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, 2015~~March 31, 2016

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

Commission File Number 1-34364

GOVERNMENT PROPERTIES INCOME TRUST

(Exact Name of Registrant as Specified in Its Charter)


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

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

(Address of Principal Executive Offices) (Zip Code)

617-219-1440

(Registrant’s Telephone Number, Including Area Code)

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

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

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


Large accelerated filer ☒		Accelerated filer ☐

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

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

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of ~~October 27, 2015:~~April 26, 2016: 71,126,308

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

FORM 10-Q

~~September 30, 2015~~March 31, 2016

INDEX


PART I	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets — ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~	3

	Condensed Consolidated Statements of Cash Flows ~~—Nine~~—Three Months Ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1917

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3229

Item 4.	Controls and Procedures	3430

	Warning Concerning Forward Looking Statements	3431

	Statement Concerning Limited Liability	3734

PART II	Other Information

Item 1A.	Risk Factors	38

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	3835

Item 6.	Exhibits	3936

	Signatures	4037

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

Table of Contents

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,
	2015		2014		2016		2015
ASSETS
Real estate properties:
Land	$	253,058	$	254,008	$	257,716	$	253,058
Buildings and improvements		1,433,993		1,428,472		1,509,921		1,443,074
Total real estate properties, gross		1,687,051		1,682,480		1,767,637		1,696,132
Accumulated depreciation		(246,191)		(219,791)		(265,843)		(255,879)
Total real estate properties, net		1,440,860		1,462,689		1,501,794		1,440,253

Equity investment in Select Income REIT		511,872		680,137		493,259		491,369
Assets of discontinued operations		12,463		13,165		12,502		12,468
Assets of property held for sale		3,079		32,797		3,098		3,098
Acquired real estate leases, net		125,898		150,080		123,300		118,267
Cash and cash equivalents		11,306		13,791		15,698		8,785
Restricted cash		1,330		2,280		713		1,022
Rents receivable, net		40,923		36,239		46,617		45,269
Deferred leasing costs, net		12,616		11,450		17,909		14,299
Deferred financing costs, net		10,587		12,782
Other assets, net		56,104		12,205		44,505		33,680
Total assets	$	2,227,038	$	2,427,615	$	2,259,395	$	2,168,510

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	114,000	$	—	$	311,000	$	117,000
Unsecured term loans		550,000		550,000
Senior unsecured notes, net of discount		347,842		347,423
Mortgage notes payable, including premiums		137,569		187,694
Unsecured term loans, net						546,660		546,490
Senior unsecured notes, net						346,095		345,809
Mortgage notes payable, net						29,053		136,299
Liabilities of discontinued operations		95		150		75		54
Liabilities of property held for sale		35		343		32		43
Accounts payable and other liabilities		48,747		26,471		48,979		50,543
Due to related persons		1,793		2,161		4,380		2,886
Assumed real estate lease obligations, net		13,513		15,924		12,224		12,735
Total liabilities		1,213,594		1,130,166		1,298,498		1,211,859

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 100,000,000 shares
authorized, 71,126,308 and 70,349,227 shares issued and outstanding, respectively		711		703
authorized, 71,126,308 shares issued and outstanding						711		711
Additional paid in capital		1,472,480		1,457,631		1,472,510		1,472,482
Cumulative net income		40,825		248,447		55,873		38,486
Cumulative other comprehensive income (loss)		(129)		37		2,548		(14,867)
Cumulative common distributions		(500,443)		(409,369)		(570,745)		(540,161)
Total shareholders’ equity		1,013,444		1,297,449		960,897		956,651
Total liabilities and shareholders’ equity	$	2,227,038	$	2,427,615	$	2,259,395	$	2,168,510

See accompanying notes.

Table of Contents

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,



2015

2014

2015

2014


Rental income

$
62,092

$
64,158

$
186,864

$
186,406

Expenses:

Real estate taxes

7,735

7,027

22,819

21,005

Utility expenses

5,194

5,327

13,788

15,072

Other operating expenses

12,281

11,685

36,659

33,586

Depreciation and amortization

17,161

17,636

51,675

49,254

Loss on impairment of real estate

—

1,616

—

1,616

Acquisition related costs

270

110

459

1,290

General and administrative

3,714

4,329

11,431

11,537

Total expenses

46,355

47,730

136,831

133,360

Operating income

15,737

16,428

50,033

53,046

Interest and other income

2

10

14

68

Interest expense (including net amortization of debt

premiums and discounts and deferred financing fees

     of $360, $373, $1,020 and $926, respectively)

(9,137)

(8,845)

(27,894)

(18,530)

Gain (loss) on early extinguishment of debt

34

(541)

34

(541)

Loss on issuance of shares by Select Income REIT

(21)

(39)

(42,145)

(39)

Loss on impairment of Select Income REIT investment

—

—

(203,297)

—

Income (loss) from continuing operations before income taxes

and equity in earnings of investees

6,615

7,013

(223,255)

34,004

Income tax benefit (expense)

13

(7)

(49)

(130)

Equity in earnings of investees

10,294

4,910

16,072

4,931

Income (loss) from continuing operations

16,922

11,916

(207,232)

38,805

Income (loss) from discontinued operations

(11)

706

(390)

3,615

Net income (loss)

16,911

12,622

(207,622)

42,420

Other comprehensive income (loss)

Equity in unrealized loss of investees

(355)

(45)

(166)

(3)

Other comprehensive loss

(355)

(45)

(166)

(3)

Comprehensive income (loss)

$
16,556

$
12,577

$
(207,788)

$
42,417

Weighted average common shares outstanding (basic)

71,004

65,481

70,589

58,300

Weighted average common shares outstanding (diluted)

71,021

65,568

70,589

58,385

Per common share amounts:

Income (loss) from continuing operations (basic)

$
0.24

$
0.18

$
(2.94)

$
0.67

Income (loss) from continuing operations (diluted)

$
0.24

$
0.18

$
(2.94)

$
0.66

Income (loss) from discontinued operations (basic and diluted)

$
—

$
0.01

$
(0.01)

$
0.06

Net income (loss) (basic and diluted)

$
0.24

$
0.19

$
(2.94)

$
0.73


	Three Months Ended March 31,
	2016		2015

Rental income	$	63,611	$	62,659

Expenses:
Real estate taxes		7,653		7,410
Utility expenses		4,174		4,571
Other operating expenses		12,911		12,210
Depreciation and amortization		18,324		17,215
Acquisition related costs		152		6
General and administrative		3,526		4,004
Total expenses		46,740		45,416

Operating income		16,871		17,243
Interest income		6		12
Interest expense (including net amortization of debt premium and discounts
and debt issuance costs of $471 and $332, respectively)		(9,364)		(9,302)
Gain on early extinguishment of debt		104		—
Loss on issuance of shares by Select Income REIT		—		(40,771)
Income (loss) from continuing operations before income taxes
and equity in earnings (losses) of investees		7,617		(32,818)
Income tax expense		(15)		(30)
Equity in earnings (losses) of investees		9,934		(316)
Income (loss) from continuing operations		17,536		(33,164)
Loss from discontinued operations		(149)		(206)
Net income (loss)		17,387		(33,370)

Other comprehensive income
Unrealized gain on investment in available for sale securities		12,871		—
Equity in unrealized gain of investees		4,544		58
Other comprehensive income		17,415		58
Comprehensive income (loss)	$	34,802	$	(33,312)

Weighted average common shares outstanding (basic and diluted)		71,031		70,266

Per common share amounts (basic and diluted):
Income (loss) from continuing operations	$	0.25	$	(0.47)
Income (loss) from discontinued operations	$	—	$	—
Net income (loss)	$	0.24	$	(0.47)

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2015		2014		2016		2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(207,622)	$	42,420	$	17,387	$	(33,370)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation		29,115		28,134		10,237		9,626
Net amortization of debt premiums and discounts and deferred financing fees		1,020		926
(Gain) loss on early extinguishment of debt		(34)		541
Net amortization of debt premiums and discounts and debt issuance costs						471		332
Gain on early extinguishment of debt						(104)		—
Straight line rental income		(2,820)		(3,346)		(149)		(663)
Amortization of acquired real estate leases		21,771		20,294		7,712		7,340
Amortization of deferred leasing costs		1,387		1,505		709		556
Other non-cash expenses		1,288		1,719
Loss on impairment of real estate		—		1,616
Increase in carrying value of asset held for sale		—		(2,344)
Net gain on sale of properties		—		(774)
Equity in earnings of investees		(16,072)		(4,931)
Other non-cash (income) expense, net						(105)		507
Equity in (earnings) losses of investees						(9,934)		316
Loss on issuance of shares by Select Income REIT		42,145		39		—		40,771
Loss on impairment of Select Income REIT investment		203,297		—
Distributions of earnings from Select Income REIT		18,850		7,509		9,117		2,176
Change in assets and liabilities:
Restricted cash		950		(612)		309		(762)
Deferred leasing costs		(2,408)		(2,319)		(1,989)		(412)
Rents receivable		456		(2,082)		(1,215)		1,587
Other assets		(865)		(1,687)		1,849		2,699
Accounts payable and accrued expenses		(1,037)		6,044		(4,577)		(2,656)
Due to related persons		(368)		(611)		1,494		201
Net cash provided by operating activities		89,053		92,041		31,212		28,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and deposits		—		(56,351)		(79,244)		—
Real estate improvements		(9,746)		(13,942)		(4,964)		(2,678)
Investment in Select Income REIT		(95,821)		(689,969)		—		(95,821)
Investment in The RMR Group Inc.		(6,467)		—
Investment in Affiliates Insurance Company		—		(825)
Distributions in excess of earnings from Select Income REIT		15,721		2,811		3,342		11,354
Proceeds from sale of properties, net		30,520		16,427		—		30,521
Net cash used in investing activities		(65,793)		(741,849)		(80,866)		(56,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage notes payable		(48,476)		(1,635)		(106,849)		(610)
Proceeds from issuance of common shares, net		—		349,789
Proceeds from issuance of senior notes, net of discount		—		347,217
Proceeds from unsecured term loans		—		500,000
Repayment of unsecured term loans		—		(500,000)
Borrowings on unsecured revolving credit facility		165,000		314,500		204,000		75,000
Repayments on unsecured revolving credit facility		(51,000)		(287,000)		(10,000)		(20,000)
Financing fees		(21)		(5,189)
Repurchase of common shares		(174)		—
Debt issuance costs						—		(16)
Distributions to common shareholders		(91,074)		(70,609)		(30,584)		(30,252)
Net cash (used in) provided by financing activities		(25,745)		647,073
Decrease in cash and cash equivalents		(2,485)		(2,735)
Net cash provided by financing activities						56,567		24,122
Increase (decrease) in cash and cash equivalents						6,913		(4,254)
Cash and cash equivalents at beginning of period		13,791		7,663		8,785		13,791
Cash and cash equivalents at end of period	$	11,306	$	4,928	$	15,698	$	9,537

Supplemental cash flow information:
Interest paid	$	30,107	$	15,533
Income taxes paid		143		126
Non-cash investing activities:
Investment in The RMR Group Inc. paid in common shares	$	13,545	$	—
Real estate acquisition funded with the assumption of mortgage debt	$	—	$	(97,524)
Non-cash financing activities:
Assumption of mortgage debt	$	—	$	97,524

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 ~~the Company,~~ 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, ~~2014,~~2015, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

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

Note 2. Recent Accounting Pronouncements

~~In February 2015,~~On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, ~~issued~~ Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changes how an entity determines the primary beneficiary of a variable interest entity. ~~This update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted.~~ The implementation of this update isdid not ~~expected to~~ have ~~a material~~an impact onin our condensed consolidated financial statements.

~~In April 2015, the~~On January 1, 2016, we adopted FASB ~~issued~~ ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt ~~liability. In August 2015, the FASB clarified the previous ASU~~liability, and ~~issued~~ ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit ~~Arrangements—~~Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. ~~These updates are effective for interim and annual reporting periods beginning after December 15, 2015 and require retrospective application.~~ The implementation of these updates ~~is not expected to cause any material changes to our condensed consolidated financial statements other than~~resulted in the reclassification of certain of our capitalized debt issuance costs ~~from assets~~as an offset to ~~contra liabilities on~~the associated debt liability in our condensed consolidated balance sheets. ~~Debt~~The classification of capitalized debt issuance costs related to ~~line of~~our unsecured revolving credit ~~arrangements will remain classified as assets~~facility remains unchanged in accordance with ASU No. 2015-15. ~~When these updates are adopted, deferred financing costs~~As of ~~$10,587 and $12,782 as of September 30, 2015 and~~ December 31, ~~2014,~~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, ~~will be~~were reclassified from assets to the ~~related~~associated debt ~~obligations on~~liability in our condensed consolidated balance sheets.

~~In May 2014, the~~On January 1, 2016, we adopted FASB ~~issued ASU No. 2014-09,~~ ~~Revenue From Contracts With Customers~~, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While this ASU specifically references contracts with customers, it may also apply to certain other transactions such as the sale of real estate. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017. We are continuing to evaluate this guidance; however, we do not expect its adoption to have a material impact on our condensed consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from this ASU.

~~In September 2015, the FASB issued~~ 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 ~~that~~they would have ~~been~~ recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements.

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

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, ~~2015,~~2018, with early adoption permitted. ~~The implementation~~We are currently assessing the potential impact the adoption of ~~this update is not expected to~~ASU No. 2016-02 will have ~~a material impact on~~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.

Note 3. Per Common Share Amounts

We calculate basic earnings per common share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. We calculate diluted earnings per common share by using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares and the related impact on earnings, are considered when calculating diluted earnings per share. 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,
		2015		2014		2015		2014			2016		2015
Weighted average common shares for basic earnings per share	Weighted average common shares for basic earnings per share		71,004		65,481		70,589		58,300	Weighted average common shares for basic earnings per share		71,031		70,266
Effect of dilutive securities: unvested share awards	Effect of dilutive securities: unvested share awards		17		87		-		85	Effect of dilutive securities: unvested share awards		-		-
Weighted average common shares for diluted earnings per share	Weighted average common shares for diluted earnings per share		71,021		65,568		70,589		58,385	Weighted average common shares for diluted earnings per share		71,031		70,266

Note 4. Real Estate Properties

As of ~~September 30, 2015,~~March 31, 2016, we owned 7172 properties ~~(91~~(92 buildings), with an undepreciated carrying value of ~~$1,690,397,~~$1,770,983, excluding one property (one building) classified as discontinued operations with an undepreciated carrying value of $12,260. We generally lease space inat our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leases expiring between ~~2015~~2016 and ~~2030. Certain of our government tenants have the right to terminate their leases before the lease term expires.~~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, 2015,~~March 31, 2016, we entered into 1820 leases for ~~207,256~~522,962 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 ~~3.3~~11.6 years and we made commitments for approximately $1,748 of leasing related costs. During the nine months ended September 30, 2015, we entered into 41 leases for 606,357 rentable square feet for a weighted (by rentable square feet) average lease term of 7.9 years and we made commitments for approximately $9,230$20,469 of leasing related costs. We have estimated unspent leasing related obligations of ~~$8,629~~$22,752 as of ~~September 30, 2015.~~March 31, 2016. In addition, prior to the commencement of the lease, we have committed to redevelop and expand the existing property referenced above at an estimated cost of approximately $12,800.

Acquisition Activities

~~In August 2015,~~During the three months ended March 31, 2016, we ~~terminated two previously disclosed agreements to acquire two office properties (two buildings) for an aggregate purchase price of $25,950.~~

~~Disposition Activities – Continuing Operations~~

the estimated fair values of

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

the acquired assets and assumed liabilities is presented in the table below. The allocation of the purchase price is based on preliminary estimates and may change upon completion of third party appraisals.

Number

Buildings

Acquired

Other

Acquisition

Properties/

Square

Purchase

and

Acquired

Lease

Assumed

Date

Location

Type

Buildings

Feet

Price

Land

Improvements

Leases

Obligations

Liabilities

January 2016

Sacramento, CA

Office

1 / 1

337,811

79,244

4,658

61,330

13,525

(269)

—

In April 2016, we exercised our option to purchase for $1,623 an adjacent land parcel at one of our existing properties in Atlanta, GA. We expect this transaction to close during the third quarter of 2016.

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

Disposition Activities – Continuing Operations

In ~~May~~ 2015, we began marketing for sale an office property ~~(one~~(one building) ~~located~~ in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 asat March 31, 2016. In March 2016, we entered into an agreement to sell this property. The contract sales price is $4,500, which amount is before transaction costs we may incur. This sale is subject to conditions and is currently expected to occur in the third quarter of ~~September 30, 2015.~~ 2016. We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or ~~what the~~that its terms ~~for any such sale would be.~~will not change. We have classified this property as held for sale as of ~~September 30, 2015.~~March 31, 2016. The results of operations for this property are included in continuing operations in our condensed consolidated financial statements. Summarized balance sheet information for the property is as follows:


	~~September 30,~~
	~~2015~~
~~Real estate properties, net~~	$	~~3,071~~
~~Rents receivable~~		1
~~Other assets~~		7
~~Assets of property held for sale~~	$	~~3,079~~

~~Other liabilities~~	$	35
~~Liabilities of property held for sale~~	$	35


	March 31,		December 31,
	2016		2015
Real estate properties, net	$	3,071	$	3,071
Rents receivable		-		1
Other assets		27		26
Assets of property held for sale	$	3,098	$	3,098

Other liabilities	$	32	$	43
Liabilities of property held for sale	$	32	$	43

Disposition Activities – Discontinued Operations

In ~~July 2015,~~March 2016, we entered into an agreement to sell an office property ~~(one~~(one building) ~~located~~ in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at ~~September 30, 2015, for a~~March 31, 2016. The contract sales price is $14,750, which amount is before transaction costs we may incur. This sale is subject to conditions, including the purchaser obtaining certain zoning entitlements, and is currently expected to occur in the first quarter of ~~$16,500, excluding closing costs.~~2017. ~~In September 2015, this agreement was terminated. We continue to market this property for sale.~~ We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or ~~what the~~that its terms ~~for any such sale would be.~~will not change.

