Third Quarter Net Loss Available for Common
Shareholders of $0.4 Million
Third Quarter Normalized FFO Available for
Common Shareholders of $53.0 Million or $0.53 Per
Share
Third Quarter Same Property Cash Basis NOI
Increased 2.0%
Completed 182,220 Square Feet of Leasing in
the Third Quarter
Announced Agreement to Merge with Select
Income REIT
Government Properties Income Trust (Nasdaq: GOV) today announced
its financial results for the quarter and nine months ended
September 30, 2018.
David Blackman, President and Chief Executive Officer of GOV,
made the following statement:
“The most significant event for the third quarter was our
entering an agreement to merge with Select Income REIT in a stock
for stock exchange. The merger will benefit shareholders by
creating a leading national office REIT with greater scale,
enhanced diversification, more well laddered lease expirations, a
broader investment strategy and a more sustainable dividend per
share than GOV can sustain as a standalone company.
Operationally, GOV had another strong quarter as we grew same
property cash basis NOI by 2.0% and executed over 182,000 square
feet of new and renewal leases. We also continued to make progress
on our property disposition plan by entering agreements to sell 50
buildings for $438.5 million since the end of the second
quarter.”
Results for the Quarter Ended September 30,
2018:
Net loss available for common shareholders determined in
accordance with U.S. generally accepted accounting principles, or
GAAP, for the quarter ended September 30, 2018 was $0.4
million, or $0.00 per diluted share, compared to net income
available for common shareholders of $11.0 million, or $0.11 per
diluted share, for the quarter ended September 30, 2017. Net
loss available for common shareholders for the quarter ended
September 30, 2018 includes a $17.4 million, or $0.18 per
diluted share, unrealized gain on equity securities relating to
GOV's investment in The RMR Group Inc., or RMR Inc., partially
offset by $16.2 million, or $0.16 per diluted share, of estimated
business management incentive fee expense. The weighted average
number of diluted common shares outstanding was 99.1 million for
the quarter ended September 30, 2018 and 97.0 million for the
quarter ended September 30, 2017.
Normalized funds from operations, or Normalized FFO, available
for common shareholders for the quarter ended September 30,
2018 were $53.0 million, or $0.53 per diluted share, compared to
Normalized FFO available for common shareholders for the quarter
ended September 30, 2017 of $39.6 million, or $0.41 per
diluted share.
Reconciliations of net income (loss) available for common
shareholders determined in accordance with GAAP to funds from
operations, or FFO, available for common shareholders and
Normalized FFO available for common shareholders for the quarters
ended September 30, 2018 and 2017 appear later in this press
release.
Results for the Nine Months Ended September 30, 2018:
Net income available for common shareholders determined in
accordance with GAAP was $35.4 million, or $0.36 per diluted share,
for the nine months ended September 30, 2018, compared to net
income available for common shareholders of $30.1 million, or $0.38
per diluted share, for the nine months ended September 30,
2017. Net income available for common shareholders for the nine
months ended September 30, 2018 includes a $40.7 million, or $0.41
per diluted share, unrealized gain on equity securities relating to
GOV's investment in RMR Inc. and a $17.3 million, or $0.17 per
diluted share, gain on sale of real estate, partially offset by
$17.0 million, or $0.17 per diluted share, of estimated business
management incentive fee expense and a $5.8 million, or $0.06 per
diluted share, loss on impairment of real estate. The weighted
average number of diluted common shares outstanding was 99.1
million for the nine months ended September 30, 2018 and 79.9
million for the nine months ended September 30, 2017.
Normalized FFO available for common shareholders for the nine
months ended September 30, 2018 were $158.4 million, or $1.60 per
diluted share, compared to Normalized FFO available for common
shareholders for the nine months ended September 30, 2017 of
$121.9 million, or $1.53 per diluted share.
Reconciliations of net income available for common shareholders
determined in accordance with GAAP to FFO available for common
shareholders and Normalized FFO available for common shareholders
for the nine months ended September 30, 2018 and 2017 appear
later in this press release.
Leasing, Occupancy and Same Property Results:
During the quarter ended September 30, 2018, GOV entered
new and renewal leases for an aggregate 182,220 rentable square
feet at weighted (by rentable square feet) average rents that were
0.4% below prior rents for the same space. The weighted (by
rentable square feet) average lease term for these leases was 8.1
years and leasing concessions and capital commitments for these
leases were $6.5 million, or $4.41 per square foot, per lease year.
These new and renewal leases include approximately 18,000 square
feet with government tenants which have weighted (by rentable
square feet) average rents that are 8.0% below prior rents for the
same space, a weighted (by rentable square feet) average lease term
of 19.7 years and leasing concessions and capital commitments of
$1.2 million, or $3.32 per square foot per weighted (by square
foot) average lease year.
As of September 30, 2018, 93.3% of GOV’s total rentable
square feet was leased, compared to 94.0% as of June 30, 2018
and 95.0% as of September 30, 2017. Occupancy for properties
owned continuously since July 1, 2017, or same properties, was
94.6% as of both September 30, 2018 and June 30, 2018,
and 95.4% as of September 30, 2017. Same properties net
operating income, or NOI, increased 0.6% and same properties cash
basis NOI, or Cash Basis NOI, increased 2.0% for the quarter ended
September 30, 2018 compared to the same period in 2017.
