Maryland | 45-4071747 | |
(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) |
Large accelerated filer ☒ | Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company ☐ | |
(Do not check if a smaller reporting company) |
Page | ||
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Real estate properties: | ||||||||
Land | $ | 1,037,445 | $ | 1,036,425 | ||||
Buildings and improvements | 3,099,126 | 3,083,243 | ||||||
4,136,571 | 4,119,668 | |||||||
Accumulated depreciation | (222,982 | ) | (164,779 | ) | ||||
3,913,589 | 3,954,889 | |||||||
Acquired real estate leases, net | 519,952 | 566,195 | ||||||
Cash and cash equivalents | 16,697 | 17,876 | ||||||
Restricted cash | 1,203 | 1,171 | ||||||
Rents receivable, including straight line rents of $111,318 and $92,264, respectively, net of allowance for doubtful accounts of $808 and $464, respectively | 117,163 | 99,307 | ||||||
Deferred leasing costs, net | 9,762 | 7,221 | ||||||
Other assets, net | 78,890 | 37,686 | ||||||
Total assets | $ | 4,657,256 | $ | 4,684,345 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Unsecured revolving credit facility | $ | 297,000 | $ | 303,000 | ||||
Unsecured term loan, net | 348,249 | 347,876 | ||||||
Senior unsecured notes, net | 1,429,247 | 1,426,025 | ||||||
Mortgage notes payable, net | 286,102 | 286,706 | ||||||
Accounts payable and other liabilities | 89,393 | 105,403 | ||||||
Assumed real estate lease obligations, net | 79,833 | 86,495 | ||||||
Rents collected in advance | 18,957 | 16,295 | ||||||
Security deposits | 11,785 | 11,845 | ||||||
Due to related persons | 4,756 | 3,740 | ||||||
Total liabilities | 2,565,322 | 2,587,385 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Common shares of beneficial interest, $.01 par value: 125,000,000 shares authorized; 89,428,912 and 89,374,029 shares issued and outstanding, respectively | 894 | 894 | ||||||
Additional paid in capital | 2,179,697 | 2,178,477 | ||||||
Cumulative net income | 417,085 | 324,986 | ||||||
Cumulative other comprehensive income (loss) | 17,029 | (19,587 | ) | |||||
Cumulative common distributions | (522,771 | ) | (387,810 | ) | ||||
Total shareholders' equity | 2,091,934 | 2,096,960 | ||||||
Total liabilities and shareholders' equity | $ | 4,657,256 | $ | 4,684,345 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
REVENUES: | ||||||||||||||||
Rental income | $ | 96,037 | $ | 94,745 | $ | 290,512 | $ | 267,389 | ||||||||
Tenant reimbursements and other income | 18,999 | 17,197 | 56,660 | 46,182 | ||||||||||||
Total revenues | 115,036 | 111,942 | 347,172 | 313,571 | ||||||||||||
EXPENSES: | ||||||||||||||||
Real estate taxes | 10,755 | 9,871 | 31,565 | 27,247 | ||||||||||||
Other operating expenses | 14,394 | 11,313 | 39,987 | 30,121 | ||||||||||||
Depreciation and amortization | 33,366 | 33,070 | 100,240 | 90,179 | ||||||||||||
Acquisition related costs | 13 | 402 | 71 | 21,720 | ||||||||||||
General and administrative | 7,553 | 6,328 | 21,903 | 19,488 | ||||||||||||
Total expenses | 66,081 | 60,984 | 193,766 | 188,755 | ||||||||||||
Operating income | 48,955 | 50,958 | 153,406 | 124,816 | ||||||||||||
Dividend income | 397 | — | 872 | — | ||||||||||||
Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $1,374, $1,357, $4,124 and $3,738, respectively) | (20,690 | ) | (20,034 | ) | (61,883 | ) | (53,710 | ) | ||||||||
Loss on early extinguishment of debt | — | — | — | (6,845 | ) | |||||||||||
Income before income tax expense and equity in earnings (loss) of an investee | 28,662 | 30,924 | 92,395 | 64,261 | ||||||||||||
Income tax expense | (107 | ) | (98 | ) | (370 | ) | (324 | ) | ||||||||
Equity in earnings (loss) of an investee | 13 | (25 | ) | 107 | 70 | |||||||||||
Net income | 28,568 | 30,801 | 92,132 | 64,007 | ||||||||||||
Net income allocated to noncontrolling interest | — | (46 | ) | (33 | ) | (135 | ) | |||||||||
Net income attributed to SIR | 28,568 | 30,755 | 92,099 | 63,872 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain on investment in available for sale securities | 11,061 | — | 37,339 | — | ||||||||||||
Unrealized gain (loss) on interest rate swap | 312 | (831 | ) | (898 | ) | (181 | ) | |||||||||
Equity in unrealized gain (loss) of an investee | 80 | (72 | ) | 175 | (91 | ) | ||||||||||
Other comprehensive income (loss) | 11,453 | (903 | ) | 36,616 | (272 | ) | ||||||||||
Comprehensive income | 40,021 | 29,898 | 128,748 | 63,735 | ||||||||||||
Comprehensive income allocated to noncontrolling interest | — | (46 | ) | (33 | ) | (135 | ) | |||||||||
Comprehensive income attributed to SIR | $ | 40,021 | $ | 29,852 | $ | 128,715 | $ | 63,600 | ||||||||
Weighted average common shares outstanding - basic | 89,308 | 89,267 | 89,295 | 85,827 | ||||||||||||
Weighted average common shares outstanding - diluted | 89,334 | 89,274 | 89,318 | 85,837 | ||||||||||||
Basic and diluted net income attributed to SIR per common share | $ | 0.32 | $ | 0.34 | $ | 1.03 | $ | 0.74 |
Nine Months Ended September 30, | |||||||
2016 | 2015 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income | $ | 92,132 | $ | 64,007 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation | 58,482 | 53,090 | |||||
Net amortization of debt premiums and discounts and debt issuance costs | 4,124 | 3,738 | |||||
Amortization of acquired real estate leases and assumed real estate lease obligations | 39,582 | 33,098 | |||||
Amortization of deferred leasing costs | 1,037 | 1,176 | |||||
Provision for losses on rents receivable | 431 | (453 | ) | ||||
Straight line rental income | (19,054 | ) | (20,395 | ) | |||
Loss on early extinguishment of debt | — | 6,845 | |||||
Other non-cash expenses, net | (215 | ) | 886 | ||||
Equity in earnings of an investee | (107 | ) | (70 | ) | |||
Change in assets and liabilities: | |||||||
Restricted cash | (32 | ) | 24 | ||||
Rents receivable | 767 | 2,048 | |||||
Deferred leasing costs | (3,794 | ) | (1,342 | ) | |||
Other assets | (4,627 | ) | (6,345 | ) | |||
Accounts payable and other liabilities | (11,137 | ) | 11,790 | ||||
Rents collected in advance | 2,662 | (2,750 | ) | ||||
Security deposits | (60 | ) | 310 | ||||
Due to related persons | 1,016 | 1,357 | |||||
Net cash provided by operating activities | 161,207 | 147,014 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Real estate acquisitions and deposits | (10,200 | ) | (2,147,626 | ) | |||
Real estate improvements | (6,739 | ) | (2,657 | ) | |||
Proceeds from sale of properties, net | — | 509,045 | |||||
Investment in The RMR Group Inc. | — | (18,461 | ) | ||||
Net cash used in investing activities | (16,939 | ) | (1,659,699 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from issuance of senior unsecured notes, net | — | 1,433,694 | |||||
Proceeds from borrowings | 135,000 | 1,774,000 | |||||
Payments of borrowings | (141,207 | ) | (1,546,182 | ) | |||
Debt issuance costs | — | (23,761 | ) | ||||
Distributions to common shareholders | (134,961 | ) | (112,910 | ) | |||
Repurchase of common shares | (305 | ) | (130 | ) | |||
Purchase of noncontrolling interest | (3,908 | ) | — | ||||
Distributions to noncontrolling interest | (66 | ) | (283 | ) | |||
Net cash (used in) provided by financing activities | (145,447 | ) | 1,524,428 | ||||
(Decrease) increase in cash and cash equivalents | (1,179 | ) | 11,743 | ||||
Cash and cash equivalents at beginning of period | 17,876 | 13,504 | |||||
Cash and cash equivalents at end of period | $ | 16,697 | $ | 25,247 |
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Interest paid | $ | 71,374 | $ | 40,051 | ||||
Income taxes paid | $ | 409 | $ | 294 | ||||
NON-CASH INVESTING ACTIVITIES: | ||||||||
Real estate and investment acquired by issuance of shares | $ | — | $ | (736,740 | ) | |||
Real estate acquired by assumption of mortgage notes payable | $ | — | $ | (297,698 | ) | |||
Real estate sold by assumption of mortgage notes payable | $ | — | $ | 29,955 | ||||
Working capital assumed | $ | — | $ | (20,720 | ) | |||
NON-CASH FINANCING ACTIVITIES: | ||||||||
Assumption of mortgage notes payable | $ | — | $ | 297,698 | ||||
Mortgage notes payable assumed in real estate sale | $ | — | $ | (29,955 | ) | |||
Issuance of SIR common shares | $ | — | $ | 736,740 |
Properties/ | Square | Purchase | Building and | ||||||||||||||||
Date | Location | Buildings | Feet | Price (1) | Land | Improvements | |||||||||||||
July 2016 | Huntsville, AL (2) | 1 / 1 | 57,420 | $ | 10,200 | $ | 1,020 | $ | 9,180 |
(1) | Purchase price excludes acquisition related costs. |
(2) | We capitalized acquisition related costs of $90 related to this transaction. The allocation of purchase price is based on preliminary estimates and may change upon the completion of third party valuations and our analysis of land and building valuations. |
Fair Value | |||||||||||||||||
Notional | of Liability | ||||||||||||||||
Amount as of | Interest | Effective | Maturity | as of | |||||||||||||
Balance Sheet Location | September 30, 2016 | Rate (1) | Date | Date | September 30, 2016 | ||||||||||||
Interest Rate Swap | Accounts Payable and Other Liabilities | $ | 41,000 | 4.16 | % | 1/29/2015 | 8/3/2020 | $ | 1,920 |
(1) | The interest rate consists of the underlying index swapped to a fixed rate and the applicable interest rate spread. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Amount of gain (loss) recognized in cumulative other comprehensive income (loss) (effective portion) | $ | 219 | $ | (953 | ) | $ | (1,182 | ) | $ | (273 | ) | |
Amount of gain (loss) reclassified from cumulative other comprehensive income (loss) into interest expense (effective portion) | $ | 93 | $ | 122 | $ | 284 | $ | 92 |
