OPITQ 10-Q Quarterly Report Sept. 30, 2017

OFFICE PROPERTIES INCOME TRUST

10-Ks and 10-Qs

10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Sept. 30, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013
10-Q	Quarter ended Sept. 30, 2013
10-Q	Quarter ended June 30, 2013
10-Q	Quarter ended March 31, 2013
10-K	Fiscal year ended Dec. 31, 2012
10-Q	Quarter ended Sept. 30, 2012
10-Q	Quarter ended June 30, 2012
10-Q	Quarter ended March 31, 2012
10-K	Fiscal year ended Dec. 31, 2011
10-Q	Quarter ended Sept. 30, 2011
10-Q	Quarter ended June 30, 2011
10-Q	Quarter ended March 31, 2011
10-K	Fiscal year ended Dec. 31, 2010
10-Q	Quarter ended Sept. 30, 2010
10-Q	Quarter ended June 30, 2010
10-Q	Quarter ended March 31, 2010
10-K	Fiscal year ended Dec. 31, 2009

PROXIES

DEF 14A	Filed on June 12, 2025
DEF 14A	Filed on April 3, 2025
DEF 14A	Filed on June 13, 2024
DEF 14A	Filed on April 4, 2024
DEF 14A	Filed on April 6, 2023
DEF 14A	Filed on June 16, 2022
DEF 14A	Filed on April 12, 2022
DEF 14A	Filed on April 13, 2021
DEF 14A	Filed on April 13, 2020
DEF 14A	Filed on March 28, 2019
DEF 14A	Filed on April 4, 2018
DEF 14A	Filed on Feb. 23, 2017
DEF 14A	Filed on Feb. 19, 2016
DEF 14A	Filed on March 13, 2015
DEF 14A	Filed on April 7, 2014
DEF 14A	Filed on Feb. 22, 2013
DEF 14A	Filed on Feb. 23, 2012
DEF 14A	Filed on Feb. 25, 2011
DEF 14A	Filed on Feb. 22, 2010

10-Q 1 gov_093017x10qxdocument.htm 10-Q Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-34364

GOVERNMENT PROPERTIES INCOME TRUST

(Exact Name of Registrant as Specified in Its Charter)



Maryland		26-4273474
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634

(Address of Principal Executive Offices) (Zip Code)

617-219-1440

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of October 30, 2017 : 99,145,921

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

FORM 10-Q

September 30, 2017

INDEX



PART I .	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets — September 30, 2017 and December 31, 2016	2

	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2017 and 2016	3

	Condensed Consolidated Statements of Cash Flows —Nine Months Ended September 30, 2017 and 2016	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	41

	Warning Concerning Forward Looking Statements	42

	Statement Concerning Limited Liability	45

PART II .	Other Information

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 6.	Exhibits	47

	Signatures	49

References in this Quarterly Report on Form 10-Q to “the Company”, “GOV”, “we”, “us” or “our” include Government Properties Income Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)



	September 30,			December 31,
	2017			2016
ASSETS
Real estate properties:
Land	$	269,332		$	267,855
Buildings and improvements	1,660,379			1,620,905
Total real estate properties, gross	1,929,711			1,888,760
Accumulated depreciation	(331,069		)	(296,804		)
Total real estate properties, net	1,598,642			1,591,956

Equity investment in Select Income REIT	475,265			487,708
Assets of discontinued operations	—			12,541
Acquired real estate leases, net	99,953			124,848
Deposit escrow for FPO acquisition	651,696			—
Cash and cash equivalents	551,707			29,941
Restricted cash	509			530
Rents receivable, net	47,461			48,458
Deferred leasing costs, net	22,250			21,079
Other assets, net	89,484			68,005
Total assets	$	3,536,967		$	2,385,066

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	565,000		$	160,000
Unsecured term loans, net	547,682			547,171
Senior unsecured notes, net	943,543			646,844
Mortgage notes payable, net	26,561			27,837
Liabilities of discontinued operations	—			45
Accounts payable and other liabilities	63,525			54,019
Due to related persons	4,297			3,520
Assumed real estate lease obligations, net	8,832			10,626
Total liabilities	2,159,440			1,450,062

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 150,000,000 and 100,000,000 shares
authorized, respectively, 99,145,921 and 71,177,906 shares issued and outstanding, respectively	991			712
Additional paid in capital	1,968,249			1,473,533
Cumulative net income	126,410			96,329
Cumulative other comprehensive income	46,980			26,957
Cumulative common distributions	(765,103		)	(662,527		)
Total shareholders’ equity	1,377,527			935,004
Total liabilities and shareholders’ equity	$	3,536,967		$	2,385,066

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Rental income	$	70,179		$	64,478		$	209,362		$	192,150

Expenses:
Real estate taxes	8,862			7,591			24,980			22,810
Utility expenses	5,408			5,483			14,186			13,330
Other operating expenses	14,867			13,854			44,046			40,031
Depreciation and amortization	20,781			18,404			61,949			54,713
Loss on impairment of real estate	230			—			230			—
Acquisition related costs	—			147			—			363
General and administrative	3,266			3,816			12,314			11,350
Total expenses	53,414			49,295			157,705			142,597

Operating income	16,765			15,183			51,657			49,553
Dividend income	304			304			911			667
Interest income	1,715			47			1,843			63
Interest expense (including net amortization of debt premiums and discounts
and debt issuance costs of $990, $805, $2,605 and $2,024, respectively)	(16,055		)	(12,608		)	(43,599		)	(32,286		)
(Loss) gain on early extinguishment of debt	(1,715		)	—			(1,715		)	104
Gain on issuance of shares by Select Income REIT	51			72			72			88
Income from continuing operations before income taxes
and equity in earnings of investees	1,065			2,998			9,169			18,189
Income tax expense	(22		)	(13		)	(65		)	(63		)
Equity in earnings of investees	9,484			8,668			20,804			28,002
Income from continuing operations	10,527			11,653			29,908			46,128
Income (loss) from discontinued operations	462			(154		)	173			(429		)
Income before gain on sale of property	10,989			11,499			30,081			45,699
Gain on sale of property	—			79			—			79
Net income	10,989			11,578			30,081			45,778

Other comprehensive income:
Unrealized gain on investment in available for sale securities	3,279			8,463			14,389			28,571
Equity in unrealized gain of investees	1,351			3,273			5,634			10,423
Other comprehensive income	4,630			11,736			20,023			38,994
Comprehensive income	$	15,619		$	23,314		$	50,104		$	84,772

Weighted average common shares outstanding (basic)	96,883			71,054			79,778			71,041
Weighted average common shares outstanding (diluted)	96,958			71,084			79,852			71,064

Per common share amounts (basic and diluted):
Income from continuing operations	$	0.11		$	0.16		$	0.37		$	0.65
Income (loss) from discontinued operations	$	—		$	—		$	—		$	(0.01	)
Net income	$	0.11		$	0.16		$	0.38		$	0.64

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)



	Nine Months Ended September 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	30,081		$	45,778
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	35,460			31,611
Net amortization of debt premiums and discounts and debt issuance costs	2,605			2,024
Gain on sale of property	—			(79		)
Loss (gain) on early extinguishment of debt	1,715			(104		)
Straight line rental income	(3,115		)	(1,789		)
Amortization of acquired real estate leases	25,592			21,948
Amortization of deferred leasing costs	2,790			2,343
Other non-cash expenses, net	352			500
Loss on impairment of real estate	230			—
Increase in carrying value of property included in discontinued operations	(619		)	—
Equity in earnings of investees	(20,804		)	(28,002		)
Gain on issuance of shares by Select Income REIT	(72		)	(88		)
Distributions of earnings from Select Income REIT	18,062			25,676
Change in assets and liabilities:
Restricted cash	21			508
Deferred leasing costs	(2,846		)	(7,998		)
Rents receivable	3,839			(126		)
Other assets	(7,045		)	(1,466		)
Accounts payable and accrued expenses	6,703			(150		)
Due to related persons	777			1,088
Net cash provided by operating activities	93,726			91,674

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and deposits	(666,202		)	(83,705		)
Real estate improvements	(29,377		)	(23,357		)
Distributions in excess of earnings from Select Income REIT	20,063			11,951
Proceeds from sale of properties, net	13,198			263
Net cash used in investing activities	(662,318		)	(94,848		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage notes payable	(1,150		)	(107,562		)
Proceeds from issuance of senior notes, after discounts	297,954			300,235
Proceeds from issuance of common shares, net	493,936			—
Borrowings on unsecured revolving credit facility	610,000			254,000
Repayments on unsecured revolving credit facility	(205,000		)	(346,000		)
Payment of debt issuance costs	(2,551		)	(464		)
Repurchase of common shares	(255		)	(312		)
Distributions to common shareholders	(102,576		)	(91,759		)
Net cash provided by financing activities	1,090,358			8,138

Increase in cash and cash equivalents	521,766			4,964
Cash and cash equivalents at beginning of period	29,941			8,785
Cash and cash equivalents at end of period	$	551,707		$	13,749



Supplemental cash flow information:
Interest paid	$	42,019	$	32,599
Income taxes paid	$	100	$	94
Non-cash investing activities:
Sale of property	$	—	$	3,600
Mortgage note receivable related to sale of property	$	—	$	(3,600	)

See accompanying notes.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of Government Properties Income Trust and its subsidiaries, or GOV, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2016 , or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets, impairment of real estate and equity method investments and the valuation of intangible assets.

Note 2. Recent Accounting Pronouncements

On January 1, 2017, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2017-01, Clarifying the Definition of a Business , which provides additional guidance on evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or of a business. This update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. As a result of the implementation of this update, certain property acquisitions, which under previous guidance were accounted for as business combinations, are now accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under the previous guidance.

On January 1, 2017, we adopted FASB ASU No. 2016-09, Compensation - Stock Compensation , which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the condensed statement of cash flows. The adoption of ASU No. 2016-09 did not have a material impact in our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers , which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In August 2015, the FASB provided for a one-year deferral of the effective date for ASU No. 2014-09, which is now effective for us beginning January 1, 2018. A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. We are continuing to evaluate ASU No. 2014-09 (and related clarifying guidance issued by the FASB); however, we do not expect its adoption to have a significant impact on the amount or timing of our revenue recognition in our consolidated financial statements with the exception of profit recognition on real estate sales. We currently have recorded a deferred gain on sale of real estate of $712 that under current guidance would be recognized upon repayment of a promissory note we received in connection with the sale but will be recognized in its entirety upon adoption of ASU No. 2014-09. We currently expect to adopt the standard using the modified retrospective approach.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. ASU No. 2016-01 states that these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

will affect how changes in the fair value of available for sale securities we hold are presented in our condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases , which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect this guidance to have a material impact in our condensed consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash , which clarifies how companies should present restricted cash and restricted cash equivalents. Companies will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon the adoption of ASU No. 2016-18, we will reconcile both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the current guidance we explain the changes during the period for cash and cash equivalents only.