Reconciliations of net income (loss) available for common
shareholders determined in accordance with GAAP to Consolidated
Property NOI and to Consolidated Property Cash Basis NOI for the
quarters ended September 30, 2018 and 2017 appear later in
this press release.
Merger with Select Income REIT:
As previously announced, on September 14, 2018, GOV, a wholly
owned subsidiary of GOV and Select Income REIT (Nasdaq: SIR), or
SIR, entered into an agreement and plan of merger, dated as of
September 14, 2018, or the Merger Agreement, whereby SIR will merge
with and into GOV’s wholly owned subsidiary, or the Merger. The
aggregate transaction value, based on the closing price of GOV’s
common shares on September 30, 2018 of $11.29, is approximately
$2.7 billion, excluding closing costs and including the repayment
or assumption of approximately $1.7 billion of SIR debt. Pursuant
to the terms of the Merger Agreement, SIR’s shareholders will
receive 1.04 newly issued common shares of GOV for each common
share of SIR they hold, with cash paid in lieu of fractional
shares. Pursuant to the terms and subject to certain conditions of
the Merger Agreement, SIR will declare and, at least one business
day prior to the completion of the Merger, pay a pro rata
distribution to SIR’s shareholders of all 45,000,000 common shares
of Industrial Logistics Properties Trust (Nasdaq: ILPT), or ILPT,
that SIR owns. GOV will acquire SIR's remaining property portfolio
(following SIR’s distribution of its ILPT common shares) of 99
properties with approximately 17.0 million rentable square feet.
Completion of the Merger will require certain approvals of GOV’s
and SIR’s shareholders and the satisfaction or waiver of other
conditions and GOV and SIR expect to consummate the Merger by
December 31, 2018. Upon the closing of the Merger, GOV will change
its name to Office Properties Income Trust and remain listed on the
Nasdaq under the ticker symbol “OPI”. GOV also expects that
immediately following the merger, it will effect a reverse stock
split of GOV common shares pursuant to which every four common
shares of OPI will be converted into one common share of OPI.
On October 9, 2018, as required by the Merger Agreement, GOV
sold all 24.9 million common shares it owned in SIR in an
underwritten public offering at a price of $18.25 per share,
raising net proceeds of approximately $434.7 million after
deducting underwriters' discounts and estimated offering expenses.
GOV used the net proceeds from the offering to repay amounts
outstanding under its unsecured revolving credit facility. GOV
expects to record a loss on the sale of the SIR shares of
approximately $19.4 million in the fourth quarter of 2018.
Recent Property Disposition Activities:
In August 2018, GOV entered into an agreement to sell an office
property (one building) located in Washington, DC with 129,035
rentable square feet for $70.0 million, excluding closing
costs.
In September 2018, GOV entered an agreement to sell a portfolio
of eight properties (34 buildings) located in northern Virginia and
Maryland containing 1,635,868 rentable square feet for $201.5
million, excluding closing costs.
In October 2018, GOV entered an agreement to sell a portfolio of
11 properties (15 buildings) located in southern Virginia
containing 1,641,109 rentable square feet for $167.0 million,
excluding closing costs.
Conference Call:
At 11:00 a.m. Eastern Time this morning, President and
Chief Executive Officer, David Blackman, and Chief Financial
Officer and Treasurer, Mark Kleifges, will host a conference call
to discuss GOV’s third quarter 2018 financial results. They will be
joined by Jeff Leer, who will assume his role as Chief Financial
Officer and Treasurer of the Company effective January 1, 2019.
The conference call telephone number is (877) 328-1172.
Participants calling from outside the United States and Canada
should dial (412) 317-5418. No pass code is necessary to access the
call from either number. Participants should dial in about 15
minutes prior to the scheduled start of the call. A replay of the
conference call will be available through 11:59 p.m. on Thursday,
November 8, 2018. To access the replay, dial (412) 317-0088. The
replay pass code is 10123761.
A live audio webcast of the conference call will also be
available in a listen only mode on GOV’s website, at
www.govreit.com. Participants wanting to access the webcast should
visit GOV’s website about five minutes before the call. The
archived webcast will be available for replay on GOV’s website
following the call for about one week. The transcription,
recording and retransmission in any way of GOV’s third quarter
conference call are strictly prohibited without the prior written
consent of GOV.
Supplemental Data:
A copy of GOV’s Third Quarter 2018 Supplemental Operating and
Financial Data is available for download at GOV’s website, which is
located at www.govreit.com. GOV’s website is not incorporated
as part of this press release.
GOV is a real estate investment trust, or REIT, which primarily
owns properties located throughout the United States that are
majority leased to government tenants and office properties in the
metropolitan Washington, D.C. market area that are leased to
government and private sector tenants. GOV is managed by the
operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an
alternative asset management company that is headquartered in
Newton, Massachusetts.