Fair Value at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Recurring Fair Value Measurements: | ||||||||||||||||
Assets: | ||||||||||||||||
Investment in RMR Inc. (1) | $ | 60,205 | $ | 60,205 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Interest rate swap (2) | $ | (1,920 | ) | $ | — | $ | (1,920 | ) | $ | — |
(1) | Our 1,586,836 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 $42,686. The unrealized gain of $17,519 for these shares as of September 30, 2016 is included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. |
(2) | As discussed in Note 5, we have an interest rate swap agreement on a $41,000 mortgage note. This interest rate swap agreement is carried at fair value and is included in accounts payable and other liabilities in our condensed consolidated balance sheets and is valued using Level 2 inputs. The fair value of this instrument is determined using interest rate pricing models. Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimate presented in the table above is not necessarily indicative of the amount for which we could be liable upon extinguishment of the liability. |
At September 30, 2016 | At December 31, 2015 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value (1) | Fair Value | Value (1) | Fair Value | |||||||||||||
Senior unsecured notes, due 2018 at 2.85% | $ | 348,367 | $ | 352,037 | $ | 347,448 | $ | 353,063 | ||||||||
Senior unsecured notes, due 2020 at 3.60% | $ | 395,648 | $ | 406,140 | $ | 394,712 | $ | 402,984 | ||||||||
Senior unsecured notes, due 2022 at 4.15% | $ | 295,097 | $ | 302,055 | $ | 294,471 | $ | 293,373 | ||||||||
Senior unsecured notes, due 2025 at 4.50% | $ | 390,135 | $ | 405,038 | $ | 389,394 | $ | 386,000 | ||||||||
Mortgage notes payable | $ | 245,869 | $ | 251,792 | $ | 246,473 | $ | 242,435 |
(1) | Includes unamortized debt issuance costs, premiums and discounts. |
Three Months Ended September 30, 2016 | ||||||||||||||||
Unrealized Gain | Unrealized | Equity in | ||||||||||||||
on Investment | Gain (Loss) | Unrealized | ||||||||||||||
in Available for | on Derivative | Gain of an | ||||||||||||||
Sale Securities | Instruments (1) | Investee (2) | Total | |||||||||||||
Balance at June 30, 2016 | $ | 6,458 | $ | (934 | ) | $ | 52 | $ | 5,576 | |||||||
Other comprehensive income before reclassifications | 11,061 | 219 | 71 | 11,351 | ||||||||||||
Amounts reclassified from cumulative other comprehensive income (loss) to net income | — | 93 | 9 | 102 | ||||||||||||
Net current period other comprehensive income | 11,061 | 312 | 80 | 11,453 | ||||||||||||
Balance at September 30, 2016 | $ | 17,519 | $ | (622 | ) | $ | 132 | $ | 17,029 |
(1) | Amounts reclassified from cumulative other comprehensive income (loss) are included in interest expense in our condensed consolidated statements of comprehensive income. |
(2) | Amounts reclassified from cumulative other comprehensive income (loss) are included in equity in earnings of an investee in our condensed consolidated statements of comprehensive income. |
Nine Months Ended September 30, 2016 | ||||||||||||||||
Unrealized Gain | Unrealized | Equity in | ||||||||||||||
(Loss) on Investment | Gain (Loss) | Unrealized Gain | ||||||||||||||
in Available for | on Derivative | (Loss) of an | ||||||||||||||
Sale Securities | Instruments (1) | Investee (2) | Total | |||||||||||||
Balance at December 31, 2015 | $ | (19,820 | ) | $ | 276 | $ | (43 | ) | $ | (19,587 | ) | |||||
Other comprehensive income (loss) before reclassifications | 37,339 | (1,182 | ) | 163 | 36,320 | |||||||||||
Amounts reclassified from cumulative other comprehensive income (loss) to net income | — | 284 | 12 | 296 | ||||||||||||
Net current period other comprehensive income (loss) | 37,339 | (898 | ) | 175 | 36,616 | |||||||||||
Balance at September 30, 2016 | $ | 17,519 | $ | (622 | ) | $ | 132 | $ | 17,029 |
(1) | Amounts reclassified from cumulative other comprehensive income (loss) are included in interest expense in our condensed consolidated statements of comprehensive income. |
(2) | Amounts reclassified from cumulative other comprehensive income (loss) are included in equity in earnings of an investee in our condensed consolidated statements of comprehensive income. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Weighted average common shares for basic earnings per share | 89,308 | 89,267 | 89,295 | 85,827 | ||||||||
Effect of dilutive securities: unvested share awards | 26 | 7 | 23 | 10 | ||||||||
Weighted average common shares for diluted earnings per share | 89,334 | 89,274 | 89,318 | 85,837 |
All Properties | Comparable Properties(1) | |||||||||||||||
As of September 30, | As of September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Total properties | 120 | 118 | 51 | 51 | ||||||||||||
Total rentable square feet (2) | 44,763 | 44,606 | 27,671 | 27,671 | ||||||||||||
Percent leased (3) | 96.8 | % | 97.7 | % | 94.8 | % | 96.3 | % |
(1) | Consists of 51 properties (281 buildings, leasable land parcels and easements) that we owned continuously since January 1, 2015. |
(2) | Subject to modest adjustments when space is re-measured or re-configured for new tenants and when land leases are converted to building leases. |
(3) | Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of September 30, 2016, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Average annualized effective rental rate per square foot leased: (1) | |||||||||||||||
All Properties | $ | 10.62 | $ | 10.32 | $ | 10.64 | $ | 10.11 | |||||||
Comparable Properties (2) | $ | 10.30 | $ | 10.24 | $ | 8.89 | $ | 8.74 |
(1) | Average annualized effective rental rate per square foot leased represents annualized total revenue during the period specified divided by the average rentable square feet leased during the period specified. |
(2) | Comparable Properties for the three months ended September 30, 2016 and 2015 consist of 116 properties (355 buildings, leasable land parcels and easements) that we owned continuously since July 1, 2015. Comparable Properties for the nine months ended September 30, 2016 and 2015 consist of 51 properties (281 buildings, leasable land parcels and easements) that we owned continuously since January 1, 2015. |
Cumulative | Percent of | |||||||||||||||||||||||||
Percent of | Percent of | Total | Cumulative | |||||||||||||||||||||||
Total | Total | Annualized | Annualized | Percent of Total | ||||||||||||||||||||||
Rented | Rented | Rented | Rental | Rental | Annualized | |||||||||||||||||||||
Number of | Square Feet | Square Feet | Square Feet | Revenue | Revenue | Rental Revenue | ||||||||||||||||||||
Year | Tenants | Expiring (1) | Expiring (1) | Expiring (1) | Expiring | Expiring | Expiring | |||||||||||||||||||
10/1/2016 - 12/31/2016 | 9 | 134 | 0.3 | % | 0.3 | % | $ | 625 | 0.1 | % | 0.1 | % | ||||||||||||||
2017 | 13 | 476 | 1.1 | % | 1.4 | % | 5,074 | 1.1 | % | 1.2 | % | |||||||||||||||
2018 | 25 | 1,138 | 2.6 | % | 4.0 | % | 14,360 | 3.2 | % | 4.4 | % | |||||||||||||||
2019 | 18 | 1,887 | 4.4 | % | 8.4 | % | 8,724 | 1.9 | % | 6.3 | % | |||||||||||||||
2020 | 15 | 961 | 2.2 | % | 10.6 | % | 9,115 | 2.0 | % | 8.3 | % | |||||||||||||||
2021 | 19 | 1,441 | 3.3 | % | 13.9 | % | 12,871 | 2.9 | % | 11.2 | % | |||||||||||||||
2022 | 70 | 3,917 | 9.0 | % | 22.9 | % | 49,185 | 10.9 | % | 22.1 | % | |||||||||||||||
2023 | 24 | 2,942 | 6.8 | % | 29.7 | % | 38,339 | 8.5 | % | 30.6 | % | |||||||||||||||
2024 | 23 | 7,001 | 16.2 | % | 45.9 | % | 68,719 | 15.2 | % | 45.8 | % | |||||||||||||||
2025 | 16 | 1,770 | 4.1 | % | 50.0 | % | 26,208 | 5.8 | % | 51.6 | % | |||||||||||||||
Thereafter | 109 | 21,666 | 50.0 | % | 100.0 | % | 218,389 | 48.4 | % | 100.0 | % | |||||||||||||||
341 | 43,333 | 100.0 | % | $ | 451,609 | 100.0 | % | |||||||||||||||||||
Weighted average remaining lease term (in years): | 10.6 | 10.1 |
(1) | Rented square feet is pursuant to existing leases as of September 30, 2016, and includes (i) space being fitted out for occupancy pursuant to existing leases, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
Annualized | ||||
Rental Revenue | ||||
as of September 30, 2016 | ||||
Scheduled to Reset | ||||
10/1/2016 - 12/31/2016 | $ | — | ||
2017 | 1,883 | |||
2018 | 2,525 | |||
2019 and thereafter | 30,101 | |||
Total | $ | 34,509 |
% of | ||||||||||||||
% of Total | Annualized Rental | |||||||||||||
Tenant | Property Type | Sq. Ft. (1) | Sq. Ft. (1) | Revenue | ||||||||||
1. | Shook, Hardy & Bacon L.L.P. | Mainland Properties | 596 | 1.4 | % | 4.0 | % | |||||||
2. | Tellabs, Inc. | Mainland Properties | 820 | 1.9 | % | 3.7 | % | |||||||
3. | Amazon.com, Inc. | Mainland Properties | 3,048 | 7.0 | % | 3.6 | % | |||||||
4. | Bank of America, National Association | Mainland Properties | 554 | 1.3 | % | 3.2 | % | |||||||
5. | Noble Energy, Inc. | Mainland Properties | 497 | 1.1 | % | 3.1 | % | |||||||
6. | Tesoro Corporation | Mainland Properties | 618 | 1.4 | % | 3.1 | % | |||||||
7. | Cinram Group, Inc. | Mainland Properties | 1,873 | 4.3 | % | 2.9 | % | |||||||
8. | F5 Networks, Inc. | Mainland Properties | 299 | 0.7 | % | 2.9 | % | |||||||
9. | WestRock Company | Mainland Properties | 311 | 0.7 | % | 2.4 | % | |||||||
10. | Orbital ATK, Inc. | Mainland Properties | 337 | 0.8 | % | 2.3 | % | |||||||
11. | Tyson Foods, Inc. | Mainland Properties | 248 | 0.6 | % | 2.1 | % | |||||||
12. | Novell, Inc. | Mainland Properties | 406 | 0.9 | % | 1.8 | % | |||||||
13. | FedEx Corporation | Mainland Properties | 795 | 1.8 | % | 1.7 | % | |||||||
14. | PNC Bank, National Association | Mainland Properties | 441 | 1.0 | % | 1.4 | % | |||||||
15. | Allstate Insurance Company | Mainland Properties | 458 | 1.1 | % | 1.3 | % | |||||||