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting , which clarifies which changes to the terms or conditions of a share based payment award are subject to the guidance on modification accounting under ASC 718. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share based payment award are the same immediately before and after a change to the terms or conditions of the award. ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are continuing to evaluate ASU No. 2017-09; however, we do not expect its adoption to have a material impact in our condensed consolidated financial statements.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 3. Weighted Average Common Shares

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):



	For the Three Months		For the Nine Months
	Ended September 30,		Ended September 30,
	2017	2016	2017	2016
Weighted average common shares for basic earnings per share	96,883	71,054	79,778	71,041
Effect of dilutive securities: unvested share awards	75	30	74	23
Weighted average common shares for diluted earnings per share	96,958	71,084	79,852	71,064

Note 4. Real Estate Properties

As of September 30, 2017 , we owned 74 properties ( 96 buildings), with an undepreciated carrying value of $1,929,711 . We generally lease space at our properties on a gross lease or modified gross lease basis pursuant to fixed term contracts expiring between 2017 and 2034. Our leases generally require us to pay all or some property operating expenses and to provide all or most property management services. During the three months ended September 30, 2017 , we entered into 14 leases for 436,102 rentable square feet, for a weighted (by rentable square feet) average lease term of 8.4 years and we made commitments for $7,902 of leasing related costs. During the nine months ended September 30, 2017 , we entered into 42 leases for 1,084,633 rentable square feet, for a weighted (by rentable square feet) average lease term of 8.8 years and we made commitments for $12,609 of leasing related costs. As of September 30, 2017 , we have estimated unspent leasing related obligations of $26,631 , and we have committed to redevelop and expand an existing property prior to commencement of the lease with an estimated remaining cost to complete as of September 30, 2017 of $3,302 . During the nine months ended September 30, 2017 , we capitalized $328 of interest expense related to the redevelopment and expansion of that existing property.

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of our long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

Acquisition Activities

During the nine months ended September 30, 2017 , we acquired an office property ( one building) located in Manassas, VA with 69,374 rentable square feet. This property was 100% leased to Prince William County on the date of acquisition. This transaction was accounted for as an acquisition of assets. The purchase price was $12,657 , including capitalized acquisition costs of $37 . Our allocation of the purchase price of this acquisition based on the estimated fair values of the acquired assets and assumed liabilities is presented in the table below.

Number

Buildings

Other

Acquisition

Properties/

Square

Purchase

and

Assumed

Date

Location

Type

Buildings

Feet

Price

Land

Improvements

Assets

Jan-17

Manassas, VA

Office

1/1

69,374

12,657

1,562

8,253

2,842

In September 2017, we acquired transferable development rights that will allow us to expand a property we own in Washington, D.C. for a purchase price of $2,030 , excluding acquisition costs.

FPO Acquisition

On October 2, 2017, we acquired First Potomac Realty Trust, or FPO, a Maryland REIT, pursuant to merger transactions, or collectively, the FPO Transaction, as a result of which, we acquired 39 office properties ( 74 buildings) with 6,454,382

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

rentable square feet, including two properties owned by joint ventures in which we acquired FPO's 50% and 51% interests. The estimated aggregate transaction value of the FPO Transaction was $1,374,624 , including $651,696 in cash consideration paid to FPO shareholders, the repayment of $483,000 of FPO debt, the assumption of $167,549 of FPO mortgage debt and an additional $82,000 of mortgage debt that encumber two joint venture properties that are 50% and 51% owned by FPO and the payment of certain transaction fees and expenses, net of FPO cash on hand. We currently expect to complete our purchase price allocation for the FPO Transaction in the fourth quarter of 2017 upon completion of third party appraisals and our analysis of acquired in place leases and building valuations.

We financed the cash payments for the FPO Transaction with borrowings under our revolving credit facility and with cash on hand, including net proceeds from our public offerings of common shares and senior unsecured notes, as described further in Notes 7 and 9.

The following table presents our pro forma results of operations for each of the nine months ended September 30, 2017 and 2016 as if the FPO Transaction and related financing activities had occurred on January 1, 2016. The historical FPO results of operations included in this pro forma financial information have been adjusted to remove the results of operations of properties and joint venture interests FPO sold since January 1, 2016. The effect of these adjustments was to decrease pro forma rental income $804 and $8,330 for the nine months ended September 30, 2017 and 2016 , respectively, and to decrease (increase) net income (loss) $47,019 and ($2,458) for the nine months ended September 30, 2017 and 2016 , respectively. This pro forma financial information is not necessarily indicative of what our actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period. Differences could result from numerous factors, including changes to our preliminary purchase price allocation for the FPO Transaction, future changes in our portfolio of investments, changes in interest rates, changes in our capital structure, changes in net property level operating expenses, changes in property level revenues, including rents expected to be received on our existing leases or leases we may enter into during and after 2017, and other reasons.



	Nine Months Ended September 30,
	2017			2016
Rental income	$	328,255		$	311,167
Net income (loss)	(4,733		)	19,411
Net income (loss) per share	$	(0.05	)	$	0.20

Disposition Activities – Continuing Operations

On October 5, 2017, we sold one vacant office property ( one building) located in Albuquerque, NM with 29,045 rentable square feet and a net book value of $1,885 as of September 30, 2017 for $2,000 , excluding closing costs. During the three months ended September 30, 2017 , we recorded a $230 loss on impairment of real estate to reduce the carrying value of this property to its estimated fair value.

Disposition Activities – Discontinued Operations

In August 2017, we sold one vacant office property ( one building) in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,901 as of the date of sale for $13,523 , excluding closing costs. Results of operations for this property, which qualified as held for sale prior to our adoption in 2014 of ASU No. 2014-8, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , are classified as discontinued operations in our condensed consolidated financial statements. During the three months ended September 30, 2017 , we recorded an adjustment of $619 to increase the carrying value of this property to its estimated fair value less costs to sell.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Summarized balance sheet and income statement information for this property is as follows:

Balance Sheets



	September 30,		December 31,
	2017		2016
Real estate properties, net	$	—	$	12,260
Other assets	—		281
Assets of discontinued operations	$	—	$	12,541

Other liabilities	$	—	$	45
Liabilities of discontinued operations	$	—	$	45

Statements of Operations



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Rental income	$	4		$	6		$	17		$	62
Real estate taxes	(40		)	(27		)	(88		)	(73		)
Utility expenses	(17		)	(34		)	(97		)	(113		)
Other operating expenses	(87		)	(70		)	(202		)	(219		)
General and administrative	(17		)	(29		)	(76		)	(86		)
Increase in carrying value of property	619			—			619			—
Income (loss) from discontinued operations	$	462		$	(154	)	$	173		$	(429	)

Note 5. Revenue Recognition

We recognize rental income from operating leases that contain fixed contractual rent changes on a straight line basis over the term of the lease agreements. Certain of our leases with government tenants provide the tenant the right to terminate before the lease expiration date if the legislature or other funding authority does not appropriate the funding necessary for the government tenant to meet its lease obligations; we have determined the fixed non-cancelable lease term of these leases to be the full term of the lease because we believe the occurrence of early terminations to be remote contingencies based on both our historical experience and our assessments of the likelihood of lease cancellation on a separate lease basis.

We increased rental income to record revenue on a straight line basis by $711 and $1,205 for the three months ended September 30, 2017 and 2016 , respectively, and $3,115 and $1,789 for the nine months ended September 30, 2017 and 2016 , respectively. Rents receivable include $24,801 and $21,686 of straight line rent receivables, net of allowance for doubtful accounts of $132 and $155 , at September 30, 2017 and December 31, 2016 , respectively.

Note 6. Concentration

Tenant and Credit Concentration

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. The U.S. Government, 13 state governments, and four other government tenants combined were responsible for 87.5% and 92.4% of our annualized rental income as of September 30, 2017 and 2016 , respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for 59.8% and 63.9% of our annualized rental income as of September 30, 2017 and 2016 , respectively.

Geographic Concentration

At September 30, 2017 , our 74 properties ( 96 buildings) were located in 31 states and the District of Columbia. Properties located in Virginia, California, the District of Columbia, Georgia, Maryland, New York and Massachusetts were responsible for 14.8% , 14.8% , 9.5% , 8.6% , 7.0% , 6.9% and 4.9% of our annualized rental income as of September 30, 2017 , respectively.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 7. Indebtedness

Our principal debt obligations at September 30, 2017 were: (1) $565,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) an aggregate outstanding principal amount of $550,000 of unsecured term loans; (3) an aggregate outstanding principal amount of $960,000 of public issuances of senior unsecured notes; and (4) $26,358 aggregate principal amount of mortgage notes.

Our $750,000 revolving credit facility, our $300,000 term loan and our $250,000 term loan are governed by a credit agreement with a syndicate of institutional lenders that includes a number of features common to all of these credit arrangements. This credit agreement also includes a feature under which the maximum aggregate borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

Our $750,000 revolving credit facility is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 31, 2019 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 31, 2020. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity and no principal repayment is due until maturity. We are required to pay interest at the rate of LIBOR plus a premium, which was 125 basis points per annum at September 30, 2017 , on borrowings under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2017 . Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2017 , the annual interest rate payable on borrowings under our revolving credit facility was 2.4% and the weighted average annual interest rate for borrowings under our revolving credit facility was 2.4% and 1.7% for the three months ended September 30, 2017 and 2016 , respectively, and 2.2% and 1.7% for the nine months ended September 30, 2017 and 2016 , respectively. As of September 30, 2017 and October 30, 2017 , we had $565,000 and $545,000 outstanding under our revolving credit facility, respectively.

Our $300,000 term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at the rate of LIBOR plus a premium, which was 140 basis points per annum at September 30, 2017 , on the amount outstanding under our $300,000 term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2017 , the annual interest rate for the amount outstanding under our $300,000 term loan was 2.6% . The weighted average annual interest rate under our $300,000 term loan was 2.6% and 1.9% for the three months ended September 30, 2017 and 2016 , respectively, and 2.4% and 1.9% for the nine months ended September 30, 2017 and 2016 , respectively.