~~Results of operations for two properties (two buildings) we sold in February 2014 and September 2014 and the Falls Church, VA~~ We have classified this property, (~~one building) disclosed above~~ which was held for sale prior to our adoption of ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, ~~are classified~~ as a discontinued ~~operations~~operation in our condensed consolidated financial statements. Summarized balance sheet and income statement information for the ~~properties classified as discontinued operations~~property 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)

Balance Sheets:


	September 30,		December 31,		March 31,		December 31,
	2015		2014		2016		2015
Real estate properties, net	$	12,260	$	12,260	$	12,260	$	12,260
Rents receivable		3		782		17		-
Other assets		200		123		225		208
Assets of discontinued operations	$	12,463	$	13,165	$	12,502	$	12,468

Other liabilities	$	95	$	150	$	75	$	54
Liabilities of discontinued operations	$	95	$	150	$	75	$	54

Statements of Operations

Three Months ended September 30,

Nine Months ended September 30,


2015

2014

2015

2014


Rental income

$
28

$
166

$
86

$
1,652

Real estate taxes

71

(100)

(69)

(373)

Utility expenses

(46)

(50)

(124)

(204)

Other operating expenses

(35)

(41)

(197)

(426)

General and administrative

(29)

(43)

(86)

(152)

Increase in carrying value of asset held for sale

—

—

—

2,344

Net gain on sale of properties

—

774

—

774

Income (loss) from discontinued operations

$
(11)

$
706

$
(390)

$
3,615


	Three Months ended March 31,
	2016		2015
Rental income	$	28	$	31
Real estate taxes		(23)		(70)
Utility expenses		(50)		(67)
Other operating expenses		(76)		(71)
General and administrative		(28)		(29)
Loss from discontinued operations	$	(149)	$	(206)

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 its respective legislature or other funding authority does not appropriate the funding necessary for the

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(unaudited)~~

government tenant to meet its lease ~~obligations. We~~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 assessment of the likelihood of lease cancellation on a separate lease basis.

We increased rental income to record revenue on a straight line basis by ~~$613~~$149 and ~~$1,135~~$663 for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and $2,820 and $3,378 for the nine months ended September 30, 2015 and 2014,~~ respectively. Rents receivable include ~~$17,837~~$19,144 and ~~$15,017~~$18,995 of straight line rent receivables at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively.

Note 6. Concentration

Tenant and Credit Concentration

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. The U.S. Government, 12 state governments, and ~~the United Nations~~three other government tenants combined were responsible for approximately 92.8% and ~~93.2%~~92.7% of our annualized rental income, excluding ~~properties~~one property (one building) classified as discontinued operations, as of ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately ~~67.5%~~64.6% and ~~69.6%~~67.7% of our annualized rental income, excluding ~~properties~~one property classified as discontinued operations, as of ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Geographic Concentration

At ~~September 30, 2015,~~March 31, 2016, our 7172 properties ~~(91~~(92 buildings), excluding one property (one building) classified as discontinued operations, were located in 31 states and the District of Columbia. Properties located in California, Virginia, the District of Columbia, Georgia, Maryland, New York ~~Maryland~~ and Massachusetts were responsible for approximately ~~11.5%~~14.6%, ~~10.6%~~10.0%, ~~10.3%~~9.9%, ~~8.7%~~8.8%, ~~8.7%~~8.2%, ~~7.4%~~8.0% and ~~5.7%~~5.3% of our annualized rental income as of ~~September 30, 2015,~~March 31, 2016, respectively.

Note 7. Indebtedness

~~At September 30, 2015~~Our principal debt obligations at March 31, 2016 were: (1) outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) $550,000 aggregate outstanding principal amount of term loans (3) $350,000 of senior unsecured notes; and ~~December 31, 2014, our outstanding indebtedness consisted~~(4) $28,592 aggregate principal amount of ~~the following:~~mortgage notes.

September 30,

December 31,

2015

2014

Unsecured revolving credit facility, due in 2019

$
114,000

$
—

Unsecured term loan, due in 2020

300,000

300,000

Unsecured term loan, due in 2022

250,000

250,000

Senior unsecured notes, 3.75% interest rate, including unamortized discounts of $2,158 and $2,577, respectively, due in 2019

347,842

347,423

Mortgage note payable, 5.55% interest rate, including unamortized premiums of $878 and $2,167, respectively, due in 2016(1)

83,878

85,167

Mortgage note payable, 6.21% interest rate, due in 2016(1)

23,586

23,833

Mortgage note payable, 5.88% interest rate, due in 2021(1)

14,215

14,374

Mortgage note payable, 7.00% interest rate, including unamortized premiums of $504 and $605, respectively, due in 2019(1)

9,291

9,563

Mortgage note payable, 8.15% interest rate, including unamortized premiums of $317 and $398, respectively, due in 2021(1)

6,599

7,339

Mortgage note payable, 5.73% interest rate, including unamortized premiums of $0 and $177, respectively, due in 2015(1)(2)

—

47,418

$
1,149,411

$
1,085,117

~~(1)~~

We assumed these mortgages in connection with our acquisitions of certain properties. The stated interest rates for these mortgage debts are the contractually stated rates. We recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value premiums, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(unaudited)~~

~~(2)~~

~~This mortgage was repaid, at par, in July 2015.~~

Our $750,000 unsecured revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our unsecured revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting ~~certain~~ other conditions, we have an option to extend the stated maturity date of our unsecured revolving credit facility by one year to January 31, 2020. ~~Borrowings~~We can borrow, repay and reborrow funds available under our unsecured revolving credit facility ~~bear~~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, 2015.~~March 31, 2016, on borrowings under our unsecured revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility, which was 25 basis points per annum at ~~September 30, 2015.~~March 31, 2016. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2015,~~March 31, 2016, the annual interest rate payable on borrowings under our unsecured revolving credit facility was ~~1.4%~~1.6% and the weighted average annual interest rate for borrowings under our unsecured revolving credit facility was ~~1.4%~~1.6% and ~~1.5%~~2.0%, respectively, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 1.7% for both the three and nine months ended~~ ~~September 30, 2014~~. As of ~~September 30, 2015~~March 31, 2016 and ~~October 27, 2015,~~April 26, 2016, we had ~~$114,000~~$311,000 and ~~$107,000~~$303,000 outstanding under our unsecured revolving credit facility, respectively.

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

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 unsecured term loan is repaid on or prior ~~to November 22, 2015, a prepayment premium of 2.0% of the amount repaid will be payable. If our $250,000 term loan is repaid during the period from November 22, 2015~~ 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. ~~The amount outstanding under our $250,000 term loan bears~~We are required to pay interest at a rate of LIBOR plus a premium, which was 180 basis points ~~at September 30, 2015.~~per annum as of March 31, 2016, on the amount outstanding under our $250,000 unsecured term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2015,~~March 31, 2016, the annual interest rate for the amount outstanding under our $250,000 unsecured term loan was ~~2.0%~~2.2%. The weighted average annual interest rate under our $250,000 unsecured term loan was 2.2% and 2.0%, respectively, for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2015.~~March 31, 2016 and 2015.

Our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan and our $250,000 unsecured 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 $350,000 of 3.75% senior unsecured notes due in 2019 are governed by an indenture and a supplement to the indenture, and require semi-annual payments of interest only through maturity. The outstanding amount of these notes

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

may be prepaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.

Our credit agreement and senior unsecured notes indenture and its supplement 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, ~~(formerly known as Reit Management & Research LLC),~~ or RMR LLC, ceasing to act as our business manager and property manager. Our credit agreement and our senior unsecured notes indenture and its supplement ~~and our credit agreement~~ also contain a number of covenants, including covenants that restrict our ability to incur debts, ~~or to make distributions under certain circumstances and~~ require us to maintain certain financial ~~ratios.~~ratios and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior unsecured notes indenture and its supplement ~~and our credit agreement~~ at ~~September 30, 2015.~~March 31, 2016.

In ~~July 2015,~~February 2016, we repaid, at par, a ~~$47,083~~$23,473 mortgage note ~~bearing~~requiring annual interest ~~at 5.73%~~of 6.21% which was secured by aone office property (~~two buildings)~~(one building) located in ~~Indianapolis, IN.~~Landover, MD. This mortgage note was scheduled to mature in ~~October 2015. As~~August 2016. We recorded a ~~result~~loss on extinguishment of debt of $21 in the three months ended March 31, 2016, which represented unamortized debt issuance costs related to this ~~repayment,~~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 ~~$34~~$125 in the three months ended ~~September 30, 2015,~~March 31, 2016, which represented the net unamortized debt premium and ~~deferred finance fees~~debt issuance costs related to this note.

At March 31, 2016, three of our properties (three buildings) with an aggregate net book value of $54,684 secured three mortgage notes with an aggregate principal amount of $28,592. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

910

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

At September 30, 2015, five of our properties (six buildings) with an aggregate net book value of $200,435 secured five mortgage notes that we assumed in connection with the acquisition of such properties. Our mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

Note 8. Fair Value of Assets and Liabilities

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


				Fair Value at Reporting Date Using
				Quoted Prices in				Significant
		Estimated		Active Markets for		Significant Other		Unobservable
		Fair		Identical Assets		Observable Inputs		Inputs
Description		Value		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements
	Assets:
	Investment in RMR Inc. (1)	$	30,368	$	30,368	$	—	$	—
Non-Recurring Fair Value Measurements
	Assets:
	Property held for sale and classified as discontinued operations (2)	$	12,260	$	—	$	—	$	12,260

⁽¹⁾

Our 1,214,225 shares of class A common stock of The RMR Group Inc., or RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $26,888 as of March 31, 2016. The net unrealized gain of $3,480 for these shares as of March 31, 2016 is included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets.

⁽²⁾

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

In addition to the assets described in the table above, our financial instruments include cash and cash equivalents, restricted cash, rents receivable, mortgage notes payable, accounts payable, senior unsecured notes, an unsecured revolving credit facility, unsecured term loans, amounts due to related persons, other accrued expenses and security deposits. At ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements due to their short term nature or variable interest rates, except as follows:


	As of September 30, 2015				As of December 31, 2014				As of March 31, 2016				As of December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount (1)		Fair Value		Carrying Amount (1)		Fair Value
Senior unsecured notes, 3.75% interest rate, due in 2019	$	347,842	$	358,206	$	347,423	$	356,129	$	346,095	$	358,376	$	345,809	$	351,692
Mortgage note payable, 5.55% interest rate, due in 2016(1)		83,878		83,866		85,167		85,171
Mortgage note payable, 6.21% interest rate, due in 2016(1)		23,586		24,400		23,833		25,394
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~~(1)~~(2)		14,215		14,965		14,374		15,249		13,994		14,921		14,045		14,678
Mortgage note payable, 7.00% interest rate, due in 2019~~(1)~~(2)		9,291		9,885		9,563		10,275		9,055		9,600		9,145		9,645
Mortgage note payable, 8.15% interest rate, due in 2021~~(1)~~(2)		6,599		7,066		7,339		7,956		6,004		6,506		6,258		6,711
Mortgage note payable, 5.73% interest rate, due in 2015(1)(2)		—		—		47,418		48,233
	$	485,411	$	498,388	$	535,117	$	548,407	$	375,148	$	389,403	$	482,108	$	490,221

⁽¹⁾

Carrying amount includes certain unamortized debt issuance costs and unamortized premiums and discounts.

⁽²⁾

We assumed these mortgages in connection with our acquisitions of the encumbered properties. The stated interest rates for these mortgage debts are the contractually stated rates. We recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value premiums, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.

~~(2)~~⁽³⁾

This mortgage note was repaid, at par, in ~~July 2015.~~February 2016.

⁽⁴⁾

This mortgage note was repaid, at par, in March 2016.

We estimate the fair value of our senior unsecured notes using an average of the bid and ask price of the notes as of the measurement date (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Table of Contents

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 ~~26, 2015,~~25, 2016, we paid a regular quarterly distribution to common shareholders of ~~$0.43 per share, or $30,252. On May 26, 2015, we paid a distribution to common shareholders~~record on January 22, 2016 of $0.43 per share, or ~~$30,256.~~ $30,584.

On ~~August 24, 2015, we paid a distribution to common shareholders of $0.43 per share, or $30,566. On October 12, 2015,~~April 13, 2016, we declared a regular quarterly distribution payable to common shareholders of record on ~~October 23, 2015~~April 25, 2016, in the amount of $0.43 per share, or $30,584. We expect to pay this distribution on or about ~~November~~May 23, ~~2015~~2016 using cash on hand and borrowings under our unsecured revolving credit facility.

~~Share Issuances~~Cumulative Other Comprehensive Income (Loss)

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

During the three and nine months ended September 30, 2015, we issued zero and 23,222, respectively, of our common shares to RMR LLC, as part of the business management fee payable by us under our business management agreement with RMR LLC. See Note 10 for further information regarding this agreement.


		Unrealized Gain (Loss)		Equity in
		on Investment in		Unrealized Gain
		Available for		(Loss) of
		Sale Securities		Investees	Total
Balance at December 31, 2015	$	(9,391)	$	(5,476)	$	(14,867)
Other comprehensive income before reclassifications		12,871		4,545		17,416
Amounts reclassified from cumulative other comprehensive income (loss) to net income (1)		-		(1)		(1)
Net current period other comprehensive income		12,871		4,544		17,415
Balance at March 31, 2016	$	3,480	$	(932)	$	2,548

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(unaudited)~~

⁽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).

On May 12, 2015, we granted 2,500 of our common shares, valued at $19.75 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees as part of their annual compensation.

On June 5, 2015, we issued 700,000 of our common shares in connection with our acquisition of an interest in The RMR Group Inc. (formerly known as Reit Management & Research Inc.), or RMR Inc., as further described in Note 10. RMR Inc. is the parent company of RMR LLC, our manager.

On September 2, 2015, pursuant to our 2009 Incentive Share Award Plan, we granted an aggregate of 53,100 of our common shares to our officers and certain other employees of our manager, RMR LLC, valued at $15.84 per share, the closing price of our common shares on the NYSE on that day. On September 24, 2015, we purchased an aggregate of 10,721 of our common shares for $16.12 per share, the closing price of our common shares on the NYSE on that day, 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 restricted common shares.

Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC ~~RMR Inc.,~~ and others related to ~~them,~~it, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees ~~directors~~ or officers of ~~us, RMR Inc. or RMR LLC.~~us. These relationships include our ownership of approximately 27.9% of the outstanding common shares of SIR, at March 31, 2016. For further information about these and other such relationships and certain other related person transactions, please refer to our Annual ~~Report and~~Report.

RMR LLC: Pursuant to our ~~Current Report on Form 8-K filed with the Securities and Exchange Commission, or SEC, on June 8, 2015.~~

~~Acquisition of Interest in our Manager:~~ ~~On June 5, 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides~~business management services – Hospitality Properties Trust, or HPT, Select Income REIT, or SIR, and Senior Housing Properties Trust, or SNH, and collectively with HPT and SIR, the Other REITs – participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired an ownership interest in RMR Inc.

~~The Up-C Transaction was completed pursuant to a transaction~~ agreement ~~by and among us, our manager, RMR LLC, its then sole member, Reit Management & Research Trust, or RMR Trust, and RMR Inc. and similar transaction agreements that each Other REIT entered into~~ with RMR LLC, ~~RMR Trust~~we recognized net business management fees of $2,508 and ~~RMR Inc. RMR Trust is owned by our Managing Trustees, Barry~~$2,561 for the three months ended March 31, 2016 and ~~Adam Portnoy. Pursuant~~2015, respectively. No incentive fees were estimated to ~~these transaction agreements: we contributed~~be payable to RMR ~~Inc. 700,000~~LLC for the three months ended March 31, 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 11,157 of our common shares ~~and $3,917 in cash; HPT contributed~~ to RMR Inc. 1,490,000 of its common shares and $12,622 in cash; SIR contributed to RMR Inc. 880,000 of its common shares and $15,880 in cash; SNH contributed to RMR Inc. 2,345,000 of its common shares and $13,967 in cash; RMR Trust contributed to RMR Inc. $11,520 in cash, which RMR Inc. contributed to RMR LLC; RMR LLC issued 1,000,000 of its class B membership units to RMR Inc.; RMR Inc. issued 1,541,201 shares of its class A common stock to us, 5,019,121 shares of its class A common stock to HPT, 3,166,891 shares of its class A common stock to SIR, 5,272,787 shares of its class A common stock to SNH and 1,000,000 shares of its class B-1 common stock and 15,000,000 shares of its class B-2 common stock to RMR Trust; RMR Trust delivered 15,000,000for the three months ended March 31, 2015 as payment for a part of the ~~30,000,000 class A membership units of RMR LLC which RMR Trust then owned to RMR Inc.; and RMR Inc. delivered to RMR Trust~~business management fee we recognized for that period. Beginning June 2015, all management fees under our ~~common shares, the common shares of the Other REITs and the cash which had been contributed by us and the Other REITs to RMR Inc.~~

~~The class A common stock and class B-1 common stock of RMR Inc. share ratably as a single class~~business management agreement are paid in dividends and other distributions of RMR Inc. when and if declared by the board of directors of RMR Inc. and have the same rights in a liquidation of RMR Inc. The class B-1 common stock of RMR Inc. is convertible into class A common stock of RMR Inc. on a 1:1 basis. The class A common stock of RMR Inc. has one vote per share. The class B-1 common stock of RMR Inc. has 10 votes per share. The class B-2 common stock of RMR Inc. has no economic interest in RMR Inc., but has 10 votes per share and is paired with the class A membership units of RMR LLC owned by RMR Trust. The class A membership units of RMR LLC owned by RMR Trust are required to be redeemed by RMR LLC upon request by RMR Trust for class A common stock of RMR Inc. on a 1:1 basis, or if RMR Inc. elects, cash. Under the governing documents of RMR Inc., upon the redemption of a class A membership unit of RMR LLC, the class B-2 common stock of RMR Inc. “paired” with an equal number of class A membership units are cancelled for no additional consideration.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

~~As part of the Up-C Transaction and concurrently with entering the transaction agreements, on June 5, 2015:~~

We entered into an amended and restated business management agreement, or the amended business management agreement, with RMR LLC and an amended and restated property management agreement, or the amended property management agreement, with RMR LLC. The amendments made by these agreements are described below in this Note under “Amendment and Restatement of Management Agreements with RMR LLC.” Each Other REIT also entered amended and restated business and property management agreements with RMR LLC which made similar amendments to their management agreements with RMR LLC.