16. | ServiceNow, Inc. | Mainland Properties | 149 | 0.3 | % | 1.3 | % | |||||||
17. | Church & Dwight Co., Inc. | Mainland Properties | 250 | 0.6 | % | 1.3 | % | |||||||
18. | Restoration Hardware, Inc. | Mainland Properties | 1,195 | 2.8 | % | 1.3 | % | |||||||
19. | Tailored Brands, Inc. | Mainland Properties | 206 | 0.5 | % | 1.2 | % | |||||||
20. | Primerica Life Insurance Company | Mainland Properties | 344 | 0.8 | % | 1.2 | % | |||||||
21. | American Tire Distributors, Inc. | Mainland Properties | 722 | 1.7 | % | 1.1 | % | |||||||
22. | United Launch Alliance, LLC | Mainland Properties | 168 | 0.4 | % | 1.1 | % | |||||||
23. | The Southern Company | Mainland Properties | 448 | 1.0 | % | 1.1 | % | |||||||
24. | Compass Group USA, Inc. | Mainland Properties | 227 | 0.5 | % | 1.1 | % | |||||||
25. | Red Hat, Inc. | Mainland Properties | 175 | 0.4 | % | 1.0 | % | |||||||
Total | 15,185 | 35.0 | % | 51.2 | % |
(1) | Square feet is pursuant to existing leases as of September 30, 2016, and includes (i) space being fitted out for occupancy pursuant to existing leases, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
Comparable Properties Results (1) | Acquired Properties Results (2) | Consolidated Results | ||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||
$ | % | $ | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | Change | Change | 2016 | 2015 | Change | 2016 | 2015 | Change | Change | ||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 92,022 | $ | 92,611 | $ | (589 | ) | (0.6 | ) | % | $ | 4,015 | $ | 2,134 | $ | 1,881 | $ | 96,037 | $ | 94,745 | $ | 1,292 | 1.4 | % | ||||||||||||||||||||||||||||
Tenant reimbursements and other income | 17,354 | 16,298 | 1,056 | 6.5 | % | 1,645 | 899 | 746 | 18,999 | 17,197 | 1,802 | 10.5 | % | |||||||||||||||||||||||||||||||||||||||
Total revenues | 109,376 | 108,909 | 467 | 0.4 | % | 5,660 | 3,033 | 2,627 | 115,036 | 111,942 | 3,094 | 2.8 | % | |||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate taxes | 10,353 | 9,672 | 681 | 7.0 | % | 402 | 199 | 203 | 10,755 | 9,871 | 884 | 9.0 | % | |||||||||||||||||||||||||||||||||||||||
Other operating expenses | 12,654 | 10,420 | 2,234 | 21.4 | % | 1,740 | 893 | 847 | 14,394 | 11,313 | 3,081 | 27.2 | % | |||||||||||||||||||||||||||||||||||||||
Total operating expenses | 23,007 | 20,092 | 2,915 | 14.5 | % | 2,142 | 1,092 | 1,050 | 25,149 | 21,184 | 3,965 | 18.7 | % | |||||||||||||||||||||||||||||||||||||||
Net operating income (3) | $ | 86,369 | $ | 88,817 | $ | (2,448 | ) | (2.8 | ) | % | $ | 3,518 | $ | 1,941 | $ | 1,577 | 89,887 | 90,758 | (871 | ) | (1.0 | ) | % | |||||||||||||||||||||||||||||
Other expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 33,366 | 33,070 | 296 | 0.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Acquisition related costs | 13 | 402 | (389 | ) | (96.8 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 7,553 | 6,328 | 1,225 | 19.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Total other expenses | 40,932 | 39,800 | 1,132 | 2.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Operating income | 48,955 | 50,958 | (2,003 | ) | (3.9 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Dividend income | 397 | — | 397 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Interest expense | (20,690 | ) | (20,034 | ) | (656 | ) | 3.3 | % | ||||||||||||||||||||||||||||||||||||||||||||
Income before income tax expense and equity in earnings (loss) of an investee | 28,662 | 30,924 | (2,262 | ) | (7.3 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Income tax expense | (107 | ) | (98 | ) | (9 | ) | 9.2 | % | ||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings (loss) of an investee | 13 | (25 | ) | 38 | (152.0 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Net income | 28,568 | 30,801 | (2,233 | ) | (7.2 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Net income allocated to noncontrolling interest | — | (46 | ) | 46 | (100.0 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Net income attributed to SIR | $ | 28,568 | $ | 30,755 | $ | (2,187 | ) | (7.1 | ) | % | ||||||||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 89,308 | 89,267 | 41 | — | % | |||||||||||||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - diluted | 89,334 | 89,274 | 60 | 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Net income attributed to SIR per common share - basic and diluted | $ | 0.32 | $ | 0.34 | $ | (0.02 | ) | (5.9 | ) | % | ||||||||||||||||||||||||||||||||||||||||||
Calculation of Funds From Operations Attributed to SIR and Normalized Funds From Operations Attributed to SIR (4): | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributed to SIR | $ | 28,568 | $ | 30,755 | ||||||||||||||||||||||||||||||||||||||||||||||||
Plus: depreciation and amortization | 33,366 | 33,070 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Plus: net income allocated to noncontrolling interest | — | 46 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: FFO allocated to noncontrolling interest | — | (121 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
FFO attributed to SIR | 61,934 | 63,750 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Plus: acquisition related costs | 13 | 402 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Normalized FFO attributed to SIR | $ | 61,947 | $ | 64,152 | ||||||||||||||||||||||||||||||||||||||||||||||||
FFO attributed to SIR per common share - basic and diluted | $ | 0.69 | $ | 0.71 | ||||||||||||||||||||||||||||||||||||||||||||||||
Normalized FFO attributed to SIR per common share - basic and diluted | $ | 0.69 | $ | 0.72 |
(1) | Consists of 116 properties (355 buildings, leasable land parcels and easements) that we owned continuously since July 1, 2015. |
(2) | Consists of four properties (six buildings) that we acquired during the period from July 1, 2015 to September 30, 2016. |
(3) | The calculation of net operating income, or NOI, excludes certain components of net income 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 because we record those amounts as depreciation and amortization. We consider NOI to be an appropriate supplemental measure to net income 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 |
(4) | We calculate funds from operations, or FFO, attributed to SIR, and normalized funds from operations, or Normalized FFO, attributed to SIR, as shown above. FFO attributed to SIR is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, plus real estate depreciation and amortization and the difference between net income and FFO allocated to noncontrolling interest, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO attributed to SIR differs from NAREIT’s definition of FFO because we include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will ultimately be payable when all contingencies for determining any such fees are determined at the end of the calendar year and we exclude acquisition related costs, loss on early extinguishment of debt and Normalized FFO from noncontrolling interest, net of FFO, if any. We consider FFO attributed to SIR and Normalized FFO attributed to SIR to be appropriate supplemental measures of operating performance for a REIT, along with net income, net income attributed to a REIT and operating income. We believe that FFO attributed to SIR and Normalized FFO attributed to SIR provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO attributed to SIR and Normalized FFO attributed to SIR may facilitate a comparison of our operating performance between periods and with other REITs. FFO attributed to SIR and Normalized FFO attributed to SIR are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs and availability of cash to pay our obligations. FFO attributed to SIR and Normalized FFO attributed to SIR do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, net income attributed to SIR or operating income as an indicator of our operating performance or as a measure of our liquidity. These measures should be considered in conjunction with net income, net income attributed to SIR and operating income as presented in our Condensed Consolidated Statements of Comprehensive Income. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. |
Comparable Properties Results (1) | Acquired Properties Results (2) | Consolidated Results | ||||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||
$ | % | $ | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | Change | Change | 2016 | 2015 | Change | 2016 | 2015 | Change | Change | ||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 149,195 | $ | 149,121 | $ | 74 | — | % | $ | 141,317 | $ | 118,268 | $ | 23,049 | $ | 290,512 | $ | 267,389 | $ | 23,123 | 8.6 | % | ||||||||||||||||||||||||||||||
Tenant reimbursements and other income | 27,087 | 25,567 | 1,520 | 5.9 | % | 29,573 | 20,615 | 8,958 | 56,660 | 46,182 | 10,478 | 22.7 | % | |||||||||||||||||||||||||||||||||||||||
Total revenues | 176,282 | 174,688 | 1,594 | 0.9 | % | 170,890 | 138,883 | 32,007 | 347,172 | 313,571 | 33,601 | 10.7 | % | |||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate taxes | 18,460 | 17,279 | 1,181 | 6.8 | % | 13,105 | 9,968 | 3,137 | 31,565 | 27,247 | 4,318 | 15.8 | % | |||||||||||||||||||||||||||||||||||||||
Other operating expenses | 16,010 | 13,902 | 2,108 | 15.2 | % | 23,977 | 16,219 | 7,758 | 39,987 | 30,121 | 9,866 | 32.8 | % | |||||||||||||||||||||||||||||||||||||||
Total operating expenses | 34,470 | 31,181 | 3,289 | 10.5 | % | 37,082 | 26,187 | 10,895 | 71,552 | 57,368 | 14,184 | 24.7 | % | |||||||||||||||||||||||||||||||||||||||
NOI (3) | $ | 141,812 | $ | 143,507 | $ | (1,695 | ) | (1.2 | ) | % | $ | 133,808 | $ | 112,696 | $ | 21,112 | 275,620 | 256,203 | 19,417 | 7.6 | % | |||||||||||||||||||||||||||||||
