EX-99.1 10 eqc123114exhibit991.htm EXHIBIT 99.1 EQC 12.31.14 Exhibit 99.1


Exhibit 99.1
 
Select Income REIT
Index to Financial Statements
 
The following consolidated financial statements of Select Income REIT are included on the pages indicated:
 
Report of Independent Registered Public Accounting Firm
1

Consolidated Balance Sheets as of July 9, 2014 and December 31, 2013
2

Consolidated Statements of Income and Comprehensive Income for the periods from January 1, 2014 to July 9, 2014 and from July 2, 2013 to December 31, 2013
3

Consolidated Statements of Shareholders’ Equity for the periods from January 1, 2014 to July 9, 2014 and from July 2, 2013 to December 31, 2013
4

Consolidated Statements of Cash Flows for the periods from January 1, 2014 to July 9, 2014 and from July 2, 2013 to December 31, 2013
5

Notes to Consolidated Financial Statements
6

Schedule II—Valuation and Qualifying Accounts
17

Schedule III—Real Estate and Accumulated Depreciation
18

 



Report of Independent Registered Public Accounting Firm
 
To the Trustees and Shareholders of Select Income REIT
 
We have audited the accompanying consolidated balance sheets of Select Income REIT as of July 9, 2014 and December 31, 2013, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the periods from January 1, 2014 to July 9, 2014 and from July 2, 2013 to December 31, 2013. Our audits also included the financial statement schedules listed in the Index to Financial Statements. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Select Income REIT at July 9, 2014 and December 31, 2013, and the consolidated results of its operations and its cash flows for the periods from January 1, 2014 to July 9, 2014 and from July 2, 2013 to December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 
 
 
/s/ Ernst & Young LLP
Boston, Massachusetts
 
February 5, 2015
 


1


SELECT INCOME REIT
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value data)
 
 
July 9,
 
December 31,
 
2014
 
2013
ASSETS
 
 
 

Real estate properties:
 
 
 

Land
$
754,759

 
$
732,509

Buildings and improvements
1,098,770

 
913,948

 
1,853,529

 
1,646,457

Accumulated depreciation
(80,845
)
 
(67,223
)
 
1,772,684

 
1,579,234

 
 

 
 

Acquired real estate leases, net
125,163

 
129,426

Cash and cash equivalents
27,531

 
20,025

Restricted cash
42

 
42

Rents receivable, net of allowance for doubtful accounts of $1,100 and $936, respectively
60,474

 
55,335

Deferred leasing costs, net
6,088

 
5,599

Deferred financing costs, net
3,798

 
4,834

Other assets
7,770

 
7,364

Total assets
$
2,003,550

 
$
1,801,859

 
 
 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 

 
 
 
 

Revolving credit facility
$
74,000

 
$
159,000

Term loan
350,000

 
350,000

Mortgage notes payable
19,069

 
27,147

Accounts payable and accrued expenses
18,390

 
20,655

Assumed real estate lease obligations, net
26,945

 
26,966

Rents collected in advance
14,116

 
8,637

Security deposits
10,217

 
8,359

Due to related persons
1,502

 
2,404

Total liabilities
514,239

 
603,168

 
 
 
 

Commitments and contingencies
 
 
 

 
 
 
 

Shareholders’ equity:
 
 
 

Common shares of beneficial interest, $0.01 par value: 75,000,000 shares authorized, 59,891,803 and 49,829,541 shares issued and outstanding, respectively
599

 
498

Additional paid in capital
1,440,047

 
1,160,894

Cumulative net income
202,528

 
144,343

Cumulative other comprehensive income (loss)
16

 
(25
)
Cumulative common distributions
(153,879
)
 
(107,019
)
Total shareholders’ equity
1,489,311

 
1,198,691

Total liabilities and shareholders’ equity
$
2,003,550

 
$
1,801,859

 
See accompanying notes.


2


SELECT INCOME REIT
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(amounts in thousands, except per share data)
 
 
January 1, 2014 to
 
July 2, 2013 to
 
July 9, 2014
 
December 31, 2013
 
 
 
 

Revenues:
 
 
 

Rental income
$
98,226

 
$
82,847

Tenant reimbursements and other income
16,980

 
15,670

Total revenues
115,206

 
98,517

 
 

 
 

Expenses:
 

 
 

Real estate taxes
11,486

 
10,486

Other operating expenses
9,496

 
9,011

Depreciation and amortization
20,832

 
17,131

Acquisition related costs
374

 
1,313

General and administrative
7,731

 
6,747

Total expenses
49,919

 
44,688

 
 

 
 

Operating income
65,287

 
53,829

 
 

 
 

Interest expense (including amortization of debt premiums and deferred financing fees of $837 and $742, respectively)
(7,287
)
 
(6,511
)
Gain on early extinguishment of debt
243

 
—

Income before income tax (expense) benefit and equity in earnings of an investee
58,243

 
47,318

Income tax (expense) benefit
(90
)
 
176

Equity in earnings of an investee
32

 
179

Net income
58,185

 
47,673

 
 

 
 

Other comprehensive income:
 

 
 

Equity in unrealized gain of an investee
41

 
31

Other comprehensive income
41

 
31

Comprehensive income
$
58,226

 
$
47,704

 
 

 
 

Weighted average common shares outstanding
52,394

 
49,758

 
 

 
 

Basic and diluted net income per common share
$
1.11

 
$
0.96

 
See accompanying notes.
 



3


SELECT INCOME REIT
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
 
 
 
Number of
Shares
 
Common
Shares
 
Additional
Paid In
Capital
 
Cumulative
Net
Income
 
Cumulative
Other
Comprehensive
Income (Loss)
 
Cumulative
Common
Distributions
 
Total
Balance at July 1, 2013
 
39,292,592

 
$
393

 
$
877,108

 
$
96,670

 
$
(56
)
 
$
(62,189
)
 
$
911,926

Net income
 
—

 
—

 
—

 
47,673

 
—

 
—

 
47,673

Sale of common shares
 
10,500,000

 
105

 
283,494

 
—

 
—

 
—

 
283,599

Common share grants
 
37,200

 
—

 
292

 
—

 
—

 
—

 
292

Forfeited share grants
 
(251
)
 
—

 
—

 
—

 
—

 
—

 
—

Other comprehensive income
 
—

 
—

 
—

 
—

 
31

 
—

 
31

Distributions to common shareholders
 
—

 
—

 
—

 
—

 
—

 
(44,830
)
 
(44,830
)
Balance at December 31, 2013
 
49,829,541

 
498

 
1,160,894

 
144,343

 
(25
)
 
(107,019
)
 
1,198,691

Net income
 
—

 
—

 
—

 
58,185

 
—

 
—

 
58,185

Sale of common shares, net
 
10,000,000

 
100

 
277,272

 
—

 
—

 
—

 
277,372

Issuance of common shares
 
49,762

 
1

 
1,467

 
 
 
 
 
 
 
1,468

Common share grants
 
12,500

 
—

 
414

 
—

 
—

 
—

 
414

Other comprehensive income
 
—

 
—

 
—

 
—

 
41

 
—

 
41

Distributions to common shareholders
 
—

 
—

 
—

 
—

 
—

 
(46,860
)
 
(46,860
)
Balance at July 9, 2014
 
$
59,891,803

 
$
599

 
$
1,440,047

 
$
202,528

 
$
16

 
$
(153,879
)
 
$
1,489,311

 
See accompanying notes.
 



