLIGATIONS OF ~~$21.6~~$24.8 MILLION, ~~WHICH EXCLUDES~~EXCLUDING THE ESTIMATED DEVELOPMENT COSTS NOTED IN THE PRECEDING SENTENCE. IT IS DIFFICULT TO ACCURATELY ESTIMATE DEVELOPMENT COSTS. THIS DEVELOPMENT PROJECT AND OUR UNSPENT LEASING RELATED OBLIGATIONS MAY COST MORE OR LESS AND MAY TAKE LONGER TO COMPLETE THAN WE CURRENTLY EXPECT, AND WE MAY INCUR INCREASING AMOUNTS FOR THESE AND SIMILAR PURPOSES IN THE FUTURE.

CURRENTLY 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.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT OR IN OUR OTHER FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

STATEMENT CONCERNING LIMITED LIABILITY

THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING GOVERNMENT PROPERTIES INCOME TRUST, DATED JUNE 8, 2009, AS AMENDED, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF GOVERNMENT PROPERTIES INCOME TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, GOVERNMENT PROPERTIES INCOME TRUST. ALL PERSONS DEALING WITH GOVERNMENT PROPERTIES INCOME TRUST IN ANY WAY SHALL LOOK ONLY TO THE ASSETS OF GOVERNMENT PROPERTIES INCOME TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

Part II. Other Information

Item 1A. Risk Factors

There have been no material changes to risk factors from those we previously disclosed in our Annual Report.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Issuer purchases of equity securities.The following table provides information about our purchases of our equity securities during the quarter ended September 30, 2016:~~

Maximum
Total Number of Approximate Dollar
Shares Purchased Value of Shares that
Number of as Part of Publicly May Yet Be Purchased
Shares Average Price Announced Plans Under the Plans or
Calendar Month
Purchased ⁽¹⁾
Paid per Share or Programs Programs
September 2016 13,209 $ 23.63 $ — $ —
Total 13,209 $ 23.63 $ — $ —


~~(1)~~	During September 2016, all common share purchases were made to satisfy our officers’ and other RMR LLC employees’ tax withholding and payment obligations in connection with the vesting of awards of our common shares. We repurchased these shares at their fair market value based upon the trading price of our common shares on the repurchase date.

Item 6. Exhibits



Exhibit Number	Description

3.1	Composite Copy of Amended and Restated Declaration of Trust, dated June 8, 2009, as amended to date. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 28, 2014.)

3.2	~~Composite Copy of~~ Amended and Restated Bylaws of the Company, adopted September 7, 2016. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 7, 2016.)

4.1	Form of Common Share Certificate. (Incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-11/A, File No. 333-157455.)

4.2	Indenture, dated as of August 18, 2014, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 18, 2014.)

4.3	Supplemental Indenture No. 1, dated as of August 18, 2014, between the Company and U.S. Bank National Association, relating to the Company’s 3.75% Senior Notes due 2019, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 18, 2014.)

4.4	Supplemental Indenture No. 2, dated as of May 26, 2016, between the Company and U.S. Bank National Association, relating to the Company’s 5.875% Senior Notes due 2046, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K dated May 26, 2016.)

4.5	Authentication Order, dated as of June 22, 2016, from the Company to U.S. Bank National Association, relating to the ~~Company's~~Company’s 5.875% Senior Notes due 2046. (Incorporated by reference to the Company’s Registration Statement on Form 8-A dated June 30, 2016.)

4.6	Registration Rights and Lock-Up Agreement, dated as of June 5, 2015, among the Company, ABP Trust (f/k/a Reit Management & Research Trust), Barry M. Portnoy and Adam D. Portnoy. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 5, 2015.)

~~10.1~~	~~Form of Share Award Agreement. (Filed herewith.~~)

12.1	Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.)