Other expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 100,240 | 90,179 | 10,061 | 11.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Acquisition related costs | 71 | 21,720 | (21,649 | ) | (99.7 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 21,903 | 19,488 | 2,415 | 12.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Total other expenses | 122,214 | 131,387 | (9,173 | ) | (7.0 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Operating income | 153,406 | 124,816 | 28,590 | 22.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Dividend income | 872 | — | 872 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Interest expense | (61,883 | ) | (53,710 | ) | (8,173 | ) | 15.2 | % | ||||||||||||||||||||||||||||||||||||||||||||
Loss on early extinguishment of debt | — | (6,845 | ) | 6,845 | (100.0 | ) | % | |||||||||||||||||||||||||||||||||||||||||||||
Income before income tax expense and equity in earnings of an investee | 92,395 | 64,261 | 28,134 | 43.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Income tax expense | (370 | ) | (324 | ) | (46 | ) | 14.2 | % | ||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings of an investee | 107 | 70 | 37 | 52.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | 92,132 | 64,007 | 28,125 | 43.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Net income allocated to noncontrolling interest | (33 | ) | (135 | ) | 102 | (75.6 | ) | % | ||||||||||||||||||||||||||||||||||||||||||||
Net income attributed to SIR | $ | 92,099 | $ | 63,872 | $ | 28,227 | 44.2 | % | ||||||||||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 89,295 | 85,827 | 3,468 | 4.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - diluted | 89,318 | 85,837 | 3,481 | 4.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Net income attributed to SIR per common share - basic and diluted | $ | 1.03 | $ | 0.74 | $ | 0.29 | 39.2 | % | ||||||||||||||||||||||||||||||||||||||||||||
Calculation of FFO Attributed to SIR and Normalized FFO Attributed to SIR (4): | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributed to SIR | $ | 92,099 | $ | 63,872 | ||||||||||||||||||||||||||||||||||||||||||||||||
Plus: depreciation and amortization | 100,240 | 90,179 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Plus: net income allocated to noncontrolling interest | 33 | 135 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: FFO allocated to noncontrolling interest | (77 | ) | (318 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
FFO attributed to SIR | 192,295 | 153,868 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Plus: acquisition related costs | 71 | 21,720 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Plus: loss on early extinguishment of debt | — | 6,845 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: normalized FFO from noncontrolling interest, net of FFO | — | (62 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Normalized FFO attributed to SIR | $ | 192,366 | $ | 182,371 | ||||||||||||||||||||||||||||||||||||||||||||||||
FFO attributed to SIR per common share - basic and diluted | $ | 2.15 | $ | 1.79 | ||||||||||||||||||||||||||||||||||||||||||||||||
Normalized FFO attributed to SIR per common share - basic and diluted | $ | 2.15 | $ | 2.12 |
(1) | Consists of 51 properties (281 buildings, leasable land parcels and easements) that we owned continuously since January 1, 2015. |
(2) | Consists of 69 properties (80 buildings) that we acquired during the period from January 1, 2015 to September 30, 2016. |
(3) | See footnote (3) on page 21 for the definition of NOI. |
(4) | See footnote (4) on page 22 for the definitions of FFO attributed to SIR and Normalized FFO attributed to SIR. |
• | maintain or improve the occupancy of, and the rental rates at, our properties; |
• | control our operating expenses; and |
• | purchase additional properties which produce cash flows in excess of our costs of acquisition capital and property operating expenses. |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Tenant improvements (1) | $ | 1,343 | $ | 12 | $ | 2,259 | $ | 1,665 | |||||||
Leasing costs (2) | 227 | 1,297 | 3,487 | 1,780 | |||||||||||
Building improvements (3) | 561 | 444 | 1,686 | 958 | |||||||||||
Development, redevelopment and other activities (4) | 613 | 69 | 2,548 | 80 | |||||||||||
$ | 2,744 | $ | 1,822 | $ | 9,980 | $ | 4,483 |
(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, legal costs and tenant inducements. |
(3) | Building improvements generally include (i) expenditures to replace obsolete building components and (ii) expenditures that extend the useful life of existing assets. |
(4) | Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property and (ii) capital expenditure projects that reposition a property or result in new sources of revenues. |
New Leases | Renewals | Totals | |||||||||
Square feet leased during the period | 8 | 989 | 997 | ||||||||
Total leasing costs and concession commitments (1) | $ | 3 | $ | 845 | $ | 848 | |||||
Total leasing costs and concession commitments per square foot (1) | $ | 0.38 | $ | 0.85 | $ | 0.85 | |||||
Weighted average lease term by square feet (years) | 7.0 | 9.1 | 9.1 | ||||||||
Total leasing costs and concession commitments per square foot per year (1) | $ | 0.05 | $ | 0.09 | $ | 0.09 |
(1) | Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. |
Annual | Annual | Interest | |||||||||||||||
Principal | Interest | Interest | Payments | ||||||||||||||
Debt | Balance (1) | Rate (1) | Expense (1) | Maturity | Due | ||||||||||||
Senior unsecured notes | $ | 350,000 | 2.85 | % | $ | 9,975 | 2018 | Semi-Annually | |||||||||
Senior unsecured notes | 400,000 | 3.60 | % | 14,400 | 2020 | Semi-Annually | |||||||||||
Senior unsecured notes | 300,000 | 4.15 | % | 12,450 | 2022 | Semi-Annually | |||||||||||
Senior unsecured notes | 400,000 | 4.50 | % | 18,000 | 2025 | Semi-Annually | |||||||||||
Mortgage note (one property (two buildings in Carlsbad, CA)) | 17,565 | 5.95 | % | 1,045 | 2017 | Monthly | |||||||||||
Mortgage note (one property (one building in Harvey, IL)) | 1,992 | 4.50 | % | 90 | 2019 | Monthly | |||||||||||
Mortgage note (one property (one building in Columbus, OH)) | 2,390 | 4.50 | % | 108 | 2019 | Monthly | |||||||||||
Mortgage note (one property (one building in Ankeny, IA)) | 12,360 | 3.87 | % | 478 | 2020 | Monthly | |||||||||||
Mortgage note (one property (one building in Philadelphia, PA)) (2) | 41,000 | 4.16 | % | 1,706 | 2020 | Monthly | |||||||||||
Mortgage note (one property (one building in Chester, VA)) | 48,750 | 3.99 | % | 1,945 | 2020 | Monthly | |||||||||||
Mortgage note (one property (three buildings in Seattle, WA)) | 71,000 | 3.55 | % | 2,521 | 2023 | Monthly | |||||||||||
Mortgage note (one property (one building in Chicago, IL)) | 50,000 | 3.70 | % | 1,850 | 2023 | Monthly | |||||||||||
$ | 1,695,057 | $ | 64,568 |
(1) | The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying value and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. |
(2) | Interest on this mortgage note is payable at a rate equal to a premium over LIBOR but has been fixed by a cash flow hedge which sets the rate at approximately 4.16% until August 3, 2020, which is the maturity date of the mortgage note. |
Impact of an Increase in Interest Rates | ||||||||||||||||
Total Interest | Annual | |||||||||||||||
Interest Rate | Outstanding | Expense | Earnings Per | |||||||||||||
Per Year (1) | Debt (2) | Per Year | Share Impact (3) | |||||||||||||
At September 30, 2016 | 1.62 | % | $ | 687,233 | $ | 11,133 | $ | 0.12 | ||||||||
100 basis point increase | 2.62 | % | $ | 687,233 | $ | 18,006 | $ | 0.20 |
(1) | Weighted based on the respective interest rates and outstanding borrowings under our floating rate debt as of September 30, 2016. |
(2) | Excludes our $41,000 mortgage note hedged by our interest rate swap agreement. |
(3) | Based on the diluted weighted average shares outstanding for the nine months ended September 30, 2016. |
Impact of an Increase in Interest Rates | ||||||||||||||||
Total Interest | Annual | |||||||||||||||
Interest Rate | Outstanding | Expense | Earnings Per | |||||||||||||
Per Year (1) | Debt (2) | Per Year | Share Impact (3) | |||||||||||||
At September 30, 2016 | 1.57 | % | $ | 1,140,233 | $ | 17,902 | $ | 0.20 | ||||||||
100 basis point increase | 2.57 | % | $ | 1,140,233 | $ | 29,304 | $ | 0.33 |
(1) | Weighted based on the respective interest rates of our floating rate debt as of September 30, 2016, assuming we were fully drawn on our revolving credit facility and our term loan and floating rate mortgage note remained outstanding. |
(2) | Excludes our $41,000 mortgage note hedged by our interest rate swap agreement. |
(3) | Based on the diluted weighted average shares outstanding for the nine months ended September 30, 2016. |
• | THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT OR BE NEGATIVELY AFFECTED BY CYCLICAL ECONOMIC CONDITIONS, |
• | THE LIKELIHOOD THAT OUR TENANTS WILL RENEW OR EXTEND THEIR LEASES OR THAT WE WILL BE ABLE TO OBTAIN REPLACEMENT TENANTS, |
• | OUR ACQUISITIONS OF PROPERTIES, |
• | OUR SALES OF PROPERTIES, |
• | OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY, |
• | THE LIKELIHOOD THAT OUR RENTS MAY INCREASE WHEN RENTS ARE RESET AT OUR LEASED LANDS IN HAWAII, |
• | OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS, |
• | THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY, |
• | OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS, |
• | OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL, |
• | OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT, |