4


SELECT INCOME REIT
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
From January 1, 2014 to
 
From July 2, 2013 to
 
July 9, 2014
 
December 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
58,185

 
$
47,673

Adjustments to reconcile net income to cash provided by operating activities
 

 
 

Depreciation
13,634

 
11,204

Net amortization of debt premiums and deferred financing fees
837

 
742

Amortization of acquired real estate leases and assumed real estate lease obligations
6,660

 
6,012

Amortization of deferred leasing costs
487

 
456

Provision for losses on rents receivable
164

 
306

Straight line rental income
(8,595
)
 
(7,335
)
Gain on early extinguishment of debt
(243
)
 
—

Other non-cash expenses
1,407

 
790

Equity in earnings of an investee
(32
)
 
(179
)
Change in assets and liabilities:
 

 
 

Rents receivable
3,291

 
(2,387
)
Deferred leasing costs
(976
)
 
(466
)
Other assets
562

 
293

Due from related persons
—

 
141

Accounts payable and accrued expenses
(1,601
)
 
337

Rents collected in advance
5,479

 
2,875

Security deposits
1,858

 
(1,276
)
Due to related persons
(358
)
 
41

Cash provided by operating activities
80,759

 
59,227

 
 

 
 

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Real estate acquisitions
(208,816
)
 
(211,012
)
Real estate improvements
(1,487
)
 
(3,135
)
Investments in Affiliates Insurance Company
(825
)
 
—

Cash used in investing activities
(211,128
)
 
(214,147
)
 
 

 
 

CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from issuance of common shares, net
277,372

 
283,598

Proceeds from borrowings
228,000

 
244,000

Payments on borrowings
(320,637
)
 
(320,109
)
Distributions to common shareholders
(46,860
)
 
(44,830
)
Cash provided by financing activities
137,875

 
162,659

 
 

 
 

Increase in cash and cash equivalents
7,506

 
7,739

Cash and cash equivalents at beginning of period
20,025

 
12,286

Cash and cash equivalents at end of period
$
27,531

 
$
20,025

 
 

 
 

Supplemental disclosures:
 

 
 

Interest paid
$
7,595

 
$
5,883

Income taxes paid
$
93

 
$
(146
)
 
 

 
 

Non-cash investing activities:
 

 
 

Additions to real estate included in accounts payable and accrued expenses
$
—

 
$
(1,095
)
 
 

 
 

Non-cash financing activities:
 

 
 

Issuance of common shares
$
—

 
$
293

See accompanying notes.

5


SELECT INCOME REIT
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Note 1.  Organization
 
Select Income REIT and its subsidiaries, or SIR, we, us or our, was organized as a real estate investment trust, or REIT, under Maryland law on December 19, 2011 as a wholly owned subsidiary of Equity Commonwealth (formerly known as CommonWealth REIT), or EQC. On February 16, 2012, we acquired 100% ownership of our 30 initial properties (251 buildings, leasable lands and easements), or the Initial Properties, by means of a contribution from EQC to one of our subsidiaries. On March 12, 2012, we completed our initial public offering, or IPO, and we became a separate publicly owned company.
 
Note 2.  Basis of Presentation
 
Our consolidated financial statements include the Initial Properties which were owned by EQC until they were contributed to us by EQC on February 16, 2012. We were consolidated by EQC through July 1, 2013. As a result of our equity offering on July 2, 2013, EQC’s ownership interest in us decreased to 44.2% and EQC began accounting for its investment in us using the equity method of accounting. On July 9, 2014, EQC sold all of the shares it owned in us. These financial statements have been presented for the period EQC accounted for its ownership interest in us using the equity method of accounting, which was from July 2, 2013 to July 9, 2014.

The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100% owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Prior to our IPO, EQC directly or indirectly wholly owned us, and we have presented applicable transactions at EQC's historical basis.
 
Note 3.  Summary of Significant Accounting Policies
  
Real Estate Properties. We recorded our Initial Properties at EQC’s historical cost basis and record our other properties at our cost and provide depreciation on real estate investments on a straight line basis over estimated useful lives generally ranging from 7 to 40 years. We and EQC estimated the purchase price allocations and the useful lives of our properties. In some circumstances, we and EQC engaged independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determinations of useful lives.

We and EQC allocated the purchase prices of our properties to land, building and improvements based on determinations of the fair values of these assets assuming the properties are vacant. We and EQC determined the fair value of each property using methods similar to those used by independent appraisers. For properties qualifying as acquired businesses under Accounting Standards Codification 805 Business Combinations, we and EQC allocated a portion of the purchase price of our properties to above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us or EQC) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective leases. We and EQC allocated a portion of the purchase price to acquired in place leases and tenant relationships in an amount, if any, equal to the excess of (i) the purchase price paid for each property, after adjusting existing acquired in place leases to market rental rates, over (ii) the estimated fair value of the property, as if vacant. We and EQC allocated this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to the accompanying consolidated financial statements. In making these allocations, we considered factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us or EQC. If the value of tenant relationships becomes material in the future, we may separately allocate those amounts and amortize the allocated amount over the estimated life of the relationships.

We amortize capitalized above market lease values (included in acquired real estate leases in our consolidated balance sheets) and below market lease values (presented as assumed real estate lease obligations in our consolidated balance sheets) as

6


a reduction or increase, respectively, to rental income over the terms of the associated leases. Such amortization resulted in a net change to rental income of $83 and ($514) during the periods from January 1, 2014 to July 9, 2014 and July 2, 2013 to December 31, 2013, respectively. We amortize the value of acquired in place leases (included in acquired real estate leases in our consolidated balance sheets), exclusive of the value of above market and below market acquired in place leases, or Lease Origination Value, over the terms of the associated leases. Such amortization, which is included in depreciation and amortization expense, totaled $6,742 and $5,498 during the periods from January 1, 2014 to July 9, 2014 and July 2, 2013 to December 31, 2013, respectively. If a lease is terminated prior to its stated expiration, we write off the unamortized amounts relating to that lease.

At July 9, 2014 and December 31, 2013, our acquired real estate leases and assumed real estate lease obligations were as follows:
 
 
As of
 
As of
 
July 9, 2014
 
December 31, 2013
Acquired real estate leases
 

 
 

Capitalized above market lease values
$
44,852

 
$
44,851

Less: accumulated amortization
(16,046
)
 
(14,556
)
Capitalized above market lease values, net
28,806

 
30,295

 
 

 
 

Lease Origination Value
121,381

 
117,491

Less: accumulated amortization
(25,024
)
 
(18,360
)
Lease Origination Value, net
96,357

 
99,131

 
 

 
 

Acquired real estate leases, net
$
125,163

 
$
129,426

 
 

 
 

Assumed real estate lease obligations
 

 
 

Capitalized below market lease values
$
39,328

 
$
37,776

Less: accumulated amortization
(12,383
)
 
(10,810
)
Assumed real estate lease obligations, net
$
26,945

 
$
26,966

 
Future amortization of net intangible acquired lease assets and liabilities to be recognized over the current terms of the associated leases as of July 9, 2014 are estimated to be $6,168 for the remainder of 2014, $12,908 in 2015, $12,502 in 2016, $12,086 in 2017, $11,538 in 2018 and $43,016 thereafter.