31.1	Rule 13a-14(a) Certification. (Filed herewith.)

31.2	Rule 13a-14(a) Certification. (Filed herewith.)

31.3	Rule 13a-14(a) Certification. (Filed herewith.)

31.4	Rule 13a-14(a) Certification. (Filed herewith.)

32.1	Section 1350 Certification. (Furnished herewith.)

101.1	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2016~~March 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	GOVERNMENT PROPERTIES INCOME TRUST


	By:	/s/ David M. Blackman
		David M. Blackman President and Chief Operating Officer
		Dated: ~~October~~April 27, ~~2016~~2017

	By:	/s/ Mark L. Kleifges
		Mark L. Kleifges Chief Financial Officer and Treasurer (principal financial and accounting officer)
		Dated: ~~October~~April 27, ~~2016~~2017

4436



Supplemental cash flow information:
Interest paid	$	32,599		$	30,107
Income taxes paid	$	94		$	143
Non-cash investing activities:
Investment in The RMR Group Inc. paid in common shares	$	—		$	13,545
Sale of property	$	3,600		$	—
Mortgage note receivable related to sale of property	$	(3,600	)	$	—



	Three Months Ended September 30, 2015
	Investment			Investment
	in Real Estate			in SIR			Corporate			Consolidated
Rental income	$	62,092		$	—		$	—		$	62,092

Expenses:
Real estate taxes	7,735			—			—			7,735
Utility expenses	5,194			—			—			5,194
Other operating expenses	12,281			—			—			12,281
Depreciation and amortization	17,161			—			—			17,161
Acquisition related costs	270			—			—			270
General and administrative	—			—			3,714			3,714
Total expenses	42,641			—			3,714			46,355

Operating income (loss)	19,451			—			(3,714		)	15,737
Interest income				—			2			2
Interest expense	(1,727		)	—			(7,410		)	(9,137		)
Gain on early extinguishment of debt	34			—			—			34
Loss on issuance of shares by Select Income REIT	—			(21		)	—			(21		)
Income (loss) from continuing operations before
income taxes and equity in earnings (losses) of investees	17,758			(21		)	(11,122		)	6,615
Income tax benefit	—			—			13			13
Equity in earnings (losses) of investees	—			10,318			(24		)	10,294
Income (loss) from continuing operations	17,758			10,297			(11,133		)	16,922
Loss from discontinued operations	(11		)	—			—			(11		)
Net income (loss)	$	17,747		$	10,297		$	(11,133	)	$	16,911



	Nine Months Ended September 30, 2015
	Investment			Investment
	in Real Estate			in SIR			Corporate			Consolidated
Rental income	$	186,864		$	—		$	—		$	186,864

Expenses:
Real estate taxes	22,819			—			—			22,819
Utility expenses	13,788			—			—			13,788
Other operating expenses	36,659			—			—			36,659
Depreciation and amortization	51,675			—			—			51,675
Acquisition related costs	459			—			—			459
General and administrative	—			—			11,431			11,431
Total expenses	125,400			—			11,431			136,831

Operating income (loss)	61,464			—			(11,431		)	50,033
Interest income	—			—			14			14
Interest expense	(21,618		)	—			(6,276		)	(27,894		)
Gain on early extinguishment of debt	34			—			—			34
Loss on issuance of shares by Select Income REIT	—			(42,145		)	—			(42,145		)
Loss on impairment of Select Income REIT investment	—			(203,297		)	—			(203,297		)
Income (loss) from continuing operations before income
income taxes and equity in earnings of investees	39,880			(245,442		)	(17,693		)	(223,255		)
Income tax expense	—			—			(49		)	(49		)
Equity in earnings of investees	—			16,002			70			16,072
Income (loss) from continuing operations	39,880			(229,440		)	(17,672		)	(207,232		)
Loss from discontinued operations	(390		)	—			—			(390		)
Net income (loss)	$	39,490		$	(229,440	)	$	(17,672	)	$	(207,622	)



										Acquired Property				Disposed Properties
										Results ⁽²⁾				Results ⁽³⁾
	Comparable Properties Results ⁽¹⁾									Nine Months Ended				Nine Months Ended					Consolidated Results
	Nine Months Ended September 30,									September 30,				September 30,					Nine Months Ended September 30,
					$			%																	$			%
	2016		2015		Change			Change		2016		2015		2016			2015		2016			2015			Change			Change
Rental income	$	186,297	$	185,062	$	1,235		0.7	%	$	5,852	$	—	$	1		$	1,802	$	192,150		$	186,864		$	5,286		2.8	%
Operating expenses:
Real estate taxes	22,259		22,575		(316		)	(1.4	%)	524		—		27			244		22,810			22,819			(9		)	(0.0	%)
Utility expenses	12,889		13,635		(746		)	(5.5	%)	417		—		24			153		13,330			13,788			(458		)	(3.3	%)
Other operating expenses	38,534		36,224		2,310			6.4	%	1,438		—		59			435		40,031			36,659			3,372			9.2	%
Total operating expenses	73,682		72,434		1,248			1.7	%	2,379		—		110			832		76,171			73,266			2,905			4.0	%
Net operating income ⁽⁴⁾	$	112,615	$	112,628	$	(13	)	(0.0	%)	$	3,473	$	—	$	(109	)	$	970	115,979			113,598			2,381			2.1	%