Please see the pages attached hereto for a more detailed
statement of GOV’s operating results and financial condition and
for an explanation of GOV’s calculation of FFO available for common
shareholders, Normalized FFO available for common shareholders, NOI
and Cash Basis NOI and a reconciliation of those amounts to amounts
determined in accordance with GAAP.
WARNING CONCERNING
FORWARD LOOKING STATEMENTS
THIS PRESS RELEASE CONTAINS STATEMENTS THAT CONSTITUTE FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO,
WHENEVER GOV USES WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”,
“INTEND”, “PLAN”, “ESTIMATE”, “WILL”, “MAY” AND NEGATIVES OR
DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, GOV IS MAKING FORWARD
LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON
GOV’S PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING
STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN
OR IMPLIED BY GOV’S FORWARD LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS. FOR EXAMPLE:
- MR. BLACKMAN'S STATEMENTS REGARDING
GOV'S QUARTERLY OPERATING AND LEASING RESULTS MAY IMPLY THAT
SIMILAR OR BETTER RESULTS WILL BE ACHIEVED IN THE FUTURE. HOWEVER,
GOV CANNOT BE SURE THAT IT WILL REALIZE SIMILAR OR BETTER OPERATING
OR LEASING RESULTS IN THE FUTURE.
- MR. BLACKMAN'S STATEMENTS THAT GOV
CONTINUED TO MAKE PROGRESS ON ITS PROPERTY DISPOSITION PLAN MAY
IMPLY THAT GOV WILL COMPLETE THE SALE OF PROPERTIES IT HAS AGREED
TO SELL AND THAT IT WILL CONTINUE TO SELL ADDITIONAL PROPERTIES IN
THE FUTURE. HOWEVER, GOV MAY NOT BE ABLE TO COMPLETE THE SALES OF
PROPERTIES IT HAS AGREED TO SELL OR THAT IT WILL SUCCESSFULLY SELL
ADDITIONAL PROPERTIES IN THE FUTURE. ALSO, GOV MAY SELL PROPERTIES
AT PRICES THAT ARE LESS THAN THEIR CARRYING VALUES AND GOV MAY
INCUR FUTURE LOSSES AS A RESULT.
- THIS PRESS RELEASE STATES THAT GOV, A
WHOLLY OWNED SUBSIDIARY OF GOV AND SIR HAVE ENTERED INTO THE MERGER
AGREEMENT. THE CLOSING OF THE MERGER IS SUBJECT TO THE SATISFACTION
OR WAIVER OF CONDITIONS, INCLUDING THE RECEIPT OF REQUISITE
APPROVALS BY GOV’S AND SIR’S SHAREHOLDERS. GOV CANNOT BE SURE THAT
ANY OR ALL OF SUCH CONDITIONS WILL BE SATISFIED OR WAIVED.
ACCORDINGLY, THE MERGER MAY NOT CLOSE WHEN EXPECTED OR AT ALL, OR
THE TERMS OF THE MERGER AND THE OTHER TRANSACTIONS MAY CHANGE.
- THE MERGER REQUIRES APPROVAL OF SIR’S
SHAREHOLDERS AND THE ISSUANCE OF GOV COMMON SHARES IN THE MERGER
REQUIRES THE APPROVAL OF GOV’S SHAREHOLDERS. SUCH APPROVALS WILL BE
SOLICITED BY A JOINT PROXY STATEMENT/PROSPECTUS, A PRELIMINARY
VERSION OF WHICH WAS INCLUDED AS PART OF THE REGISTRATION STATEMENT
ON FORM S-4, AS AMENDED, OR THE FORM S-4, THAT GOV FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, OR SEC. THE FORM S-4 MUST BE
DECLARED EFFECTIVE BY THE SEC BEFORE THE DEFINITIVE JOINT PROXY
STATEMENT/PROSPECTUS CAN BE MAILED TO GOV’S SHAREHOLDERS AND SIR’S
SHAREHOLDERS. THE AMOUNT OF TIME IT TAKES FOR THE SEC TO DECLARE
THE FORM S-4 EFFECTIVE IS BEYOND GOV’S AND SIR’S CONTROL.
ACCORDINGLY, GOV CANNOT BE SURE THAT THE MERGER AND THE OTHER
TRANSACTIONS WILL BE CONSUMMATED WITHIN A SPECIFIED TIME PERIOD OR
AT ALL OR THAT THE TERMS OF THE MERGER AND THE OTHER TRANSACTIONS
WILL NOT CHANGE. FURTHER, THIS PRESS RELEASE STATES THE AGGREGATE
TRANSACTION VALUE IS BASED ON THE CLOSING PRICE OF GOV'S COMMON
SHARES ON SEPTEMBER 30, 2018 OF $11.29 PER SHARE, OR APPROXIMATELY
$2.7 BILLION, AND INCLUDES THE REPAYMENT OR ASSUMPTION OF
APPROXIMATELY $1.7 BILLION OF SIR'S DEBT. THESE VALUES ARE BASED ON
THE MARKET PRICE OF GOV'S COMMON SHARES AND SIR'S DEBT BALANCES AS
OF SEPTEMBER 30, 2018. THESE ESTIMATES ARE SUBJECT TO CHANGES
BEYOND GOV’S CONTROL, INCLUDING VOLATILITY IN THE MARKET PRICE OF
GOV’S COMMON SHARES AND SIR’S ACTUAL DEBT BALANCES UPON
CONSUMMATION OF THE MERGER. FURTHER MR. BLACKMAN STATES THAT THE
MERGER WILL BENEFIT GOV’S SHAREHOLDERS BY CREATING A LEADING
NATIONAL OFFICE REIT WITH GREATER SCALE, ENHANCED DIVERSIFICATION,
MORE WELL LADDERED LEASE EXPIRATIONS, A BROADER INVESTMENT STRATEGY
AND AN EXPECTED PER SHARE DIVIDEND THAT IS MORE SUSTAINABLE THAN
GOV CAN SUSTAIN AS A STANDALONE COMPANY. GOV AND ITS SHAREHOLDERS
MAY NOT REALIZE THESE BENEFITS.