We recognize impairment losses on real estate investments when indicators of impairment are present and the estimated undiscounted cash flow from our real estate investments is less than the carrying amount of such real estate investments. Impairment indicators may include declining tenant occupancy, lack of progress releasing vacant space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. We review our properties for impairment quarterly, or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future undiscounted cash flows expected to be generated from that property. If the sum of these expected future undiscounted cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. The determination of undiscounted cash flow includes consideration of many factors including income to be earned from the investment, holding costs (exclusive of interest), estimated selling prices, and prevailing economic and market conditions. Based on these procedures performed, no impairments exist on any of our properties as of July 9, 2014 and December 31, 2013.

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 land parcels or to undertake this

7


environmental remediation. 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 July 9, 2014 and December 31, 2013, accrued environmental remediation costs totaling $8,150 were included in accounts payable and accrued expenses in our 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 consolidated statements of income and comprehensive income.

Cash and Cash Equivalents. We consider highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Restricted Cash. Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by certain of our mortgage debts.

Deferred Leasing Costs. Deferred leasing costs include capitalized brokerage, legal and other fees associated with the successful negotiation of leases that are amortized to depreciation and amortization expense on a straight line basis over the terms of the respective leases. Deferred leasing costs totaled $8,773 and $7,858 at July 9, 2014 and December 31, 2013, respectively, and accumulated amortization of deferred leasing costs totaled $2,685 and $2,259 at July 9, 2014 and December 31, 2013, respectively. Future amortization of deferred leasing costs to be recognized during the current terms of the existing leases as of July 9, 2014, are estimated to be $462 for the remainder of 2014, $893 in 2015, $744 in 2016, $680 in 2017, $572 in 2018 and $2,737 thereafter.

Deferred Financing Fees. Deferred financing fees include capitalized issuance or assumption costs related to borrowings that are amortized to interest expense over the terms of the respective loans. Deferred financing fees totaled $7,692 and $7,761 at July 9, 2014 and December 31, 2013, respectively, and accumulated amortization of deferred financing fees totaled $3,894 and $2,927 at July 9, 2014 and December 31, 2013, respectively. Future amortization of deferred financing fees to be recognized with respect to our loans as of July 9, 2014, are estimated to be $900 for the remainder of 2014, $1,893 in 2015, $749 in 2016, $256 in 2017 and $0 thereafter.

Other Assets. Other assets consist primarily of deposits on potential acquisitions, our investment in Affiliates Insurance Company, or AIC, (see Note 9 for further information regarding this investment) and prepaid real estate taxes and other prepaid expenses. We account for our investment in AIC using the equity method of accounting. Significant influence is present through common representation on the boards of trustees or directors of us and AIC. Our Managing Trustees are also owners of Reit Management & Research LLC, or RMR, which is the manager of us and AIC, and each of our Trustees is a director of AIC. See Note 9 for a further discussion of our investment in AIC.

Revenue Recognition. Rental income from operating leases is recognized on a straight line basis over the lives of lease agreements. We defer the recognition of contingent rental income, such as percentage rents, until the specific targets that trigger the contingent rental income are achieved. Contingent rental income recognized for the periods from January 1, 2014 to July 9, 2014 and July 2, 2013 to December 31, 2013, totaled $1,270 and $0, respectively. Tenant reimbursements and other income include property level operating expenses and capital expenditures reimbursed by our tenants as well as other incidental revenues. Certain tenants are obligated to pay directly their obligations under their leases for insurance, real estate taxes and certain other expenses and these costs, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our consolidated financial statements. To the extent any tenant responsible for these costs under its respective lease defaults on its payment obligations under the lease or it is deemed probable that the tenant will fail to pay for such costs, we would record a liability for such obligation.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of certain tenants to make payments required under their leases. The computation of the allowance is based on the tenants' payment histories and current credit profiles, as well as other considerations.

Income Taxes. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and, accordingly, we generally will not be subject to federal income taxes provided we distribute our taxable income and meet certain other requirements to qualify as a REIT. We are, however, subject to certain state and local taxes.


8


Cumulative Other Comprehensive Income. Cumulative other comprehensive income consists of the unrealized gains and losses related to our investment in AIC (see Note 9 for further information regarding this investment).

Use of Estimates. Preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that may affect the amounts reported in these consolidated financial statements and related notes. The actual results could differ from these estimates.

Net Income Per Common Share. We compute net income per common share using the weighted average number of common shares outstanding.

New Accounting Pronouncements. In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update amends the criteria for reporting discontinued operations to, among other things, raise the threshold for disposals to qualify as discontinued operations. This update is effective for interim and annual reporting periods, beginning after December 15, 2014, with early adoption permitted. We currently expect that, when adopted, this update will reduce the number of any future property dispositions we make to be presented as discontinued operations in our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact, if any, the adoption of this ASU will have on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. The update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. The implementation of this update is not expected to cause any significant changes to our consolidated financial statements.

Note 4.  Real Estate Properties
 
During the period from January 1, 2014 to July 9, 2014, we acquired two properties (two buildings) with a combined 986,937 rentable square feet for an aggregate purchase price of $207,860, excluding closing costs. We allocated the purchase prices of these acquisitions based on the estimated fair values of the acquired assets and assumed liabilities. Details of these completed acquisitions are as follows:
 
 
 
 
 
Properties
 
Square
 
Purchase
 
 
 
Building and
 
Acquired
Real Estate
 
Assumed
Real Estate
Lease
Date
 
Location
 
\Buildings
 
Feet
 
Price (1)
 
Land
 
Improvements
 
Leases
 
Obligations
April 2014
 
Naperville, IL (2)
 
1 / 1
 
819,513

 
$
187,500

 
$
13,757

 
$
173,743

 
$
—

 
$
—

April 2014
 
Mahwah, NJ (3)
 
1 / 1
 
167,424

 
20,360

 
8,492

 
9,451

 
3,968

 
(1,551
)
 
 
 
 
2 / 2
 
986,937

 
$
207,860

 
$
22,249

 
$
183,194

 
$
3,968

 
$
(1,551
)
 
(1)                 The allocation of purchase price is based on preliminary estimates and may change upon the completion of (i) third party appraisals and (ii) our analysis of acquired in place leases and building valuations. Purchase price excludes acquisition costs.
 
(2)                 Property was acquired and simultaneously leased back to an affiliate of the seller in a sale/leaseback transaction. We accounted for this transaction as an acquisition of assets. We recognized acquisition costs of $956 which we capitalized as part of the transaction.

(3)     This acquisition was accounted for as a business combination.
 
In December 2014, we acquired a single tenant, net leased industrial property located in Memphis, TN with approximately 646,000 rentable square feet. The purchase price of this property was $14,370, excluding closing costs.