We entered into a registration rights agreement with RMR Inc. covering the class A common stock of RMR Inc. that we received in the Up-C Transaction, pursuant to which we received demand and piggyback registration rights, subject to certain limitations. Each Other REIT entered into a similar registration rights agreement with RMR Inc.

We entered into a lock up and registration rights agreement with RMR Trust and Barry and Adam Portnoy pursuant to which RMR Trust and Barry and Adam Portnoy agreed not to transfer the 700,000 of our common shares RMR Trust received in the Up-C Transaction for a period of 10 years and we granted them certain registration rights, subject to certain limited exceptions. Each Other REIT also entered into a similar lock up and registration rights agreement with RMR Trust and Barry and Adam Portnoy.

As a result of the Up-C Transaction: RMR LLC became a subsidiary of RMR Inc.; RMR Inc. became the managing member of RMR LLC; through our ownership of class A common stock of RMR Inc., we currently have an indirect 5.0% economic interest in RMR LLC; through their ownership of class A common stock of RMR Inc., HPT, SIR and SNH currently have an indirect 16.2%, 10.2% and 17.0% economic interest in RMR LLC, respectively; and RMR Trust through its ownership of class B-1 common stock of RMR Inc., class B-2 common stock of RMR Inc. and class A membership units of RMR LLC currently directly and indirectly has a 51.6% economic interest in RMR LLC and controls 91.4% of the voting power of outstanding capital stock of RMR Inc.

Pursuant to the transaction agreements, we and each Other REIT agreed to distribute approximately half of the shares of class A common stock of RMR Inc. received in the Up-C Transaction to our respective shareholders as a special distribution, and RMR Inc. agreed to facilitate this distribution by filing a registration statement with the SEC to register the shares of class A common stock of RMR Inc. to be distributed and by seeking a listing of those shares on a national stock exchange upon the registration statement being declared effective by the SEC. The distribution of class A common stock of RMR Inc. that we and the Other REITs have agreed to make to our and the Other REITs’ shareholders will be made only after a registration statement, including a prospectus, is declared effective by the SEC.

~~Amendment and Restatement of Management Agreements with RMR LLC~~: As part of the Up-C Transaction, on June 5, 2015, we and RMR LLC entered into the amended business management agreement, which amended and restated our previous business management agreement with RMR LLC, and the amended property management agreement, which amended and restated our previous property management agreement with RMR LLC. Our amended business management agreement and amended property management agreement are referred to together in this Note as our amended management agreements. Our amended management agreements were effective as of June 5, 2015.

Our amended management agreements have terms that end on December 31, 2035, and automatically extend on December 31st of each year for an additional year, so that the terms of the agreements thereafter end on the 20th anniversary of the date of the extension. We have the right to terminate each amended management agreement: (i) at any time on 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined therein, (iii) on 60 days’ written notice given within 60 days after the end of any calendar year for a performance reason, as defined therein, and (iv) by written notice during the 12 months following a change of control of RMR LLC, as defined therein. RMR LLC has the right to terminate the amended management agreements for good reason, as defined therein.

If we terminate one or both of our amended management agreements for convenience, or if RMR LLC terminates one or both of our amended management agreements for good reason, we have agreed to pay RMR LLC a termination fee in an amount equal to the sum of the present values of the monthly future fees, as defined therein, for the terminated amended management agreement(s) for the remaining term. If we terminate one or both of our amended management agreements for a performance

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(unaudited)~~

reason, as defined therein, we have agreed to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years. We are not required to pay any termination fee if we terminate our amended management agreements for cause or as a result of a change of control of RMR LLC.

~~Accounting for Investment in RMR Inc.:~~ On June 5, 2015, we acquired 1,541,201 shares of class A common stock of RMR Inc. for $17,462, excluding transaction costs. We have concluded, for accounting purposes, that the consideration paid for this investment in RMR Inc.’s shares of class A common stock represented a discount to the fair value of these shares. We account for this investment under the cost method of accounting and have recorded this investment at its estimated fair value of $39,833 as of June 5, 2015 using Level 3 inputs as defined in the fair value hierarchy under GAAP. As a result, we recorded a liability for the amount by which the estimated fair value exceeded the price we paid for these shares and which amount we are amortizing as described below. As of September 30, 2015, the unamortized balance of this liability was $22,025 and it is included in accounts payable and other liabilities in our condensed consolidated balance sheet. Our investment is included in other assets in our condensed consolidated balance sheet and the carrying value of our investment was $42,384, including transaction costs, as of September 30, 2015. We believe the carrying value of our investment in RMR Inc. as of September 30, 2015 approximates its estimated fair value for accounting purposes. The liability related to the acquisition of these shares is being amortized on a straight line basis over the 20 year life of the business and property management agreements with RMR LLC as a reduction to business management fees and property management fees, which are included in general and administrative and other operating expenses, respectively, in our condensed consolidated statements of comprehensive income. Amortization of the liability, included in general and administrative expense and other operating expenses for the three and nine months ended September 30, 2015, totaled $281 and $346, respectively.

~~RMR LLC Management Fees and Reimbursements~~: We recognized business management fees of $2,438 and $2,643 for the three months ended September 30, 2015 and 2014, respectively, and $7,482 and $7,578 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and 2014, no incentive fees were estimated to be payable to RMR LLC for 2015 and 2014, respectively. The business management fees we recognized for the 2015 and 2014 periods are included in general and administrative expenses in our condensed consolidated financial statements. In accordance with the terms of our previous business management agreement, we issued 19,339 and 27,103 of our common shares to RMR LLC for the nine months ended September 30, 2015 and 2014, respectively, as payment for portions of the base business management fees we recognized for those periods. Our amended business management agreement requires that 100% of the management fee due to RMR LLC be paid by us in cash.

Pursuant to our property management agreement with RMR LLC, ~~the~~we recognized aggregate net property management ~~fees, including~~and construction supervision fees ~~we recognized were $1,930~~of $2,109 and ~~$2,095~~$2,016 for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and $5,861 and $6,034 for the nine months ended September 30, 2015 and 2014,~~ respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

~~Pursuant to~~We are generally responsible for all of our ~~previous and amended management agreements with~~operating expenses, including certain expenses incurred by RMR LLC ~~we are responsible for paying all of the~~on our behalf. Our property level operating ~~costs which costs~~expenses are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. ~~The total of those~~We reimbursed RMR LLC $2,944 and $2,510 for property management related ~~reimbursements paid to RMR LLC~~expenses for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014 were $3,011 and $2,312 respectively, and $8,478 and $6,332 for the nine months ended September 30, 2015 and 2014, respectively, and~~respectively; these amounts are included in ~~property~~other operating expenses in our condensed consolidated ~~financial~~ statements ~~for these periods. In addition, we~~of comprehensive income (loss).

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plan and we accrue estimated amounts for such share grants based upon historical practices throughout the year. In September 2015 and 2014, we made annual share grants to RMR LLC employees of 53,100 and 51,150 of our common shares, respectively. In September 2015, we purchased 10,721 of our common shares, at the closing price for our common shares on the NYSE on the date of purchase, from certain of our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares.plan. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts ~~accrued~~recognized as expense for share grants to RMR LLC employees and internal audit costs were ~~$292~~$234 and ~~$508~~$314 for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and $725 and $973 for the nine months ended September 30, 2015 and 2014, respectively, and~~respectively; these amounts are included in ~~our~~ general and administrative expenses ~~for these periods.~~in our condensed consolidated statements of comprehensive income (loss).

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~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(unaudited)~~

~~Leases with RMR LLC~~: We lease office space to RMR LLC in certain of our properties for its property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of approximately ~~$111~~$91 and ~~$14~~$15 for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and approximately $278 and $47 for the nine months ended September 30, 2015 and 2014,~~ respectively.

~~SIR:~~RMR Inc. On February 28, 2015, we entered into a share purchase agreement, or the GOV Purchase Agreement, with Lakewood Capital Partners, LP, or Lakewood, the other persons who are members of a group with Lakewood, or, together with Lakewood, the Lakewood Parties, and, for the purpose of specified sections, SIR, pursuant to which, on March 4, 2015, we acquired 3,418,421 common shares of SIR from Lakewood for a cash purchase price equal to approximately $95,203. On February 28, 2015, the SIR common shares that we acquired pursuant to the GOV Purchase Agreement represented approximately 3.9% of SIR’s outstanding common shares. We funded our acquisition of these SIR common shares with cash on hand and borrowings under our revolving credit facility. As of September 30, 2015, we owned 24,918,421 SIR common shares, or approximately 27.9% of SIR’s total outstanding common shares.

The GOV Purchase Agreement contains (i) standstill provisions, pursuant to which the Lakewood Parties agreed not to take certain actions with respect to our securities, or those of SIR, for a 50-year period and (ii) voting provisions, pursuant to which the Lakewood Parties agreed to cause our securities, or those of SIR, that they or any of their affiliates own as of a record date for a meeting of our or SIR’s shareholders to be present and voted at such meeting in favor of all actions recommended by the board of trustees of such company.

On February 28, 2015, our Managing Trustees, Messrs. Barry and Adam Portnoy, entered into separate share purchase agreements with the Lakewood Parties, with provisions similar to the GOV Purchase Agreement, including the per share purchase price, pursuant to which, on March 4, 2015, Messrs. Barry Portnoy and Adam Portnoy acquired 107,606 and 87,606 SIR common shares, respectively, from Lakewood and, on March 5, 2015, Messrs. Barry Portnoy and Adam Portnoy acquired 2,429 and 2,429 SIR common shares, respectively, from Mr. William H. Lenehan, one of the Lakewood Parties. Concurrently with entering into the agreements among us, Messrs. Barry Portnoy and Adam Portnoy and the Lakewood Parties, Lakewood withdrew its nomination of Mr. Lenehan for election to SIR’s board of trustees at SIR’s 2015 annual meeting of shareholders. See Note 11 for further information regarding our investment in SIR.

~~AIC:~~ As of September 30, 2015, our investment in Affiliates Insurance Company, or AIC, an Indiana insurance company, had a carrying value of $6,926, which amount is included in other assets on our condensed consolidated balance sheet. We recognized income (loss) of ($24) and $38 related to our investment in AIC for the three months ended September 30, 2015 and 2014, respectively, and $70 and $59 for the nine months ended September 30, 2015 and 2014, respectively. Our other comprehensive income (loss) includes unrealized gains (losses) on securities held for sale which are owned by AIC of ($72) and ($33) for the three months ended September 30, 2015 and 2014, respectively, and ($91) and $8 for the nine months ended September 30, 2015 and 2014, respectively.

: In June 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services, including SIR, or collectively, the Other REITs, participated in a transaction whereby we and the Other REITs each acquired shares of class A common stock of RMR Inc. and simultaneously amended our business and property management agreements with RMR LLC to, among other ~~shareholders~~things, provide for continuing 20 year terms. RMR Inc. is the managing member of ~~AIC renewed~~RMR LLC and RMR LLC is a subsidiary of RMR Inc. The controlling shareholder of RMR Inc., ABP Trust, is owned by our ~~participation in an insurance program arranged by AIC.~~ Managing Trustees.

In connection with ~~that renewal,~~our acquisition of shares of class A common stock of RMR Inc., we ~~purchased~~recorded a three year combined property insurance policy providing $500,000 of coverage annually with the premium to be paid annually and a one year combined policy providing terrorism coverage of $200,000 for our properties which policies were arranged by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately $1,277 in connection with these policiesliability for the ~~policy year ending June 30,~~amount by which the estimated fair value of these shares exceeded the price we paid for these shares; this liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets. We are amortizing this liability ratably through December 31, 2035 as a reduction to our management fees expense. For the three months ended March 31, 2016, we amortized $272 of this liability, which amount is reflected in the net business management and property management fee amounts for the period referenced above. As of March 31, 2016, the unamortized amount of this liability was $21,482.

As of March 31, 2016, we own 1,214,225 shares of class A common stock of RMR Inc. We receive dividends on these shares as declared and paid by RMR Inc. to all holders of shares of RMR Inc. class A common stock. We did not receive any dividends on these shares during the three months ended March 31, 2016. However, on April 13, 2016, RMR Inc. declared a dividend of $0.2993 on its shares of class A common stock payable to shareholders of record on April 25, 2016. RMR Inc. has indicated that this dividend represents a regular quarterly dividend of $0.25 per share of class A common stock for the quarter ended March 31, 2016 plus a pro rata dividend of $0.0493 per share of class A common stock for the period from December 14, 2015 to December 31, 2015. RMR Inc. has indicated that it expects to pay this dividend on or about May 19, 2016.

SIR: We receive distributions on the common shares of SIR we own as declared and paid by SIR to all holders of its common shares. During the three months ended March 31, 2016 and ~~this amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.~~

~~Directors’ and Officers’ Liability Insurance: In August~~ 2015, we ~~extended through September 2017~~received distributions of $12,459 and $13,530, respectively, on our ~~combined directors' and officers' insurance policy with RMR LLC and five other companies managed by RMR LLC~~SIR common shares. In addition, on April 13, 2016, SIR declared a dividend of $0.50 per common share payable to shareholders of record on April 25, 2016. SIR has indicated that ~~provides $10,000 in aggregate primary coverage. At that time, we also extended through September 2016~~it expects to pay this dividend on or about May 19, 2016. For additional information about our ~~separate additional directors' and officers' liability insurance policies that provide $20,000~~ownership of ~~aggregate excess coverage plus $5,000 of excess non-indemnifiable coverage. The total premium payable by us for these extensions was approximately $338.~~SIR shares, see Note 11 below.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

AIC: We and six other companies to which RMR LLC provides management services each own in equal amounts of AIC. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.

As of March 31, 2016, our investment in AIC had a carrying value of $7,075; this amount is included in other assets in our condensed consolidated balance sheets. We recognized income of $77 and $72 related to our investment in AIC for the three months ended March 31, 2016 and 2015, respectively. Our other comprehensive income (loss) includes our proportional share of unrealized gains on securities which are owned by AIC of $52 and $45 for the three months ended March 31, 2016 and 2015, respectively.

Note 11. Equity Investment in Select Income REIT

As ~~described in Note 10, as~~ of ~~September 30, 2015,~~March 31, 2016, we owned 24,918,421, or approximately 27.9%, of the then outstanding SIR common shares. SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties.

We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our condensed consolidated statements of comprehensive ~~income.~~income (loss). For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015, we recorded ~~$8,425~~$9,857 and ~~$18,850~~$2,176 of equity in the earnings of SIR, respectively. Our other comprehensive income (loss) includes unrealized gains attributable to our investment in SIR of $4,492 and $13 for the three months ended March 31, 2016 and 2015, respectively.

~~During~~As of March 31, 2016, our investment in SIR had a carrying value of $493,259 and a market value, based on the three and nine months ended September 30, 2015, SIR issued 45,389 and 29,414,279 common shares, respectively. We recognized a loss on issuance of shares by SIR of $21 and $42,145, respectively, during the three and nine months ended September 30, 2015 as a result of the per share issuanceclosing price of ~~these~~ SIR common shares ~~being below~~on the ~~then average per share carrying value~~New York Stock Exchange on March 31, 2016, of ~~our SIR common shares.~~

$574,370. 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 ~~and the extent to which~~ the market value of our investment is below our ~~carrying value,~~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 ~~estimated~~ fair value. ~~In performing our periodic evaluation~~

During the three months ended March 31, 2015, SIR issued 28,453,447 common shares, which included 28,439,111 common shares issued in connection with SIR’s acquisition of ~~other than temporary impairment~~Cole Corporate Income Trust, Inc. on January 29, 2015. We recognized a loss on issuance of ~~our investment in~~shares by SIR of $40,771 during the ~~second quarter~~three months ended March 31, 2015 as a result of ~~2015, we determined, based on~~ the ~~length~~per share issuance price of ~~time and~~these SIR common shares being below the extent to which the market value of our SIR investment was below our carrying value, that the decline in fair value was other than temporary. Accordingly, we recorded a $203,297 loss on impairment to reduce thethen average per share carrying value of our SIR ~~investment to its estimated fair value during the second quarter of 2015. We estimated fair value using the closing price of SIR~~ common ~~shares on the NYSE as of June 30, 2015.~~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 ~~acquisition.~~acquisitions. This amortization decreased our equity in the earnings of SIR by ~~zero and $4,742~~$2,564 for the three ~~and nine~~ months ended ~~September 30, 2015, respectively, and $2,637 for both the three and nine months ended September 30, 2014. Recording the~~March 31, 2015. We recorded a loss on impairment ~~noted above resulted~~of our SIR investment during the three months ended June 30, 2015 resulting in the carrying value of our SIR investment to be less than our proportionate share of SIR’s total shareholders’ book equity as of June 30, 2015. As a result, the previous basis difference was eliminated and we are currently amortizing a basis difference of ($95,035) to earnings over the estimated remaining useful lives of the real estate assets and intangible assets and liabilities owned by SIR as of June 30, 2015. This amortization increased our equity in the earnings of SIR by ~~$1,893~~$740 for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2015.~~March 31, 2016.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015, we received cash distributions from SIR totaling $12,459 and ~~$34,571, respectively, and $10,320 for both the three and nine months ended September 30, 2014.~~$13,530, respectively.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

The following summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, or the SIR Quarterly ~~Report, includes the results of operations for periods prior to July 9, 2014 (the date on which we acquired our initial interest in SIR).~~Report. References in our financial statements to the SIR Quarterly Report are included as references to the source of the data only, and the information in the SIR Quarterly Report is not incorporated by reference into our financial statements.