Our $250,000 term loan, which matures on March 31, 2022, is prepayable without penalty at any time. We are required to pay interest at the rate of LIBOR plus a premium, which was 180 basis points per annum as of September 30, 2017 , on the amount outstanding under our $250,000 term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2017 , the annual interest rate for the amount outstanding under our $250,000 term loan was 3.0% . The weighted average annual interest rate under our $250,000 term loan was 3.0% and 2.3% , respectively, for the three months ended September 30, 2017 and 2016 and 2.8% and 2.3% for the nine months ended September 30, 2017 and 2016 , respectively.

Our credit agreement and senior notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our credit agreement and our senior notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, require us to maintain certain financial ratios and, in the case of our credit agreement, restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit agreement and senior notes indentures and their supplements at September 30, 2017 .

On July 20, 2017, we issued $300,000 of 4.000% senior unsecured notes due 2022 in an underwritten public offering. The net proceeds from this offering of $295,403 , after payment of the underwriters' discount and other offering expenses, were used to finance, in part, the FPO Transaction.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Concurrently with our entering into the FPO merger agreement, we entered a commitment letter with a group of institutional lenders for a 364 -day senior unsecured bridge loan facility in an initial aggregate principal amount of up to $750,000 . On July 20, 2017, we and the lenders terminated this commitment letter and bridge loan facility as a result of our issuance of the senior unsecured notes described above and the proceeds from the sale of our common shares in July 2017 (see Note 9 for more information regarding this sale), and we recognized a loss on extinguishment of debt of $1,715 .

At September 30, 2017 , three of our properties ( three buildings) with an aggregate net book value of $50,031 were encumbered by three mortgages with an aggregate principal balance of $26,358 . These mortgage notes are non-recourse, subject to certain limited exceptions and do not contain any material financial covenants.

As described in Note 4, in connection with the FPO Transaction we assumed five mortgage notes with an aggregate principal balance of $167,549 . These mortgage notes are secured by five properties ( five buildings). In connection with the FPO Transaction we also assumed two mortgage notes with an aggregate principal balance of $82,000 , which are secured by two properties owned by joint ventures in which we acquired FPO's 50% and 51% interests.

Note 8. Fair Value of Assets and Liabilities

The table below presents certain of our assets measured at fair value at September 30, 2017 , categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:



			Fair Value at Reporting Date Using
			Quoted Prices in				Significant
	Estimated		Active Markets for		Significant Other		Unobservable
	Fair		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements Assets:
Investment in RMR Inc. ⁽¹⁾	$	62,351	$	62,351	$	—	$	—
Non-Recurring Fair Value Measurements Assets:
One property ⁽²⁾	$	1,885	$	—	$	1,885	$	—

(1)

Our 1,214,225 shares of class A common stock of The RMR Group Inc., or RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs as defined in the fair value hierarchy under GAAP). Our historical cost basis for these shares is $26,888 as of September 30, 2017 . The net unrealized gain of $35,463 for these shares as of September 30, 2017 is included in cumulative other comprehensive income in our condensed consolidated balance sheets.


(2)	We estimated the fair value of this property at September 30, 2017 based upon the selling price agreed to with a third party (Level 2 inputs as defined in the fair value hierarchy under GAAP). See Note 4 for further details.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

In addition to the assets described in the table above, our financial instruments include cash and cash equivalents, restricted cash, rents receivable, mortgage notes receivable, accounts payable, our revolving credit facility, term loans, senior unsecured notes, mortgage notes payable, amounts due to related persons, other accrued expenses and security deposits. At September 30, 2017 and December 31, 2016 , the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements due to their short term nature or variable interest rates, except as follows:



	As of September 30, 2017				As of December 31, 2016
	Carrying Amount ⁽¹⁾		Fair Value		Carrying Amount ⁽¹⁾		Fair Value
Senior unsecured notes, 3.75% interest rate, due in 2019	$	347,810	$	357,625	$	346,952	$	354,078
Senior unsecured notes, 4.000% interest rate, due in 2022	295,587		302,655		—		—
Senior unsecured notes, 5.875% interest rate, due in 2046	300,146		325,500		299,892		292,268
Mortgage note payable, 5.88% interest rate, due in 2021 ⁽²⁾	13,677		14,388		13,841		14,492
Mortgage note payable, 7.00% interest rate, due in 2019 ⁽²⁾	8,490		8,739		8,778		9,188
Mortgage note payable, 8.15% interest rate, due in 2021 ⁽²⁾	4,394		4,665		5,218		5,575
	$	970,104	$	1,013,572	$	674,681	$	675,601


(1)	Carrying amount includes certain unamortized debt issuance costs and unamortized premiums and discounts.

(2)

We assumed these mortgages in connection with our acquisitions of the encumbered properties. The stated interest rates 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, if any, 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.

We estimated the fair value of our senior unsecured notes due 2019 and due 2022 using an average of the bid and ask price of the notes as of the measurement date (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair value of our senior unsecured notes due 2046 based on the closing price on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs as defined in the fair value hierarchy under GAAP) as of the measurement date. We estimated the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Note 9. Shareholders’ Equity

Distributions

On February 23, 2017 , we paid a regular quarterly distribution to common shareholders of record on January 23, 2017 of $0.43 per share, or $30,606 . On May 22, 2017 , we paid a regular quarterly distribution to common shareholders of record on April 21, 2017 of $0.43 per share, or $30,606 . On August 21, 2017 , we paid a regular quarterly distribution to common shareholders of record on July 24, 2017 of $0.43 per share, or $41,364 . On October 12, 2017 , we declared a regular quarterly distribution payable to common shareholders of record on October 23, 2017 of $0.43 per share, or $42,633 . We expect to pay this distribution on or about November 20, 2017 using cash on hand and borrowings under our revolving credit facility.

Sale of Shares

On July 5, 2017, we sold 25,000,000 of our common shares at a price of $18.50 per share in an underwritten public offering. On August 3, 2017, we sold 2,907,029 of our common shares at a price of $18.50 per share pursuant to an overallotment option granted to the underwriters for the July offering. The aggregate net proceeds from these sales were $493,936 , after payment of the underwriters' discount and other offering expenses.

Share Grants and Purchases

On May 17, 2017 , we granted 3,000 of our common shares, valued at $21.75 per share, the closing price of our common shares on the Nasdaq on that day, to each of our six Trustees as part of their annual compensation.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

On May 17, 2017 , we withheld 450 of our common shares awarded to one of our Trustees to fund that Trustee's resulting minimum required tax withholding obligation. The aggregate value of the withheld shares was $10 , which is reflected as a decrease to shareholders' equity in our condensed consolidated balance sheets.

On June 30, 2017, we purchased 278 of our common shares valued at $18.31 per share, the closing price of our common shares on the Nasdaq on that day, from a former employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with vesting of awards of our common shares.

On September 14, 2017, we granted an aggregate of 57,350 of our common shares to our officers and certain other employees of RMR LLC, valued at $18.61 per share, the closing price of our common shares on the Nasdaq on that day.

On September 19, 2017, we purchased an aggregate of 13,636 of our common shares valued at $18.30 per share, the closing price of our common shares on the Nasdaq on that day, from our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

Cumulative Other Comprehensive Income

Cumulative other comprehensive income represents the unrealized gain on the RMR Inc. shares we own and our share of the comprehensive income of our equity method investees, Select Income REIT, or SIR, and Affiliates Insurance Company, or AIC. The following table presents changes in the amounts we recognized in cumulative other comprehensive income by component for the three and nine months ended September 30, 2017 :



	Three Months Ended September 30, 2017
	Unrealized Gain		Equity in
	on Investment		Unrealized Gain
	in Available for		of
	Sale Securities		Investees			Total
Balance at June 30, 2017	$	32,184	$	10,166		$	42,350
Other comprehensive income before reclassifications	3,279		1,355			4,634
Amounts reclassified from cumulative other comprehensive loss to net income ⁽¹⁾	—		(4		)	(4		)
Net current period other comprehensive income	3,279		1,351			4,630
Balance at September 30, 2017	$	35,463	$	11,517		$	46,980



	Nine Months Ended September 30, 2017
	Unrealized Gain		Equity in
	on Investment		Unrealized Gain
	in Available for		of
	Sale Securities		Investees		Total
December 31, 2016	$	21,074	$	5,883	$	26,957
Other comprehensive income before reclassifications	14,389		5,626		20,015
Amounts reclassified from cumulative other comprehensive income to net income ⁽¹⁾	—		8		8
Net current period other comprehensive income	14,389		5,634		20,023
Balance at September 30, 2017	$	35,463	$	11,517	$	46,980


(1)	Amounts reclassified from cumulative other comprehensive income (loss) are included in equity in earnings of investees in our condensed consolidated statements of comprehensive income.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 10. Business and Property Management Agreements with RMR LLC

We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations.

Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $1,891 and $2,572 for the three months ended September 30, 2017 and 2016 , respectively, and $8,241 and $7,614 for the nine months ended September 30, 2017 and 2016 , respectively. As of September 30, 2017 , no annual incentive fees were estimated, based on our common share total return, as defined, as of September 30, 2017 , to be payable to RMR LLC for 2017. The business management fee for the three months ended September 30, 2017 includes the reversal of $893 of estimated incentive fees accrued as of June 30, 2017. The actual amount of annual incentive fees payable to RMR LLC for 2017, if any, will be based on our common share total return, as defined, for the three year period ending December 31, 2017, and will be payable in 2018. The net business management fees we recognized are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,338 and $2,249 for the three months ended September 30, 2017 and 2016 , respectively, and $7,371 and $6,636 for the nine months ended September 30, 2017 and 2016 , respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants. We reimbursed RMR LLC $3,436 and $3,221 for property management related expenses for the three months ended September 30, 2017 and 2016 , respectively, and $10,482 and $9,132 for the nine months ended September 30, 2017 and 2016 , respectively, which amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC’s costs for providing our internal audit function. The amount recognized as expense for internal audit costs was $67 and $34 for the three months ended September 30, 2017 and 2016 , respectively, and $202 and $168 for the nine months ended September 30, 2017 and 2016 , respectively. We include these amounts in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Note 11. Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., SIR, AIC and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers.

Our Manager, RMR LLC. See Note 10 for further information regarding our management agreements with RMR LLC.

We have historically granted share awards to certain RMR LLC employees under our equity compensation plans. In September 2017 and 2016, we granted annual share awards of 57,350 and 53,400 of our common shares, respectively, to our officers and to other employees of RMR LLC. In September 2017 and 2016, we purchased 13,636 and 13,209 of our common shares, respectively, at the closing price of our common shares on the Nasdaq on the date of purchase from our officers and other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We include amounts recognized as expense for share awards to RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.