9



We committed $1,226 for expenditures and concessions related to approximately 445,000 square feet of leases executed during the period from January 1, 2014 to July 9, 2014. Committed but unspent tenant related obligations based on existing leases as of July 9, 2014, were $2,895.

The future minimum lease payments scheduled to be received by us during the current terms of our leases as of July 9, 2014 are as follows:

 
Minimum
Year
Lease Payment
2014 (July 10, 2014 to December 31, 2014)
$
84,386

2015
179,240

2016
174,714

2017
173,739

2018
170,929

Thereafter
1,370,322

 
$
2,153,330


Acquisition of Cole Corporate Income Trust, Inc.

On January 29, 2015, we completed our acquisition of Cole Corporate Income Trust, Inc., a Maryland corporation, or CCIT, pursuant to the Agreement and Plan of Merger, dated as of August 30, 2014, as amended, or the Merger Agreement, by and among us, SC Merger Sub LLC, a Maryland limited liability company and our wholly owned subsidiary, or SIR Merger Sub, and CCIT. At the effective time on January 29, 2015, or the Effective Time, CCIT merged with and into SIR Merger Sub, and the separate corporate existence of CCIT ceased, with SIR Merger Sub surviving as our wholly owned subsidiary, or the Merger.
In accordance with the terms of the Merger Agreement, CCIT stockholders had the right to elect, subject to proration and certain adjustments, prior to the election deadline, for each share of common stock, par value $.01 par value per share, of CCIT, or the CCIT Common Stock, they owned, either (i) $10.50, or the Cash Consideration, or (ii) 0.360 of one of our common shares, or the Share Consideration, and, together with the Cash Consideration, the Merger Consideration. The Cash Consideration and the Share Consideration are being allocated in accordance with the Merger Agreement so that the aggregate number of shares of CCIT Common Stock converted into the right to receive the Cash Consideration does not exceed 60% of the shares of CCIT Common Stock issued and outstanding immediately prior to the Effective Time. No fractional SIR Common Shares were issued in the Merger, and cash is being paid in lieu thereof. We issued approximately 28,400,000 SIR Common Shares in connection with the Merger.
The effects of the Merger include the related acquisition of CCIT’s full property portfolio which includes 64 office and industrial net lease properties, or the 64 CCIT Properties, as well as the healthcare properties (described below) for estimated total consideration of approximately $3,000,000, including the assumption of approximately $297,700 of mortgage debt principal (of which approximately $30,000 was assumed by Senior Housing Properties, or SNH, in the Healthcare Properties Sale (as defined below)) and excluding acquisition related costs.
We financed the Cash Consideration and the fees, expenses and costs incurred in connection with the Merger and the related transactions and repayment of CCIT’s revolving credit facility and term loan, using a combination of our available cash on hand, borrowings under our existing revolving credit facility, borrowings under a new credit facility for a $1,000,000 364-day senior unsecured bridge loan (as further described below) and approximately $509,000 in cash proceeds from the Healthcare Properties Sale (as defined below). In connection with the completion of the Merger, we entered into a bridge loan agreement with a group of institutional lenders, or the Loan Agreement, pursuant to which we obtained a 364-day $1,000,000 bridge loan, which had a maturity date of January 28, 2016, bore interest at LIBOR plus 140 basis points (subject to adjustment based on changes to SIR’s credit ratings), and was prepayable in whole or part at any time. The Loan Agreement contained a number of covenants that restricted our ability to incur debt in excess of calculated amounts, restricted our ability to make distributions under certain circumstances and generally required SIR to maintain certain financial ratios. The Loan Agreement provided for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of SIR, which includes RMR ceasing to act as our business manager and property manager. On February 3, 2015, we repaid the $1,000,000 senior unsecured bridge loan and reduced amounts outstanding on our

10


revolving credit facility with proceeds from an underwritten public offering of $1,450,000 of senior unsecured notes, including: $350,000 aggregate principal amount of 2.85% unsecured senior notes due 2018; $400,000 aggregate principal amount of 3.60% unsecured senior notes due 2020; $300,000 aggregate principal amount of 4.15% unsecured senior notes due 2022; and $400,000 aggregate principal amount of 4.50% unsecured senior notes due 2025.
Concurrently with the completion of the Merger and pursuant to the Purchase and Sale Agreement and Joint Escrow Instructions, dated as of August 30, 2014, by and between SIR Merger Sub and SNH, or the Healthcare Properties Purchase and Sale Agreement, SIR Merger Sub sold to SNH the entities acquired in the Merger which own 23 healthcare properties for approximately $509,000 in cash, plus the assumption of approximately $30,000 of mortgage debt principal. Such sale is referred to herein as the “Healthcare Properties Sale.”
Note 5.  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 footage leased to one tenant. Our buildings and lands are primarily leased to single tenants; however, we do own some multi tenant buildings on the island of Oahu, HI.
 
Note 6.  Indebtedness
 
At July 9, 2014 and December 31, 2013 our outstanding indebtedness consisted of the following:
 
 
July 9,
 
December 31,
 
2014
 
2013
Revolving credit facility, due in 2016
$
74,000

 
$
159,000

Term loan, due in 2017
350,000

 
350,000

Mortgage note payable, 5.950% interest rate, including unamortized premium of $975 and $1,131, respectively, due in 2017 (1)
19,069

 
19,361

Mortgage note payable, 5.689% interest rate, including unamortized premium of $0 and $286, respectively, due in 2016 (1) (2)
—

 
7,786

 
$
443,069

 
$
536,147

 

(1)            We assumed these mortgages in connection with our acquisition of certain properties. The stated interest rate for these mortgage debts are the contractually stated rates; we recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value premiums to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.
(2)            This mortgage note was repaid, at par, in January 2014.
 
We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is March 11, 2016 and, subject to the payment of an extension fee and meeting certain other conditions, our revolving credit facility includes an option for us to extend the stated maturity date by one year to March 11, 2017. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to $1,000,000 in certain circumstances. In February 2013, we partially exercised our option to increase the available borrowing amount under our revolving credit facility from $500,000 to $750,000. Borrowings under our revolving credit facility bear interest at LIBOR plus a premium. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our leverage or credit ratings. As of July 9, 2014, the interest rate premium on our revolving credit facility was 130 basis points and our facility fee was 30 basis points. The interest rate payable on borrowings under our revolving credit facility as of July 9, 2014 and the weighted average interest rate for borrowings under the revolving credit facility for the period from January 1, 2014 to July 9, 2014 were both 1.45%. As of December 31, 2013, the interest rate

11


payable on borrowings under our revolving credit facility was 1.47% and the weighted average interest rate for borrowings under the revolving credit facility was 1.48% for the period from July 2, 2013 to December 31, 2013. 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 July 9, 2014, we had $74,000 outstanding under our revolving credit facility.

We also have a $350,000 unsecured term loan that matures on July 11, 2017 and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium, which was155 basis points as of July 9, 2014. The interest rate premium is subject to adjustment based upon changes to our leverage or credit ratings. The interest rate payable for the amount outstanding under our term loan as of July 9, 2014 and the weighted average interest rate for the amount outstanding under our term loan for the period from January 1, 2014 to July 9, 2014 were both 1.70%. As of December 31, 2013, the interest rate payable for the amount outstanding under our term loan was 1.72% and the weighted average interest rate for the amount outstanding under our term loan was 1.73% for the period from July 2, 2013 to December 31, 2013.

