Note 6. Equity Investments

At September 30, 2013 and December 31, 2012, we had the following equity investments in SIR, Government Properties Income Trust, or GOV, and Affiliates Insurance Company, or AIC:

	Ownership Percentage				Equity Investments				Equity in Earnings
									Three Months Ended				Nine Months Ended
	September 30,		December 31,		September 30,		December 31,		September 30,				September 30,
	2013		2012		2013		2012		2013		2012		2013		2012
SIR	44.2	%	Consolidated		$	511,473	$	—	$	10,428	$	—	$	10,428	$	—
GOV	—	%	18.2	%	—		173,452		—		2,638		4,111		8,231
AIC	12.5	%	25.0	%	5,781		11,259		64		230		374		424
					$	517,254	$	184,711	$	10,492	$	2,868	$	14,913	$	8,655

At September 30, 2013, we owned 22,000,000, or approximately 44.2%, of the common shares of beneficial interest of SIR, with a carrying value of $511,473 and a market value, based on quoted market prices, of $567,600 ($25.80 per share). SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties and was one of our consolidated subsidiaries until July 2, 2013. On July 2, 2013, SIR issued and sold to the public 10,500,000 of its common shares for $28.25 per common share. Prior to the completion of this offering, our 22,000,000 common shares of SIR represented approximately 56.0% of SIR’s outstanding common shares, and SIR was one of our consolidated subsidiaries. Following the completion of this offering, our 22,000,000 common shares of SIR represented approximately 44.2% of SIR’s outstanding common shares and SIR ceased to be our consolidated subsidiary. Accordingly, since the completion of this offering on July 2, 2013, we no longer consolidate our investment in SIR, but instead account for such investment under the equity method. Under the equity method, we record our percentage share of net earnings of SIR in our condensed consolidated statements of operations. Prior to July 2, 2013, the operating results and investments of SIR were included in our consolidated results of operations and financial position. On July 2, 2013, our share of the underlying equity of SIR exceeded our carrying value by $17,590. As required under GAAP, we are amortizing this difference to equity in earnings of investees over a 27 year period, which approximates the average remaining useful lives of the buildings owned by SIR as of July 2, 2013. If we determine there is an “other than temporary” decline in the fair value of this investment, we would record a charge to earnings. See Note 1 and Note 15 for additional information regarding SIR.

Since July 2, 2013, we received cash distributions from SIR totaling $9,680.

The following summarized financial data of SIR is as reported in SIR’s Quarterly Report on Form 10-Q for the period ended September 30, 2013, or the SIR Quarterly Report. References in our financial statements to the SIR Quarterly Report are included as references to the source of the data only, and the information in the SIR Quarterly Report is not incorporated by reference into our financial statements.

Condensed Consolidated Balance Sheets:

	September 30,		December 31,
	2013		2012
Real estate properties, net	$	1,510,338	$	1,249,081
Acquired real estate leases, net	114,937		95,248
Cash and cash equivalents	14,540		20,373
Rents receivable, net	52,174		38,885
Other assets, net	23,162		27,065
Total assets	$	1,715,151	$	1,430,652

Revolving credit facility	$	80,000	$	95,000
Term loan	350,000		350,000
Mortgage notes payable	27,309		27,778
Assumed real estate lease obligations, net	19,317		20,434
Other liabilities	40,999		37,257
Shareholders’ equity	1,197,526		900,183
Total liabilities and shareholders’ equity	$	1,715,151	1,430,652

Condensed Consolidated Statements of Income:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Total revenues	$	48,584		$	30,878		$	138,390		$	86,385
Operating expenses	(9,287		)	(5,710		)	(26,172		)	(16,828		)
Depreciation and amortization	(8,485		)	(3,888		)	(22,445		)	(9,682		)
Acquisition related costs	(790		)	(583		)	(1,479		)	(1,258		)
General and administrative	(3,208		)	(2,626		)	(8,884		)	(5,664		)
Operating income	26,814			18,071			79,410			52,953

Interest expense	(3,232		)	(2,467		)	(10,484		)	(4,436		)
Equity in earnings of an investee	64			115			219			189
Income before income tax expense	23,646			15,719			69,145			48,706
Income tax expense	(52		)	—			(132		)	—
Net income	$	23,594		$	15,719		$	69,013		$	48,706

Weighted average common shares outstanding	49,686			31,206			42,790			25,226

Net income per common share	$	0.47		$	0.50		$	1.61		$	1.93

On March 15, 2013, we sold all 9,950,000 common shares that we owned of GOV in a public offering for $25.20 per common share, raising gross proceeds of $250,740 ($239,576 after deducting underwriters’ discounts and commissions and expenses). We recognized a gain on this sale of an equity investment of $66,293 as a result of the per share sales price of this transaction being above our per share carrying value. 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 in June 2009 when it became a separate public entity.

During the nine months ended September 30, 2013 and 2012, we received cash distributions from GOV totaling $4,279 and $12,537, respectively.

As of September 30, 2013, we have invested $5,209 in AIC, an insurance company owned in equal proportion by us, Reit Management & Research LLC, our business and property manager, or RMR, GOV, SIR and four other companies to which RMR provides management services. At September 30, 2013, we owned 12.5% of AIC with a carrying value of $5,781. For the period that SIR was both a shareholder of AIC and our consolidated subsidiary, from May 2012 until July 2, 2013, our condensed consolidated financial statements also include SIR’s equity investment in AIC. We and SIR use the equity method to account for our and SIR’s investment in AIC because we and SIR believe that we each have significant influence over AIC because all of our Trustees and all of SIR’s trustees are also directors of AIC. Following our deconsolidating SIR, we continue to account for our investment in AIC under the equity method, as we continue to believe we have significant influence over AIC for the same reason. Under the equity method, we record our and our percentage share of SIR’s percentage share of net earnings from AIC in our condensed consolidated statements of operations. 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 15 for additional information about our investment in AIC.