RMR Inc. RMR LLC is a subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees. As of September 30, 2017 , we owned 1,214,225 shares of class A common stock of RMR Inc. See Note 8 for further information regarding our investment in RMR Inc.

SIR . As of September 30, 2017 , we owned 24,918,421 of SIR's common shares, or approximately 27.8% of its outstanding common shares. Our Managing Trustees also serve as managing trustees of SIR, our President and Chief Operating Officer and

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

one of our Independent Trustees also serves as the president and chief operating officer and an independent trustee of SIR, respectively. RMR LLC provides management services to SIR and us. See Note 12 for further information regarding our investment in SIR.

AIC . We, SIR, ABP Trust and four other companies to which RMR LLC provides management services currently own AIC, an Indiana insurance company, in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately $757 in connection with this insurance program for the policy year ending June 30, 2018, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

As of September 30, 2017 and December 31, 2016, our investment in AIC had a carrying value of $8,064 and $7,235 , respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which amounts are presented as equity in earnings of investees in our condensed consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized gains on securities which are owned and held for sale by AIC.

For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.

Note 12. Equity Investment in Select Income REIT

As described in Note 11, as of September 30, 2017 , we owned 24,918,421 , or approximately 27.8% , of the then outstanding SIR common shares. SIR is a REIT which owns properties that are primarily leased to single tenants.

We account for our investment in SIR under the equity method. Under the equity method, we record our proportionate share of SIR’s net income as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. We recorded $9,453 and $8,655 of equity in the earnings of SIR for the three months ended September 30, 2017 and 2016 , respectively, and $20,271 and $27,895 of equity in the earnings of SIR for the nine months ended September 30, 2017 and 2016 , respectively. Our other comprehensive income includes our proportionate share of SIR’s unrealized gains of $1,236 and $3,192 for the three months ended September 30, 2017 and 2016 , respectively, and $5,339 and $10,248 for the nine months ended September 30, 2017 and 2016 , respectively.

The adjusted GAAP cost basis of our investments in SIR was less than our proportionate share of SIR’s total shareholders’ equity book value on the dates we acquired the shares. As of September 30, 2017 , our remaining basis difference was $87,976 and, as required under GAAP, we are accreting this basis difference to earnings over the estimated remaining useful lives of certain real estate assets and intangible assets and liabilities owned by SIR. This accretion increased our equity in the earnings of SIR by $736 and $740 for the three months ended September 30, 2017 and 2016 , respectively, and $2,209 and $2,219 for the nine months ended September 30, 2017 and 2016 , respectively.

As of September 30, 2017 , our investment in SIR had a carrying value of $475,265 and a market value, based on the closing price of SIR common shares on the Nasdaq on September 30, 2017 , of $583,589 . We periodically evaluate our equity investment in SIR for possible indicators of other than temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. These indicators may include the length of time the market value of our investment is below our cost basis, the financial condition of SIR, our intent and ability to be a long term holder of the investment and other considerations. If the decline in fair value is judged to be other than temporary, we may record an impairment charge to adjust the basis of the investment to its fair value.

We received cash distributions from SIR totaling $12,708 during each of the three months ended September 30, 2017 and 2016 and $38,125 and $37,627 during the nine months ended September 30, 2017 and 2016 , respectively.

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The following are summarized financial data of SIR as reported in SIR’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 , or the SIR Quarterly Report. References in our condensed consolidated financial statements to the SIR Quarterly Report are included as references to the source of the data only, and the information in the SIR Quarterly Report is not incorporated by reference into our condensed consolidated financial statements.

Condensed Consolidated Balance Sheets



	September 30,		December 31,
	2017		2016
Real estate properties, net	$	3,922,568	$	3,899,792
Acquired real estate leases, net	493,780		506,298
Properties held for sale	5,829		—
Cash and cash equivalents	18,155		22,127
Rents receivable, net	122,292		124,089
Other assets, net	114,771		87,376
Total assets	$	4,677,395	$	4,639,682

Unsecured revolving credit facility	$	102,000	$	327,000
Unsecured term loan, net	348,746		348,373
Senior unsecured notes, net	1,776,087		1,430,300
Mortgage notes payable, net	227,772		245,643
Assumed real estate lease obligations, net	70,989		77,622
Other liabilities	129,502		136,782
Shareholders' equity	2,022,299		2,073,962
Total liabilities and shareholders' equity	$	4,677,395	$	4,639,682

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Condensed Consolidated Statements of Income



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Rental income	$	98,635		$	96,037		$	293,020		$	290,512
Tenant reimbursements and other income	19,379			18,999			57,158			56,660
Total revenues	118,014			115,036			350,178			347,172

Real estate taxes	11,489			10,755			33,168			31,565
Other operating expenses	14,649			14,394			41,039			39,987
Depreciation and amortization	34,713			33,366			102,770			100,240
Acquisition related costs	—			13			—			71
General and administrative	1,589			7,553			24,658			21,903
Write-off of straight line rents receivable, net	—			—			12,517			—
Loss on asset impairment	—			—			4,047			—
Loss on impairment of real estate assets	—			—			229			—
Total expenses	62,440			66,081			218,428			193,766
Operating income	55,574			48,955			131,750			153,406

Dividend income	397			397			1,190			872
Interest expense	(24,383		)	(20,690		)	(68,278		)	(61,883		)
Income before income tax expense and equity in earnings of an investee	31,588			28,662			64,662			92,395
Income tax expense	(177		)	(107		)	(364		)	(370		)
Equity in earnings of an investee	31			13			533			107
Net income	31,442			28,568			64,831			92,132
Net income allocated to noncontrolling interest	—			—			—			(33		)
Net income attributed to SIR	$	31,442		$	28,568		$	64,831		$	92,099

Weighted average common shares outstanding (basic)	89,355			89,308			89,341			89,295
Weighted average common shares outstanding (diluted)	$	89,379		$	89,334		$	89,364		$	89,318
Net income attributed to SIR per common share (basic and diluted)	$	0.35		$	0.32		$	0.73		$	1.03

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 13. Segment Information

We operate in two separate reportable business segments: direct ownership of real estate properties and our equity method investment in SIR.



	Three Months Ended September 30, 2017
	Investment			Investment
	in Real Estate			in SIR		Corporate			Consolidated
Rental income	$	70,179		$	—	$	—		$	70,179

Expenses:
Real estate taxes	8,862			—		—			8,862
Utility expenses	5,408			—		—			5,408
Other operating expenses	14,867			—		—			14,867
Depreciation and amortization	20,781			—		—			20,781
Loss on impairment of real estate	230			—		—			230
General and administrative	—			—		3,266			3,266
Total expenses	50,148			—		3,266			53,414

Operating income (loss)	20,031			—		(3,266		)	16,765
Dividend income	—			—		304			304
Interest income	54			—		1,661			1,715
Interest expense	(401		)	—		(15,654		)	(16,055		)
Loss on early extinguishment of debt	—					(1,715		)	(1,715		)
Gain on issuance of shares by Select Income REIT	—			51		—			51
Income (loss) from continuing operations before
income taxes and equity in earnings of investees	19,684			51		(18,670		)	1,065
Income tax expense	—			—		(22		)	(22		)
Equity in earnings of investees	—			9,453		31			9,484
Income (loss) from continuing operations	19,684			9,504		(18,661		)	10,527
Income from discontinued operations	462			—		—			462
Net income (loss)	$	20,146		$	9,504	$	(18,661	)	$	10,989

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)



	Nine Months Ended September 30, 2017
	Investment			Investment
	in Real Estate			in SIR		Corporate			Consolidated
Rental income	$	209,362		$	—	$	—		$	209,362

Expenses:
Real estate taxes	24,980			—		—			24,980
Utility expenses	14,186			—		—			14,186
Other operating expenses	44,046			—		—			44,046
Depreciation and amortization	61,949			—		—			61,949
Loss on impairment of real estate	230			—		—			230
General and administrative	—			—		12,314			12,314
Total expenses	145,391			—		12,314			157,705

Operating income (loss)	63,971			—		(12,314		)	51,657
Dividend income	—			—		911			911
Interest income	148			—		1,695			1,843
Interest expense	(1,238		)	—		(42,361		)	(43,599		)
Loss on early extinguishment of debt	(1,715		)	—		—			(1,715		)
Gain on issuance of shares by Select Income REIT	—			72		—			72
Income (loss) from continuing operations before income taxes and
equity in earnings of investees	61,166			72		(52,069		)	9,169
Income tax expense	—			—		(65		)	(65		)
Equity in earnings of investees	—			20,271		533			20,804
Income (loss) from continuing operations	61,166			20,343		(51,601		)	29,908
Income from discontinued operations	173			—		—			173
Net income (loss)	$	61,339		$	20,343	$	(51,601	)	$	30,081



	As of September 30, 2017
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Total Assets	$	1,780,753	$	475,265	$	1,280,949	$	3,536,967

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)



	Three Months Ended September 30, 2016
	Investment			Investment
	in Real Estate			in SIR		Corporate			Consolidated
Rental income	$	64,478		$	—	$	—		$	64,478

Expenses:
Real estate taxes	7,591			—		—			7,591
Utility expenses	5,483			—		—			5,483
Other operating expenses	13,854			—		—			13,854
Depreciation and amortization	18,404			—		—			18,404
Acquisition related costs	147			—		—			147
General and administrative	—			—		3,816			3,816
Total expenses	45,479			—		3,816			49,295

Operating income (loss)	18,999			—		(3,816		)	15,183
Dividend income	—			—		304			304
Interest income	—			—		47			47
Interest expense	(429		)	—		(12,179		)	(12,608		)
Gain on issuance of shares by Select Income REIT	—			72		—			72
Income (loss) from continuing operations before income taxes and
equity in earnings of investees	18,570			72		(15,644		)	2,998
Income tax expense	—			—		(13		)	(13		)
Equity in earnings of investees	—			8,655		13			8,668
Income (loss) from continuing operations	18,570			8,727		(15,644		)	11,653
Loss from discontinued operations	(154		)	—		—			(154		)
Income (loss) before gain on sale of property	18,416			8,727		(15,644		)	11,499
Gain on sale of property	79			—		—			79
Net income (loss)	$	18,495		$	8,727	$	(15,644	)	$	11,578

Table of Contents

GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)



	Nine Months Ended September 30, 2016
	Investment			Investment
	in Real Estate			in SIR		Corporate			Consolidated
Rental income	$	192,150		$	—	$	—		$	192,150

Expenses:
Real estate taxes	22,810			—		—			22,810
Utility expenses	13,330			—		—			13,330
Other operating expenses	40,031			—		—			40,031
Depreciation and amortization	54,713			—		—			54,713
Acquisition related costs	363			—		—			363
General and administrative	—			—		11,350			11,350
Total expenses	131,247			—		11,350			142,597

Operating income (loss)	60,903			—		(11,350		)	49,553
Dividend income	—			—		667			667
Interest income	—			—		63			63
Interest expense	(1,953		)	—		(30,333		)	(32,286		)
Gain on early extinguishment of debt	104			—		—			104
Gain on issuance of shares by Select Income REIT	—			88		—			88
Income (loss) from continuing operations before income taxes and
equity in earnings of investees	59,054			88		(40,953		)	18,189
Income tax expense	—			—		(63		)	(63		)
Equity in earnings of investees	—			27,895		107			28,002
Income (loss) from continuing operations	59,054			27,983		(40,909		)	46,128
Loss from discontinued operations	(429		)	—		—			(429		)
Income (loss) before gain on sale of property	58,625			27,983		(40,909		)	45,699
Gain on sale of property	79			—		—			79
Net income (loss)	$	58,704		$	27,983	$	(40,909	)	$	45,778



	As of December 31, 2016
	Investment		Investment
	in Real Estate		in SIR		Corporate		Consolidated
Total Assets	$	1,807,560	$	487,708	$	89,798	$	2,385,066

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016 , or our Annual Report.