Condensed Consolidated Balance Sheets:


	March 31,		December 31,
	2016		2015
Real estate properties, net	$	3,936,299	$	3,954,889
Acquired real estate leases, net		550,664		566,195
Cash and cash equivalents		31,294		17,876
Rents receivable, net		106,741		99,307
Other assets, net		67,812		46,078
Total assets	$	4,692,810	$	4,684,345

Unsecured revolving credit facility	$	328,000	$	303,000
Unsecured term loan, net		348,000		347,876
Senior unsecured notes, net		1,427,169		1,426,025
Mortgage notes payable, net		286,516		286,706
Assumed real estate lease obligations, net		84,255		86,495
Other liabilities		117,793		137,283
Shareholders' equity		2,101,077		2,096,960
Total liabilities and shareholders' equity	$	4,692,810	$	4,684,345

Condensed Consolidated Statements of Income:


	Three Months Ended March 31,
	2016		2015
Rental income	$	97,860	$	80,478
Tenant reimbursements and other income		19,372		13,937
Total revenues		117,232		94,415

Real estate taxes		10,288		8,357
Other operating expenses		12,958		9,007
Depreciation and amortization		33,469		24,719
Acquisition related costs		58		20,539
General and administrative		6,976		6,792
Total expenses		63,749		69,414
Operating income		53,483		25,001

Interest expense		(20,609)		(14,179)
Loss on early extinguishment of debt		—		(6,845)
Income before income tax expense and equity in earnings of an investee		32,874		3,977
Income tax expense		(139)		(31)
Equity in earnings of an investee		77		72
Net income		32,812		4,018
Net income allocated to noncontrolling interest		(33)		(41)
Net income attributed to SIR	$	32,779	$	3,977

Weighted average common shares outstanding (basic)		89,286		79,489
Weighted average common shares outstanding (diluted)		89,295		79,498
Net income attributed to SIR per common share (basic and diluted)	$	0.37	$	0.05

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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,

2015

2014
Real estate properties, net

$
3,894,684

$
1,772,510
Properties held for sale

67,250

-
Acquired real estate leases, net

558,027

120,700
Cash and cash equivalents

25,247

13,504
Rents receivable, net

91,506

68,385
Other assets, net

124,933

18,132
Total assets

$
4,761,647

$
1,993,231

Revolving credit facility

$
305,000

$
77,000
Term loan

350,000

350,000
Senior notes

1,435,095

-
Mortgage notes payable

286,945

18,816
Assumed real estate lease obligations, net

92,536

26,475
Other liabilities

119,267

40,493
Noncontrolling interest

3,270

-
Shareholders' equity

2,169,534

1,480,447
Total liabilities and shareholders' equity

$
4,761,647

$
1,993,231

~~Condensed Consolidated Statements of Income:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014
Rental income

$
94,745

$
48,523

$
267,389

$
142,051
Tenant reimbursements and other income

17,197

8,177

46,182

24,234
Total revenues

111,942

56,700

313,571

166,285

Operating expenses

21,184

10,282

57,368

30,246
Depreciation and amortization

33,070

10,653

90,179

30,442
Acquisition related costs

402

5,365

21,720

5,739
General and administrative

6,328

3,749

19,488

11,123
Total expenses

60,984

30,049

188,755

77,550
Operating income

50,958

26,651

124,816

88,735

Interest expense

(20,034)

(3,033)

(53,710)

(10,025)
Gain (loss) on early extinguishment of debt

—

—

(6,845)

243
Income before income tax expense and equity in earnings (losses) of an investee

30,924

23,618

64,261

78,953
Income tax expense

(98)

(30)

(324)

(120)
Equity in earnings (losses) of an investee

(25)

38

70

59
Gain on sale of property

-

116

-

116
Net income

30,801

23,742

64,007

79,008
Net income allocated to noncontrolling interest

(46)

-

(135)

-
Net income attributed to SIR

$
30,755

$
23,742

$
63,872

$
79,008

Weighted average common shares outstanding (basic)

89,267

59,857

85,827

54,642
Weighted average common shares outstanding (diluted)

89,274

59,910

85,837

54,688
Basic net income attributed to SIR per common share

$
0.34

$
0.40

$
0.74

$
1.45
Diluted net income attributed to SIR per common share

$
0.34

$
0.40

$
0.74

$
1.44

~~Table of Contents~~

~~GOVERNMENT PROPERTIES INCOME TRUST~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(unaudited)~~

Note 12. Segment Information

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


	Three months ended September 30, 2015								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	$	62,092	$	—	$	—	$	62,092	$	63,611	$	—	$	—	$	63,611

Expenses:
Real estate taxes		7,735		—		—		7,735		7,653		—		—		7,653
Utility expenses		5,194		—		—		5,194		4,174		—		—		4,174
Other operating expenses		12,281		—		—		12,281		12,911		—		—		12,911
Depreciation and amortization		17,161		—		—		17,161		18,324		—		—		18,324
Acquisition related costs		270		—		—		270		152		—		—		152
General and administrative		—		—		3,714		3,714		—		—		3,526		3,526
Total expenses		42,641		—		3,714		46,355		43,214		—		3,526		46,740

Operating income (loss)		19,451		—		(3,714)		15,737		20,397		—		(3,526)		16,871
Interest and other income		—		—		2		2
Interest income										—		—		6		6
Interest expense		(1,727)		—		(7,410)		(9,137)		(8,269)		—		(1,095)		(9,364)
Gain on early extinguishment of debt		34		—		—		34		104		—		—		104
Loss on issuance of shares by SIR		—		(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
equity in earnings of investees										12,232		—		(4,615)		7,617
Income tax expense										—		—		(15)		(15)
Equity in earnings of investees										—		9,857		77		9,934
Income (loss) from continuing operations		17,758		10,297		(11,133)		16,922		12,232		9,857		(4,553)		17,536
Loss from discontinued operations		(11)		—		—		(11)		(149)		—		—		(149)
Net income (loss)	$	17,747	$	10,297	$	(11,133)	$	16,911	$	12,083	$	9,857	$	(4,553)	$	17,387

									As of March 31, 2016
									Investment		Investment
									in Real Estate		in SIR		Corporate		Consolidated
Total Assets									$	1,708,910	$	493,259	$	57,226	$	2,259,395


	Nine months ended September 30, 2015								Three Months Ended March 31, 2015
	Investment		Investment						Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated		in Real Estate		in SIR		Corporate		Consolidated
Rental income	$	186,864	$	—	$	—	$	186,864	$	62,659	$	—	$	—	$	62,659

Expenses:
Real estate taxes		22,819		—		—		22,819		7,410		—		—		7,410
Utility expenses		13,788		—		—		13,788		4,571		—		—		4,571
Other operating expenses		36,659		—		—		36,659		12,210		—		—		12,210
Depreciation and amortization		51,675		—		—		51,675		17,215		—		—		17,215
Acquisition related costs		459		—		—		459		6		—		—		6
General and administrative		—		—		11,431		11,431		—		—		4,004		4,004
Total expenses		125,400		—		11,431		136,831		41,412		—		4,004		45,416

Operating income (loss)		61,464		—		(11,431)		50,033		21,247		—		(4,004)		17,243
Interest and other income		—		—		14		14
Interest income										—		—		12		12
Interest expense		(21,618)		—		(6,276)		(27,894)		(2,267)		—		(7,035)		(9,302)
Gain on early extinguishment of debt		34		—		—		34
Loss on issuance of shares by SIR		—		(42,145)		—		(42,145)
Loss on impairment of SIR investment		—		(203,297)		—		(203,297)
Loss on issuance of shares by Select Income REIT										—		(40,771)				(40,771)
Income (loss) from continuing operations before income taxes and
equity in earnings of investees		39,880		(245,442)		(17,693)		(223,255)
equity in earnings (losses) of investees										18,980		(40,771)		(11,027)		(32,818)
Income tax expense		—		—		(49)		(49)		—		—		(30)		(30)
Equity in earnings of investees		—		16,002		70		16,072
Equity in earnings (losses) of investees										—		(388)		72		(316)
Income (loss) from continuing operations		39,880		(229,440)		(17,672)		(207,232)		18,980		(41,159)		(10,985)		(33,164)
Loss from discontinued operations		(390)		—		—		(390)		(206)		—		—		(206)
Net income (loss)	$	39,490	$	(229,440)	$	(17,672)	$	(207,622)	$	18,774	$	(41,159)	$	(10,985)	$	(33,370)

	As of September 30, 2015								As of December 31, 2015
	Investment		Investment						Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated		in Real Estate		in SIR		Corporate		Consolidated
Total Assets	$	1,643,834	$	511,872	$	71,332	$	2,227,038	$	1,639,462	$	491,369	$	37,679	$	2,168,510

~~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, 2014

Investment

Investment


in Real Estate

in SIR

Corporate

Consolidated
Rental income

$
64,158

$
—

$
—

$
64,158

Expenses:

Real estate taxes

7,027

—

—

7,027
Utility expenses

5,327

—

—

5,327
Other operating expenses

11,685

—

—

11,685
Depreciation and amortization

17,636

—

—

17,636
Loss on impairment of real estate

1,616

—

—

1,616
Acquisition related costs

110

—

—

110
General and administrative

—

—

4,329

4,329
Total expenses

43,401

—

4,329

47,730

Operating income (loss)

20,757

—

(4,329)

16,428
Interest and other income

—

—

10

10
Interest expense

(2,326)

—

(6,519)

(8,845)
Loss on early extinguishment of debt

—

—

(541)

(541)
Loss on issuance of shares by SIR

—

(39)

—

(39)
Income (loss) from continuing operations before income taxes and

  equity in earnings of investees

18,431

(39)

(11,379)

7,013
Income tax expense

—

—

(7)

(7)
Equity in earnings of investees

—

4,872

38

4,910
Income (loss) from continuing operations

18,431

4,833

(11,348)

11,916
Income from discontinued operations

706

—

—

706
Net income (loss)

$
19,137

$
4,833

$
(11,348)

$
12,622

Nine months ended September 30, 2014

Investment

Investment


in Real Estate

in SIR

Corporate

Consolidated
Rental income

$
186,406

$
—

$
—

$
186,406

Expenses:

Real estate taxes

21,005

—

—

21,005
Utility expenses

15,072

—

—

15,072
Other operating expenses

33,586

—

—

33,586
Depreciation and amortization

49,254

—

—

49,254
Loss on impairment of real estate

1,616

—

—

1,616
Acquisition related costs

1,070

—

220

1,290
General and administrative

—

—

11,537

11,537
Total expenses

121,603

—

11,757

133,360

Operating income (loss)

64,803

—

(11,757)

53,046
Interest and other income

—

—

68

68
Interest expense

(13,029)

—

(5,501)

(18,530)
Loss on early extinguishment of debt

—

—

(541)

(541)
Loss on issuance of shares by SIR

—

(39)

—

(39)
Income (loss) from continuing operations before income taxes and

  equity in earnings of investees

51,774

(39)

(17,731)

34,004
Income tax expense

—

—

(130)

(130)
Equity in earnings of investees

—

4,872

59

4,931
Income (loss) from continuing operations

51,774

4,833

(17,802)

38,805
Income from discontinued operations

3,615

—

—

3,615
Net income (loss)

$
55,389

4,833

$
(17,802)

$
42,420

As of December 31, 2014

Investment

Investment

in Real Estate

in SIR

Corporate

Consolidated
Total Assets

$
1,714,130

$
680,137

$
33,348

$
2,427,615

1816

Table of Contents

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, ~~2014,~~2015, or our Annual Report.

OVERVIEW

We are a real estate investment trust, or REIT, organized under Maryland law. As of ~~September 30, 2015,~~March 31, 2016, we owned 7172 properties ~~(91~~(92 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 ~~10.7~~11.0 million rentable square feet, of which ~~63.4%~~61.7% was leased to the U.S. Government, ~~20.2%~~22.2% was leased to 12 state governments, ~~1.7%~~2.7% was leased to ~~the United Nations, an international intergovernmental organization, 8.2%~~three other government tenants, 8.3% was leased to various non-governmental organizations and ~~6.5%~~5.1% was available for lease as of ~~September 30, 2015.~~March 31, 2016. The U.S. Government, 12 state governments and ~~the United Nations~~three other government tenants combined were responsible for 92.8% and ~~93.2%~~92.7% of our annualized rental income, as defined below, as of ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively.

As of ~~September 30, 2015,~~March 31, 2016, we also owned 24,918,421 common shares, or approximately 27.9% of the then outstanding common shares, of Select Income REIT, or SIR. SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties. See Notes 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our investment in SIR. We account for our investment in SIR under the equity method.

Property Operations

As of ~~September 30, 2015,~~March 31, 2016, excluding one property (one building) classified as discontinued operations, ~~93.5%~~94.9% of our rentable square feet was leased, compared to ~~95.4%~~94.8% of our rentable square feet as of ~~September 30, 2014.~~March 31, 2015. Occupancy data for our properties as of ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ is as follows (square feet in thousands):

Comparable

All Properties(1)

Properties(2)

September 30,

September 30,

2015

2014

2015

2014

Total properties

71

72

67

67

Total buildings

91

92

86

86

Total square feet(3)

10,701

11,037

9,971

9,969

Percent leased(3)(4)

93.5%

95.4%

93.1%

95.0%


			Comparable
	All Properties(1)		Properties(2)
	March 31,		March 31,
	2016	2015	2016	2015
Total properties	72	71	71	71
Total buildings	92	91	91	91
Total square feet(3)	10,985	10,699	10,648	10,699
Percent leased(3)(4)	94.9%	94.8%	95.1%	94.8%

(1)

Based on properties we owned on ~~September 30,~~March 31, 2016 and 2015, ~~and September 30, 2014,~~ respectively, and excludes one property (one building) classified as discontinued operations.

(2)

Based on properties we owned on ~~September 30, 2015~~March 31, 2016 and which we owned continuously since January 1, ~~2014,~~2015, and excludes one property (one building) classified as discontinued operations. Our comparable properties increased from 6367 properties ~~(79~~(86 buildings) at ~~September 30, 2014~~March 31, 2015 as a result of our acquisition of ~~five~~four properties ~~(eight~~(five buildings) during the year ended December 31, ~~2013 and the sale of one property (one building) from continuing operations during the nine months ended September 30, 2015.~~2014.

(3)

Subject to ~~modest~~ 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, 2016 and 2015 ~~and 2014~~ are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014

Average annualized effective rental rate per square foot(1):

All properties(2)

$
24.97

$
24.68

$
24.72

$
24.74

Comparable properties(3)

$
25.00

$
24.42

$
24.51

$
24.31


	Three Months Ended March 31,
	2016		2015
Average annualized effective rental rate per square foot(1):
All properties(2)	$	25.04	$	24.43
Comparable properties(3)	$	24.87	$	24.24

(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, 2015~~March 31, 2016 and excludes one property (one building) classified as discontinued operations.

(3)

Based on properties we owned on ~~September 30, 2015~~March 31, 2016 and which we owned continuously since ~~July 1, 2014 and~~ January 1, ~~2014, respectively,~~2015, and excludes one property (one building) classified as discontinued operations.

1917

Table of Contents

During the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016, changes in rentable square feet leased and available for lease at our properties, excluding one property (one building) classified as discontinued operations, were as follows:

Three Months Ended September 30, 2015

Nine Months Ended September 30, 2015

Available

Available

Leased

for Lease

Total

Leased

for Lease

Total

Beginning of period

10,091,890

607,474

10,699,364

10,473,975

562,768

11,036,743

Changes resulting from:

Disposition of a property

—

—

—

(337,500)

—

(337,500)

Lease expirations

(294,010)

294,010

—

(737,696)

737,696

—

Lease renewals(1)

176,366

(176,366)

—

527,465

(527,465)

—

New leases(1)

30,890

(30,890)

—

78,892

(78,892)

—

Remeasurements(2)

—

1,600

1,600

—

1,721

1,721

End of period

10,005,136

695,828

10,700,964

10,005,136

695,828

10,700,964


	Three Months Ended March 31, 2016
		Available
	Leased	for Lease	Total
Beginning of period	10,115,001	585,963	10,700,964
Changes resulting from:
Acquisition of properties	290,879	46,932	337,811
Lease expirations	(477,134)	477,134	—
Lease renewals(1)	388,726	(388,726)	—
New leases(1)(2)	108,657	(108,657)	—
Re-measurements(3)	—	(53,408)	(53,408)
End of period	10,426,129	559,238	10,985,367

(1)

Based on leases entered into during the three ~~and nine~~ months ended ~~September 30, 2015, respectively.~~March 31, 2016.

(2)

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

(3)

Subject to ~~modest~~ changes when space is re-measured or re-configured for tenants.