Our revolving credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us, which includes RMR ceasing to act as our business manager and property manager. Our revolving credit facility agreement and our term loan agreement also contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth. We believe we were in compliance with the terms of our revolving credit facility and term loan covenants at July 9, 2014.

On January 9, 2015, we entered into a credit agreement with a group of lenders, or the credit agreement, pursuant to which we replaced our revolving credit facility and our term loan with new facilities providing $1,100,000 in aggregate borrowing availability. The credit agreement replaces our prior revolving credit facility maturing on March 11, 2016 with a new $750,000 unsecured revolving credit facility that has a maturity date of March 29, 2019, interest paid on borrowings of LIBOR plus 105 basis points and a facility fee of 20 basis points. Both the interest rate premium and the facility fee for the new revolving credit facility are subject to adjustment based on changes to our credit ratings. Upon the payment of an extension fee and meeting certain other conditions, we have the option to extend the maturity date of the new revolving credit facility to March 29, 2020. The credit agreement also replaces our prior term loan maturing on July 11, 2017 with a new $350,000 unsecured term loan that has a maturity date of March 31, 2020 and interest paid on the amount outstanding of LIBOR plus 115 basis points. The interest rate premium for the new term loan is subject to adjustment based on changes to our credit ratings. The credit agreement includes a feature under which the maximum borrowing availability under the credit agreement may be increased to up to $2,200,000 on a combined basis under certain circumstances.

The credit agreement contains a number of covenants that restrict our ability to incur debt in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and generally require us to maintain certain financial ratios. The credit agreement provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes RMR ceasing to act as our business manager and property manager.

In connection with our acquisition of CCIT, on February 3, 2015, we repaid our $1,000,000 senior unsecured bridge
loan and reduced amounts outstanding on our revolving credit facility with proceeds from an underwritten public offering of
$1,450,000 of senior unsecured notes, including: $350,000 aggregate principal amount of 2.85% unsecured senior notes due
2018; $400,000 aggregate principal amount of 3.60% unsecured senior notes due 2020; $300,000 aggregate principal amount
of 4.15% unsecured senior notes due 2022; and $400,000 aggregate principal amount of 4.50% unsecured senior notes due
2025.

At July 9, 2014, one of our properties (two buildings) with an aggregate net book value of $20,519 is secured by a mortgage note we assumed in connection with our acquisition of the property. The aggregate principal amount outstanding under the mortgage note as of July 9, 2014, was $18,094. This mortgage note is non-recourse, subject to certain limited exceptions, and does not contain any material financial covenants.


12


The required principal payments due during the next five years and thereafter under all our outstanding debt as of July 9, 2014 are as follows:
 
 
 
Principal
 
 
Year
 
Payment
 
 
2014 (July 10, 2014 to December 31, 2014)
 
$
94

 
 
2015
 
245

 
 
2016
 
74,257

 
 
2017
 
367,498

 
 
 
 
$
442,094

 
(1)
 
(1)             Total debt outstanding as of July 9, 2014, including unamortized premiums of $975, was $443,069.
 
In January 2014, we repaid, at par, a $7,500 mortgage note which was secured by a building located in Chelmsford, MA. This mortgage was scheduled to mature in 2016.

Note 7.  Fair Value of Financial Instruments
 
Our financial instruments at July 9, 2014 included cash and cash equivalents, rents receivable, an equity investment, a mortgage note payable, our revolving credit facility, our term loan, amounts due to related persons and accounts payable. At July 9, 2014, the fair value of our financial instruments approximated their carrying values in our consolidated financial statements due to their short term nature or variable interest rates, except as follows:
 
 
 
Carrying
Amount
 
Estimated
Fair Value
Mortgage note payable
 
$
19,069

 
$
19,628

 
We estimate the fair values of our mortgage note payable by using discounted cash flow analyses and currently prevailing market rates for similar mortgage notes as of July 9, 2014. These inputs are categorized as level 3 inputs as defined in the fair value hierarchy under the accounting standards for Fair Value Measurements and Disclosures. Because our inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
 
Note 8.  Shareholders’ Equity

In August 2014, we amended our declaration of trust, increasing the number of our authorized shares of beneficial interest from 75,000,000 to 125,000,000. All of our authorized shares are currently classified as common shares, $.01 par value per share, or our common shares.

Sale of Shares:

During the second quarter of 2014, we sold 10,000,000 of our common shares in a public offering, including 1,000,000 of our common shares sold when the underwriters partially exercised their option to purchase additional shares, at a price of $29.00 per share raising net proceeds of approximately $277,372, after deducting estimated offering expenses and the underwriting discount. We used the net proceeds from this offering to partially repay amounts outstanding under our revolving credit facility and for general business purposes.

Issuance of Shares:
    
We issued 49,762 common shares to RMR during the period from January 1, 2014 to July 9, 2014, as part of the business management fee payable by us under our business management agreement. See Note 9 for further information regarding this agreement.

Share Awards:

We have common shares available for issuance under the terms of our equity compensation plan adopted in 2012, or the 2012 Plan. We awarded each of our Trustees 2,500 common shares with an aggregate market value of approximately $385

13


(approximately $77 per Trustee) as part of their annual compensation, based on the closing price of our common shares on the New York Stock Exchange, or the NYSE, on the date of grant. The common shares awarded to the Trustees vest immediately and the associated expenses are included in general and administrative expenses.

At July 9, 2014, 2,907,959 common shares remain available for issuance under the 2012 Plan.

Distributions:

In February 2014, we paid a distribution of $0.46 per common share, or approximately $22,922, to shareholders of record on January 13, 2014.

In May 2014, we paid a distribution of $0.48 per common share, or approximately $23,938, to shareholders of record on April 14, 2014.

In August 2014, we paid a distribution of $0.48 per common share, or approximately $28,748, to shareholders of record on July 25, 2014.

In November 2014, we paid a distribution of $0.48 per common share, or approximately $28,777, to shareholders of record on October 24, 2014.

On January 12, 2015, we declared a regular quarterly distribution of $0.48 per common share, or approximately
$28,800, to shareholders of record on January 23, 2015. We expect to pay this distribution on February 24, 2015. On January
16, 2015, we declared a prorated common share distribution, conditioned upon the completion of the merger with CCIT. The
prorated distribution is intended to align the two companies’ distributions for the first quarter of 2015. The prorated
distribution of $0.1493 is based upon our current quarterly common share distribution of $0.48 per quarter and will be
payable on February 27, 2015, to our shareholders of record as of the close of business on January 28, 2015, the last business
day immediately prior to the effective date of the merger.
 
Note 9.  Related Person Transactions
 
RMR: We have no employees. Personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management and administrative services to us: (i) a business management agreement, which relates to our business generally, and (ii) a property management agreement, which relates to our property level operations.

One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR. Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR. Each of our executive officers is also an officer of RMR. Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services. Mr. Barry Portnoy serves as a managing director or managing trustee of a majority of the companies that RMR or its affiliates provide management services to and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies. In addition, officers of RMR serve as officers of those companies.