OVERVIEW (dollars in thousands, except per share data)

We are a real estate investment trust, or REIT, organized under Maryland law. As of September 30, 2017 , we owned 74 properties ( 96 buildings) located in 31 states and the District of Columbia that contain approximately 11.5 million rentable square feet, of which 57.8% was leased to the U.S. Government, 21.8% was leased to 13 state governments, 3.2% was leased to four other government tenants, 3.6% was leased to government contractor tenants, 8.6% was leased to various other non-governmental organizations and 5.0% was available for lease as of September 30, 2017 . The U.S. Government, 13 state governments and four other government tenants combined were responsible for 87.5% and 92.4% of our annualized rental income as of September 30, 2017 and 2016 , respectively. The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

On October 2, 2017, we completed our acquisition of First Potomac Realty Trust, or FPO, a Maryland REIT, pursuant to a definitive Agreement and Plan of Merger, by and among us and certain of our subsidiaries and FPO and its operating partnership, or the FPO Transaction, pursuant to which we acquired 39 office properties (74 buildings) with 6,454,382 rentable square feet, including two properties owned by joint ventures in which we acquired FPO's 50% and 51% interests. The estimated aggregate transaction value of the FPO Transaction was approximately $1,374,624 , including $651,696 in cash consideration paid to FPO shareholders, the repayment of $483,000 of FPO debt, the assumption of $167,549 of FPO mortgage debt and an additional $82,000 of mortgage debt that encumbers the two joint venture properties which are 50% and 51% owned by FPO, as well as the payment of certain transaction fees and expenses, net of FPO cash on hand. We currently expect to complete our purchase price allocation for the FPO Transaction in the fourth quarter of 2017 upon completion of third party appraisals and our analysis of acquired in place leases and building valuations.

We financed the cash portion of the FPO Transaction consideration with borrowings under our revolving credit facility and with cash on hand, which included net proceeds from our public offerings of common shares and notes, as described further in Notes 7 and 9 to our condensed consolidated financial statements.

The FPO Transaction significantly increased our property portfolio. Giving effect to the completion of the FPO Transaction, we owned113 properties (170 buildings) that contain approximately 18.0 million square feet, including two properties owned by joint ventures in which we acquired FPO's 50% and 51% interests. Because the FPO Transaction was completed after the end of the 2017 third fiscal quarter, our results of operations for the three and nine months ending September 30, 2017 and 2016 do not include the properties and joint venture interests we acquired as part of the FPO Transaction. See "Acquisition and Disposition Activities" below for additional information related to the FPO Transaction.

As of September 30, 2017 , we owned 24,918,421 common shares, or approximately 27.8% of the then outstanding common shares, of Select Income REIT, or SIR. SIR is a REIT which owns properties that are primarily leased to single tenants. See Notes 11 and 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our investment in SIR. We account for our investment in SIR under the equity method.

Table of Contents

Property Operations

As of September 30, 2017 , 95.0% of our rentable square feet was leased, compared to 95.0% of our rentable square feet as of September 30, 2016 , which excludes one property (one building) classified as discontinued operations which was sold on August 31, 2017 . Occupancy data for our properties as of September 30, 2017 and 2016 is as follows (square feet in thousands):



					Comparable
	All Properties ⁽¹⁾				Properties ⁽²⁾
	September 30,				September 30,
	2017		2016		2017		2016
Total properties	74		71		70		70
Total buildings	96		91		90		90
Total square feet ⁽³⁾	11,517		10,950		10,617		10,612
Percent leased ⁽⁴⁾	95.0	%	95.0	%	95.0	%	95.2	%


(1)	Based on properties we owned on September 30, 2017 and 2016 , respectively, and excludes one property (one building) classified as discontinued operations which was sold on August 31, 2017 .


(2)	Based on properties we owned on September 30, 2017 and which we owned continuously since January 1, 2016. Our comparable properties decreased from 71 properties (91 buildings) at September 30, 2016 as a result of the sale of one property (one building) in July 2016.


(3)	Subject to changes when space is re-measured or re-configured for tenants.


(4)	Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.

The average annualized effective rental rate per square foot for our properties for the three and nine months ended September 30, 2017 and 2016 are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Average annualized effective rental rate per square foot ⁽¹⁾ :
All properties ⁽²⁾	$	25.89	$	25.31	$	25.74	$	25.15
Comparable properties ⁽³⁾	$	25.68	$	25.32	$	25.30	$	24.95


(1)	Average annualized effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified. Excludes one property (one building) classified as discontinued operations which was sold on August 31, 2017.


(2)	Based on properties we owned on September 30, 2017 and 2016 , respectively, and excludes one property (one building) classified as discontinued operations which was sold on August 31, 2017 .


(3)	Based on properties we owned on September 30, 2017 and which we owned continuously since July 1, 2016 and January 1, 2016, respectively.

Table of Contents

During the three and nine months ended September 30, 2017 , changes in rentable square feet leased and available for lease at our properties, excluding one property (one building) classified as discontinued operations which was sold on August 31, 2017, were as follows:



	Three Months Ended September 30, 2017					Nine Months Ended September 30, 2017
			Available					Available
	Leased ⁽¹⁾		for Lease		Total	Leased ⁽¹⁾		for Lease		Total
Beginning of period	10,937,046		578,941		11,515,987	10,881,289		561,224		11,442,513
Changes resulting from:
Acquisition of properties	—		—		—	69,374		—		69,374
Lease expirations	(426,847	)	426,847		—	(1,088,995	)	1,088,995		—
Lease renewals ⁽²⁾	416,660		(416,660	)	—	1,000,878		(1,000,878	)	—
New leases ⁽²⁾	19,442		(19,442	)	—	83,755		(83,755	)	—
Re-measurements ⁽³⁾	—		864		864	—		4,964		4,964
End of period	10,946,301		570,550		11,516,851	10,946,301		570,550		11,516,851


(1)	Rentable square footage excludes an expansion being constructed at an existing property we own prior to the commencement of the lease.


(2)	Based on leases entered into during the three and nine months ended September 30, 2017 .


(3)	Rentable square feet is subject to changes when space is re-measured or re-configured for tenants.

Leases at our properties totaling 426,847 and 1,088,995 rentable square feet expired during the three and nine months ended September 30, 2017 , respectively. During the three and nine months ended September 30, 2017 , we entered into leases totaling 436,102 and 1,084,633 rentable square feet, including lease renewals of 416,660 and 1,000,878 rentable square feet, respectively. The weighted (by rentable square feet) average rental rates for leases of 393,158 and 953,444 rentable square feet entered into with government tenants during the three and nine months ended September 30, 2017 increased by 0.2% and 4.0% , respectively, when compared to the weighted (by rentable square feet) average prior rents for the same space. The weighted (by rentable square feet) average rental rates for leases of 42,944 and 131,189 rentable square feet entered into with non-government tenants during the three and nine months ended September 30, 2017 decreased by 11.1% and increased by 0.7% , respectively, when compared to the weighted (by rentable square feet) average rental rates previously charged for the same space.

During the three and nine months ended September 30, 2017 , changes in effective rental rates per square foot achieved for new leases and lease renewals that commenced during the three and nine months ended September 30, 2017 , when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows:



	Three Months Ended September 30, 2017					Nine Months Ended September 30, 2017
	Old Effective		New Effective			Old Effective		New Effective
	Rent Per		Rent Per		Rentable	Rent Per		Rent Per		Rentable
	Square Foot ⁽¹⁾		Square Foot ⁽¹⁾		Square Feet	Square Foot ⁽¹⁾		Square Foot ⁽¹⁾		Square Feet
New leases	$	—	$	—	—	$	22.67	$	22.98	97,797
Lease renewals	$	22.74	$	23.25	17,442	$	13.65	$	15.25	578,330
Total leasing activity	$	22.74	$	23.25	17,442	$	14.95	$	16.36	676,127


(1)	Effective rental rate includes contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and excluding lease value amortization.

Table of Contents

During the three and nine months ended September 30, 2017 , commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows:



	Government		Non-Government
Three Months Ended September 30, 2017	Leases		Leases		Total
Rentable square feet leased during the period	393,158		42,944		436,102
Tenant leasing costs and concession commitments ⁽¹⁾ (in thousands)	$	6,629	$	1,273	$	7,902
Tenant leasing costs and concession commitments per rentable square foot ⁽¹⁾	$	16.86	$	29.64	$	18.12
Weighted (by square feet) average lease term (years)	8.5		7.2		8.4
Total leasing costs and concession commitments per rentable square foot per year ⁽¹⁾	$	1.98	$	4.10	$	2.16



	Government		Non-Government
Nine Months Ended September 30,2017	Leases		Leases		Total
Rentable square feet leased during the period	953,444		131,189		1,084,633
Tenant leasing costs and concession commitments ⁽¹⁾ (in thousands)	$	9,120	$	3,489	$	12,609
Tenant leasing costs and concession commitments per rentable square foot ⁽¹⁾	$	9.57	$	26.59	$	11.62
Weighted (by square feet) average lease term (years)	9.2		5.6		8.8
Total leasing costs and concession commitments per rentable square foot per year ⁽¹⁾	$	1.04	$	4.77	$	1.32


(1)	Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.