Other expenses:
Depreciation and amortization																			54,713			51,675			3,038			5.9	%
Acquisition related costs																			363			459			(96		)	(20.9	%)
General and administrative																			11,350			11,431			(81		)	(0.7	%)
Total other expenses																			66,426			63,565			2,861			4.5	%
Operating income																			49,553			50,033			(480		)	(1.0	%)
Dividend income																			667			—			667			nm
Interest income																			63			14			49			350.0	%
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $2,024 and $1,020, respectively)																			(32,286		)	(27,894		)	(4,392		)	15.7	%
Gain on early extinguishment of debt																			104			34			70			205.9	%
Gain (loss) on issuance of shares by Select Income REIT																			88			(42,145		)	42,233			nm
Loss on impairment of Select Income REIT investment																			—			(203,297		)	203,297			nm
Income (loss) from continuing operations before income taxes and equity in earnings of investees																			18,189			(223,255		)	241,444			(108.1	%)
Income tax expense																			(63		)	(49		)	(14		)	28.6	%
Equity in earnings of investees																			28,002			16,072			11,930			74.2	%
Income (loss) from continuing operations																			46,128			(207,232		)	253,360			nm
Loss from discontinued operations																			(429		)	(390		)	(39		)	10.0	%
Income (loss) before gain on sale of property																			45,699			(207,622		)	253,321			nm
Gain on sale of property																			79			—			79			nm
Net income (loss)																			$	45,778		$	(207,622	)	$	253,400		nm

Weighted average common shares outstanding (basic)																			71,041			70,589			452			0.6	%
Weighted average common shares outstanding (diluted)																			71,064			70,589			475			0.7	%

Per common share amounts (basic and diluted):
Income (loss) from continuing operations																			$	0.65		$	(2.94	)	$	3.59		nm
Loss from discontinued operations																			$	(0.01	)	$	(0.01	)	$	—		nm
Net income (loss)																			$	0.64		$	(2.94	)	$	3.58		nm

Calculation of Funds From Operations and Normalized Funds From Operations ⁽⁵⁾

Net income (loss)																			$	45,778		$	(207,622	)
Plus: Depreciation and amortization																			54,713			51,675
Plus: FFO attributable to Select Income REIT investment																			53,609			43,961
Less: Equity in earnings from Select Income REIT																			(27,895		)	(16,002		)
Less: Gain on sale of property																			(79		)	—
Funds from operations																			126,126			(127,988		)
Plus: Acquisition related costs																			363			459
Plus: Loss on issuance of shares by Select Income REIT																			—			42,145
Plus: Loss on impairment of Select Income REIT investment																			—			203,297
Plus: Normalized FFO attributable to Select Income REIT investment																			53,629			51,177
Less: FFO attributable to Select Income REIT investment																			(53,609		)	(43,961		)
Less: Gain on early extinguishment of debt																			(104		)	(34		)
Less: Gain on issuance of shares by Select Income REIT																			(88		)	—
Normalized funds from operations																			$	126,317		$	125,095

Funds from operations per common share (basic and diluted)																			$	1.78		$	(1.81	)
Normalized funds from operations per common share (basic and diluted)																			$	1.78		$	1.77




							Maximum
					Total Number of		Approximate Dollar
					Shares Purchased		Value of Shares that
	Number of				as Part of Publicly		May Yet Be Purchased
	Shares	Average Price			Announced Plans		Under the Plans or
Calendar Month	Purchased ⁽¹⁾	Paid per Share		or Programs		Programs
September 2016	13,209	$	23.63	$	—	$	—
Total	13,209	$	23.63	$	—	$	—