- PURSUANT TO THE MERGER AGREEMENT, SIR
HAS AGREED TO DISTRIBUTE ALL 45,000,000 COMMON SHARES OF ILPT THAT
SIR OWNS TO SIR’S SHAREHOLDERS, SUBJECT TO THE SATISFACTION OR
WAIVER OF CERTAIN CONDITIONS, INCLUDING, AMONG OTHER THINGS,
OBTAINING THE REQUISITE SHAREHOLDER APPROVALS WITH RESPECT TO THE
MERGER. SIR CANNOT BE SURE WHEN OR IF THOSE CONDITIONS WILL BE
SATISFIED OR WAIVED OR THAT SUCH DISTRIBUTION WILL OCCUR.
- GOV HAS ENTERED INTO AGREEMENTS TO SELL
AN AGGREGATE OF 20 PROPERTIES (50 BUILDINGS). THESE TRANSACTIONS
ARE SUBJECT TO CONDITIONS. THESE CONDITIONS MAY NOT BE MET AND
THESE TRANSACTIONS MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS MAY
CHANGE.
THE INFORMATION CONTAINED IN GOV’S FILINGS WITH THE SEC,
INCLUDING UNDER “RISK FACTORS” IN THE FORM S-4 AND IN GOV’S
PERIODIC REPORTS, OR INCORPORATED THEREIN, IDENTIFIES OTHER
IMPORTANT FACTORS THAT COULD CAUSE GOV’S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE STATED IN OR IMPLIED BY GOV’S FORWARD LOOKING
STATEMENTS. GOV’S FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S
WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING
STATEMENTS.
EXCEPT AS REQUIRED BY LAW, GOV DOES NOT INTEND TO UPDATE OR
CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
Additional Information about the Merger and
the other Transactions and Where to Find It
In connection with the Merger and the other transactions
contemplated by the Merger Agreement, GOV has filed with the SEC
the Form S-4, containing a preliminary joint proxy
statement/prospectus and other documents with respect to the Merger
and the other transactions contemplated by the Merger Agreement.
This communication does not constitute an offer to sell or the
solicitation of an offer to buy any securities or a solicitation of
any vote or approval. INVESTORS ARE URGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS (INCLUDING ALL AMENDMENTS AND SUPPLEMENTS
THERETO) AND ANY OTHER DOCUMENTS FILED OR TO BE FILED WITH THE SEC
IN CONNECTION WITH THE MERGER OR INCORPORATED BY REFERENCE IN THE
JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY CONTAIN AND WILL
CONTAIN IMPORTANT INFORMATION ABOUT THE MERGER AND THE OTHER
TRANSACTIONS.
After the registration statement for the Merger has been
declared effective by the SEC, a definitive joint proxy
statement/prospectus will be mailed to GOV’s and SIR’s
shareholders. Investors will be able to obtain free copies of
documents filed with the SEC at the SEC’s website at www.sec.gov.
In addition, investors may obtain free copies of GOV’s filings with
the SEC from GOV’s website at www.govreit.com and free copies of
SIR’s filings with the SEC from its website at www.sirreit.com.
Participants in the Solicitation Relating to
the Merger and the other Transactions
GOV, its trustees and certain of its executive officers, SIR,
its trustees and certain of its executive officers, and The RMR
Group LLC, or RMR LLC, RMR Inc. and certain of their directors,
officers and employees may be deemed participants in the
solicitation of proxies from SIR’s shareholders in respect of the
approval of the Merger and the other transactions contemplated by
the Merger Agreement to which SIR is a party and from GOV’s
shareholders in respect of the approval of the issuance of GOV
common shares in the Merger. Information regarding the persons who
may, under the rules of the SEC, be considered participants in
the solicitation of GOV’s and SIR’s shareholders in connection with
the Merger and the other transactions contemplated by the Merger
Agreement is set forth in the preliminary joint proxy
statement/prospectus for the Merger filed, and will be set forth in
the definitive joint proxy statement/prospectus for the Merger to
be filed, with the SEC. You can find information about GOV’s
trustees and executive officers in its definitive proxy statement
for its 2018 Annual Meeting of Shareholders. You can find
information about SIR’s trustees and executive officers in SIR’s
definitive proxy statement for its 2018 Annual Meeting of
Shareholders. These documents are available free of charge on the
SEC’s website and from GOV or SIR, as applicable, using the sources
indicated above.