• | OUR ABILITY TO APPROPRIATELY BALANCE OUR USE OF EQUITY AND DEBT CAPITAL, |
• | OUR CREDIT RATINGS, |
• | OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF RMR INC., |
• | OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AIC AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC, |
• | OUR QUALIFICATION FOR TAXATION AS A REIT, |
• | THE CREDIT QUALITIES OF OUR TENANTS, AND |
• | OTHER MATTERS. |
• | THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS, |
• | COMPETITION WITHIN THE REAL ESTATE INDUSTRY, PARTICULARLY IN THOSE MARKETS IN WHICH OUR PROPERTIES ARE LOCATED, |
• | COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS, |
• | 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, |
• | ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES, RMR LLC, RMR INC., GOV, SENIOR HOUSING PROPERTIES TRUST, AIC AND OTHERS AFFILIATED WITH THEM, AND |
• | ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL. |
• | 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 AND THE CAPITAL COSTS WE INCUR TO LEASE OUR PROPERTIES. 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 OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND LEASE THEM FOR RENTS, LESS PROPERTY OPERATING COSTS, 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, |
• | CONTINGENCIES IN OUR ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING ACQUISITIONS AND SALES MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE, |
• | RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE, |
• | A SIGNIFICANT NUMBER OF OUR HAWAII PROPERTIES ARE LANDS LEASED FOR RENTS THAT ARE PERIODICALLY RESET BASED ON THEN CURRENT FAIR MARKET VALUES. REVENUES FROM OUR PROPERTIES IN HAWAII HAVE GENERALLY INCREASED DURING OUR OWNERSHIP AS THE LEASES FOR THOSE PROPERTIES HAVE BEEN RESET OR RENEWED. THERE CAN BE NO ASSURANCE THAT REVENUES FROM OUR HAWAII PROPERTIES WILL INCREASE AS A RESULT OF FUTURE RENT RESETS OR LEASE RENEWALS, AND FUTURE RENTS FROM THESE PROPERTIES COULD DECREASE OR NOT INCREASE TO THE EXTENT THEY HAVE IN THE PAST, |
• | WE MAY NOT SUCCEED IN FURTHER DIVERSIFYING OUR TENANTS, AND ANY DIVERSIFICATION WE MAY ACHIEVE MAY NOT MITIGATE OUR PORTFOLIO RISKS OR IMPROVE THE SECURITY OF OUR REVENUES OR OUR OPERATING PERFORMANCE, |
• | OUR POSSIBLE REDEVELOPMENT OF CERTAIN OF OUR HAWAII PROPERTIES MAY NOT BE REALIZED OR BE SUCCESSFUL, |
• | THE UNEMPLOYMENT RATE OR ECONOMIC CONDITIONS IN THE UNITED STATES MAY BECOME WORSE IN THE FUTURE. SUCH CIRCUMSTANCES OR OTHER CONDITIONS MAY REDUCE DEMAND FOR LEASING OFFICE AND INDUSTRIAL SPACE. IF THE DEMAND FOR LEASING OFFICE AND INDUSTRIAL SPACE IS REDUCED, WE MAY BE UNABLE TO RENEW LEASES WITH OUR TENANTS AS LEASES EXPIRE OR ENTER INTO NEW LEASES AT RENTAL RATES AS HIGH AS EXPIRING RATES AND OUR FINANCIAL RESULTS MAY DECLINE, |
• | OUR BELIEF THAT THERE IS A LIKELIHOOD THAT TENANTS MAY RENEW OR EXTEND OUR LEASES WHEN THEY EXPIRE WHENEVER THEY HAVE MADE SIGNIFICANT INVESTMENTS IN THE LEASED PROPERTIES, OR BECAUSE THOSE PROPERTIES MAY BE OF STRATEGIC IMPORTANCE TO THEM, MAY NOT BE REALIZED, |
• | 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, |
• | WE MAY INCUR SIGNIFICANT COSTS TO PREPARE A PROPERTY FOR A TENANT, PARTICULARLY FOR SINGLE TENANT PROPERTIES, |
• | CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CUSTOMARY CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY, |
• | ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY OR OTHER FLOATING RATE CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES, |
• | WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE, |
• | THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOAN MAY BE INCREASED TO UP TO $2.2 BILLION ON A COMBINED BASIS IN CERTAIN CIRCUMSTANCES; HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOAN IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR, |
• | WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING OTHER CONDITIONS. HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET, |
• | WE RECEIVED AN ASSESSMENT FROM THE STATE OF WASHINGTON FOR REAL ESTATE EXCISE TAX, INTEREST AND PENALTIES OF $2.8 MILLION ON CERTAIN PROPERTIES WE ACQUIRED IN CONNECTION WITH OUR ACQUISITION OF CCIT IN JANUARY 2015. ALTHOUGH WE BELIEVE WE ARE EXEMPT FROM THIS TAX AND ARE DISPUTING THIS ASSESSMENT, WE MAY NOT SUCCEED IN HAVING ALL OR ANY PART OF THIS ASSESSMENT NULLIFIED, |
• | 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., GOV, SNH, AIC, AND OTHERS AFFILIATED WITH THEM MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. HOWEVER, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE, AND |
• | THE PREMIUMS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY AND TERM LOAN AND THE FACILITY FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR CREDIT RATINGS. FUTURE CHANGES IN OUR CREDIT RATINGS MAY CAUSE THE INTEREST AND FEES WE PAY TO INCREASE. |
Maximum | |||||||||||||||
Total Number of | Approximate Dollar | ||||||||||||||
Shares Purchased | Value of Shares that | ||||||||||||||
Number of | Average | as Part of Publicly | May Yet Be Purchased | ||||||||||||
Shares | Price Paid | Announced Plans | Under the Plans or | ||||||||||||
Calendar Month | Purchased (1) | per Share | or Programs | Programs | |||||||||||
September 2016 | 11,017 | $ | 27.64 | $ | — | $ | — | ||||||||
Total | 11,017 | $ | 27.64 | $ | — | $ | — |
(1) | During September 2016, all common share purchases were made to satisfy one of our officer's and other RMR LLC employees’ tax withholding and payment obligations in connection with the vesting of awards of our common shares. We repurchased these shares at their fair market value based upon the trading price of our common shares on the repurchase date. |
Exhibit Number | Description | |
3.1 | Amended and Restated Declaration of Trust, dated March 9, 2012, as amended to date. (Incorporated by reference to the Company’s Registration Statement on Form S-4, File No. 333-199445.) | |
3.2 | Amended and Restated Bylaws of the Company adopted September 7, 2016. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 7, 2016.) | |
4.1 | Form of Common Share Certificate. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) | |
4.2 | Indenture, dated February 3, 2015, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated January 29, 2015.) | |
4.3 | First Supplemental Indenture, dated February 3, 2015, between the Company and U.S. Bank National Association, including the forms of 2.85% Senior Note due 2018, 3.60% Senior Note due 2020, 4.15% Senior Note due 2022 and 4.50% Senior Note due 2025. (Incorporated by reference to the Company’s Current Report on Form 8-K dated January 29, 2015.) | |
4.4 | 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 the Company’s Current Report on Form 8-K dated June 5, 2015.) | |
10.1 | Form of Share Award Agreement. (Filed herewith.) | |
12.1 | Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.) | |
31.1 | Rule 13a-14(a) Certification. (Filed herewith.) | |
31.2 | Rule 13a-14(a) Certification. (Filed herewith.) | |
31.3 | Rule 13a-14(a) Certification. (Filed herewith.) | |
31.4 | Rule 13a-14(a) Certification. (Filed herewith.) | |
32.1 | Section 1350 Certification. (Furnished herewith.) | |
101.1 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text and detail. (Filed herewith.) |
SELECT INCOME REIT | ||
By: | /s/ David M. Blackman | |
David M. Blackman | ||
President and Chief Operating Officer | ||
Dated: October 25, 2016 | ||
By: | /s/ John C. Popeo | |
John C. Popeo | ||
Chief Financial Officer and Treasurer | ||
(principal financial and accounting officer) | ||
Dated: October 25, 2016 |
To the Recipient: | To the Recipient’s address as set forth on the signature page hereof. |
By: | |
Title: | Chief Financial Officer and Treasurer |
Nine Months Ended | Year Ended December 31, | ||||||||||||||||||||||
September 30, 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||
Earnings: | |||||||||||||||||||||||
Income from continuing operations (including gains on sales of properties, if any) before income tax expense and equity in earnings of an investee | $ | 92,395 | $ | 75,419 | $ | 105,983 | $ | 92,662 | $ | 65,896 | $ | 68,943 | |||||||||||
Fixed charges | 61,883 | 73,885 | 12,974 | 13,763 | 7,565 | — | |||||||||||||||||
Adjusted earnings | $ | 154,278 | $ | 149,304 | $ | 118,957 | $ | 106,425 | $ | 73,461 | $ | 68,943 | |||||||||||
Fixed charges: | |||||||||||||||||||||||
Interest expense (including net amortization of debt premiums and discounts and debt issuance costs) | $ | 61,883 | $ | 73,885 | $ | 12,974 | $ | 13,763 | $ | 7,565 | $ | — | |||||||||||
Ratio of Earnings to Fixed Charges (1) | 2.5x | 2.0x | 9.2x | 7.7x | 9.7x | — |
(1) | There is no ratio for the year ended December 31, 2011 because there were no fixed charges attributable to us for that year. |
1. | I have reviewed this Quarterly Report on Form 10-Q of Select Income REIT; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
5 | |||||
Date: October 25, 2016 | /s/ Barry M. Portnoy | ||||
Barry M. Portnoy | |||||
Managing Trustee |
1. | I have reviewed this Quarterly Report on Form 10-Q of Select Income REIT; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
5 | |||||
Date: October 25, 2016 | /s/ Adam D. Portnoy | ||||
Adam D. Portnoy | |||||
Managing Trustee |
1. | I have reviewed this Quarterly Report on Form 10-Q of Select Income REIT; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
5 | |||||
Date: October 25, 2016 | /s/ David M. Blackman | ||||
David M. Blackman | |||||
President and Chief Operating Officer |
1. | I have reviewed this Quarterly Report on Form 10-Q of Select Income REIT; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