Leases at our properties ~~excluding one property (one building) classified as discontinued operations,~~ totaling ~~294,010 and 737,696~~477,134 rentable square feet expired during the three ~~and nine~~ months ended ~~September 30, 2015, respectively.~~March 31, 2016. During the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, we entered into leases totaling ~~207,256 and 606,357~~522,962 rentable square feet, ~~respectively, which includes~~including a 25,579 square foot expansion to be constructed at an existing property, and lease renewals of ~~176,366 and 527,465~~388,726 rentable square ~~feet, respectively.~~feet. The weighted (by rentable square feet) average rental rates for leases of ~~154,945 and 437,381~~460,620 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, 2015~~March 31, 2016 increased by ~~17.4% and 5.4%, respectively,~~14.4% 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 ~~52,311 and 168,976~~62,342 rentable square feet entered into with non-government tenants during the three ~~and nine~~ months ended ~~September 30, 2015 increased by 0.6% and~~March 31, 2016 decreased by ~~1.3%, respectively,~~2.3% 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, 2015,~~March 31, 2016, changes in effective rental rates per square foot achieved for new leases and lease renewals that commenced during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows:

Three Months Ended September 30, 2015

Nine Months Ended September 30, 2015


Old Effective

New Effective



Old Effective

New Effective



Rent Per

Rent Per

Rentable

Rent Per

Rent Per

Rentable

Square Foot(1)

Square Foot(1)

Square Feet

Square Foot(1)

Square Foot(1)

Square Feet

New leases

$
19.93

$
20.96

3,975

$
24.15

$
19.61

56,002

Lease renewals

$
14.81

$
16.81

161,788

$
18.81

$
19.49

560,240

Total leasing activity

$
14.94

$
16.91

165,763

$
19.30

$
19.50

616,242


	Three Months Ended March 31, 2016
	Old Effective		New Effective
	Rent Per		Rent Per		Rentable
	Square Foot(1)		Square Foot(1)		Square Feet
New leases	$	18.64	$	28.89	26,267
Lease renewals	$	25.46	$	27.96	252,402
Total leasing activity	$	24.82	$	28.05	278,669

(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.

2018

Table of Contents

During the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows:

Government

Non-Government



Three Months Ended September 30, 2015

Leases

Leases

Total
Rentable square feet leased during the period

154,945

52,311

207,256
Tenant leasing costs and concession commitments(1) (in thousands)

$
150

$
1,598

$
1,748
Tenant leasing costs and concession commitments per rentable square foot(1)

$
0.96

$
30.55

$
8.43
Weighted (by square feet) average lease term (years)

2.4

6.0

3.3
Total leasing costs and concession commitments per rentable square foot per year(1)

$
0.40

$
5.10

$
2.56

Government

Non-Government


Nine Months Ended September 30, 2015

Leases

Leases
Total
Rentable square feet leased during the period

437,381

168,976

606,357
Tenant leasing costs and concession commitments(1) (in thousands)

$
4,385

$
4,845

$
9,230
Tenant leasing costs and concession commitments per rentable square foot(1)

$
10.03

$
28.67

$
15.22
Weighted (by square feet) average lease term (years)

8.2

6.8

7.9
Total leasing costs and concession commitments per rentable square foot per year(1)

$
1.22

$
4.19

$
1.94


	Government		Non-Government
Three Months Ended March 31, 2016	Leases		Leases		Total
Rentable square feet leased during the period (1)		460,620		62,342		522,962
Tenant leasing costs and concession commitments(2)(3) (in thousands)	$	18,420	$	2,049	$	20,469
Tenant leasing costs and concession commitments per rentable square foot(2)(3)	$	39.99	$	32.87	$	39.14
Weighted (by square feet) average lease term (years)		12.0		8.1		11.6
Total leasing costs and concession commitments per rentable square foot per year(2)(3)	$	3.32	$	4.04	$	3.38

(1)

Square footage includes a 25,579 square foot expansion to be constructed at an existing property prior to the commencement of the lease.

(2)

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

(3)

Excludes the estimated cost of $12,800 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, 2016 and 2015, ~~and 2014,~~ amounts capitalized at our properties, excluding ~~properties~~one property (one building) classified as discontinued operations, for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (dollars in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

Tenant improvements(1)

$
2,213

$
1,861

$
5,039

$
5,386

Leasing costs(2)

$
439

$
437

$
2,876

$
1,439

Building improvements(3)

$
2,210

$
2,788

$
4,151

$
5,783

Development, redevelopment and other activities(4)

$
946

$
168

$
1,167

$
1,169


	Three Months Ended
	March 31,
	2016		2015
Tenant improvements(1)	$	1,989	$	1,320
Leasing costs(2)	$	4,312	$	651
Building improvements(3)	$	3,033	$	748
Development, redevelopment and other activities(4)	$	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) ~~major~~ capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property, and (ii) ~~major~~ capital expenditure projects that reposition a property or result in new sources of revenue.

We have estimated unspent leasing related obligations of $22,752 as of March 31, 2016, which excludes the estimated $12,800 cost of the expansion to be constructed at an existing property referenced above.

We believe that current government budgetary pressures may cause an increased demand for leased space by government tenants, as opposed to governments acquiring buildings or constructing new buildings. However, these same budgetary pressures ~~may~~have also ~~result~~resulted in a decrease in government employment, government tenants improving their space utilization orand consolidation into existing government owned properties, thereby reducing the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. However, relocation may become more prevalent if efforts by government tenants to improve their space utilization require significant reconfiguration of currently leased space. Accordingly, we are unable to reasonably project what the financial impact of market conditions or changing government financial circumstances will be on our financial results for future periods.

As of ~~September 30, 2015, excluding one property (one building) classified as discontinued operations,~~March 31, 2016, we had leases totaling ~~799,794~~871,373 rentable square feet that were scheduled to expire through ~~September 30, 2016.~~March 31, 2017. As of ~~October 28, 2015,~~April 26, 2016, tenants with leases totaling ~~155,996~~166,068 rentable square feet, that are scheduled to expire through ~~September 30, 2016,~~March 31, 2017, have notified us that they do not plan to renew their leases upon expiration and we can provide no assurance as to whether additional tenants may or may not renew their leases upon expiration. Based upon current market conditions and tenant negotiations for leases scheduled to expire through ~~September 30, 2016,~~March 31, 2017, we expect that the rental rates we are likely to achieve on new or renewed leases for space under expiring leases through ~~September 30, 2016~~March 31, 2017 will, in the aggregate and on a weighted (by annualized revenues) average basis, be ~~slightly~~modestly lower than the rates currently being paid, thereby generally resulting in lower revenue from the same space. ~~However, we~~We can provide no assurance ~~that~~regarding the rental rates which will result from our ongoing negotiations regarding lease renewals; also, we ~~expect will occur or that we will not~~may experience material declines in our rental income due to vacancies upon lease expirations. Prevailing market conditions and government tenants' needs at the time we negotiate and conclude leases will generally determine rental rates and demand for leased space in our properties, and market conditions and government tenants' needs are beyond our control.

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~~properties; and market conditions and government tenants' needs are beyond our control.~~

As of ~~September 30, 2015,~~March 31, 2016, lease expirations at our properties, excluding one property (one building) classified as discontinued operations, by year are as follows (dollars in thousands):

Number

Expirations

Annualized

of

of Leased

Cumulative

Rental

Cumulative

Tenants

Square

Percent

Percent

Income

Percent

Percent

Year(1)

Expiring

Feet(2)

of Total

of Total

Expiring(3)

of Total

of Total

2015

14

185,047

1.8%

1.8%

$
4,264

1.8%

1.8%

2016

42

1,041,824

10.4%

12.2%

35,633

14.8%

16.6%

2017

40

801,246

8.0%

20.2%

15,941

6.6%

23.2%

2018

40

1,161,801

11.6%

31.8%

32,056

13.3%

36.5%

2019

33

1,856,044

18.6%

50.4%

46,757

19.4%

55.9%

2020

33

1,325,513

13.2%

63.6%

30,976

12.9%

68.8%

2021

16

873,659

8.7%

72.3%

17,049

7.1%

75.9%

2022

11

693,583

6.9%

79.2%

14,857

6.2%

82.1%

2023

13

544,551

5.4%

84.6%

12,600

5.2%

87.3%

2024 and thereafter

24

1,521,868

15.4%

100.0%

30,276

12.7%

100.0%

Total

266

10,005,136

100.0%

$
240,409

100.0%

Weighted average remaining lease term (in years)

4.8

4.5


	Number	Expirations				Annualized
	of	of Leased			Cumulative	Rental			Cumulative
	Tenants	Square		Percent	Percent	Income		Percent	Percent
Year(1)	Expiring	Feet(2)		of Total	of Total	Expiring(4)		of Total	of Total
2016	35	778,890		7.5%	7.5%	$	28,439	11.1%	11.1%
2017	41	824,303		7.9%	15.4%		17,257	6.7%	17.8%
2018	41	1,167,026		11.2%	26.6%		32,253	12.6%	30.4%
2019	36	1,911,715		18.3%	44.9%		48,237	18.9%	49.3%
2020	33	1,306,531		12.5%	57.4%		31,004	12.2%	61.5%
2021	25	919,553		8.8%	66.2%		17,871	7.0%	68.5%
2022	12	694,233		6.7%	72.9%		14,957	5.8%	74.3%
2023	14	536,625		5.1%	78.0%		12,382	4.8%	79.1%
2024	10	810,281		7.8%	85.8%		17,491	6.8%	85.9%
2025 and thereafter	27	1,476,972	(3)	14.2%	100.0%		35,842	14.1%	100.0%
Total	274	10,426,129		100.0%		$	255,733	100.0%

Weighted average remaining lease term (in years)		5.0					4.8

(1)

The year of lease expiration is pursuant to current contract terms. Some government tenants have the right to vacate their space before the stated expirations of their leases. As of ~~September 30, 2015,~~March 31, 2016, government tenants occupying approximately ~~7.3%~~10.1% of our rentable square feet and responsible for approximately ~~6.8%~~7.5% of our annualized rental income as of ~~September 30, 2015~~March 31, 2016 have currently exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in ~~2015,~~ 2016, 2017, 2018, 2019, 2020, 2021, 2022, 2023, 2026 and ~~2023,~~2027, early termination rights become exercisable by other tenants who currently occupy an additional approximately ~~2.4%~~4.0%, ~~6.2%~~3.1%, ~~3.2%~~1.2%, ~~1.3%~~4.6%, ~~4.7%~~5.1%, ~~3.0%~~0.4%, 2.1%, 2.0%, 0.9% and ~~1.4%~~0.6% of our rentable square feet, respectively, and contribute an additional approximately ~~0.7%~~4.2%, ~~5.7%, 2.6%~~2.4%, 1.4%, ~~5.2%~~5.0%, ~~2.9%~~5.4%, ~~1.5%~~0.4%, 1.3%, 1.8%, 1.3% and ~~1.2%~~0.7% of our annualized rental income, respectively, as of ~~September 30, 2015.~~March 31, 2016. In addition, as of ~~September 30, 2015,~~March 31, 2016, 14 of our government tenants have currently exercisable rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 14 tenants occupy approximately ~~14.7%~~15.0% of our rentable square feet and contribute approximately 15.4% of our annualized rental income as of ~~September 30, 2015.~~March 31, 2016.

(2)

Leased square feet is pursuant to leases existing as of ~~September 30, 2015,~~March 31, 2016, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to ~~modest~~ changes when space is re-measured or re-configured for new tenants.

(3)

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

(4)

Annualized rental income is calculated using the annualized contractual base rents from our tenants pursuant to our lease agreements as of ~~September 30, 2015,~~March 31, 2016, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

Acquisition and Disposition Activities (dollar amounts in thousands)

~~In February 2015,~~acquired one ~~of our U.S. Government tenants exercised its option to acquire the~~ office property (one building) ~~it leased from us~~ located in ~~Riverdale, MD~~Sacramento, CA with ~~337,500~~337,811 rentable square ~~feet. The sales~~feet for a purchase price ~~was $30,600,~~of $79,244, excluding ~~closing~~acquisition costs. We acquired this property at a capitalization rate of 7.2%. We calculate the capitalization rate for property acquisitions as the ratio of (x) annual straight line rental income, excluding the impact of above and below market lease amortization, based on leases in effect on the acquisition date, less estimated annual property operating expenses as of the acquisition date, excluding depreciation and amortization expense, to (y) the acquisition purchase price, including the principal amount of assumed debt, if any, and excluding acquisition costs.

In ~~May 2015,~~March 2016, we ~~began marketing for sale~~entered into an agreement to sell an office property (one building) located in Savannah, GA with 35,228 rentable square feet and a net book value of $3,071 asat March 31, 2016. The contract sales price is $4,500, which amount is before transaction costs we may incur. This sale is subject to conditions and is currently expected to occur in the third quarter of ~~September 30, 2015.~~ 2016. We can provide no assurance that the sale of this property will occur, that the sale will not be delayed or that its terms will not change.

~~In July 2015,~~Also in March 2016, we entered into an agreement to sell an office property (one building) located in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,282 at ~~September 30, 2015, for a~~March 31, 2016. The contract sales price is $14,750, which amount is before transaction costs we may incur. This sale is subject to conditions, including the purchaser obtaining certain zoning entitlements, and is currently expected to occur in the first quarter of ~~$16,500, excluding closing costs.~~2017. ~~In September 2015, this agreement was terminated. We continue to market this property for sale.~~

We can provide no assurance that wethe sale of this property will ~~sell~~occur, that the ~~properties we are marketing for~~ sale will not be delayed or ~~what the~~that its terms ~~of any such sale would be.~~will not change.

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Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants; however, we ~~cannot assure~~can provide no assurance 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 other properties for disposition, we expect to periodically identify properties for sale based on future changes in market conditions, changes in property performance, our expectation regarding lease renewals, or our plans with regard to particular ~~properties.~~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.

~~On March 4, 2015, we acquired 3,418,421 SIR common shares for a cash purchase price equal to $95,203, before acquisition related costs.~~

On June 5, 2015, we acquired 1,541,201 shares of class A common stock of The RMR Group Inc. (formerly known as Reit Management & Research Inc.), or RMR Inc., for $17,462, excluding transaction costs. As payment for the RMR Inc. shares, we issued 700,000 of our common shares valued at $13,545 and paid the remainder of the purchase price in cash. Through our acquisition of the RMR Inc. shares, we indirectly acquired an economic ownership of 5.0% of our manager, The RMR Group LLC (formerly known as Reit Management & Research LLC), or RMR LLC. We have agreed to distribute approximately half of the RMR Inc. shares we acquired to our shareholders as a special distribution (excluding shares we may receive as a shareholder of SIR, which we currently intend to retain), and RMR Inc. agreed to facilitate this distribution by filing a registration statement with the SEC to register those shares to be distributed and by seeking a listing of those shares on a national stock exchange. We will not distribute our RMR Inc. shares until such a registration statement is declared effective by the SEC.

For more information about these transactions, see Notes 9, 10, and 11 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which are incorporated herein by reference.

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

Three Months Ended ~~September 30, 2015,~~March 31, 2016, Compared to Three Months Ended ~~September 30, 2014~~

March 31, 2015


										Acquired Property Results(2)				Disposed Property Results(3)																					Acquired Property Results(2)				Disposed Property 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,
							$	%															$	%								$	%															$	%
		2015		2014			Change	Change		2015		2014		2015		2014		2015		2014			Change	Change			2016		2015			Change	Change		2016		2015		2016		2015		2016		2015			Change	Change

Rental income		$	61,763	$	61,639	$	124	0.2	%	$	329	$	79	$	—	$	2,440	$	62,092	$	64,158	$	(2,066)	(3.2)	%		$	62,079	$	61,126	$	953	1.6	%	$	1,532	$	—	$	—	$	1,533	$	63,611	$	62,659	$	952	1.5	%
Operating expenses:
Real estate taxes			7,658		6,661		997	15.0	%		77		9		—		357		7,735		7,027		708	10.1	%			7,526		7,219		307	4.3	%		127		—		—		191		7,653		7,410		243	3.3	%
Utility expenses			5,186		5,094		92	1.8	%		8		1		—		232		5,194		5,327		(133)	(2.5)	%			4,076		4,572		(496)	(10.8)	%		98		—		—		(1)		4,174		4,571		(397)	(8.7)	%
Other operating expenses			12,254		11,228		1,026	9.1	%		27		3		—		454		12,281		11,685		596	5.1	%			12,564		11,846		718	6.1	%		347		—		—		364		12,911		12,210		701	5.7	%
Total operating expenses			25,098		22,983		2,115	9.2	%		112		13		—		1,043		25,210		24,039		1,171	4.9	%			24,166		23,637		529	2.2	%		572		—		—		554		24,738		24,191		547	2.3	%
Net operating income(4)		$	36,665	$	38,656	$	(1,991)	(5.2)	%	$	217	$	66	$	—	$	1,397		36,882		40,119		(3,237)	(8.1)	%		$	37,913	$	37,489	$	424	1.1	%	$	960	$	—	$	—	$	979		38,873		38,468		405	1.1	%

Other expenses:
Depreciation and amortization																			17,161		17,636		(475)	(2.7)	%																			18,324		17,215		1,109	6.4	%
Loss on impairment of real estate																			—		1,616		(1,616)	nm
Acquisition related costs																			270		110		160	145.5	%																			152		6		146	2,433.3	%
General and administrative																			3,714		4,329		(615)	(14.2)	%																			3,526		4,004		(478)	(11.9)	%
Total other expenses																			21,145		23,691		(2,546)	(10.7)	%																			22,002		21,225		777	3.7	%
Operating income																			15,737		16,428		(691)	(4.2)	%																			16,871		17,243		(372)	(2.2)	%
Interest and other income																			2		10		(8)	(80.0)	%
Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $360 and $373, respectively)																			(9,137)		(8,845)		(292)	3.3	%
Gain (loss) on early extinguishment of debt																			34		(541)		575	nm
Loss on issuance of shares by SIR																			(21)		(39)		18	(46.2)	%
Income from continuing operations before income taxes and equity in earnings of investees																			6,615		7,013		(398)	(5.7)	%
Income tax benefit (expense)																			13		(7)		20	nm
Equity in earnings of investees																			10,294		4,910		5,384	109.7	%
Income from continuing operations																			16,922		11,916		5,006	42.0	%
Income (loss) from discontinued operations																			(11)		706		(717)	nm
Net income																		$	16,911	$	12,622	$	4,289	34.0	%
Interest income																																												6		12		(6)	(50.0)	%
Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $471 and $332, respectively)																										Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $471 and $332, respectively)																		(9,364)		(9,302)		(62)	0.7	%
Gain on early extinguishment of debt																										Gain on early extinguishment of debt																		104		—		104	nm
Loss on issuance of shares by Select Income REIT																										Loss on issuance of shares by Select Income REIT																		—		(40,771)		40,771	nm
Income (loss) from continuing operations before income taxes and equity in earnings of investees																										Income (loss) from continuing operations before income taxes and equity in earnings of investees																		7,617		(32,818)		40,435	(123.2)	%
Income tax expense																										Income tax expense																		(15)		(30)		15	(50.0)	%
Equity in earnings (losses) of investees																										Equity in earnings (losses) of investees																		9,934		(316)		10,250	nm
Income (loss) from continuing operations																										Income (loss) from continuing operations																		17,536		(33,164)		50,700	(152.9)	%
Loss from discontinued operations																										Loss from discontinued operations																		(149)		(206)		57	(27.7)	%
Net income (loss)																										Net income (loss)																	$	17,387	$	(33,370)	$	50,757	nm