Government Properties Income
TrustCondensed Consolidated Statements of Income
(Loss)(amounts in thousands, except per share
data)(unaudited)
Three Months Ended September 30, Nine Months Ended
September 30, 2018 2017 2018 2017
Rental income $ 106,102 $ 70,179 $ 322,904
$ 209,362 Expenses: Real estate taxes 12,072
8,862 37,402 24,980 Utility expenses 7,783 5,408 20,490 14,186
Other operating expenses 21,785 14,867 66,221 44,046 Depreciation
and amortization 42,569 20,781 129,444 61,949 Loss on impairment of
real estate (1) — 230 5,800 230 Acquisition and transaction related
costs (2) 3,813 — 3,813 — General and administrative (3) 22,383
3,266 36,438 12,314 Total expenses
110,405 53,414 299,608 157,705
Operating income (loss) (4,303 ) 16,765 23,296 51,657 Dividend
income 304 304 912 911 Unrealized gain on equity securities (4)
17,425 — 40,677 — Interest income 140 1,715 405 1,843
Interest expense (including net
amortization of debt premiums and discounts and debt issuance costs
of $893, $990, $2,749 and $2,605, respectively)
(23,374 ) (16,055 ) (69,444 ) (43,599 ) Loss on early
extinguishment of debt — (1,715 ) — (1,715 )
Income (loss) from continuing operations
before income taxes, equity in net earnings (losses) of investees
and gain on sale of real estate
(9,808 ) 1,014 (4,154 ) 9,097 Income tax expense (9 ) (22 ) (124 )
(65 ) Equity in net earnings (losses) of investees 94 31
(1,112 ) 533 Income (loss) from continuing operations
(9,723 ) 1,023 (5,390 ) 9,565 Income from discontinued operations
(5) 9,274 9,966 23,872 20,516 Income
(loss) before gain on sale of real estate (449 ) 10,989 18,482
30,081 Gain on sale of real estate (6) — — 17,329
— Net income (loss) (449 ) 10,989 35,811 30,081
Preferred units of limited partnership distributions — —
(371 ) — Net income (loss) available for common
shareholders $ (449 ) $ 10,989 $ 35,440 $ 30,081
Weighted average common shares outstanding
(basic) 99,071 96,883 99,055 79,778
Weighted average common shares outstanding (diluted) 99,071
96,958 99,075 79,852 Per common share
amounts (basic and diluted): Income (loss) from continuing
operations $ (0.10 ) $ 0.01 $ 0.12 $ 0.12 Income from discontinued
operations $ 0.09 $ 0.10 $ 0.24 $ 0.26 Net income (loss) available
for common shareholders $ 0.00 $ 0.11 $ 0.36 $ 0.38
See Notes on pages 8 and 9
Government Properties Income
TrustFunds from Operations and Normalized Funds from
Operations(amounts in thousands, except per share
data)(unaudited)
Three Months Ended September 30, Nine Months Ended
September 30, 2018 2017 2018 2017
Calculation of Funds from Operations (FFO) and Normalized FFO
available for common shareholders (7): Net income (loss) available
for common shareholders $ (449 ) $ 10,989 $ 35,440 $ 30,081 Add
(less): Depreciation and amortization: Consolidated properties
42,569 20,781 129,444 61,949 Unconsolidated joint venture
properties 1,913 — 6,283 — FFO attributable to SIR investment
19,012 18,429 49,914 47,982 Loss on impairment of real estate (1) —
230 5,800 230 Equity in earnings of SIR included in discontinued
operations (9,253 ) (9,453 ) (23,843 ) (20,271 ) Increase in
carrying value of property included in discontinued operations —
(619 ) — (619 ) Gain on sale of real estate (6) — —
(17,329 ) — FFO available for common shareholders 53,792
40,357 185,709 119,352 Add (less): Acquisition and transaction
related costs (2) 3,813 — 3,813 — Loss on early extinguishment of
debt — 1,715 — 1,715 Normalized FFO attributable to SIR investment
15,584 16,903 42,482 48,900 FFO attributable to SIR investment
(19,012 ) (18,429 ) (49,914 ) (47,982 ) Net gain on issuance of
shares by SIR included in discontinued operations (21 ) (51 ) (29 )
(72 ) Estimated business management incentive fees (3) 16,236 (893
) 16,973 — Unrealized gain on equity securities (4) (17,425 ) —
(40,677 ) — Normalized FFO available for common
shareholders $ 52,967 $ 39,602 $ 158,357 $
121,913 Weighted average common shares outstanding
(basic) 99,071 96,883 99,055 79,778 Weighted average common shares
outstanding (diluted) 99,071 96,958 99,075 79,852 Per common
share amounts (basic and diluted): Net income (loss) available for
common shareholders $ 0.00 $ 0.11 $ 0.36 $
0.38 FFO available for common shareholders (basic) $ 0.54
$ 0.42 $ 1.87 $ 1.50 FFO available for
common shareholders (diluted) $ 0.54 $ 0.42 $ 1.87
$ 1.49 Normalized FFO available for common
shareholders (basic and diluted) $ 0.53 $ 0.41 $ 1.60
$ 1.53 Distributions declared per share $ 0.43
$ 0.43 $ 1.29 $ 1.29 (1) Loss on
impairment of real estate for the nine months ended September 30,
2018 represents an adjustment of $6,116 in the three months ended
March 31, 2018 to reduce the carrying value of three properties
(three buildings) to their estimated fair value less costs to sell,
an adjustment of $322 to increase the carrying value of one
property (one building) removed from held for sale status to its
estimated fair value in the three months ended June 30, 2018 and an
adjustment of $6 to reduce the carrying value of one property (one
building) to its estimated fair value less costs to sell in the
three months ended June 30, 2018. Loss on impairment of real estate
for the three and nine months ended September 30, 2017 represents
an adjustment of $230 to reduce the carrying value of one property
(one building) to its estimated fair value. (2) Acquisition
and transaction related costs for the three and nine months ended
September 30, 2018 include costs incurred in connection with the
pending Merger with SIR and related transactions. (3)
Incentive fees under GOV’s business management agreement with RMR
LLC are payable after the end of each calendar year, are calculated
based on common share total return, as defined, and are included in
general and administrative expenses in GOV’s condensed consolidated