5 | |||||
Date: October 25, 2016 | /s/ John C. Popeo | ||||
John C. Popeo | |||||
Chief Financial Officer and Treasurer |
1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
9 | |||
/s/ Barry M. Portnoy | /s/ David M. Blackman | ||
Barry M. Portnoy | David M. Blackman | ||
Managing Trustee | President and Chief Operating Officer | ||
/s/ Adam D. Portnoy | /s/ John C. Popeo | ||
Adam D. Portnoy | John C. Popeo | ||
Managing Trustee | Chief Financial Officer and Treasurer | ||
Date: October 25, 2016 |
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Oct. 24, 2016 |
|
Document and Entity Information | ||
Entity Registrant Name | Select Income REIT | |
Entity Central Index Key | 0001537667 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Large Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 89,428,912 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q3 |
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Rents receivable, including straight line rents (in dollars) | $ 111,318 | $ 92,264 |
Rents receivable, allowance for doubtful accounts (in dollars) | $ 808 | $ 464 |
Common shares, par value (in dollars per share) | $ 0.01 | $ 0.01 |
Common shares, shares authorized (in shares) | 125,000,000 | 125,000,000 |
Common shares, shares issued (in shares) | 89,428,912 | 89,374,029 |
Common shares, shares outstanding (in shares) | 89,428,912 | 89,374,029 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Income Statement [Abstract] | ||||
Net amortization of debt premiums and discounts and debt issuance costs | $ 1,374 | $ 1,357 | $ 4,124 | $ 3,738 |
Basis of Presentation |
9 Months Ended |
---|---|
Sep. 30, 2016 | |
Basis of Presentation | |
Basis of Presentation | Basis of Presentation The accompanying condensed consolidated financial statements of Select Income REIT and its subsidiaries, or SIR, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation. The preparation of 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 the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and the assessments of the carrying values and impairments of long lived assets. |
Recent Accounting Pronouncements |
9 Months Ended |
---|---|
Sep. 30, 2016 | |
New Accounting Pronouncements and Changes in Accounting Principles [Abstract] | |
Recent Accounting Pronouncements | Recent Accounting Pronouncements On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changed how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact in our condensed consolidated financial statements. On January 1, 2016, we adopted FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, and FASB ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loan, senior unsecured notes and mortgage notes payable of $2,124, $9,607 and $41, respectively, were reclassified from assets to an offset to the associated debt liability in our condensed consolidated balance sheets. On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements. In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale equity investments we hold are presented in our condensed consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 31, 2016. We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-15 will have in our condensed consolidated financial statements. |
Real Estate Properties |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate Properties | Real Estate Properties As of September 30, 2016, we owned 120 properties (361 buildings, leasable land parcels and easements) with approximately 44,763,000 rentable square feet. On February 29, 2016, we acquired a joint venture interest in an office building containing approximately 344,000 square feet located in Duluth, GA. We paid $3,908 for this 11% ownership interest. Following this acquisition, we own 100% of this office building. See Note 8 for more information regarding this joint venture arrangement, our acquisition of the 11% interest and certain resulting accounting. During the nine months ended September 30, 2016, we also acquired one property (one building) with 57,420 rentable square feet for a purchase price of $10,200, excluding acquisition related costs. This property was acquired and simultaneously leased back to the seller. We accounted for this acquisition as an acquisition of assets and allocated the purchase price based on the estimated fair value of the acquired assets as follows:
On October 12, 2016, we acquired a single tenant, net leased office property located in Richmond, VA with approximately 50,000 rentable square feet for a purchase price of $7,760, excluding acquisition related costs. In October 2016, we committed to a plan to sell one mainland office property (two buildings) with 100,500 rentable square feet and a net book value of $9,206. Certain of our real estate assets contain hazardous substances, including asbestos. We believe the asbestos at our properties is contained in accordance with current environmental regulations and we have no current plans to remove it. If these properties were demolished today, certain environmental regulations specify the manner in which the asbestos must be removed and we could incur substantial costs complying with such regulations. Due to the uncertainty of the timing and amount of costs we may incur, we cannot reasonably estimate the fair value and we have not recognized a liability in our financial statements for these costs. Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed; however, we do not have any present plans to change the use of those lands or to undertake this environmental cleanup. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as, for example, fire or flood, although some of our tenants may maintain such insurance. However, as of September 30, 2016 and December 31, 2015, accrued environmental remediation costs totaling $8,160 were included in accounts payable and other liabilities in our condensed consolidated balance sheets. These accrued environmental remediation costs relate to maintenance of our properties for current uses and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. We do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us. However, no assurances can be given that such conditions are not present in our properties or that other costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs are included in other operating expenses in our condensed consolidated statements of comprehensive income. On June 29, 2016, we received an assessment from the State of Washington for real estate excise tax, interest and penalties of $2,837 on certain properties we acquired in connection with our acquisition of Cole Corporate Income Trust, Inc., or CCIT, in January 2015. We believe we are exempt from this tax and are disputing the assessment. As of September 30, 2016, we have not recorded a loss related to this matter. |
Tenant Concentration and Segment Information |
9 Months Ended |
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Sep. 30, 2016 | |
Risks and Uncertainties [Abstract] | |
Tenant Concentration and Segment Information | Tenant Concentration and Segment Information We operate in one business segment: ownership of properties that include buildings and leased industrial lands that are primarily net leased to single tenants, with no one tenant accounting for more than 10% of our total revenues. A “net leased property” or a property being “net leased” means that the building or land lease requires the tenant to pay rent and pay, or reimburse us, for all, or substantially all, property level operating expenses and capital expenditures, such as real estate taxes, insurance, utilities, maintenance and repairs, other than, in certain circumstances, roof and structural element related expenditures; in some instances, tenants instead reimburse us for all expenses in excess of certain amounts included in the stated rent. We define a single tenant leased building or land parcel as a building or land parcel with at least 90% of its rentable square feet leased to one tenant. Our buildings and lands are primarily leased to single tenants; however, we also own some multi-tenant buildings on the island of Oahu, HI, and one mainland multi-tenant office property. For the three months ended September 30, 2016 and 2015, approximately 19.7% and 19.8%, respectively, and for the nine months ended September 30, 2016 and 2015, approximately 19.7% and 21.4%, respectively, of our total revenues were from 11 properties (229 buildings, leasable land parcels and easements) with a combined approximately 17,778,000 rentable square feet that we own on Oahu, HI. |
Derivatives and Hedging Activities |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives and Hedging Activities | Derivatives and Hedging Activities We are exposed to certain risks relating to our ongoing business operations, including the effect of changes in interest rates. We use derivative instruments to manage only a part of our interest rate risk. We have an interest rate swap agreement to manage our interest rate risk exposure on a $41,000 mortgage note due 2020, with interest payable at a rate equal to a spread over LIBOR. We assumed this mortgage note and related interest rate swap agreement in connection with our acquisition of CCIT in January 2015. We record all derivatives on the balance sheet at fair value. The following table summarizes the terms of our outstanding interest rate swap agreement, which we have designated as a cash flow hedge:
The table below presents the effects of our interest rate derivative in our condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015:
We may enter into additional interest rate swaps or hedge agreements to manage some of our interest rate risk associated with our other floating rate borrowings. |