On May 9, 2014, we and RMR entered into amendments to our business management agreement and property management agreement. As amended, RMR may terminate the agreements upon 120 days’ written notice. Prior to the amendments, RMR could terminate the agreements upon 60 days’ written notice and could also terminate the property management agreement upon five business days’ notice if we underwent a change of control. The amendments also provide for certain termination payments by us to RMR in the event that we terminate the agreements other than for cause, including certain proportional adjustments to the termination fees if we merge with another REIT to which RMR is providing management services or if we spin-off a subsidiary of ours to which we contributed properties and to which RMR is providing management services both at the time of the spin-off and on the date of the expiration or termination of the agreement. Finally, as amended, RMR agrees to provide certain transition services to us for 120 days following an applicable termination by us or notice of termination by RMR.

Pursuant to our business management agreement with RMR, we recognized business management fees of $5,406 for the period from January 1, 2014 to July 9, 2014, including approximately $427 of estimated 2014 incentive fees payable in our common shares in 2015 based on our common share total return. We recognized business management fees of $5,077 for the period from July 2, 2013 to December 31, 2013. Business management fees are included in general and administrative expenses in our consolidated financial statements. In accordance with the terms of our business management agreement, as

14


amended in December 2013, we issued 16,897 of our common shares to RMR during the period from January 1, 2014 to July 9, 2014 as payment for 10% of the base business management fee we recognized for such period. In March 2014, we also issued 32,865 of our common shares to RMR for the incentive fee for 2013 pursuant to the business management agreement.

In connection with our property management agreement with RMR, the aggregate property management and construction supervision fees we recognized were $3,219 and $2,880 for the periods from January 1, 2014 to July 9, 2014 and July 2, 2013 to December 31, 2013, respectively. These amounts are included in operating expenses or have been capitalized, as appropriate, in our consolidated financial statements.

EQC and GOV: We were formerly a 100% owned subsidiary of EQC. As of July 8, 2014, EQC was our largest shareholder and owned 22,000,000 of our common shares, or approximately 36.7% of our outstanding common shares. On July 9, 2014, EQC sold its entire investment in us. One of our Managing Trustees, Mr. Barry Portnoy, was a managing trustee of EQC until March 25, 2014. Our other Managing Trustee, Mr. Adam Portnoy, was the President of EQC until May 23, 2014 and was a managing trustee of EQC until March 25, 2014. In addition, Mr. John Popeo, our Treasurer and Chief Financial Officer, also served as the treasurer and chief financial officer of EQC until May 23, 2014, and one of our Independent Trustees, Mr. William Lamkin, was an independent trustee of EQC until March 25, 2014. RMR provides management services to both us and EQC.

In 2012, we completed our IPO. To facilitate our IPO, we and EQC entered into a transaction agreement that governs our separation from and relationship with EQC. The transaction agreement provides that, among other things, (i) the current assets and liabilities of the Initial Properties as of the time of closing of the IPO, were settled between us and EQC so that EQC retained all pre-closing current assets and liabilities and we assumed all post-closing current assets and liabilities and (ii) we will indemnify EQC with respect to any liability relating to any property transferred by EQC to us, including any liability which relates to periods prior to our formation, other than the pre-closing current assets and current liabilities that EQC retained with respect to the Initial Properties.

In March 2013, we entered into a registration agreement with EQC, pursuant to which we agreed to register for resale by EQC up to 22,000,000 of our common shares owned by EQC, or an Offering, and we filed a registration statement on Form S-3 to permit the resale by EQC of some or all of our common shares owned by EQC. Under the registration agreement, EQC agreed to pay all expenses incurred by us relating to the registration and any sale of the shares in an Offering. On March 31, 2014, we notified EQC that, effective that same day, we had elected to terminate the registration agreement with EQC as a result of the removal, without cause, of all of the trustees of EQC which constituted a change of control of EQC as provided in that agreement.

On July 9, 2014, EQC sold 21,500,000 of our common shares that it owned to Government Properties Income Trust, or GOV, and sold 500,000 of our common shares that it owned to RMR. We were not a contracting party to this transaction. We understand that, following these sales, EQC no longer owned any of our common shares. RMR provides management services to GOV; our Managing Trustees serve as managing trustees of GOV; our Independent Trustee, Jeffrey Somers, serves as an independent trustee of GOV; our President and Chief Operating Officer serves as an officer of GOV; and GOV’s other executive officer is an officer of RMR. In connection with this transaction, and in light of the fact that GOV would own greater than 10% of our common shares, our Independent Trustees voted to exempt GOV from the provisions of the Maryland General Corporation Law applicable to business combinations with interested shareholders.

AIC: We, RMR, GOV and four other companies to which RMR provides management services each currently own approximately 14.3% of AIC, an Indiana insurance company. All of our Trustees and most of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.

In June 2014, we and the other shareholders of AIC renewed our participation in an insurance program arranged by AIC. In connection with that renewal, we purchased a one-year property insurance policy providing $500,000 of coverage, with respect to which AIC is a reinsurer of certain coverage amounts. We paid AIC a premium, including taxes and fees, of approximately $434 in connection with that policy, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in the policy. As of July 9, 2014, we had invested $6,160 in our AIC investment since we became an equity owner of AIC in 2012. 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 as all of our Trustees are also directors of AIC. Our investment in AIC had a carrying value of $6,812 and $5,913 as of July 9, 2014 and December 31, 2013, respectively, which amounts are included in other assets on our consolidated balance sheets. We recognized income of $32 and $179 for the period from January 1, 2014 to July 9, 2014 and July 2, 2013 to December 31, 2013, respectively, related to our investment in AIC.


15


On March 25, 2014, as a result of the removal, without cause, of all of the trustees of EQC, EQC underwent a change in control, as defined in the shareholders agreement among us, EQC, the other shareholders of AIC and AIC. As a result of that change in control and in accordance with the terms of the shareholders agreement, on May 9, 2014, we and those other shareholders purchased pro rata the AIC shares EQC owned. Pursuant to that purchase, we purchased 2,857 AIC shares from EQC for $825. Following these purchases, we and the other remaining six shareholders each owned approximately 14.3% of AIC.

