Equity Investments

6 Months Ended

Jun. 30, 2011

Equity Investments

Equity Investments

Note 5.  Equity Investments

At June 30, 2011 and December 31, 2010, we had the following equity investments in GOV and Affiliates Insurance Company, or AIC:

	Ownership Percentage				Equity Investments				Equity in Earnings (Loss)
	June 30,		December 31,		June 30,		December 31,		Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010		2011		2010		2011		2010			2011		2010
GOV	24.6	%	24.6	%	$	163,669	$	166,388	$	2,864	$	2,329		$	5,539	$	4,696
AIC	14.3	%	14.3	%	5,202		5,076		46		(24		)	83		(52		)
					$	168,871	$	171,464	$	2,910	$	2,305		$	5,622	$	4,644

At June 30, 2011, we owned 9,950,000, or approximately 24.6%, of the common shares of beneficial interest of GOV, with a carrying value of $163,669 and a market value, based on quoted market prices, of $268,849 ($27.02 per share).  GOV is a real estate investment trust, or REIT, which primarily owns properties that are majority leased to government tenants and was our wholly owned subsidiary until its initial public offering, or the GOV IPO, in June 2009 when it became a separate public entity.  In July 2011, GOV issued 6,500,000 common shares in a public offering for $25.40 per common share, raising net proceeds of approximately $157,700 and reducing our ownership percentage from 24.6% prior to this transaction to 21.2% after that transaction.  GOV has granted the underwriters an option to purchase up to an additional 975,000 common shares of beneficial interest to cover overallotments, if any.  If the underwriters exercise their overallotment option in full, we will beneficially own approximately 20.7% of GOV’s common shares of beneficial interest.

Since the GOV IPO, we have accounted for our investment in it using the equity method.  Under the equity method, we record our percentage share of net earnings of GOV in our consolidated statements of income.  Prior to the GOV IPO, the operating results and investments of GOV were included in our results of operations and financial position.  The market value of our GOV common shares on the date of the GOV IPO exceeded our carrying value by $13,824.  We are amortizing the difference between our carrying value of GOV and our share of the underlying equity of GOV over a 30 year period, which approximates the remaining useful lives of the properties that we initially contributed to GOV.  If we determine there is an “other than temporary” decline in the fair value of this investment, we would record a charge to earnings.

During the six months ended June 30, 2011 and 2010, we received cash distributions from GOV totaling $8,259 and $7,960, respectively.

The following summarized financial data of GOV is as reported in GOV’s Quarterly Report on Form 10-Q for the periods ended June 30, 2011.  References in our financial statements to the Quarterly Report on Form 10-Q for GOV are included as textual references only, and the information in GOV’s Quarterly Report on Form 10-Q is not incorporated by reference into our financial statements.

	June 30, 2011		December 31, 2010
Real estate properties, net	$	1,036,462	$	846,447
Acquired real estate leases, net	80,075		60,097
Cash and cash equivalents	1,081		2,437
Rents receivable	21,200		19,200
Other assets, net	23,916		23,107
Total assets	$	1,162,734	$	951,288
Revolving credit facility	$	338,000	$	118,000
Mortgage notes payable	45,898		46,428
Assumed real estate lease obligations, net	12,626		13,679
Other liabilities	20,945		15,784
Shareholders’ equity	745,265		757,397
Total liabilities and shareholders’ equity	$	1,162,734	$	951,288

Income Statements:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Rental income	$	41,923		$	25,940		$	80,999		$	49,295
Operating expenses	(15,253		)	(8,460		)	(29,986		)	(16,262		)
Depreciation and amortization	(9,097		)	(5,401		)	(17,483		)	(10,281		)
Acquisition related costs	(1,009		)	(1,011		)	(1,838		)	(1,855		)
General and administrative	(2,566		)	(1,623		)	(4,909		)	(3,082		)
Operating income	13,998			9,445			26,783			17,815
Interest and other income	20			16			35			68
Interest expense	(3,076		)	(1,678		)	(5,613		)	(3,209		)
Equity in earnings (losses) of an investee	46			(23		)	83			(52		)
Income before income tax expense	10,988			7,760			21,288			14,622
Income tax expense	(56		)	(25		)	(102		)	(36		)
Net income	$	10,932		$	7,735		$	21,186		$	14,586
Weighted average common shares outstanding	40,506			31,261			40,503			30,178
Net income per common share	$	0.27		$	0.25		$	0.52		$	0.48

As of June 30, 2011, we have invested $5,209 in AIC, an insurance company organized by Reit Management & Research LLC, or RMR, and companies to which RMR provides management services.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  At June 30, 2011, we owned approximately 14.3% of AIC with a current carrying value of $5,202.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because each of our Trustees is a director of AIC.  Under the equity method, we record our percentage share of net earnings from AIC in our consolidated statements of income.  If we determine there is an “other than temporary” decline in the fair value of this investment, we would record a charge to earnings.  In evaluating the fair value of this investment, we have considered, among other things, the assets and liabilities held by AIC, AIC’s overall financial condition, and the financial condition and prospects for AIC’s insurance business.

In 2010, AIC designed a combination property insurance program for us and other AIC shareholders in which AIC participated as a reinsurer.  Our total premiums paid under this program in 2011 and 2010 were approximately $5,540 and $5,328, respectively.  We are currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.