statements of income (loss). In calculating net income (loss) in
accordance with GAAP, GOV recognizes estimated business management
incentive fee expense, if any, in the first, second and third
quarters. Although GOV recognizes this expense, if any, in the
first, second and third quarters for purposes of calculating net
income (loss), GOV does not include such expense in the calculation
of Normalized FFO until the fourth quarter, when the amount of the
business management incentive fee expense for the calendar year, if
any, is determined. Net income (loss) includes $16,236 of estimated
business management incentive fee expense and the reversal of $893
of previously accrued estimated business management incentive fee
expense in the three months ended September 30, 2018 and 2017,
respectively. Net income includes $16,973 of estimated business
management incentive fee expense in the nine months ended September
30, 2018. No estimated business management incentive fees were
included in net income for the nine months ended September 30,
2017. (4) Unrealized gain on equity securities represents
the adjustment required to adjust the carrying value of GOV's
investment in RMR Inc. common stock to its fair value as of
September 30, 2018 in accordance with new GAAP standards effective
January 1, 2018. (5) Income from discontinued operations
includes operating results related to GOV's equity method
investment in SIR. GOV sold its entire investment in SIR in October
2018 and reclassified the related operating results of this equity
method investment to discontinued operations for all periods
presented. Income from discontinued operations for the 2017 periods
also includes operating results of one property (one building) that
GOV sold in August 2017. (6) GOV recorded a $17,329 gain on
sale of real estate in the nine months ended September 30, 2018 in
connection with the sale of one property (one building) in May
2018. (7) GOV calculates FFO available for common
shareholders and Normalized FFO available for common shareholders
as shown above. FFO available for common shareholders is calculated
on the basis defined by The National Association of Real Estate
Investment Trusts, or Nareit, which is net income (loss) available
for common shareholders calculated in accordance with GAAP, plus
real estate depreciation and amortization of consolidated
properties and its proportionate share of the real estate
depreciation and amortization of unconsolidated joint venture
properties and the difference between FFO attributable to an equity
investment and equity in earnings of SIR included in discontinued
operations, but excluding impairment charges on and increases in
the carrying value of real estate assets, any gain or loss on sale
of real estate, as well as certain other adjustments currently not
applicable to GOV. GOV's calculation of Normalized FFO available
for common shareholders differs from Nareit's definition of FFO
available for common shareholders because GOV includes SIR's
Normalized FFO attributable to GOV's equity investment in SIR (net
of FFO attributable to GOV's equity investment in SIR) included in
discontinued operations, GOV includes 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 GOV's core
operating performance and the uncertainty as to whether any such
business management incentive fees will be payable when all
contingencies for determining such fees are known at the end of the
calendar year and GOV excludes acquisition and transaction related
costs, loss on early extinguishment of debt, gains on issuance of
shares by SIR included in discontinued operations and unrealized
gains and losses on equity securities. GOV considers FFO available
for common shareholders and Normalized FFO available for common
shareholders to be appropriate supplemental measures of operating
performance for a REIT, along with net income (loss), net income
(loss) available for GOV's common shareholders and operating
income. GOV believes that FFO available for common shareholders and
Normalized FFO available for common shareholders provide useful
information to investors because by excluding the effects of
certain historical amounts, such as depreciation expense, FFO
available for common shareholders and Normalized FFO available for
common shareholders may facilitate a comparison of GOV's operating
performance between periods and with other REITs. FFO available for
common shareholders and Normalized FFO available for common
shareholders are among the factors considered by GOV's Board of
Trustees when determining the amount of distributions to GOV's
shareholders. Other factors include, but are not limited to,
requirements to maintain GOV's qualification for taxation as a
REIT, limitations in GOV's credit agreement and public debt
covenants, the availability to GOV of debt and equity capital,
GOV's expectation of its future capital requirements and operating
performance and GOV's expected needs for and availability of cash
to pay its obligations. FFO available for common shareholders and
Normalized FFO available for common shareholders do not represent
cash generated by operating activities in accordance with GAAP and
should not be considered alternatives to net income (loss), net
income (loss) available for common shareholders or operating income
as indicators of GOV's operating performance or as measures of
GOV's liquidity. These measures should be considered in conjunction
with net income (loss), net income (loss) available for common
shareholders and operating income as presented in GOV's Condensed
Consolidated Statements of Income (Loss). Other real estate
companies and REITs may calculate FFO available for common
shareholders and Normalized FFO available for common shareholders
differently than GOV does.