Weighted average common shares outstanding (basic)																			71,004		65,481		5,523	8.4	%
Weighted average common shares outstanding (diluted)																			71,021		65,568		5,453	8.3	%
Weighted average common shares outstanding (basic and diluted)																										Weighted average common shares outstanding (basic and diluted)																		71,031		70,266		765	1.1	%

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																		$	0.24	$	0.18	$	0.06	33.3	%
Income (loss) from continuing operations																										Income (loss) from continuing operations																	$	0.25	$	(0.47)	$	0.72	nm
Income (loss) from discontinued operations	Income (loss) from discontinued operations																	$	—	$	0.01	$	(0.01)	nm		Income (loss) from discontinued operations																	$	—	$	—	$	—	nm
Net income																		$	0.24	$	0.19	$	0.05	26.3	%
Net income (loss)																										Net income (loss)																	$	0.24	$	(0.47)	$	0.71	nm

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

Net income																		$	16,911	$	12,622
Net income (loss)																																											$	17,387	$	(33,370)
Plus: Depreciation and amortization	Plus: Depreciation and amortization																		17,161		17,636					Plus: Depreciation and amortization																		18,324		17,215
Plus: Loss on impairment of real estate																			—		1,616
Plus: FFO attributable to SIR investment																			17,780		11,230
Less: Equity in earnings from SIR																			(10,318)		(4,872)
Less: Net gain on sale of properties from discontinued operations																			—		(774)
Plus: FFO attributable to Select Income REIT investment																										Plus: FFO attributable to Select Income REIT investment																		18,458		8,894
Plus: Equity in loss of Select Income REIT																										Plus: Equity in loss of Select Income REIT																		—		388
Less: Equity in earnings from Select Income REIT																										Less: Equity in earnings from Select Income REIT																		(9,857)		—
Funds from operations	Funds from operations																		41,534		37,458					Funds from operations																		44,312		(6,873)
Plus: Acquisition related costs	Plus: Acquisition related costs																		270		110					Plus: Acquisition related costs																		152		6
Plus: Loss on early extinguishment of debt																			—		541
Plus: Loss on issuance of shares by SIR																			21		39
Plus: Normalized FFO attributable to SIR investment																			17,892		12,874
Less: FFO attributable to SIR investment																			(17,780)		(11,230)
Plus: Loss on issuance of shares by Select Income REIT																										Plus: Loss on issuance of shares by Select Income REIT																		—		40,771
Plus: Normalized FFO attributable to Select Income REIT investment																										Plus: Normalized FFO attributable to Select Income REIT investment																		18,475		15,779
Less: FFO attributable to Select Income REIT investment																										Less: FFO attributable to Select Income REIT investment																		(18,458)		(8,894)
Less: Gain on early extinguishment of debt																			(34)		—																							(104)		—
Normalized funds from operations	Normalized funds from operations																	$	41,903	$	39,792					Normalized funds from operations																	$	44,377	$	40,789
Funds from operations per common share (basic and diluted)	Funds from operations per common share (basic and diluted)																	$	0.58	$	0.57					Funds from operations per common share (basic and diluted)																	$	0.62	$	(0.10)
Normalized funds from operations per common share (basic and diluted)	Normalized funds from operations per common share (basic and diluted)																	$	0.59	$	0.61					Normalized funds from operations per common share (basic and diluted)																	$	0.62	$	0.58

(1)

Comparable properties consist of 7071 properties ~~(90~~(91 buildings) we owned on ~~September 30, 2015~~March 31, 2016 and which we owned continuously since ~~July~~January 1, ~~2014,~~2015, and excludes one property (one building) classified as discontinued operations.

(2)

Acquired property consists of one property (one building) we owned on ~~September 30, 2015,~~March 31, 2016, which we acquired during the ~~period from July 1, 2014 to September 30, 2015.~~three months ended March 31, 2016.

(3)

Disposed property consists of one property (one building) we sold during the ~~nine~~three months ended ~~September 30, 2015 that was not classified as discontinued operations.~~March 31, 2015.

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(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 calculate NOI, as shown above.~~ 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. 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), operating income or cash flow from operating activities determined in accordance with GAAP or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income (loss), operating income and cash flow from operating activities as presented in our ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~comprehensive income~~Comprehensive Income (Loss) and ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~cash flows.~~Cash Flows. Other REITs and real estate companies ~~and REITs~~ may calculate NOI differently than we do.

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(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 (losses) of an equity investee but excluding impairment charges on real estate assets, carrying value adjustments of real estate assets held for sale, 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 ~~estimated~~ business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP and we exclude acquisition related costs, gains or losses on early extinguishment of debt ~~loss on impairment of SIR investment~~ and losses on issuance of shares by SIR. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income (loss), operating income and cash flow from operating activities. 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 ~~status~~qualification for taxation as a REIT, limitations in our credit ~~facility and term loan~~ 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), operating income or cash flow from operating activities, determined in accordance with GAAP or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. These measures should be considered in conjunction with net income (loss), operating income and cash flow from operating activities as presented in our ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~comprehensive income~~Comprehensive Income (Loss) and ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~cash flows.~~Cash Flows. Other REITs and real estate companies ~~and REITs~~ may calculate FFO and Normalized FFO differently than we do.

We refer to the 7071 properties ~~(90~~(91 buildings) we owned on ~~September 30, 2015~~March 31, 2016 and which we have owned continuously since ~~July~~January 1, ~~2014,~~2015, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the one property (one building) that we owned as of ~~September 30, 2015,~~March 31, 2016, which we acquired during the ~~period from July 1, 2014 to September 30, 2015,~~three months ended March 31, 2016, as the acquired property. We refer to the one property (one building) that we sold during the ~~period from July 1, 2014 to September 30,~~three months ended March 31, 2015 ~~that was not classified as discontinued operations,~~ as the disposed property.

Our condensed consolidated statements of comprehensive income (loss) for the three months ended September 30, 2015 include the operating results of the acquired property for the entire period, as we acquired this property prior to July 1, 2015 and excludes the operating results of the disposed property for the entire period, as that property was sold prior to July 1, 2015. Our condensed consolidated statements of comprehensive income for the three months ended September 30, 2014March 31, 2016 include the operating results of the acquired property for less than the entire period, as we acquired ~~that~~this property during ~~that~~the 2016 period and exclude the operating results of the 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 three months ended March 31, 2015 exclude the operating results of the acquired property for the entire period, as we acquired that property after March 31, 2015, and include the operating results of the 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 three month period ended ~~September 30, 2015,~~March 31, 2016, compared to the three month period ended ~~September 30, 2014.~~March 31, 2015.

Rental income. The ~~decrease~~increase in rental income reflects the net effect of acquired and disposed properties and ~~a modest~~an increase in rental income for comparable properties. Rental income ~~from~~increased $1,532 as a result of the acquired ~~property increased $250.~~property. Rental income ~~from~~declined $1,533 as a result of the disposed ~~property declined $2,440.~~property. Rental income for comparable properties increased ~~$124~~$953 due primarily to ~~rental increases at certain of our properties partially offset by a decrease~~an increase in occupied space at certain of our properties in the ~~2015~~2016 period. Rental income includes non-cash straight line rent adjustments totaling ~~$613~~$149 in the ~~2015~~2016 period and ~~$1,135~~$663 in the ~~2014~~2015 period, and amortization of acquired leases and assumed lease obligations totaling ($~~298)~~307) in the ~~2015~~2016 period and ($~~225)~~278) in the ~~2014~~2015 period.

Real estate taxes. The increase in real estate taxes reflects the net effect of acquired and disposed properties and an increase in real estate taxes for comparable properties. Real estate taxes ~~from~~increased $127 as a result of the acquired ~~property increased $68.~~property. Real estate taxes ~~from~~declined $191 as a result of the disposed ~~property declined $357.~~property. Real estate taxes for comparable properties increased ~~$997~~$307 due primarily to the effect of higher real estate tax valuation assessments at certain of our properties in the ~~2015~~2016 period.

Utility expenses. The decrease in utility expenses reflects the net effect of acquired and disposed properties and ~~an increase~~a decrease in utility expenses for comparable properties. Utility expenses ~~from~~increased $98 as a result of the acquired ~~property increased $7.~~property. Utility expenses ~~from~~increased $1 as a result of the disposed ~~property declined $232.~~property. Utility expenses at comparable properties ~~increased $92~~

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declined $496 primarily due to ~~higher electricity usage at~~warmer temperatures experienced in certain parts of ~~our properties~~the United States during the 2016 period compared to the 2015 period.

Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties, and property management fees, net of amortization of the liability we recorded in connection with our June 2015 acquisition of shares of The RMR Group Inc., or RMR Inc. ~~shares as discussed above~~ (see Note 10 to ~~the Notes to Condensed Consolidated Financial Statements~~our condensed consolidated financial statements included in Part I,1, Item 1 of this Quarterly Report on Form ~~10-Q for further information regarding this liability)~~10-Q). The increase in other operating expenses reflects the net effect of acquired and disposed properties and an increase in expenses for comparable properties. Other operating expenses ~~from~~increased $347 as a result of the acquired ~~property increased $24.~~property. Other operating expenses ~~from~~declined $364 as a result of the disposed ~~property declined $454.~~property. Other operating expenses at comparable properties increased ~~$1,026~~$718 primarily as a result of higher repair and maintenance costs ~~and property insurance expense increases~~partially offset by lower snow removal costs at certain of our properties during the ~~2015~~2016 period.

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Depreciation and amortization. The ~~decrease~~increase in depreciation and amortization reflects the ~~net~~ effect of property acquisitions, ~~and dispositions, the effect of certain assets becoming fully depreciated,~~ and improvements made to certain of our properties since ~~July~~January 1, ~~2014.~~2015, partially offset by the effect of certain assets becoming fully depreciated. Depreciation and amortization ~~from~~increased $1,262 as a result of the acquired ~~property increased $89. Depreciation and amortization from the disposed property declined $513.~~property. Depreciation and amortization at comparable properties declined ~~$51~~$153 due primarily to certain depreciable leasing related assets becoming fully depreciated in ~~2014~~2015 and ~~2015,~~2016, partially offset by depreciation and amortization of improvements made to certain of our properties after ~~July~~January 1, ~~2014.~~

~~Loss on impairment of real estate.~~ Loss on asset impairment relates to the adjustment to reduce the carrying value of one property (one building) classified as held for sale during the 2014 period to estimated fair value less costs to sell.2015.

Acquisition related costs. Acquisition related costs in both the ~~2015~~2016 and ~~2014~~2015 periods include legal and due diligence costs incurred in connection with our property acquisitions and other investment activity.

General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares ~~as discussed above~~ (see Note 10 to ~~the Notes to the Condensed Consolidated Financial Statements included~~our condensed consolidated financial statements in Part I, Item 1 of this Quarterly ~~Report)~~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 decrease in general and administrative expenses primarily reflects the decrease in ~~professional service costs~~legal and accounting fees during the ~~2015~~2016 period.

Interest ~~and other~~ income. The decrease in interest ~~and other~~ income is primarily the result of a smaller amount of investable cash in the ~~2015~~2016 period compared to the ~~2014~~2015 period.

Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on those borrowings during the ~~2015~~2016 period compared to the ~~2014~~2015 period.

Gain ~~(loss)~~ 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. We recorded a $541 loss on early extinguishment of debt in the 2014 period in connection with the repayment of a $500,000 term loan.~~notes.

Loss on issuance of shares by ~~SIR.~~Select Income REIT. Loss on issuance of shares by SIR is a result of the issuance of common shares by SIR at prices below our then per share carrying value of our SIR common ~~shares.~~

~~Income tax benefit (expense).~~ ~~The change in income tax benefit (expense) reflects a decrease in our accrued state income tax liability~~shares during the 2015 ~~period due to lower estimated operating income in certain jurisdictions in 2015.~~

~~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, and amortization of the difference between the basis of our SIR investment and our proportionate share of SIR’s total shareholders’ equity book value.

~~Income (loss) from discontinued operations.~~ Income (loss) from discontinued operations reflects operating results for one property (one building) sold during the 2014 period and one property (one building) included in discontinued operations and held for sale as of September 30, 2015.

~~Net income.~~ ~~Our net income increased in the 2015 period compared to the 2014 period as a result of the changes noted above.~~

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~~Nine Months Ended September 30, 2015, Compared to Nine Months Ended September 30, 2014~~

Acquired Properties Results(2)

Disposed Property 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,

$

%

$

%


2015

2014


Change

Change

2015

2014

2015

2014

2015

2014


Change

Change

Rental income

$
170,948

$
172,494

$
(1,546)

(0.9)
%
$
14,383

$
6,545

$
1,533

$
7,367

$
186,864

$
186,406

$
458

0.2
%
Operating expenses:

Real estate taxes

21,038

19,476

1,562

8.0
%

1,579

470

202

1,059

22,819

21,005

1,814

8.6
%
Utility expenses

13,398

14,237

(839)

(5.9)
%

292

165

98

670

13,788

15,072

(1,284)

(8.5)
%
Other operating expenses

33,863

31,565

2,298

7.3
%

2,454

838

342

1,183

36,659

33,586

3,073

9.1
%
Total operating expenses

68,299

65,278

3,021

4.6
%

4,325

1,473

642

2,912

73,266

69,663

3,603

5.2
%
Net operating income(4)

$
102,649

$
107,216

$
(4,567)

(4.3)
%
$
10,058

$
5,072

$
891

$
4,455

113,598

116,743

(3,145)

(2.7)
%

Other expenses:

Depreciation and amortization

51,675

49,254

2,421

4.9
%
Loss on impairment of real estate

—

1,616

(1,616)

nm

Acquisition related costs

459

1,290

(831)

(64.4)
%
General and administrative

11,431

11,537

(106)

(0.9)
%
Total other expenses

63,565

63,697

(132)

(0.2)
%
Operating income

50,033

53,046

(3,013)

(5.7)
%
Interest and other income

14

68

(54)

(79.4)
%
Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $1,020 and $926, respectively)

(27,894)

(18,530)

(9,364)

50.5
%
Gain (loss) on early extinguishment of debt

34

(541)

575

nm

Loss on issuance of shares by SIR

(42,145)

(39)

(42,106)

nm

Loss on impairment of SIR investment

(203,297)

—

(203,297)

nm

Income (loss) from continuing operations before income taxes and equity in earnings of investees

(223,255)

34,004

(257,259)

(756.6)
%
Income tax expense

(49)

(130)

81

(62.3)
%
Equity in earnings of investees

16,072

4,931

11,141

225.9
%
Income (loss) from continuing operations

(207,232)

38,805

(246,037)

(634.0)
%
Income (loss) from discontinued operations

(390)

3,615

(4,005)

nm

Net income (loss)

$
(207,622)

$
42,420

$
(250,042)

(589.4)
%

Weighted average common shares outstanding (basic)

70,589

58,300

12,289

21.1
%
Weighted average common shares outstanding (diluted)

70,589

58,385

12,204

20.9
%

Per common share amounts (basic and diluted):

Income (loss) from continuing operations (basic)

$
(2.94)

$
0.67

$
(3.61)

nm

  Income (loss) from continuing operations (diluted)

$
(2.94)

$
0.66

$
(3.60)

nm

Income (loss) from discontinued operations

$
(0.01)

$
0.06

$
(0.07)

nm

Net income (loss)

$
(2.94)

$
0.73

$
(3.67)

nm

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

Net income (loss)

$
(207,622)

$
42,420

Plus: Depreciation and amortization

51,675

49,254

Plus: Loss on impairment of real estate

—

1,616

Plus: FFO attributable to SIR investment

43,961

11,230

Less: Equity in earnings  from SIR

(16,002)

(4,872)

Less: Increase in carrying value of asset held for sale

—

(2,344)

Less: Net gain on sale of properties from discontinued operations

—

(774)

Funds from operations

(127,988)

96,530

Plus: Acquisition related costs

459

1,290

Plus: Loss on early extinguishment of debt

—

541

Plus: Loss on issuance of shares by SIR

42,145

39

Plus: Loss on impairment of SIR investment

203,297

—

Plus: Normalized FFO attributable to SIR investment

51,177

12,874

Less: FFO attributable to SIR investment

(43,961)

(11,230)

Less: Gain on early extinguishment of debt

(34)

—

Normalized funds from operations

$
125,095

$
100,044

Funds from operations per common share (basic)

$
(1.81)

$
1.66

Funds from operations per common share (diluted)

$
(1.81)

$
1.65

Normalized funds from operations per common share (basic and diluted)

$
1.77

$
1.71

~~(1)~~

Comparable properties consist of 67 properties (86 buildings) we owned on September 30, 2015 and which we owned continuously since January 1, 2014, and excludes one property (one building) classified as discontinued operations.