Note 10.  Selected Quarterly Financial Data (Unaudited)
 
The following is a summary of our unaudited quarterly results of operations for the first and second quarter of 2014 and the third and fourth quarter of 2013:
 
 
2014
 
 
First
 
Second
 
July 1, 2014
 
 
Quarter
 
Quarter
 
to July 9, 2014
Total revenues
 
$
53,028

 
$
56,557

 
$
5,621

Net income
 
$
25,058

 
$
30,208

 
$
2,919

Net income per common share
 
$
0.50

 
$
0.56

 
$
0.06

Common distributions declared
 
$
0.46

 
$
0.48

 
$
—


 
 
2013
 
 
Third
 
Fourth
 
 
Quarter
 
Quarter
Total revenues
 
$
48,584

 
$
49,933

Net income
 
$
23,594

 
$
24,079

Net income per common share
 
$
0.47

 
$
0.48

Common distributions declared
 
$
0.44

 
$
0.46















 
 


16


SELECT INCOME REIT
 
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
July 9, 2014
(dollars in thousands)
 
 
 
Balance at
Beginning
 
Charged to
Costs and
 
 
 
Balance
at End
Description
 
of Period
 
Expenses
 
Deductions
 
of Period
Period from July 2, 2013 to December 31, 2013:
 
 

 
 

 
 

 
 

Allowance for doubtful accounts
 
$
690

 
$
306

 
$
(60
)
 
$
936

Period from January 1, 2014 to July 9, 2014:
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
 
$
936

 
$
164

 
$
—

 
$
1,100

 



17


SELECT INCOME REIT
 
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
July 9, 2014
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Initial Cost to Company
 
 
 
Gross Amount Carried at Close of  Period (4)
 
 
 
 
 
 
Property
 
Location
 
State
 
Property Type
 
Encumbrances (1)
 
Land
 
Buildings and Equipment
 
Costs Capitalized Subsequent to Acquisition
 
Land
 
Buildings and Equipment
 
Total(2)
 
Accumulated Depreciation (3)
 
Date Acquired
 
Original Construction Date
1

 
Inverness Center
 
Birmingham
 
AL
 
Mainland Properties
 
$
—

 
$
4,209

 
$
32,096

 
$
325

 
$
4,209

 
$
32,421

 
$
36,630

 
$
2,914

 
12/9/2010
 
1984;1985
2

 
Cinram Distribution Center
 
Huntsville
 
AL
 
Mainland Properties
 
—

 
5,628

 
67,373

 
—

 
5,628

 
67,373

 
73,001

 
3,129

 
8/31/2012
 
1979
3

 
Regents Center
 
Tempe
 
AZ
 
Mainland Properties
 
—

 
1,125

 
10,122

 
2,030

 
1,125

 
12,152

 
13,277

 
4,964

 
6/30/1999
 
1988
4

 
Campbell Place
 
Carlsbad
 
CA
 
Mainland Properties
 
19,069

 
3,381

 
17,918

 
15

 
3,381

 
17,933

 
21,314

 
795

 
9/21/2012
 
2007
5

 
Folsom Corporate Center
 
Folsom
 
CA
 
Mainland Properties
 
—

 
3,450

 
25,504

 
—

 
3,450

 
25,504

 
28,954

 
2,247

 
12/17/2010
 
2008
6

 
Bayside Technology Park
 
Fremont
 
CA
 
Mainland Properties
 
—

 
5,200

 
4,860

 
521

 
5,200

 
5,381

 
10,581

 
655

 
3/19/2009
 
1990
7

 
North First Street
 
San Jose
 
CA
 
Mainland Properties
 
—

 
6,160

 
7,961

 
—

 
6,160

 
7,961

 
14,121

 
104

 
12/23/2013
 
1984
8

 
Rio Robles Drive
 
San Jose
 
CA
 
Mainland Properties
 
—

 
16,608

 
28,316

 
—

 
16,608

 
28,316

 
44,924

 
372

 
12/23/2013
 
1984
9

 
350 West Java Drive
 
Sunnyvale
 
CA
 
Mainland Properties
 
—

 
11,552

 
12,461

 
—

 
11,552

 
12,461

 
24,013

 
527

 
11/15/2012
 
1984
10

 
333 Inverness Drive South
 
Englewood
 
CO
 
Mainland Properties
 
—

 
3,230

 
11,801

 
415

 
3,230

 
12,216

 
15,446

 
627

 
6/15/2012
 
1998
11

 
2 Tower Drive
 
Wallingford
 
CT
 
Mainland Properties
 
—

 
1,471

 
2,165

 
8

 
1,471

 
2,173

 
3,644

 
426

 
10/24/2006
 
1978
12

 
1 Targeting Center
 
Windsor
 
CT
 
Mainland Properties
 
—

 
1,850

 
7,226

 
—

 
1,850

 
7,226

 
9,076

 
351

 
7/20/2012
 
1980
13

 
235 Great Pond Road
 
Windsor
 
CT
 
Mainland Properties
 
—

 
2,400

 
9,469

 
—

 
2,400

 
9,469

 
11,869

 
459

 
7/20/2012
 
2004
14

 
2100 NW 82nd Ave
 
Miami
 
FL
 
Mainland Properties
 
—

 
144

 
1,297

 
401

 
144

 
1,698

 
1,842

 
566

 
3/19/1998
 
1987
15

 
King Street Ground Lease
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
1,342

 
—

 
—

 
1,342

 
—

 
1,342

 
—

 
12/5/2003
 
—
16

 
Mapunapuna Ground Leases
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
333,883

 
9,404

 
1,158

 
334,534

 
9,911

 
344,445

 
2,556

 
12/5/2003;11/21/2012
 
—
17

 
Safeway Shopping Center
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
11,437

 
—

 
167

 
11,437

 
167

 
11,604

 
55

 
12/5/2003
 
—
18

 
Salt Lake Shopping Center
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
9,660

 
—

 
—

 
9,660

 
—

 
9,660

 
—

 
12/5/2003
 
—
19

 
Sand Island Ground Leases
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
94,033

 
—

 
236

 
94,033

 
236

 
94,269

 
16

 
12/5/2003
 
—
20

 
Sand Island Buildings
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
13,845

 
11,307

 
11,272

 
13,845

 
22,579

 
36,424

 
4,795

 
12/5/2003;11/23/2004
 
1953;1959; 1966;1970; 1972;2004
21

 
Waiwai Ground Leases
 
Honolulu
 
HI
 
Hawaii Properties
 
—

 
2,112

 
455

 
—

 
2,112

 
455

 
2,567

 
121

 
12/5/2003
 
—
22

 
Campbell Buildings
 
Kapolei
 
HI
 
Hawaii Properties
 
—

 
4,074

 
7,736

 
12,052

 
4,074

 
19,788

 
23,862

 
3,558

 
6/15/2005
 
1964;1980; 1981;1990; 1991
23

 
Campbell Easements
 
Kapolei
 
HI
 
Hawaii Properties
 
—

 
10,496

 
—

 
—

 
10,496

 
—

 
10,496

 
—

 
6/15/2005
 
—
24

 
Campbell Ground Leases
 
Kapolei
 
HI
 
Hawaii Properties
 
—

 
101,905

 
—

 
1,020

 
101,905

 
1,020

 
102,925

 
139

 
6/15/2005
 
—
25

 
Waipahu Ground Lease
 
Waipahu
 
HI
 
Hawaii Properties
 
—

 
717

 
—

 
—

 
717

 
—

 
717

 
—

 
12/5/2003
 
—
26

 
951 Trails Road
 
Eldridge
 
IA
 
Mainland Properties
 
—

 
470

 
7,480

 
376

 
470

 
7,856

 
8,326

 
1,413

 
4/2/2007
 
1994

18


 
 
 
 
 
 
 
 
 
 
 
 
Initial Cost to Company
 
Costs Capitalized Subsequent to Acquisition
 
Gross Amount Carried at Close of  Period (4)
 
 
 
 
 
Original Construction Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Buildings and Equipment
 
 
 
 
Buildings and Equipment
 
 
 