Government Properties Income
TrustCalculation and Reconciliation of Consolidated Property
Net Operating Income (NOI) and Consolidated Property Cash Basis
NOI (1)(amounts in
thousands)(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30, 2018 2017
2018 2017 Calculation of Consolidated Property NOI
and Consolidated Property Cash Basis NOI (2):
Rental income (3) $ 106,102 $ 70,179 $ 322,904 $ 209,362 Property
operating expenses (41,640 ) (29,137 ) (124,113 ) (83,212 )
Consolidated Property NOI 64,462 41,042 198,791 126,150 Non-cash
straight line rent adjustments included in rental income (3) (1,990
) (711 ) (7,825 ) (3,115 ) Lease value amortization included in
rental income (3) 773 619 2,361 1,863 Non-cash amortization
included in property operating expenses (4) (121 ) (121 ) (363 )
(363 ) Consolidated Property Cash Basis NOI $ 63,124 $
40,829 $ 192,964 $ 124,535
Reconciliation of Net Income Available for Common Shareholders
to Consolidated NOI and Consolidated Property Cash Basis NOI:
Net income (loss) available for common shareholders $ (449 ) $
10,989 $ 35,440 $ 30,081 Preferred units of limited partnership
distributions — — 371 — Net income
(loss) (449 ) 10,989 35,811 30,081 Gain on sale of real estate —
— (17,329 ) — Income (loss) before gain on
sale of real estate (449 ) 10,989 18,482 30,081 Income from
discontinued operations (9,274 ) (9,966 ) (23,872 ) (20,516 )
Income (loss) from continuing operations (9,723 ) 1,023 (5,390 )
9,565 Equity in net (earnings) losses of investees (94 ) (31 )
1,112 (533 ) Income tax expense 9 22 124 65 Loss on early
extinguishment of debt — 1,715 — 1,715 Interest expense 23,374
16,055 69,444 43,599 Interest income (140 ) (1,715 ) (405 ) (1,843
) Unrealized gain on equity securities (17,425 ) — (40,677 ) —
Dividend income (304 ) (304 ) (912 ) (911 ) Operating income (loss)
(4,303 ) 16,765 23,296 51,657 General and administrative 22,383
3,266 36,438 12,314 Acquisition and transaction related costs 3,813
— 3,813 — Loss on impairment of real estate — 230 5,800 230
Depreciation and amortization 42,569 20,781 129,444
61,949 Consolidated Property NOI 64,462 41,042
198,791 126,150 Non-cash amortization included in property
operating expenses (4) (121 ) (121 ) (363 ) (363 ) Lease value
amortization included in rental income (3) 773 619 2,361 1,863
Non-cash straight line rent adjustments included in rental income
(3) (1,990 ) (711 ) (7,825 ) (3,115 ) Consolidated Property Cash
Basis NOI $ 63,124 $ 40,829 $ 192,964 $
124,535
Reconciliation of Consolidated Property NOI to
Same Property NOI (5)(6): Rental income $ 106,102
$ 70,179 $ 322,904 $ 209,362 Property operating expenses (41,640 )
(29,137 ) (124,113 ) (83,212 ) Consolidated Property NOI 64,462
41,042 198,791 126,150 Less: NOI of properties not included in same
property results (25,537 ) (2,340 ) (79,280 ) (8,124 ) Same
property NOI $ 38,925 $ 38,702 $ 119,511 $
118,026
Calculation of Same Property Cash Basis
NOI (5) (6): Same property NOI $ 38,925 $ 38,702
$ 119,511 $ 118,026 Add: Lease value amortization included in
rental income (3) 496 525 1,454 1,592 Less: Non-cash straight line
rent adjustments included in rental income (3) (284 ) (867 ) (1,599
) (3,289 ) Non-cash amortization included in property operating
expenses (4) (121 ) (115 ) (359 ) (345 ) Same property Cash Basis
NOI $ 39,016 $ 38,245 $ 119,007 $ 115,984
(1) GOV calculates Consolidated Property NOI and
Consolidated Property Cash Basis NOI as shown above. The
calculations of Consolidated Property NOI and Consolidated Property
Cash Basis NOI exclude certain components of net income (loss)
available for common shareholders in order to provide results that
are more closely related to GOV's consolidated property level
results of operations. GOV defines Consolidated Property NOI as
consolidated income from its rental of real estate less its
consolidated property operating expenses. Consolidated Property NOI
excludes amortization of capitalized tenant improvement costs and
leasing commissions that GOV records as depreciation and
amortization. GOV defines Consolidated Property Cash Basis NOI as
Consolidated Property NOI excluding non-cash straight line rent
adjustments, lease value amortization and non-cash amortization
included in other operating expenses. GOV considers Consolidated
Property NOI and Consolidated Property Cash Basis NOI to be
appropriate supplemental measures to net income (loss) available
for common shareholders because they may help both investors and
management to understand the operations of GOV's consolidated
properties. GOV uses Consolidated Property NOI and Consolidated
Property Cash Basis NOI to evaluate individual and company wide
consolidated property level performance, and GOV believes that
Consolidated Property NOI and Consolidated Property Cash Basis NOI
provide useful information to investors regarding GOV's results of
operations because they reflect only those income and expense items
that are generated and incurred at the property level and may
facilitate comparisons of GOV's operating performance between
periods and with other REITs. Consolidated Property NOI and
Consolidated Property Cash Basis NOI do not represent cash
generated by operating activities in accordance with GAAP and
should not be considered alternatives to net income (loss), net
income (loss) available for common shareholders or operating income
as indicators of GOV's operating performance or as measures of its
liquidity. These measures should be considered in conjunction with
net income (loss), net income (loss) available for common
shareholders and operating income as presented in GOV's Condensed
Consolidated Statements of Income (Loss). Other real estate
companies and REITs may calculate Consolidated Property NOI and
Consolidated Property Cash Basis NOI differently than GOV does.