~~(2)~~

~~Acquired properties consist of four properties (five buildings) we owned on September 30, 2015, which we acquired during the period from January 1, 2014 to September 30, 2015.~~

~~(3)~~

~~Disposed property consists of one property (one building) we sold during the period from January 1, 2015 to September 30, 2015.~~

~~(4)~~

~~See footnote (4) on page 24 for a definition of NOI.~~

~~(5)~~

~~See footnote (5) on page 24 for a definition of FFO and Normalized FFO.~~

We refer to the 67 properties (86 buildings) we owned on September 30, 2015 and which we have owned continuously since January 1, 2014, excluding one property (one building) classified as discontinued operations, as comparable properties. We refer to the four properties (five buildings) that we owned as of September 30, 2015, which we acquired during the period from January 1, 2014 to September 30, 2015, as acquired properties. We refer to the property (one building) that we sold during the period from January 1, 2014 to September 30, 2015 that was not classified as discontinued operations, as the disposed property.

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Our condensed consolidated statements of comprehensive income for the nine months ended September 30, 2015 include the operating results of the acquired properties for the entire period, as we acquired those properties prior to January 1, 2015, and the disposed property for less than the entire period, as that property was sold during the 2015 period. Our condensed consolidated statements of comprehensive income for the nine months ended September 30, 2014 include the operating results of the acquired properties for less than the entire period, as we acquired those properties during that period, and the disposed property for the entire period, as we sold that property after that 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, 2015, compared to the nine month period ended September 30, 2014.

~~Rental income.~~ The increase in rental income reflects the net effect of acquired and disposed properties offset by a decrease in rental income for comparable properties. Rental income from the acquired properties increased $7,838. Rental income from the disposed property declined $5,834. Rental income for comparable properties declined $1,546 due primarily to decreases in occupied space at certain of our properties in the 2015 period. Rental income includes non-cash straight line rent adjustments totaling $2,820 in the 2015 period and $3,378 in the 2014 period, and amortization of acquired leases and assumed lease obligations totaling ($862) in the 2015 period and ($630) in the 2014 period.

~~Real estate taxes.~~ The increase in real estate taxes reflects the net effect of acquired and disposed properties and an increase in real estate taxes for comparable properties. Real estate taxes from the acquired properties increased $1,109. Real estate taxes from the disposed property declined $857. Real estate taxes for comparable properties increased $1,562 due primarily to the effect of higher tax assessments at certain of our properties in the 2015 period.

~~Utility expenses.~~ The decrease in utility expenses primarily reflects the net effect of acquired and disposed properties and a decrease in utility expenses for comparable properties. Utility expenses from the acquired properties increased $127. Utility expense from the disposed property declined $572. Utility expenses at comparable properties declined $839 due primarily to colder than normal temperatures experienced in certain parts of the United States during the winter of 2014.

~~Other operating expenses.~~ The increase in other operating expenses reflects the net effect of acquired and disposed properties and an increase in expenses for comparable properties. Other operating expenses from the acquired properties increased $1,616. Other operating expenses from the disposed property declined $841. Other operating expenses at comparable properties increased $2,298 primarily as a result of increases in repair and maintenance costs at certain of our properties during the 2015 period and a reduction of property management fees from amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above (see Note 10 to the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report).

~~Depreciation and amortization.~~ The increase in depreciation and amortization reflects the net effect of property acquisitions and dispositions and improvements made to certain of our properties since January 1, 2014. Depreciation and amortization from the acquired properties increased $4,288. Depreciation and amortization from the disposed property declined $2,029. Depreciation and amortization at comparable properties increased $162, due primarily to depreciation and amortization of improvements made to certain of our properties after January 1, 2014, partially offset by certain depreciable leasing related assets becoming fully depreciated in 2014 and 2015.

~~Loss on impairment of real estate~~. Loss on asset impairment relates to the adjustment to reduce the carrying value of one property (one building) classified as held for sale during the 2014 period to estimated fair value less costs to sell.

~~Acquisition related costs.~~ ~~Acquisition related costs in both the 2015 and 2014 periods include legal and due diligence costs incurred in connection with our property acquisitions and other investment activity.~~

~~General and administrative.~~ The decrease in general and administrative expenses primarily reflects higher audit, insurance and other administrative costs in the 2014 period, partially offset by an increase in net business management fees recognized in amounts due under our business management agreement as a result of our net property acquisitions since January 1, 2014 net of amortization of the liability we recorded in connection with our June 2015 acquisition of RMR Inc. shares as discussed above (see Note 10 to the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report).

~~Interest and other income.~~ ~~The decrease in interest and other income is primarily the result of a smaller amount of investable cash in the 2015 period compared to the 2014 period.~~

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~~Interest expense.~~ ~~The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on those borrowings during the 2015 period compared to the 2014 period.~~

~~Gain (loss) on early extinguishment of debt~~. We recorded a $34 gain on early extinguishment of debt in the 2015 period in connection with the repayment of a mortgage note. We recorded a $541 loss on early extinguishment of debt in the 2014 period in connection with the repayment of a $500,000 term loan.

~~Loss on issuance of shares by SIR.~~ ~~Loss on issuance of shares by SIR is a result of the issuance of common shares by SIR during the 2015 period at prices below our then per share carrying value of our SIR common shares.~~

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

Income tax expense. The decrease in income tax expense reflects lower operating income in certain jurisdictions in the ~~2015~~2016 period ~~compared~~that is subject to ~~the 2014 period.~~state income taxes.

Equity in earnings (losses) of investees. Equity in earnings (losses) of investees represents our proportionate share of earnings from our investments in SIR and ~~AIC, and amortization of the difference between the basis of our SIR investment and our proportionate share of SIR’s total shareholders’ equity book value.~~Affiliates Insurance Company, or AIC.

~~Income (loss)~~Loss from discontinued operations. ~~Income (loss)~~Loss from discontinued operations reflects operating results ~~of two properties (two buildings) sold during the 2014 period, and~~for one property (one building) included in discontinued operations ~~and held for sale~~ as of September 30, 2015. Income (loss) from discontinued operations for the 2014 period includes a $2,344 increase in the carrying value of one property (one building) included in discontinued operations and a $774 gain from the sale of one property (one building) included in discontinued operations.March 31, 2016.

Net income (loss). ~~We experienced a~~Our net ~~loss~~income increased in the ~~2015~~2016 period compared to ~~net income in~~ the ~~2014~~2015 period as a result of the changes noted above.

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LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollar amounts in thousands)

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

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

our ability to control operating ~~cost increases~~expenses at our properties;

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

our receipt of distributions from our investment in SIR.

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

Our changes in cash flows for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 compared to the same period in ~~2014~~2015 were as follows: (i) cash provided by operating activities ~~decreased~~increased from ~~$92,041~~$28,248 in ~~2014~~2015 to ~~$89,053~~$31,212 in ~~2015;~~2016; (ii) cash used in investing activities ~~decreased~~increased from ~~$741,849~~$56,624 in ~~2014~~2015 to ~~$65,793~~$80,866 in ~~2015;~~2016; and (iii) ~~cash flow from financing activities changed from $647,073 of~~ cash provided by financing activities increased from $24,122 in ~~2014~~2015 to ~~$25,745 cash used~~$56,567 in ~~financing activities in 2015.~~2016.

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The ~~decrease~~increase in cash provided by operating activities for the ~~nine~~three month period ended ~~September 30, 2015~~March 31, 2016 as compared to the corresponding prior year period primarily reflects ~~increased payments for interest on borrowings and a decrease~~an increase in property ~~NOI the 2015 period, partially offset by~~net operating income and an increase in distributions of earnings received from our investment in SIR common shares, partially offset by unfavorable changes in working capital in the ~~2015~~2016 period. The ~~decrease~~increase in cash used in investing activities for the ~~nine~~three month period ended ~~September 30, 2015~~March 31, 2016 as compared to the corresponding prior year period was due primarily to ~~our~~an increase in acquisition ~~of approximately 21.5 million SIR common shares~~activity in the ~~2014~~2016 period versus disposition activity in the 2015 period, partially offset by our investment in SIR in the 2015 period and by a decrease in distributions in excess of earnings from our investment in SIR in the 2016 period. The ~~change~~increase in cash ~~(used in)~~ provided by financing activities for the ~~nine months~~three month period ended ~~September 30, 2015~~March 31, 2016 as compared to the corresponding prior year period was due primarily to ~~a common equity offering and~~ an ~~unsecured senior debt issuance during~~increase in net borrowings to fund higher net investment activity in the ~~2014 period.~~2016 period, partially offset by the repayment of mortgage debt.

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 ~~timing differences between our receipt of rents and~~ 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 unsecured revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting ~~certain~~ other conditions, we have an option to extend the stated maturity date of our unsecured revolving credit facility by one year to January 31, 2020. ~~Borrowings under our revolving credit facility bear~~We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at ~~September 30, 2015.~~ March 31, 2016, on the amount outstanding under our unsecured revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility, which was 25 basis points per annum at ~~September 30, 2015.~~March 31, 2016. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, ~~and~~ repay and reborrow funds available under our unsecured revolving credit facility until maturity, and no principal repayment is due until maturity. As of ~~September 30, 2015,~~March 31, 2016, the annual interest rate payable on borrowings under our unsecured revolving credit facility was ~~1.4%~~1.6%. As of ~~September 30, 2015~~March 31, 2016 and ~~October 27, 2015,~~April 26, 2016, we had ~~$114,000~~$311,000 and ~~$107,000,~~$303,000, respectively, outstanding and ~~$636,000~~$439,000 and ~~$643,000,~~$447,000, respectively, available to borrow under our unsecured revolving credit facility.

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Our $750,000 unsecured revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders, which also governs our two unsecured term loans:

Our $300,000 unsecured term loan, which matures on March 31, 2020, is prepayable without penalty at any time. ~~The amount outstanding under our $300,000 term loan bears~~We are required to pay interest at LIBOR plus a premium, which was 140 basis points per annum at ~~September 30, 2015.~~March 31, 2016, on the amount outstanding under our $300,000 unsecured term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2015,~~March 31, 2016, the annual interest rate for the amount outstanding under our $300,000 unsecured term loan was ~~1.6%~~1.8%.

Our $250,000 unsecured term loan, which matures on March 31, 2022, is prepayable at any time. If our $250,000 unsecured term loan is repaid on or prior ~~to November 22, 2015, a prepayment premium of 2.0% of the amount repaid would be payable. If our $250,000 term loan is repaid during the period from November 22, 2015~~ 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. ~~The amount outstanding under our $250,000 term loan bears~~We are required to pay interest at LIBOR plus a premium, which was 180 basis points per annum at ~~September 30, 2015.~~March 31, 2016, on the amount outstanding under our $250,000 unsecured term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of ~~September 30, 2015,~~March 31, 2016, the annual interest rate for the amount outstanding under our $250,000 unsecured term loan was ~~2.0%~~2.2%.

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 unsecured revolving credit facility and term loans provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under the unsecured revolving credit facility and term loans only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in the credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.

Our $350,000 of 3.75% senior unsecured notes ~~are~~ due 2019 are governed by an indenture and a supplement to the indenture and require semi-annual ~~payment~~payments of interest ~~only.~~only through maturity.

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our ~~$135,870~~$28,592 in mortgage ~~debt~~debts generally ~~requires~~require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of ~~September 30, 2015,~~March 31, 2016, we have estimated unspent leasing related obligations of ~~$8,629.~~$22,752, which excludes the estimated $12,800 cost of the expansion to be constructed at an existing property. Our debt maturities (other than our unsecured revolving credit facility) are as follows: ~~$429 in 2015, $107,933~~$1,084 in 2016, $1,549 in 2017, $1,671 in 2018, ~~$359,440~~$359,439 in 2019, $301,619 in 2020 and ~~$564,848~~$263,230 thereafter.

We currently expect to use cash balances, borrowings under our unsecured revolving credit facility, net proceeds from our property sales, distributions received from our investment in SIR, assumption of mortgage debt and net proceeds from offerings of equity or debt securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions.

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When significant amounts are outstanding under our unsecured revolving credit facility or the maturity date of our unsecured revolving credit facility, unsecured term loans, senior unsecured notes, mortgage notes or our other debts approach, we intend to explore alternatives for repaying or refinancing such amounts. Such alternatives may include incurring additional term debt, issuing equity or debt securities, extending the maturity date of our unsecured revolving credit facility and entering into a new revolving credit facility. We may ~~also~~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 provide assurance that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

Our ability to obtain, and the costs of, our future financings will depend primarily on market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our

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business in a manner which will afford us reasonable access to capital for investment and financing activities, but we cannot provide assurance that we will be able to successfully carry out this intention.

On February ~~26, 2015,~~25, 2016, we paid a regular quarterly distribution to common shareholders of record on January 22, 2016 of $0.43 per share, or approximately $30,252. On May 26, 2015, we paid a distribution to common shareholders of $0.43 per share, or approximately $30,256. On August 24, 2015, we paid a distribution to common shareholders of $0.43 per share, or $30,566.$30,584. We funded ~~these distributions~~this distribution using cash on hand and borrowings under our unsecured revolving credit facility. On ~~October 12, 2015,~~April 13, 2016, we declared a regular quarterly distribution payable to common shareholders of record on ~~October 23, 2015~~April 25, 2016 of $0.43 per share, or approximately $30,584. We expect to pay this distribution on or about ~~November~~May 23, ~~2015~~2016 using cash on hand and borrowings under our unsecured revolving credit facility.

In ~~July 2015,~~February 2016, we repaid, at par, a ~~$47,083~~$23,473 mortgage note ~~bearing~~requiring annual interest at ~~5.73%~~6.21% which was secured by aone office property ~~(two buildings)~~(one building) located in ~~Indianapolis, IN with~~Landover, MD using cash on hand and borrowings under our unsecured revolving credit facility. This mortgage note was scheduled to mature in ~~October 2015.~~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 unsecured revolving credit facility. This mortgage note was scheduled to mature in April 2016.

Off Balance Sheet Arrangements

As of ~~September 30, 2015,~~March 31, 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a ~~future~~ material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants (dollars in thousands)

Our principal debt obligations at ~~September 30, 2015 consist~~March 31, 2016 consisted of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan, our $250,000 unsecured term loan, $350,000 of publicly issued senior unsecured notes and ~~five~~three secured mortgage ~~loans~~notes that were assumed in connection with certain of our acquisitions. Our publicly issued senior unsecured notes are governed by an indenture. Our senior unsecured notes indenture and its supplement and ~~our~~the credit agreement for our unsecured revolving credit facility and our two unsecured term loans ~~provides~~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 supplement 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 and require us to maintain various financial ratios.~~circumstances. Our mortgage ~~loans~~notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. As of ~~September 30, 2015,~~March 31, 2016, we believe we were in compliance with the terms and conditions of our respective covenants under our senior unsecured notes indenture and its supplement and our credit agreement.

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

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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 supplement contain cross default provisions to any other debts of more than $25,000.

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Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, ~~RMR Inc.~~SIR and others related to them. ~~We also~~For example, we have ~~relationships~~no employees and ~~historical~~the personnel and ~~continuing transactions with~~various services we require to operate our business are provided to us by RMR LLC pursuant to management agreements; RMR Inc. is the managing member of RMR LLC and we own shares of class A common stock of RMR Inc. and the controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees. Also, we own common shares of SIR; and we and six other companies to which RMR LLC provides management services own in equal amounts AIC, an insurance company, and ~~which have trustees, directors~~we participate in a combined property insurance program arranged and ~~officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc.~~reinsured in part by AIC. For further information about these and other such relationships and related person transactions, please see ~~Note~~Notes 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, our Annual Report, our definitive Proxy Statement for our ~~2015~~2016 Annual Meeting of Shareholders ~~our Current Report on Form 8-K filed with the SEC on June 8, 2015~~ 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 ~~are available at the SEC’s website at www.sec.gov. Copies~~and copies of certain of our agreements with these related parties are publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov.

We believe that our agreements with related persons are on commercially reasonable terms. We also believe that our relationships with such related persons and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business. We may engage in additional transactions with related persons, including ~~businesses~~companies to which RMR LLC or its affiliates provide management services.

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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, ~~2014.~~2015. 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, 2015,~~March 31, 2016, 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 notes	$	350,000	3.75	%	$	13,307	2019	Semi-annually
Mortgage		83,000	5.55	%		4,670	2016	Monthly
Mortgage		23,586	6.21	%		1,485	2016	Monthly
Senior unsecured notes									$	350,000	3.75	%	$	13,307	2019	Semi-annually
Mortgage		14,215	5.88	%		847	2021	Monthly		14,104	5.88	%		841	2021	Monthly
Mortgage		8,787	7.00	%		624	2019	Monthly		8,669	7.00	%		615	2019	Monthly
Mortgage		6,282	8.15	%		519	2021	Monthly		5,819	8.15	%		481	2021	Monthly
	$	485,870			$	21,452			$	378,592			$	15,244

(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 senior unsecured notes require semi-annual interest payments through maturity. Our mortgages generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts ~~bear~~require interest 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 ~~$4,924.~~$3,821.

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, 2015,~~March 31, 2016, and discounted cash flow analysis 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 ~~change~~increase in interest rates would change the fair value of those obligations by approximately ~~$10,624.~~$6,300.

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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, 2015,~~March 31, 2016, our floating rate debt consisted of ~~$114,000~~$311,000 outstanding under our $750,000 unsecured revolving credit facility, our $300,000 unsecured term loan and our $250,000 unsecured term loan. Our unsecured revolving credit facility matures in January 2019 and, subject to ~~our meeting certain conditions, including our~~the payment of an extension fee and our meeting certain other conditions, we have the option to extend the stated maturity by one year to January 2020. No principal repayments are required under our unsecured revolving credit facility or our unsecured term loans prior to maturity, and ~~repayments~~we can borrow, repay and reborrow funds available under our unsecured revolving credit facility, ~~may be made, and redrawn~~ subject to conditions, at any time without penalty. Our $300,000 unsecured term loan matures on March 31, 2020. Our $250,000 unsecured term loan matures on March 31, 2022. Amounts outstanding under our unsecured term loans may be repaid at any time, but after they are repaid amounts may not be redrawn. Our $300,000 unsecured term loan may be repaid without penalty at any time. If our $250,000 unsecured term loan is repaid on or prior ~~to November 22, 2015, a prepayment premium of 2.0% of the amount repaid would be incurred. If our $250,000 unsecured term loan is repaid during the period from November 22, 2015~~ 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.