Indebtedness |
9 Months Ended |
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Sep. 30, 2016 | |
Debt Disclosure [Abstract] | |
Indebtedness | Indebtedness Our principal debt obligations at September 30, 2016 were: (1) our $297,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) our $350,000 unsecured term loan; (3) an aggregate outstanding principal amount of $1,450,000 of public issuances of senior unsecured notes; and (4) an aggregate outstanding principal amount of $285,290 of mortgage notes. Our $750,000 revolving credit facility and our $350,000 term loan are governed by a credit agreement with a syndicate of institutional lenders. This credit agreement includes a feature under which the maximum aggregate borrowing availability under the revolving credit facility and the term loan may be increased to up to $2,200,000 on a combined basis under certain circumstances. Our $750,000 revolving credit facility has a maturity date of March 29, 2019, interest payable on borrowings of LIBOR plus 105 basis points and a facility fee of 20 basis points per annum on the total amount of lending commitments. Both the interest rate premium and the facility fee for the revolving credit facility are subject to adjustment based on changes to our credit ratings. Upon the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the revolving credit facility to March 29, 2020. As of September 30, 2016 and December 31, 2015, the annual interest rate payable on borrowings under our revolving credit facility was 1.50% and 1.44%, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.49% and 1.26% for the three months ended September 30, 2016 and 2015, respectively, and 1.46% and 1.26% for the nine months ended September 30, 2016 and 2015, respectively. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of September 30, 2016 and October 24, 2016, we had $297,000 and $282,000, respectively, outstanding under our revolving credit facility. Our $350,000 term loan has a maturity date of March 31, 2020 and interest payable on the amount outstanding of LIBOR plus 115 basis points. The interest rate premium for our term loan is subject to adjustment based on changes to our credit ratings. As of September 30, 2016 and December 31, 2015, the annual interest rate payable for the amount outstanding under our term loan was 1.67% and 1.39%, respectively. The weighted average annual interest rate for the amount outstanding under our term loan was 1.64% and 1.34% for the three months ended September 30, 2016 and 2015, respectively, and 1.61% and 1.34% for the nine months ended September 30, 2016 and 2015, respectively. Our credit agreement and our 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, 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, including covenants that restrict our ability to incur debts or to make distributions under certain circumstances, and generally require us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of the respective covenants under our senior unsecured notes indenture and its supplement and our credit agreement at September 30, 2016. At September 30, 2016, nine of our properties (12 buildings) with a net book value of $450,555 were encumbered by mortgages we assumed in connection with our acquisition of those properties. The aggregate principal amount outstanding under these mortgage notes as of September 30, 2016 was $285,290. These mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. |
Fair Value of Assets and Liabilities |
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Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value of Assets and Liabilities | Fair Value of Assets and Liabilities The table below presents certain of our assets and liabilities measured at fair value at September 30, 2016, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset and liability:
In addition to the asset and liability described in the table above, our financial instruments include cash and cash equivalents, restricted cash, rents receivable, a revolving credit facility, a term loan, senior unsecured notes, mortgage notes payable, accounts payable, rents collected in advance, security deposits and amounts due to related persons. At September 30, 2016 and December 31, 2015, the fair value 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:
We estimate the fair value of our senior unsecured notes using an average of the bid and ask prices of the notes as of the measurement date (Level 2 inputs). We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value. |
Noncontrolling Interest |
9 Months Ended |
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Sep. 30, 2016 | |
Noncontrolling Interest [Abstract] | |
Noncontrolling Interest | Noncontrolling Interest We previously owned a controlling interest in a joint venture that owned an office building containing approximately 344,000 square feet located in Duluth, GA. On February 29, 2016, we acquired the 11% ownership interest of our joint venture partner for $3,908. As a result, for periods from and after that date, there is no longer a noncontrolling interest with respect to this office building and we now own 100% of this property. |
Shareholders' Equity |
9 Months Ended |
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Sep. 30, 2016 | |
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |
Shareholders' Equity | Shareholders’ Equity Share Issuances and Purchases: On May 24, 2016, we granted 2,500 of our common shares, valued at $24.22 per share, the closing price of our common shares on the New York Stock Exchange on that day, to each of our five Trustees as part of their annual compensation. On September 15, 2016, pursuant to our equity compensation plan, we granted an aggregate of 53,400 of our common shares to our officers and certain other employees of our manager, RMR LLC, valued at $26.17 per share, the closing price of our common shares on The NASDAQ Stock Market LLC, or Nasdaq, on that day. On September 26, 2016, we purchased an aggregate of 11,017 of our common shares valued at $27.64 per common share, the closing price of our common shares on Nasdaq on that day, from one 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. Distributions: On February 23, 2016, we paid a regular quarterly distribution of $0.50 per common share, or $44,687, to shareholders of record on January 22, 2016. On May 19, 2016, we paid a regular quarterly distribution of $0.50 per common share, or $44,687, to shareholders of record on April 25, 2016. On August 18, 2016, we paid a regular quarterly distribution of $0.51 per common share, or $45,587, to shareholders of record on July 22, 2016. On October 11, 2016, we declared a regular quarterly distribution of $0.51 per common share, or approximately $45,600, to shareholders of record on October 21, 2016. We expect to pay this distribution on or about November 17, 2016. |
Cumulative Other Comprehensive Income (Loss) |
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Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative Other Comprehensive Income (Loss) | Cumulative Other Comprehensive Income (Loss) The following tables present changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the three and nine months ended September 30, 2016:
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Weighted Average Common Shares |
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Weighted Average Number of Shares Outstanding Reconciliation [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted Average Common Shares | Weighted Average Common Shares The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):
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Related Person Transactions |
9 Months Ended |
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Sep. 30, 2016 | |
Related Party Transactions [Abstract] | |
Related Person Transactions | Related Person Transactions We have relationships and historical and continuing transactions with RMR LLC, Government Properties Income Trust, or GOV, and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report. RMR LLC: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $5,739 and $4,943 for the three months ended September 30, 2016 and 2015, respectively, and $16,187 and $14,958 for the nine months ended September 30, 2016 and 2015, respectively. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income. In accordance with the terms of our business management agreement, we issued 34,206 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash. Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $3,224 and $2,887 for the three months ended September 30, 2016 and 2015, respectively, and $9,522 and $8,467 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $2,177 and $1,270 for property management related expenses for the three months ended September 30, 2016 and 2015, respectively, and $5,587 and $3,140 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income. We have historically awarded share grants to certain RMR LLC employees under our equity compensation plan. In September 2016 and 2015, we awarded annual share grants of 53,400 and 52,600 of our common shares, respectively, to our officers and to other employees of RMR LLC. In September 2016, we purchased 11,017 of our common shares, at the closing price of our common shares on Nasdaq on the date of purchase, from one of our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $612 and $315 for the three months ended September 30, 2016 and 2015, respectively, and $1,322 and $676 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income. We lease office space to RMR LLC in one of our properties located in Seattle, WA. Pursuant to our lease agreement with RMR LLC, we recognized rental income from RMR LLC for leased office space of $16 and $15 for the three months ended September 30, 2016 and 2015, respectively, and $24 and $27 for the nine months ended September 30, 2016 and 2015, respectively. RMR Inc.: In connection with our June 2015 acquisition of shares of class A common stock of RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares. This liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets. A part of this liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management and property management fee expense. We amortized $558 and $567 of this liability, for the three months ended September 30, 2016 and 2015, respectively, and $1,673 and $709 of this liability for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods. As of September 30, 2016, the remaining unamortized amount of this liability was $42,957. As of September 30, 2016, we owned 1,586,836 shares of class A common stock of RMR Inc. We receive dividends on our RMR Inc. class A common shares as declared and paid by RMR Inc. to all holders of its class A common shares. We received a dividend of $475 on our RMR Inc. class A common shares during the three months ended June 30, 2016, which was for the period from December 14, 2015 through March 31, 2016. We received a dividend of $397 on our RMR Inc. class A common shares during the three months ended September 30, 2016, which was for the period from April 1, 2016 through June 30, 2016. On October 11, 2016, RMR Inc. declared a regular quarterly dividend of $0.25 per class A common share payable to shareholders of record on October 21, 2016. RMR Inc. has stated that it expects to pay this dividend on or about November 17, 2016. Our investment in RMR Inc. class A common shares is included in other assets in our condensed consolidated balance sheets and is recorded at fair value with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our RMR Inc. class A common shares each reporting period as unrealized gain or loss on investment in available for sale securities which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. For further information, see Notes 7 and 10. GOV: GOV is our largest shareholder. As of September 30, 2016, GOV owned 24,918,421 of our common shares or approximately 27.9% of our outstanding common shares. AIC: We and six other companies to which RMR LLC provides management services each own Affiliates Insurance Company, or AIC, in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately $2,162 in connection with this insurance program for the policy year ending June 30, 2017, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program. As of September 30, 2016 and December 31, 2015, our investment in AIC had a carrying value of $7,109 and $6,827, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income (loss) of $13 and ($25) related to our investment in AIC for the three months ended September 30, 2016 and 2015, respectively, and $107 and $70 for the nine months ended September 30, 2016 and 2015, respectively. Our other comprehensive income includes our proportionate part of unrealized gains (losses) on securities which are owned by AIC of $80 and ($72) for the three months ended September 30, 2016 and 2015, respectively, and $175 and ($91) for the nine months ended September 30, 2016 and 2015, respectively. Directors’ and Officers’ Liability Insurance: We, RMR Inc., RMR LLC and certain companies to which RMR LLC provides management services participate in a combined directors’ and officers’ liability insurance policy. In September 2016, we participated in a one year extension of this combined directors’ and officers’ insurance policy through September 2018. Our premium for this policy extension was approximately $111. |
Real Estate Properties Real Estate Properties (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Real Estate Properties | We accounted for this acquisition as an acquisition of assets and allocated the purchase price based on the estimated fair value of the acquired assets as follows:
|
Derivatives and Hedging Activities (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of interest rate swap derivatives | We record all derivatives on the balance sheet at fair value. The following table summarizes the terms of our outstanding interest rate swap agreement, which we have designated as a cash flow hedge:
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Schedule of effects on consolidated statements of income and comprehensive income | The table below presents the effects of our interest rate derivative in our condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015:
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Fair Value of Assets and Liabilities (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule fair value of assets and liabilities measurement on recurring basis | The table below presents certain of our assets and liabilities measured at fair value at September 30, 2016, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset and liability:
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Schedule of carrying value and the estimated fair market value of mortgage notes payable | At September 30, 2016 and December 31, 2015, the fair value 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:
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Cumulative Other Comprehensive Income (Loss) (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative Other Comprehensive Income (Loss) |
The following tables present changes in the amounts we recognized in cumulative other comprehensive income (loss) by component for the three and nine months ended September 30, 2016:
|
Weighted Average Common Shares (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted Average Number of Shares Outstanding Reconciliation [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of weighted average common shares, basic and diluted | The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):
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Real Estate Properties Purchase Price Allocation (Details) $ in Thousands |
Sep. 30, 2016
USD ($)
ft²
Building
Property
|
Jul. 31, 2016
USD ($)
ft²
|
Dec. 31, 2015
USD ($)
|
---|---|---|---|
Real Estate Properties [Line Items] | |||
Net rentable area | ft² | 44,763,000 | ||
Land | $ 1,037,445 | $ 1,036,425 | |
Buildings and improvements | $ 3,099,126 | $ 3,083,243 | |
Office And Industrial Net Leased Properties | Huntsville, AL | |||
Real Estate Properties [Line Items] | |||
Number of properties acquired | Property | 1 | ||
Number of buildings acquired | Building | 1 | ||
Net rentable area | ft² | 57,420 | ||
Real estate aggregate purchase price | $ 10,200 | ||
Land | 1,020 | ||
Buildings and improvements | 9,180 | ||
Acquisition costs | $ 90 |
Tenant Concentration and Segment Information (Details) ft² in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016
ft²
Building
Property
|
Sep. 30, 2015
ft²
Building
Property
|
Sep. 30, 2016
ft²
Building
item
Property
|
Sep. 30, 2015
ft²
Building
Property
|
|
Number of business segments | item | 1 | |||
Minimum percentage of rentable square feet of a building or land leased as a building or land parcel to single tenant | 90.00% | |||
Number of tenants under single tenant leased buildings and lands | item | 1 | |||
Percentage of revenues | 19.70% | 19.80% | 19.70% | 21.40% |
Net rentable area | ft² | 44,763 | 44,763 | ||
Oahu, HI | ||||
Number of real estate properties | Property | 11 | 11 | 11 | 11 |
Number of buildings acquired | Building | 229 | 229 | 229 | 229 |
Net rentable area | ft² | 17,778 | 17,778 | 17,778 | 17,778 |
Multi-tenant Office Property | Mainland | ||||
Number of real estate properties | Property | 1 | 1 |
Derivatives and Hedging Activities (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Designated Cash Flow Hedge RollForward | ||||
Amount of gain (loss) recognized in cumulative other comprehensive income (loss) (effective portion) | $ 219 | $ (953) | $ (1,182) | $ (273) |
Amount of gain (loss) reclassified from cumulative other comprehensive income (loss) into interest expense (effective portion) | 93 | $ 122 | 284 | $ 92 |
Interest Rate Swap | Cash Flow Hedging | Designated as Hedging Instrument | Cole Corporate Income Trust, Inc. (CCIT) | ||||
Derivative Instruments, Gain (Loss) [Line Items] | ||||
Derivative, outstanding notional amount | 41,000 | $ 41,000 | ||
Hedge rate (as a percent) | 4.16% | |||
Derivative, effective date | Jan. 29, 2015 | |||
Derivative, maturity date | Aug. 03, 2020 | |||
Cash flow hedge derivative instrument liabilities at fair value | $ 1,920 | $ 1,920 |
Noncontrolling Interest (Details) - Duluth, GA ft² in Thousands, $ in Thousands |
Feb. 29, 2016
USD ($)
ft²
|
---|---|
Temporary Equity, Carrying Amount, Including Portion Attributable to Noncontrolling Interests [Abstract] | |
Area of office building (square feet) | ft² | 344 |
Ownership percentage acquired | 11.00% |
Aggregate purchase price | $ | $ 3,908 |
Weighted Average Common Shares (Details) - shares shares in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Weighted Average Number of Shares Outstanding Reconciliation [Abstract] | ||||
Weighted average common shares for basic earnings per share (in shares) | 89,308 | 89,267 | 89,295 | 85,827 |
Effect of dilutive securities: unvested share awards (in shares) | 26 | 7 | 23 | 10 |
Weighted average common shares for diluted earnings per share (in shares) | 89,334 | 89,274 | 89,318 | 85,837 |
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