During the three and nine months ended September 30, 2017 and 2016 , amounts capitalized at our properties for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (dollars in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Tenant improvements ⁽¹⁾	$	3,213	$	5,636	$	6,692	$	12,306
Leasing costs ⁽²⁾	$	1,993	$	655	$	4,051	$	8,002
Building improvements ⁽³⁾	$	2,640	$	3,009	$	8,883	$	8,691
Development, redevelopment and other activities ⁽⁴⁾	$	3,132	$	1,292	$	16,362	$	4,221


(1)	Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.


(2)	Leasing costs include leasing related costs, such as brokerage commissions and other tenant inducements.


(3)	Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.


(4)	Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property, and (ii) capital expenditure projects that reposition a property or result in new sources of revenue.

As of September 30, 2017 , we have estimated unspent leasing related obligations of $26,631 and have committed to redevelop and expand an existing property prior to commencement of the lease with an estimated remaining cost to complete as of September 30, 2017 of $3,302 .

We believe that current government budgetary pressures have resulted in a decrease in government employment, government tenants reducing their space utilization per employee and consolidation of government tenants into existing government owned properties, thereby reducing the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. However, efforts to reduce space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or in renewing their leases for less space than they currently occupy. Also, our government tenants' desire to reconfigure leased office space to reduce utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations have become more prevalent than our past experiences in instances where efforts by government tenants to reduce their space utilization require a significant reconfiguration of currently leased space. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations recently has resulted in delayed decisions by some of our

Table of Contents

government tenants and their reliance on short term lease renewals. At present, we are unable to reasonably project what the financial impact of market conditions or changing government financial circumstances will be on our financial results for future periods.

The Internal Revenue Service, or IRS, has publicly stated that it plans to discontinue its tax return processing operations at our property located in Fresno, CA in 2021. The IRS lease for this property, which accounted for approximately 3.0% of our annualized rental income as of September 30, 2017 , expires in the fourth quarter of 2021. The IRS has also publicly stated that it plans to discontinue its tax return processing operations in Covington, KY in 2019. Our property located in Florence, KY is leased to the IRS and we believe it is used to support the Covington, KY operations. This IRS lease, which accounted for approximately 0.9% of our annualized rental income as of September 30, 2017 , expires in the second quarter of 2022, but is subject to possible early termination by our tenant. Despite its public announcements, the IRS has not sent us any official notices of its intentions regarding the Fresno, CA or Covington, KY properties.

As of September 30, 2017 , we had leases totaling 787,271 rentable square feet that were scheduled to expire through September 30, 2018 . As of October 30, 2017 , tenants with leases totaling 196,753 rentable square feet that are scheduled to expire through September 30, 2018 , have notified us that they do not plan to renew their leases upon expiration and we cannot be sure as to whether other tenants may or may not renew their leases upon expiration. Based upon current market conditions and tenant negotiations for leases scheduled to expire through September 30, 2018 , we expect that the rental rates we are likely to achieve on new or renewed leases for space under leases expiring through September 30, 2018 will, in the aggregate and on a weighted (by annualized revenues) average basis, be lower than the rates currently being paid, thereby generally resulting in lower revenue from the same space. We cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new leases we may enter into; also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations. Prevailing market conditions and government and other tenants' needs at the time we negotiate and enter leases will generally determine rental rates and demand for leased space at our properties, and market conditions and government and other tenants' needs are beyond our control.

As of September 30, 2017 , lease expirations at our properties by year are as follows (dollars in thousands):



	Number	Expirations						Annualized
	of	of Leased				Cumulative		Rental				Cumulative
	Tenants	Square		Percent		Percent		Income		Percent		Percent
Year ⁽¹⁾	Expiring	Feet ⁽²⁾		of Total		of Total		Expiring		of Total		of Total
2017	20	434,049		4.0	%	4.0	%	$	10,004	3.6	%	3.6	%
2018	37	704,708		6.4	%	10.4	%	22,913		8.3	%	11.9	%
2019	45	1,940,016		17.7	%	28.1	%	59,116		21.5	%	33.4	%
2020	39	1,447,413		13.2	%	41.3	%	40,155		14.6	%	48.0	%
2021	37	1,061,519		9.7	%	51.0	%	20,732		7.5	%	55.5	%
2022	31	940,554		8.6	%	59.6	%	22,505		8.2	%	63.7	%
2023	18	595,662		5.4	%	65.0	%	13,685		5.0	%	68.7	%
2024	16	993,635		9.1	%	74.1	%	22,696		8.2	%	76.9	%
2025	15	801,648		7.3	%	81.4	%	16,572		6.0	%	82.9	%
2026 and thereafter	32	2,027,097	⁽³⁾	18.6	%	100.0	%	47,042		17.1	%	100.0	%
Total	290	10,946,301		100.0	%			$	275,420	100.0	%

Weighted average remaining lease term (in years)		5.1						4.7

(1)

The year of lease expiration is pursuant to current contract terms. Some government tenants have the right to vacate their space before the stated expirations of their leases. As of September 30, 2017 , government tenants occupying approximately 13.2% of our rentable square feet and responsible for approximately 10.2% of our annualized rental income as of September 30, 2017 have currently exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2017 , 2018 , 2019 , 2020 , 2021 , 2022 , 2023 , 2026 and 2027, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.1% , 1.6% , 4.9% , 8.0% , 1.5% , 3.6% , 0.6% , 0.9% and 0.6% of our rentable square feet, respectively, and contribute an additional approximately 0.0% , 2.2% , 5.1% , 8.3% , 1.5% , 2.9% , 0.7% , 1.2% and 0.6% of our annualized rental income, respectively, as of September 30, 2017 . In addition, as of September 30, 2017 , 15 of our government tenants have currently exercisable rights to terminate their leases if the legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 15 tenants occupy approximately 17.3% of our rentable square feet and contribute approximately 16.8% of our annualized rental income as of September 30, 2017 .


(2)	Leased square feet is pursuant to leases existing as of September 30, 2017 , and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to changes when space is re-measured or re-configured for new tenants.


(3)	Leased square footage excludes an expansion being constructed at an existing property we own prior to the commencement of the lease.

Table of Contents

Acquisition and Disposition Activities (dollar amounts in thousands)

In January 2017, we acquired an office property (one building) located in Manassas, VA with 69,374 rentable square feet for a purchase price of $12,620, excluding capitalized acquisition costs of $37 , using cash on hand and borrowings under our revolving credit facility. We acquired this property at a capitalization rate of 8.6% . We calculate the capitalization rate for property acquisitions as the ratio of (x) annual straight line rental income, excluding the impact of above and below market lease amortization, based on leases in effect on the acquisition date, less estimated annual property operating expenses that we expected to pay as of the acquisition date, excluding depreciation and amortization expense, to (y) the acquisition purchase price, including the principal amount of assumed debt, if any, and excluding acquisition costs.

In September 2017, we acquired transferable development rights that would allow us to expand a property we own in Washington, D.C. for a purchase price of $2,030 , excluding acquisition costs.

As described above, we completed the FPO Transaction on October 2, 2017. Pursuant to that transaction, we acquired 39 office properties ( 74 buildings) with 6,454,382 rentable square feet, including two properties owned by joint ventures in which we acquired FPO's 50% and 51% interests. The estimated aggregate transaction value of the FPO Transaction was $1,374,624 .

Our ownership and operation of office properties in the metropolitan Washington, D.C. market area increased significantly as a result of the FPO Transaction and we may acquire additional properties in this area in the future. Outside of the metropolitan Washington, D.C. market area, our strategy related to property acquisitions is materially unchanged from that disclosed in our Annual Report and we will continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants and government contractor tenants. Until we have fully integrated the FPO properties into our business we expect that our acquisition activities may be reduced. Also, as part of the long term financing plan for the FPO Transaction, we expect to identify properties within our portfolio for disposition. Generally, we identify properties for sale based on market conditions in the area where the property is located, our expectations regarding property future financial performance, our expectation regarding lease renewals, our plans with regard to particular properties or alternative opportunities we may wish to pursue. Our plans for particular properties and other strategic considerations may cause us to change our acquisition and disposition strategies, and we may do so at any time and without shareholder approval.

In August 2017, we sold a vacant office property (one building) located in Falls Church, VA with 164,746 rentable square feet and a net book value of $12,901 as of the sale date for $13,523 , excluding closing costs.

In October 2017, we sold a vacant office property (one building) located in Albuquerque, NM with 29,045 rentable square feet and a net book value of $1,885 , as of September 30, 2017 for $2,000 , excluding closing costs.

Financing Activities (dollar amounts in thousands except per share amounts)

On July 5, 2017, we sold 25,000,000 of our common shares at a price of $18.50 per share in an underwritten public offering. On August 3, 2017, we sold 2,907,029 of our common shares at a price of $18.50 per share pursuant to an overallotment option granted to the underwriters for the July offering. The aggregate net proceeds from these sales was $493,936 , after payment of the underwriters' discount and other offering expenses. We used part of the proceeds from these sales to repay amounts outstanding under our revolving credit facility and used the remaining proceeds to finance, in part, the FPO Transaction.

In July 2017, we issued $300,000 of 4.000% senior unsecured notes due 2022 in an underwritten public offering. The net proceeds from this offering of $295,403 , after payment of the underwriters' discount and other offering expenses, were used to finance, in part, the FPO Transaction.

Concurrently with our entering into the FPO merger agreement, we entered a commitment letter with a group of institutional lenders for a 364-day senior unsecured bridge loan facility in an initial aggregate principal amount of $750,000. On July 20, 2017, we and the lenders terminated this commitment letter and bridge loan facility as a result of our issuance of the senior unsecured notes and the proceeds from the sale of our common shares in July 2017, each as described above, and we recognized a loss on extinguishment of debt of $1,715 .