(2) Excludes one property (one building) classified as
discontinued operations that GOV sold on August 31, 2017.
(3) GOV reports rental income on a straight line basis over the
terms of the respective leases; as a result, rental income includes
non-cash straight line rent adjustments. Rental income also
includes expense reimbursements, tax escalations, parking revenues,
service income and other fixed and variable charges paid to GOV by
its tenants, as well as the net effect of non-cash amortization of
intangible lease assets and liabilities. (4) GOV recorded a
liability for the amount by which the estimated fair value for
accounting purposes exceeded the price GOV paid for its investment
in RMR Inc. common stock in June 2015. A portion of this liability
is being amortized on a straight line basis through December 31,
2035 as a reduction to property management fees expense, which is
included in property operating expenses. (5) For the three
months ended September 30, 2018 and 2017, same property NOI and
same property Cash Basis NOI are based on consolidated properties
GOV owned as of September 30, 2018 and which it owned continuously
since July 1, 2017. (6) For the nine months ended September
30, 2018 and 2017, same property NOI and same property Cash Basis
NOI are based on consolidated properties GOV owned as of September
30, 2018 and which it owned continuously since January 1, 2017.
Government Properties Income
TrustCondensed Consolidated Balance Sheets(amounts in
thousands, except share data)(unaudited)
September 30,
December 31, 2018 2017 ASSETS Real estate
properties: Land $ 448,714 $ 627,108 Buildings and improvements
2,050,365 2,348,613 Total real estate properties,
gross 2,499,079 2,975,721 Accumulated depreciation (363,490 )
(341,848 ) Total real estate properties, net 2,135,589 2,633,873
Assets of discontinued operations - Equity investment in Select
Income REIT 453,275 467,499 Assets of properties held for sale
408,626 — Investment in unconsolidated joint ventures 45,161 50,202
Acquired real estate leases, net 215,938 351,872 Cash and cash
equivalents 9,644 16,569 Restricted cash 2,354 3,111 Rents
receivable, net 55,297 61,429 Deferred leasing costs, net 22,181
22,977 Other assets, net 136,360 96,033 Total assets
$ 3,484,425 $ 3,703,565 LIABILITIES AND
SHAREHOLDERS’ EQUITY Unsecured revolving credit facility $ 467,000
$ 570,000 Unsecured term loans, net 548,363 547,852 Senior
unsecured notes, net 945,948 944,140 Mortgage notes payable, net
176,828 183,100 Liabilities of properties held for sale 9,998 —
Accounts payable and other liabilities 64,868 89,440 Due to related
persons 23,300 4,859 Assumed real estate lease obligations, net
8,759 13,635 Total liabilities 2,245,064
2,353,026 Commitments and contingencies
Preferred units of limited partnership — 20,496
Shareholders’ equity: Common shares of beneficial interest, $.01
par value: 150,000,000 shares authorized, 99,205,199 and 99,145,921
shares issued and outstanding, respectively 992 991 Additional paid
in capital 1,969,168 1,968,217 Cumulative net income 204,579
108,144 Cumulative other comprehensive income 265 60,427 Cumulative
common distributions (935,643 ) (807,736 ) Total shareholders’
equity 1,239,361 1,330,043 Total liabilities and
shareholders’ equity $ 3,484,425 $ 3,703,565
A Maryland Real Estate Investment Trust with
transferable shares of beneficial interest listed on the Nasdaq.No
shareholder, Trustee or officer is personally liable for any act or
obligation of the Trust.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20181101005172/en/
Government Properties Income TrustBrad Shepherd,
617-219-1410Senior Director, Investor Relations
Government Properties Income (NASDAQ:GOV)
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