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Borrowings under our $750,000 unsecured revolving credit facility and unsecured term loans are in U.S. dollars and ~~bear~~require interest at a rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of our unsecured revolving credit facility or unsecured 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, 2015:~~March 31, 2016:


	Impact of Changes in Interest Rates								Impact of Changes in Interest Rates
			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, 2015	1.7	%	$	664,000	$	11,445	$	0.16
At March 31, 2016									1.9	%	$	861,000	$	16,586	$	0.23
100 bps increase	2.7	%	$	664,000	$	18,177	$	0.26	2.9	%	$	861,000	$	25,316	$	0.36

(1)

Weighted based on the respective interest rates and outstanding borrowings under our unsecured revolving credit facility and unsecured term loans as of ~~September 30, 2015.~~ March 31, 2016.

(2)

Based on the weighted average shares outstanding (diluted) for the ~~nine~~three months ended ~~September 30, 2015.~~March 31, 2016.

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, 2015~~March 31, 2016 if we were fully drawn on our unsecured revolving credit facility and our unsecured term loans remained outstanding:


	Impact of Changes in Interest Rates								Impact of Changes in Interest Rates
			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, 2015	1.6	%	$	1,300,000	$	21,089	$	0.30
At March 31, 2016									1.8	%	$	1,300,000	$	23,725	$	0.33
100 bps increase	2.6	%	$	1,300,000	$	34,269	$	0.49	2.8	%	$	1,300,000	$	36,906	$	0.52

(1)

Weighted based on the respective interest rates and outstanding borrowings under our unsecured revolving credit facility (assuming fully drawn) and our unsecured term loans as of ~~September 30, 2015.~~March 31, 2016.

(2)

Based on the weighted average shares outstanding (diluted) for the ~~nine~~three months ended ~~September 30, 2015.~~March 31, 2016.

The foregoing tables show the impact of an immediate change in floating interest rates as of ~~September 30, 2015.~~March 31, 2016. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our unsecured revolving credit facility, our unsecured 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.

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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 Treasurer and Chief Financial Officer, 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, Rules 13a-15 and 15d-15.~~amended. Based upon that evaluation, our Managing Trustees, our President and Chief Operating Officer and our Treasurer and Chief Financial Officer 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, 2015~~March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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��~~“ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “MAY” 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, RENEW LEASES, ENTER INTO NEW LEASES, NOT EXERCISE EARLY TERMINATION OPTIONS PURSUANT TO THEIR LEASES OR BE AFFECTED BY CYCLICAL ECONOMIC CONDITIONS OR GOVERNMENT BUDGET CONSTRAINTS,

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

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

OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND ~~FINANCINGS,~~DISPOSITIONS,

THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR UNSECURED 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,

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 DEBT AND EQUITY CAPITAL,

OUR CREDIT RATINGS,

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OUR EXPECTATION THAT WE ~~WILL~~ 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 ~~TAX STATUS~~QUALIFICATION FOR TAXATION AS A REAL ESTATE INVESTMENT TRUST, OR REIT,

~~OUR EXPECTED DISTRIBUTION OF RMR INC. CLASS A COMMON STOCK TO OUR SHAREHOLDERS,~~ AND

OTHER MATTERS.

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OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH BASIS 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 ~~LEASED PROPERTIES,~~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 ~~THEIR RELATED PERSONS AND ENTITIES,~~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 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 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,

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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,

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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 ~~PENDING AND FUTURE~~ 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,

WE ARE MARKETING TWO OFFICE PROPERTIES WITH AN AGGREGATE NET BOOK VALUE OF $15.4 MILLION FOR SALE. WE MAY ELECT NOT TO SELL THESE PROPERTIES AND THERE CAN BE NO ASSURANCE THAT WE WILL COMPLETE A SALE OF EITHER OF THESE PROPERTIES OR THAT ANY SUCH SALE WOULD REALIZE NET PROCEEDS IN AN AMOUNT AT LEAST EQUAL TO OUR BOOK VALUES OF THESE PROPERTIES,

CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR UNSECURED REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND ~~MEETING~~ OTHER ~~CUSTOMARY CREDIT FACILITY~~ CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,

ACTUAL COSTS UNDER OUR UNSECURED REVOLVING CREDIT FACILITY AND 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 UNSECURED 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 UNSECURED 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 UNSECURED REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING ~~CERTAIN~~ OTHER 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, THERE CAN BE NO ASSURANCE 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. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE,

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

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

Table of Contents

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,~~

~~Table of Contents~~

~~THE PURCHASE PRICE~~OTHERWISE; WE ~~PAID FOR THE RMR INC.~~MAY REALIZE A LOSS ON OUR INVESTMENT IN OUR SIR SHARES, AND OUR ECONOMIC OWNERSHIP INTEREST IN RMR LLC ARE STATED IN THIS QUARTERLY REPORT ON FORM 10-Q. AN IMPLICATION OF THESE STATEMENTS MAY BE THAT THE RMR INC. SHARES WE EXPECT TO DISTRIBUTE TO OUR SHAREHOLDERS WILL HAVE A MARKET VALUE AT LEAST EQUAL TO THE VALUE WE PAID FOR THE RMR INC. SHARES. IN FACT, THE VALUE OF THE RMR INC. SHARES MAY BE DIFFERENT FROM THE PRICE WE PAID FOR THE RMR INC. SHARES. THE MARKET VALUE OF THE RMR INC. SHARES WILL DEPEND UPON VARIOUS FACTORS, INCLUDING SOME THAT ARE BEYOND OUR CONTROL, SUCH AS MARKET CONDITIONS GENERALLY AT THE TIME THE RMR INC. SHARES ARE AVAILABLE FOR TRADING. THERE CAN BE NO ASSURANCE PROVIDED REGARDING THE PRICE AT WHICH THE RMR INC. SHARES WILL TRADE IF AND WHEN THEY ARE DISTRIBUTED AND LISTED ON A NATIONAL STOCK EXCHANGE,

WE CURRENTLY EXPECT TO ~~DISTRIBUTE~~SPEND APPROXIMATELY ~~HALF~~$12.8 MILLION TO REDEVELOP AND EXPAND AN EXISTING PROPERTY IN CONNECTION WITH A NEW LEASE AGREEMENT. IN ADDITION, AS OF MARCH 31, 2016, WE HAVE ESTIMATED UNSPENT LEASING RELATED OBLIGATIONS OF $22.8 MILLION, WHICH EXCLUDES THE ~~RMR INC. SHARES~~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 ~~ACQUIRED (EXCLUDING SHARES~~CURRENTLY EXPECT, AND WE MAY ~~RECEIVE AS A SHAREHOLDER OF SIR, WHICH WE CURRENTLY INTEND TO RETAIN) TO OUR SHAREHOLDERS.~~INCUR INCREASING AMOUNTS FOR THESE AND SIMILAR MATTERS IN THE PROCESS OF PREPARING A REGISTRATION STATEMENT FOR THE DISTRIBUTION OF THE RMR INC. SHARES REQUIRES EXTENSIVE LEGAL AND ACCOUNTING SERVICES. THE REGISTRATION STATEMENT IS SUBJECT TO REVIEW BY SEC STAFF, WHICH MAY TAKE CONSIDERABLE TIME TO COMPLETE. THE LISTING OF THE RMR INC. SHARES ON A NATIONAL STOCK EXCHANGE WILL ALSO BE SUBJECT TO THE SATISFACTION OF THE LISTING REQUIREMENTS AND APPROVAL OF THE APPLICABLE STOCK EXCHANGE. WE CAN PROVIDE NO ASSURANCE WHEN OR IF THE REGISTRATION STATEMENT WILL BE DECLARED EFFECTIVE BY THE SEC, THAT THE RMR INC. SHARES WILL BE APPROVED FOR LISTING ON A NATIONAL STOCK EXCHANGE OR WHEN THE DISTRIBUTION OF THE RMR INC. SHARES WILL OCCUR, IF EVER, AND

THE BUSINESS MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE BEEN AMENDED AND EXTENDED FOR 20 YEAR TERMS. THE AMENDED MANAGEMENT AGREEMENTS INCLUDE TERMS WHICH PERMIT EARLY TERMINATION AND EXTENSIONS IN CERTAIN CIRCUMSTANCES. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR 20 YEARS OR FOR SHORTER OR LONGER TERMS.FUTURE.

THESE 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.

3734

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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 and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015.~~Report.

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

~~Issuer purchase of equity securities.The following table provides information about our purchases of our equity securities during the quarter ended September 30, 2015:~~

Maximum

Total Number of

Approximate Dollar

Shares Purchased

Value of Shares that

as Part of Publicly

May Yet Be Purchased

Number of Shares

Average Price

Announced Plans

Under the Plans or
Calendar Month

Purchased (1)

Paid per Share

or Programs

Programs
September 2015

10,721

$
16.12

$
—

$
—
Total

10,721

$
16.12

$
—

$
—

⁽¹⁾

During September 2015, all common share purchases were made to satisfy certain of our officers’ and other RMR LLC employees’ tax withholding and payment obligations in connection with the vesting of awards of our restricted common shares. We repurchased these shares at their fair market value based upon the trading price of our common shares on the repurchase date.

3835

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Item 6. Exhibits


Exhibit Number	Description

3.1	Composite Copy of Amended and Restated Declaration of Trust, dated September 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, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.)

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.)

~~10.1~~4.4	~~First Amendment~~Registration Rights and Lock-Up Agreement, dated June 5, 2015, among the Company, ABP Trust, Barry M. Portnoy and Adam D. Portnoy. (Incorporated by reference to ~~2009 Incentive Share Award Plan. (Filed herewith.)~~

~~10.2~~	the Company’s Current Report on Form ~~of Restricted Share Agreement. (Filed herewith)~~8-K dated June 5, 2015.)

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, 2015~~March 31, 2016 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.)

3936

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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 29, 2015~~April 28, 2016


	By:	/s/ Mark L. Kleifges
		Mark L. Kleifges Treasurer and Chief Financial Officer (principal financial and accounting officer) Dated: ~~October 29, 2015~~April 28, 2016

4037


	Three months ended September 30, 2014
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Rental income	$	64,158	$	—	$	—	$	64,158

Expenses:
Real estate taxes		7,027		—		—		7,027
Utility expenses		5,327		—		—		5,327
Other operating expenses		11,685		—		—		11,685
Depreciation and amortization		17,636		—		—		17,636
Loss on impairment of real estate		1,616		—		—		1,616
Acquisition related costs		110		—		—		110
General and administrative		—		—		4,329		4,329
Total expenses		43,401		—		4,329		47,730

Operating income (loss)		20,757		—		(4,329)		16,428
Interest and other income		—		—		10		10
Interest expense		(2,326)		—		(6,519)		(8,845)
Loss on early extinguishment of debt		—		—		(541)		(541)
Loss on issuance of shares by SIR		—		(39)		—		(39)
Income (loss) from continuing operations before income taxes and
equity in earnings of investees		18,431		(39)		(11,379)		7,013
Income tax expense		—		—		(7)		(7)
Equity in earnings of investees		—		4,872		38		4,910
Income (loss) from continuing operations		18,431		4,833		(11,348)		11,916
Income from discontinued operations		706		—		—		706
Net income (loss)	$	19,137	$	4,833	$	(11,348)	$	12,622


	Nine months ended September 30, 2014
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Rental income	$	186,406	$	—	$	—	$	186,406

Expenses:
Real estate taxes		21,005		—		—		21,005
Utility expenses		15,072		—		—		15,072
Other operating expenses		33,586		—		—		33,586
Depreciation and amortization		49,254		—		—		49,254
Loss on impairment of real estate		1,616		—		—		1,616
Acquisition related costs		1,070		—		220		1,290
General and administrative		—		—		11,537		11,537
Total expenses		121,603		—		11,757		133,360

Operating income (loss)		64,803		—		(11,757)		53,046
Interest and other income		—		—		68		68
Interest expense		(13,029)		—		(5,501)		(18,530)
Loss on early extinguishment of debt		—		—		(541)		(541)
Loss on issuance of shares by SIR		—		(39)		—		(39)
Income (loss) from continuing operations before income taxes and
equity in earnings of investees		51,774		(39)		(17,731)		34,004
Income tax expense		—		—		(130)		(130)
Equity in earnings of investees		—		4,872		59		4,931
Income (loss) from continuing operations		51,774		4,833		(17,802)		38,805
Income from discontinued operations		3,615		—		—		3,615
Net income (loss)	$	55,389		4,833	$	(17,802)	$	42,420

	As of December 31, 2014
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Total Assets	$	1,714,130	$	680,137	$	33,348	$	2,427,615


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Tenant improvements(1)	$	2,213	$	1,861	$	5,039	$	5,386
Leasing costs(2)	$	439	$	437	$	2,876	$	1,439
Building improvements(3)	$	2,210	$	2,788	$	4,151	$	5,783
Development, redevelopment and other activities(4)	$	946	$	168	$	1,167	$	1,169


									Acquired Properties Results(2)				Disposed Property 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,
						$	%															$	%
	2015		2014			Change	Change		2015		2014		2015		2014		2015		2014			Change	Change

Rental income	$	170,948	$	172,494	$	(1,546)	(0.9)	%	$	14,383	$	6,545	$	1,533	$	7,367	$	186,864	$	186,406	$	458	0.2	%
Operating expenses:
Real estate taxes		21,038		19,476		1,562	8.0	%		1,579		470		202		1,059		22,819		21,005		1,814	8.6	%
Utility expenses		13,398		14,237		(839)	(5.9)	%		292		165		98		670		13,788		15,072		(1,284)	(8.5)	%
Other operating expenses		33,863		31,565		2,298	7.3	%		2,454		838		342		1,183		36,659		33,586		3,073	9.1	%
Total operating expenses		68,299		65,278		3,021	4.6	%		4,325		1,473		642		2,912		73,266		69,663		3,603	5.2	%
Net operating income(4)	$	102,649	$	107,216	$	(4,567)	(4.3)	%	$	10,058	$	5,072	$	891	$	4,455		113,598		116,743		(3,145)	(2.7)	%

Other expenses:
Depreciation and amortization																		51,675		49,254		2,421	4.9	%
Loss on impairment of real estate																		—		1,616		(1,616)	nm
Acquisition related costs																		459		1,290		(831)	(64.4)	%
General and administrative																		11,431		11,537		(106)	(0.9)	%
Total other expenses																		63,565		63,697		(132)	(0.2)	%
Operating income																		50,033		53,046		(3,013)	(5.7)	%
Interest and other income																		14		68		(54)	(79.4)	%
Interest expense (including net amortization of debt premiums and discounts and deferred financing fees of $1,020 and $926, respectively)																		(27,894)		(18,530)		(9,364)	50.5	%
Gain (loss) on early extinguishment of debt																		34		(541)		575	nm
Loss on issuance of shares by SIR																		(42,145)		(39)		(42,106)	nm
Loss on impairment of SIR investment																		(203,297)		—		(203,297)	nm
Income (loss) from continuing operations before income taxes and equity in earnings of investees																		(223,255)		34,004		(257,259)	(756.6)	%
Income tax expense																		(49)		(130)		81	(62.3)	%
Equity in earnings of investees																		16,072		4,931		11,141	225.9	%
Income (loss) from continuing operations																		(207,232)		38,805		(246,037)	(634.0)	%
Income (loss) from discontinued operations																		(390)		3,615		(4,005)	nm
Net income (loss)																	$	(207,622)	$	42,420	$	(250,042)	(589.4)	%

Weighted average common shares outstanding (basic)																		70,589		58,300		12,289	21.1	%
Weighted average common shares outstanding (diluted)																		70,589		58,385		12,204	20.9	%

Per common share amounts (basic and diluted):
Income (loss) from continuing operations (basic)																	$	(2.94)	$	0.67	$	(3.61)	nm
Income (loss) from continuing operations (diluted)																	$	(2.94)	$	0.66	$	(3.60)	nm
Income (loss) from discontinued operations																	$	(0.01)	$	0.06	$	(0.07)	nm
Net income (loss)																	$	(2.94)	$	0.73	$	(3.67)	nm

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

Net income (loss)																	$	(207,622)	$	42,420
Plus: Depreciation and amortization																		51,675		49,254
Plus: Loss on impairment of real estate																		—		1,616
Plus: FFO attributable to SIR investment																		43,961		11,230
Less: Equity in earnings from SIR																		(16,002)		(4,872)
Less: Increase in carrying value of asset held for sale																		—		(2,344)
Less: Net gain on sale of properties from discontinued operations																		—		(774)
Funds from operations																		(127,988)		96,530
Plus: Acquisition related costs																		459		1,290
Plus: Loss on early extinguishment of debt																		—		541
Plus: Loss on issuance of shares by SIR																		42,145		39
Plus: Loss on impairment of SIR investment																		203,297		—
Plus: Normalized FFO attributable to SIR investment																		51,177		12,874
Less: FFO attributable to SIR investment																		(43,961)		(11,230)
Less: Gain on early extinguishment of debt																		(34)		—
Normalized funds from operations																	$	125,095	$	100,044
Funds from operations per common share (basic)																	$	(1.81)	$	1.66
Funds from operations per common share (diluted)																	$	(1.81)	$	1.65
Normalized funds from operations per common share (basic and diluted)																	$	1.77	$	1.71


							Maximum
					Total Number of		Approximate Dollar
					Shares Purchased		Value of Shares that
					as Part of Publicly		May Yet Be Purchased
	Number of Shares	Average Price			Announced Plans		Under the Plans or
Calendar Month	Purchased (1)	Paid per Share		or Programs		Programs
September 2015	10,721	$	16.12	$	—	$	—
Total	10,721	$	16.12	$	—	$	—

Supplemental cash flow information:

Interest paid

Income taxes paid