Table of Contents

RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Three Months Ended September 30, 2017 , Compared to Three Months Ended September 30, 2016



										Acquired Properties				Disposed Property
										Results ⁽²⁾				Results ⁽³⁾
	Comparable Properties Results ⁽¹⁾									Three Months Ended				Three Months Ended					Consolidated Results
	Three Months Ended September 30,									September 30,				September 30,					Three Months Ended September 30,
					$			%																	$			%
	2017		2016		Change			Change		2017		2016		2017			2016		2017			2016			Change			Change
Rental income	$	66,038	$	64,478	$	1,560		2.4	%	$	4,141	$	—	$	—		$	—	$	70,179		$	64,478		$	5,701		8.8	%
Operating expenses:
Real estate taxes	8,354		7,591		763			10.1	%	507		—		1			—		8,862			7,591			1,271			16.7	%
Utility expenses	5,092		5,483		(391		)	(7.1	%)	316		—		—			—		5,408			5,483			(75		)	(1.4	%)
Other operating expenses	14,079		13,854		225			1.6	%	746		—		42			—		14,867			13,854			1,013			7.3	%
Total operating expenses	27,525		26,928		597			2.2	%	1,569		—		43			—		29,137			26,928			2,209			8.2	%
Net operating income ⁽⁴⁾	$	38,513	$	37,550	$	963		2.6	%	$	2,572	$	—	$	(43	)	$	—	41,042			37,550			3,492			9.3	%

Other expenses:
Depreciation and amortization																			20,781			18,404			2,377			12.9	%
Loss on impairment of real estate																			230			—			230			nm
Acquisition related costs																			—			147			(147		)	nm
General and administrative																			3,266			3,816			(550		)	(14.4	%)
Total other expenses																			24,277			22,367			1,910			8.5	%
Operating income																			16,765			15,183			1,582			10.4	%
Dividend income																			304			304			—			—	%
Interest income																			1,715			47			1,668			nm
Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $990 and $805, respectively)																			(16,055		)	(12,608		)	(3,447		)	27.3	%
Loss on early extinguishment of debt																			(1,715		)	—			(1,715		)	nm
Gain on issuance of shares by Select Income REIT																			51			72			(21		)	(29.2	%)
Income from continuing operations before income taxes and equity in earnings of investees																			1,065			2,998			(1,933		)	(64.5	%)
Income tax expense																			(22		)	(13		)	(9		)	69.2	%
Equity in earnings of investees																			9,484			8,668			816			9.4	%
Income from continuing operations																			10,527			11,653			(1,126		)	(9.7	%)
Income (loss) from discontinued operations																			462			(154		)	616			nm
Income before gain on sale of property																			10,989			11,499			(510		)	(4.4	%)
Gain on sale of property																			—			79			(79		)	nm
Net income																			$	10,989		$	11,578		$	(589	)	(5.1	%)

Weighted average common shares outstanding (basic)																			96,883			71,054			25,829			36.4	%
Weighted average common shares outstanding (diluted)																			96,958			71,084			25,874			36.4	%

Per common share amounts (basic and diluted):
Income from continuing operations																			$	0.11		$	0.16		$	(0.05	)	(31.3	%)
Income (loss) from discontinued operations																			$	—		$	—		$	—		—	%
Net income																			$	0.11		$	0.16		$	(0.05	)	(31.3	%)

Reconciliation of Net Income to NOI: ⁽⁴⁾
Net income																			$	10,989		$	11,578
Gain on sale of property																			—			(79		)
Income before gain on sale of property																			10,989			11,499
(Income) loss from discontinued operations																			(462		)	154
Income from continuing operations																			10,527			11,653
Equity in earnings of investees																			(9,484		)	(8,668		)
Income tax expense																			22			13
Gain on issuance of shares by Select Income REIT																			(51		)	(72		)
Loss on early extinguishment of debt																			1,715			—
Interest expense																			16,055			12,608
Interest income																			(1,715		)	(47		)
Dividend income																			(304		)	(304		)
Operating income																			16,765			15,183
General and administrative																			3,266			3,816
Acquisition related costs																			—			147
Loss on impairment of real estate																			230			—
Depreciation and amortization																			20,781			18,404
Net operating income																			$	41,042		$	37,550

Table of Contents



Reconciliation of Net Income to Funds From Operations and Normalized Funds From Operations ⁽⁵⁾
	2017			2016
Net income	$	10,989		$	11,578
Plus: Depreciation and amortization	20,781			18,404
Plus: FFO attributable to Select Income REIT investment	18,429			17,264
Plus: Loss on impairment of real estate	230			—
Less: Equity in earnings from Select Income REIT	(9,453		)	(8,655		)
Less: Increase in carrying value of property included in discontinued operations	(619		)	—
Less: Gain on sale of property	—			(79		)
Funds from operations	40,357			38,512
Plus: Acquisition related costs	—			147
Plus: Loss on early extinguishment of debt	1,715			—
Plus: Normalized FFO attributable to Select Income REIT investment	16,903			17,267
Less: FFO attributable to Select Income REIT investment	(18,429		)	(17,264		)
Less: Gain on issuance of shares by Select Income REIT	(51		)	(72		)
Less: Estimated business management incentive fee ⁽⁶⁾	(893		)	—
Normalized funds from operations	$	39,602		$	38,590

Funds from operations per common share (basic and diluted)	$	0.42		$	0.54
Normalized funds from operations per common share (basic and diluted)	$	0.41		$	0.54


(1)	Comparable properties consist of 71 properties ( 91 buildings) we owned on September 30, 2017 and which we owned continuously since July 1, 2016.


(2)	Acquired properties consist of three properties (five buildings) we acquired since July 1, 2016.


(3)	Disposed property consists of one property (one building) which we sold in July 2016 and excludes one property (one building) classified as discontinued operations which was sold in August 2017.

(4)

The calculation of net operating income, or NOI, excludes certain components of net income in order to provide results that are more closely related to our property level results of operations. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered an alternative to net income or operating income as an indicator of our operating performance or as a measure of our liquidity. This measure should be considered in conjunction with net income and operating income as presented in our condensed consolidated statements of comprehensive income. Other REITs and real estate companies may calculate NOI differently than we do.

(5)

We calculate funds from operations, or FFO, and normalized funds from operations, or Normalized FFO, as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, plus real estate depreciation and amortization and the difference between FFO attributable to an equity investment and equity in earnings of an equity investee but excluding impairment charges on and increases in the carrying value of real estate assets, any gain or loss on sale of properties, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT's definition of FFO because we include SIR's Normalized FFO attributable to our equity investment in SIR, net of FFO attributable to our equity investment in SIR, we include 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 our 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 we exclude acquisition related costs expensed under GAAP, gains and losses on issuance of shares by SIR and gains and losses on early extinguishment of debt. We consider FFO and Normalized FFO to be appropriate supplemental measures of operating performance for a REIT, along with net income and operating income. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, our receipt of distributions from SIR and our expected needs and availability of cash to pay our obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income or operating income as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income and operating income as presented in our condensed consolidated statements of comprehensive income. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.

(6)

Incentive fees under our business management agreement 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 our condensed consolidated statements of comprehensive income. In calculating net income in accordance with GAAP, we recognize estimated business management incentive fee expense, if any, in the first, second and third quarters. Although we recognize this expense, if any, in the first, second and third quarters for purposes of calculating net income, we do 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. General and administrative expenses for the three months ended September 30, 2017 includes the reversal of $893 of previously accrued estimated business management fees.

Table of Contents

We refer to the 71 properties ( 91 buildings) we owned on September 30, 2017 and which we have owned continuously since July 1, 2016 as comparable properties. We refer to the three properties (five buildings) which we acquired since July 1, 2016 as the acquired properties. We refer to the one property (one building) we sold in July 2016 as the disposed property.

Our condensed consolidated statements of comprehensive income for the three months ended September 30, 2017 include the operating results of three acquired properties (five buildings) for the entire period, as we acquired those properties prior to July 1, 2017 and exclude the operating results of the one disposed property (one building) for the entire period, as we sold that property prior to July 1, 2017. Our condensed consolidated statements of comprehensive income for the three months ended September 30, 2016 exclude the operating results of three acquired properties (five buildings) for the entire period, as we acquired those properties after September 30, 2016 and include the operating results of the one disposed property (one building) for less than the entire period as we sold that property during the three months ended September 30, 2016 .

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended September 30, 2017 , compared to the three month period ended September 30, 2016 .

Rental income. The increase in rental income reflects an increase in rental income for comparable properties and the rental income from the acquired properties. Rental income from comparable properties increased $1,560 primarily due to increases in rental rates and in occupied space at certain of our properties in the 2017 period. Rental income increased $4,141 as a result of the acquired properties. Rental income includes non-cash straight line rent adjustments totaling $711 in the 2017 period and $1,205 in the 2016 period, and amortization of acquired leases and assumed lease obligations totaling ($619) in the 2017 period and ($370) in the 2016 period.

Real estate taxes. The increase in real estate taxes reflects an increase in real estate taxes for comparable properties and the taxes for acquired properties. Real estate taxes for comparable properties increased $763 due primarily to the effect of higher real estate tax valuation assessments at certain of our properties in the 2017 period. Real estate taxes increased $507 as a result of the acquired properties.

Utility expenses. The decrease in utility expenses reflects a decline in utility expenses for the comparable properties partially offset by the net effect of the acquired and disposed properties. Utility expenses at comparable properties decreased $391 primarily due to a decrease in electricity usage at certain of our buildings during the 2017 period. Utility expenses increased $316 as a result of the acquired properties.

Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees. The increase in other operating expenses reflects an increase in expenses for the comparable properties and the net effect of the acquired and disposed properties. Other operating expenses at the comparable properties increased $225 primarily as a result of higher repairs and maintenance costs during the 2017 period. Other operating expenses increased $746 as a result of the acquired properties and increased $42 as a result of the disposed property.

Depreciation and amortization. The increase in depreciation and amortization reflects the depreciation and amortization from the acquired properties and the effect of improvements made to certain of our comparable properties, partially offset by the effect of certain assets becoming fully depreciated. Depreciation and amortization increased $1,921 as a result of the acquired properties. Depreciation and amortization at comparable properties increased $456 due primarily to depreciation and amortization of improvements made to certain of our properties after July 1, 2016 , partially offset by certain leasing related assets becoming fully depreciated after July 1, 2016 .

Loss on impairment of real estate. We recorded a $230 loss on impairment of real estate in the 2017 period to reduce the carrying value of one property (one building) to its estimated fair value.

Acquisition related costs. Acquisition related costs include legal and diligence costs incurred in connection with our 2016 property acquisition activities that were expensed in accordance with GAAP. Pursuant to changes in GAAP, beginning in 2017, we generally capitalize our asset acquisition related costs.

General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The decrease in general and administrative expenses is primarily as a result of the reversal in the 2017 period of $893 of previously accrued estimated business management incentive fee expense, partially offset by an increase in other business management fee expense in the 2017 period.

Table of Contents

Dividend income. Dividend income consists of dividends received from our investment in The RMR Group Inc., or RMR Inc.

Interest income. The increase in interest income is primarily the result of higher cash balances in the 2017 period due to our financing activities related to the FPO Transaction.

