Equity Investments

3 Months Ended

Mar. 31, 2012

Equity Investments

Equity Investments

Note 5.  Equity Investments

At March 31, 2012 and December 31, 2011, we had the following equity investments in Government Properties Income Trust, or GOV, and Affiliates Insurance Company, or AIC:

	Ownership Percentage				Equity Investments				Equity in Earnings
									Three Months Ended
	March 31,		December 31,		March 31,		December 31,		March 31,
	2012		2011		2012		2011		2012		2011
GOV	21.1	%	21.1	%	$	170,920	$	172,186	$	2,913	$	2,675
AIC	14.3	%	14.3	%	5,335		5,291		45		37
					$	176,255	$	177,477	$	2,958	$	2,712

At March 31, 2012, we owned 9,950,000, or approximately 21.1%, of the common shares of beneficial interest of GOV, with a carrying value of $170,920 and a market value, based on quoted market prices, of $239,895 ($24.11 per share).  GOV is a 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.

Since the GOV IPO, we have accounted for our investment in GOV using the equity method.  Under the equity method, we record our percentage share of net earnings of GOV in our condensed 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 three months ended March 31, 2012 and 2011, we received cash distributions from GOV totaling $4,179 and $4,080, respectively.

The following summarized financial data of GOV is as reported in GOV’s Quarterly Report on Form 10-Q for the period ended March 31, 2012.  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.

Condensed Consolidated Balance Sheets:

	March 31,		December 31,
	2012		2011
Real estate properties, net	$	1,191,091	$	1,198,050
Acquired real estate leases, net	112,178		117,596
Cash and cash equivalents	9,275		3,272
Rents receivable, net	26,472		29,000
Other assets, net	24,231		20,657
Total assets	$	1,363,247	$	1,368,575
Unsecured revolving credit facility	$	—	$	345,500
Unsecured term loan	350,000		—
Mortgage notes payable	94,826		95,383
Assumed real estate lease obligations, net	10,482		11,262
Other liabilities	22,034		24,762
Shareholders’ equity	885,905		891,668
Total liabilities and shareholders’ equity	$	1,363,247	$	1,368,575

Condensed Consolidated Statements of Income:

	Three Months Ended March 31,
	2012			2011
Rental income	$	50,455		$	39,228
Operating expenses	(18,221		)	(14,885		)
Depreciation and amortization	(12,072		)	(8,386		)
Acquisition related costs	(49		)	(829		)
General and administrative	(3,039		)	(2,343		)
Operating income	17,074			12,785
Interest and other income	8			15
Interest expense	(4,023		)	(2,537		)
Equity in earnings of an investee	45			37
Income before income tax expense	13,104			10,300
Income tax expense	(45		)	(46		)
Net income	$	13,059		$	10,254
Weighted average common shares outstanding	47,052			40,501
Net income per common share	$	0.28		$	0.25

As of March 31, 2012, we have invested $5,209 in AIC, an insurance company owned in equal proportion by Reit Management & Research LLC, our business and property manager, or RMR, us and five other companies to which RMR provides management services, including GOV and Senior Housing Properties Trust, or SNH.  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 March 31, 2012, we owned approximately 14.3% of AIC with a current carrying value of $5,335.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Under the equity method, we record our percentage share of net earnings from AIC in our condensed 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.  See Note 12 for additional information about our investment in AIC.