Accumulated Depreciation (3)
 
Date Acquired
 
Property
 
Location
 
State
 
Property Type
 
Encumbrances (1)
 
Land
 
 
 
Land
 
 
Total(2)
 
 
 
27

 
2300 N 33rd Ave
 
Newton
 
IA
 
Mainland Properties
 
—

 
500

 
13,236

 
163

 
500

 
13,399

 
13,899

 
1,982

 
9/29/2008
 
2008
28

 
1415 West Diehl Road
 
Naperville
 
IL
 
Mainland Properties
 
—

 
13,757

 
174,629

 
23

 
13,757

 
174,652

 
188,409

 
1,196

 
4/1/2014
 
2001
29

 
440 North Fairway Drive
 
Vernon Hills
 
IL
 
Mainland Properties
 
—

 
4,095

 
9,882

 
—

 
4,095

 
9,882

 
13,977

 
191

 
10/15/2013
 
1992
30

 
Capitol Tower
 
Topeka
 
KS
 
Mainland Properties
 
—

 
1,300

 
15,918

 
150

 
1,300

 
16,068

 
17,368

 
774

 
7/30/2012
 
1983
31

 
The Atrium at Circleport II
 
Erlanger
 
KY
 
Mainland Properties
 
—

 
2,020

 
9,545

 
1,039

 
2,020

 
10,584

 
12,604

 
2,725

 
6/30/2003
 
0
32

 
300 and 330 Billerica Road
 
Chelmsford
 
MA
 
Mainland Properties
 
—

 
3,419

 
14,049

 
313

 
3,419

 
14,362

 
17,781

 
934

 
1/18/2011; 9/27/2012
 
1984
33

 
111 Powdermill Road
 
Maynard
 
MA
 
Mainland Properties
 
—

 
3,603

 
26,180

 
100

 
3,603

 
26,280

 
29,883

 
4,800

 
3/30/2007
 
1990
34

 
7001 Columbia Gateway Drive
 
Columbia
 
MD
 
Mainland Properties
 
—

 
3,700

 
24,592

 
—

 
3,700

 
24,592

 
28,292

 
937

 
12/21/2012
 
2008
35

 
3550 Green Court
 
Ann Arbor
 
MI
 
Mainland Properties
 
—

 
2,877

 
9,081

 
1,060

 
2,877

 
10,141

 
13,018

 
369

 
12/21/2012
 
1998
36

 
725 Darlington Avenue
 
Mahwah
 
NJ
 
Mainland Properties
 
—

 
8,492

 
9,451

 
—

 
8,492

 
9,451

 
17,943

 
65

 
4/9/2014
 
1999
37

 
8687 Carling Road
 
Liverpool
 
NY
 
Mainland Properties
 
—

 
375

 
3,265

 
1,924

 
375

 
5,189

 
5,564

 
1,037

 
1/6/2006
 
1997
38

 
1212 Pittsford - Victor Road
 
Pittsford
 
NY
 
Mainland Properties
 
—

 
528

 
3,755

 
465

 
528

 
4,220

 
4,748

 
1,292

 
11/30/2004
 
1965
39

 
500 Canal View Boulevard
 
Rochester
 
NY
 
Mainland Properties
 
—

 
1,462

 
12,482

 
1,201

 
1,462

 
13,683

 
15,145

 
3,382

 
1/6/2006
 
1996
40

 
32150 Just Imagine Drive
 
Avon
 
OH
 
Mainland Properties
 
—

 
2,200

 
23,280

 
—

 
2,200

 
23,280

 
25,480

 
2,973

 
5/29/2009
 
1996
41

 
501 Ridge Avenue
 
Hanover
 
PA
 
Mainland Properties
 
—

 
4,800

 
22,200

 
30

 
4,800

 
22,230

 
27,030

 
3,231

 
9/24/2008
 
1948
42

 
16001 North Dallas Parkway
 
Addison
 
TX
 
Mainland Properties
 
—

 
10,107

 
95,124

 
218

 
10,107

 
95,342

 
105,449

 
3,426

 
1/16/2013
 
1987
43

 
Research Park
 
Austin
 
TX
 
Mainland Properties
 
—

 
1,441

 
13,007

 
661

 
1,441

 
13,668

 
15,109

 
5,126

 
6/16/1999
 
1999
44

 
4421 W. John Carp. Freeway
 
Irving
 
TX
 
Mainland Properties
 
—

 
542

 
4,879

 
553

 
542

 
5,432

 
5,974

 
2,228

 
3/19/1998
 
1995
45

 
3600 Wiseman Boulevard
 
San Antonio
 
TX
 
Mainland Properties
 
—

 
3,197

 
12,175

 
51

 
3,197

 
12,226

 
15,423

 
388

 
3/19/2013
 
2004
46

 
1800 Novell Place
 
Provo
 
UT
 
Mainland Properties
 
—

 
6,700

 
78,940

 
—

 
6,700

 
78,940

 
85,640

 
4,159

 
6/1/2012
 
2000
47

 
4885-4931 North 300 West
 
Provo
 
UT
 
Mainland Properties
 
—

 
3,400

 
25,938

 
—

 
3,400

 
25,938

 
29,338

 
880

 
2/28/2013
 
2009
48

 
501 South 5th Street
 
Richmond
 
VA
 
Mainland Properties
 
—

 
13,849

 
109,823

 
—

 
13,849

 
109,823

 
123,672

 
2,812

 
7/2/2013
 
2009
49

 
Orbital Sciences Campus
 
Sterling
 
VA
 
Mainland Properties
 
—

 
9,875

 
62,238

 
—

 
9,875

 
62,238

 
72,113

 
2,501

 
11/29/2012
 
2000;2001
50

 
181 Battaile Drive
 
Winchester
 
VA
 
Mainland Properties
 
—

 
1,487

 
12,854

 
—

 
1,487

 
12,854

 
14,341

 
2,648

 
4/20/2006
 
1987
Totals
 
 
 
 
 
 
 
$
19,069

 
$
754,108

 
$
1,061,474

 
$
37,947

 
$
754,759

 
$
1,098,770

 
$
1,853,529

 
$
80,845

 
 
 
 
 

(1)             Includes the unamortized balance of the fair value adjustments.
 
(2)             Excludes value of real estate intangibles.
 
(3)             Depreciation on buildings and improvements is provided for periods ranging up to 40 years and on equipment up to 12 years.
 
(4)             The total aggregate cost for U.S. federal income tax purposes is approximately $1,881,716.
 


 

19


SELECT INCOME REIT
 
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
July 9, 2014
(dollars in thousands)
 
Analysis of the carrying amount of real estate properties and accumulated depreciation:
 
 
 
Real Estate
Properties
 
Accumulated
Depreciation
Balance at July 1, 2013
 
$
1,446,781

 
$
(56,023
)
Additions
 
199,680

 
(11,204
)
Disposals
 
(4
)
 
4

Balance at December 31, 2013
 
1,646,457

 
(67,223
)
Additions
 
207,084

 
(13,634
)
Disposals
 
(12
)
 
12

Balance at July 9, 2014
 
$
1,853,529

 
$
(80,845
)


20