Interest expense. The increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rates on borrowings during the 2017 period compared to the 2016 period.

Loss on early extinguishment of debt . We recorded a loss on early extinguishment of debt of $1,715 in the 2017 period in connection with the termination of the bridge loan facility described in Note 7 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Gain on issuance of shares by Select Income REIT. Gain on issuance of shares by SIR is a result of the issuance of common shares by SIR at prices above our then per share carrying value of our SIR common shares.

Income tax expense. The increase in income tax expense reflects higher operating income in certain jurisdictions in the 2017 period that is subject to state income taxes.

Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and Affiliates Insurance Company, or AIC. The increase in the 2017 period is primarily the result of an increase in SIR's net income for the 2017 period.

Income (loss) from discontinued operations. Income (loss) from discontinued operations reflects operating results for one property (one building) included in discontinued operations. During the 2017 period, we recorded an adjustment of $619 to increase the carrying value of this property to its estimated fair value less costs to sell. We sold this property on August 31, 2017.

Gain on sale of property. Gain on sale of property represents the portion of the gain recognized from the sale of a property accounted for under the installment method during the 2016 period.

Net income. Our net income decreased in the 2017 period compared to the 2016 period as a result of the changes noted above. The percentage decrease in net income per common share (basic and diluted) is higher primarily as a result of the higher number of weighted average common shares outstanding as result of our issuance of common shares in an underwritten public offering during the 2017 period.

Table of Contents

RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Nine Months Ended September 30, 2017 , Compared to Nine Months Ended September 30, 2016



										Acquired Properties				Disposed Property
										Results ⁽²⁾				Results ⁽³⁾
	Comparable Properties Results ⁽¹⁾									Nine Months Ended				Nine Months Ended						Consolidated Results
	Nine Months Ended September 30,									September 30,				September 30,						Nine Months Ended September 30,
					$			%																		$			%
	2017		2016		Change			Change		2017		2016		2017			2016			2017			2016			Change			Change
Rental income	$	189,558	$	186,298	$	3,260		1.7	%	$	19,804	$	5,852	$	—		$	—		$	209,362		$	192,150		$	17,212		9.0	%
Operating expenses:
Real estate taxes	22,916		22,259		657			3.0	%	2,064		524		—			27			24,980			22,810			2,170			9.5	%
Utility expenses	12,788		12,889		(101		)	(0.8	%)	1,398		417		—			24			14,186			13,330			856			6.4	%
Other operating expenses	40,424		38,535		1,889			4.9	%	3,587		1,438		35			58			44,046			40,031			4,015			10.0	%
Total operating expenses	76,128		73,683		2,445			3.3	%	7,049		2,379		35			109			83,212			76,171			7,041			9.2	%
Net operating income ⁽⁴⁾	$	113,430	$	112,615	$	815		0.7	%	$	12,755	$	3,473	$	(35	)	$	(109	)	126,150			115,979			10,171			8.8	%

Other expenses:
Depreciation and amortization																				61,949			54,713			7,236			13.2	%
Loss on impairment of real estate																				230			—			230			nm
Acquisition related costs																				—			363			(363		)	nm
General and administrative																				12,314			11,350			964			8.5	%
Total other expenses																				74,493			66,426			8,067			12.1	%
Operating income																				51,657			49,553			2,104			4.2	%
Dividend income																				911			667			244			36.6	%
Interest income																				1,843			63			1,780			nm
Interest expense (including net amortization of debt premium and discounts and debt issuance costs of $2,605 and $2,024, respectively)																				(43,599		)	(32,286		)	(11,313		)	35.0	%
(Loss) gain on early extinguishment of debt																				(1,715		)	104			(1,819		)	nm
Gain on issuance of shares by Select Income REIT																				72			88			(16		)	(18.2	%)
Income from continuing operations before income taxes and equity in earnings of investees																				9,169			18,189			(9,020		)	(49.6	%)
Income tax expense																				(65		)	(63		)	(2		)	3.2	%
Equity in earnings of investees																				20,804			28,002			(7,198		)	(25.7	%)
Income from continuing operations																				29,908			46,128			(16,220		)	(35.2	%)
Income (loss) from discontinued operations																				173			(429		)	602			nm
Income before gain on sale of property																				30,081			45,699			(15,618		)	(34.2	%)
Gain on sale of property																				—			79			(79		)	nm
Net income																				$	30,081		$	45,778		$	(15,697	)	(34.3	%)

Weighted average common shares outstanding (basic)																				79,778			71,041			8,737			12.3	%
Weighted average common shares outstanding (diluted)																				79,852			71,064			8,788			12.4	%

Per common share amounts (basic and diluted):
Income from continuing operations																				$	0.37		$	0.65		$	(0.28	)	(43.1	%)
Income (loss) from discontinued operations																				$	—		$	(0.01	)	$	0.01		—	%
Net income																				$	0.38		$	0.64		$	(0.26	)	(40.6	%)

Reconciliation of Net Income to NOI: ⁽⁴⁾
Net income																				$	30,081		$	45,778
Gain on sale of property																				—			(79		)
Income before gain on sale of property																				30,081			45,699
(Income) loss from discontinued operations																				(173		)	429
Income from continuing operations																				29,908			46,128
Equity in earnings of investees																				(20,804		)	(28,002		)
Income tax expense																				65			63
Gain on issuance of shares by Select Income REIT																				(72		)	(88		)
Loss (gain) on early extinguishment of debt																				1,715			(104		)
Interest expense																				43,599			32,286
Interest income																				(1,843		)	(63		)
Dividend income																				(911		)	(667		)
Operating income																				51,657			49,553
General and administrative																				12,314			11,350
Acquisition related costs																				—			363
Loss on impairment of real estate																				230			—
Depreciation and amortization																				61,949			54,713
Net operating income																				$	126,150		$	115,979

Table of Contents



Calculation of Funds From Operations and Normalized Funds From Operations ⁽⁵⁾
	2017			2016
Net income	$	30,081		$	45,778
Plus: Depreciation and amortization	61,949			54,713
Plus: FFO attributable to Select Income REIT investment	47,982			53,609
Plus: Loss on impairment of real estate	230			—
Less: Equity in earnings from Select Income REIT	(20,271		)	(27,895		)
Less: Gain on sale of property	—			(79		)
Less: Increase in carrying value of property included in discontinued operations	(619		)	—
Funds from operations	119,352			126,126
Plus: Acquisition related costs	—			363
Plus: Normalized FFO attributable to Select Income REIT investment	48,900			53,629
Less: FFO attributable to Select Income REIT investment	(47,982		)	(53,609		)
Less: Loss (gain) on early extinguishment of debt	1,715			(104		)
Less: Gain on issuance of shares by Select Income REIT	(72		)	(88		)
Normalized funds from operations	$	121,913		$	126,317

Funds from operations per common share (basic)	$	1.50		$	1.78
Funds from operations per common share (diluted)	$	1.49		$	1.77
Normalized funds from operations per common share (basic and diluted)	$	1.53		$	1.78


(1)	Comparable properties consist of 70 properties ( 90 buildings) we owned on September 30, 2017 and which we owned continuously since January 1, 2016.


(2)	Acquired properties consist of four properties (six buildings) we acquired since January 1, 2016.


(3)	Disposed property consists of one property (one building) which we sold in July 2016 and excludes one property (one building) classified as discontinued operations which was sold in August 2017.


(4)	See footnote (4) on page 29 for a definition of NOI.


(5)	See footnote (5) on page 29 for a definition of FFO and Normalized FFO.

We refer to the 70 properties ( 90 buildings) we owned on September 30, 2017 and which we have owned continuously since January 1, 2016 as comparable properties. We refer to the four properties (six buildings) which we acquired since January 1, 2016 as the acquired properties. We refer to one property (one building) we sold in July 2016 as the disposed property.

Our condensed consolidated statements of comprehensive income for the nine months ended September 30, 2017 include the operating results of three acquired properties (five buildings) for the entire period, as we acquired those properties prior to January 1, 2017, one property (one building) for less than the entire period, as we acquired the property after January 1, 2017, and exclude the operating results of the disposed property for the entire period, as we sold that property prior to January 1, 2017. Our condensed consolidated statements of comprehensive income for the nine months ended September 30, 2016 exclude the operating results of three acquired properties (five buildings) for the entire period, as we acquired these properties after September 30, 2016, one property (one building) for less than the entire period, as we acquired that property after January 1, 2016 and include the operating results of the disposed property for less than the entire period, as we sold that property prior to September 30, 2016 .

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine month period ended September 30, 2017 , compared to the nine month period ended September 30, 2016 .

Rental income. The increase in rental income reflects an increase in rental income for comparable properties and the rental income from the acquired properties. Rental income from comparable properties increased $3,260 primarily due to increases in rental rates and in occupied space at certain of our properties in the 2017 period. Rental income increased $13,952 as a result of the acquired properties. Rental income includes non-cash straight line rent adjustments totaling $3,115 in the 2017 period and $1,789 in the 2016 period, and amortization of acquired leases and assumed lease obligations totaling ($1,863) in the 2017 period and ($1,103) in the 2016 period.

Real estate taxes. The increase in real estate taxes reflects an increase in real estate taxes for the comparable properties and the net effect of the acquired properties and the disposed property. Real estate taxes for the comparable properties increased $657 due primarily to the effect of higher real estate tax valuation assessments at certain of our properties in the 2017 period. Real estate taxes increased $1,540 as a result of the acquired properties. We also realized a decrease of $27 in real estate taxes as a result of the disposed property.

Utility expenses. The increase in utility expenses reflects an increase in utility expenses for the acquired properties partially offset by the combined impact of utility expense decreases at the comparable properties and the disposed property. Utility expenses at the comparable properties decreased $101 primarily due to a decrease in electricity usage at certain of our

Table of Contents

properties during the 2017 period. Utility expenses increased $981 as a result of the acquired properties. We also realized a decrease of $24 in utility expenses as a result of the disposed property.

Other operating expenses. The increase in other operating expenses reflects an increase in expenses for the comparable properties and the acquired properties partially offset by a decrease as a result of the disposed property. Other operating expenses at comparable properties increased $1,889 primarily as a result of higher repairs and maintenance costs during the 2017 period. Other operating expenses increased $2,149 as a result of the acquired properties. We also realized a decrease of $23 in other operating expenses as a result of the disposed property.

Depreciation and amortization. The increase in depreciation and amortization reflects the depreciation and amortization from the acquired properties and the effect of improvements made to certain of our properties since January 1, 2016, partially offset by the effect of certain assets becoming fully depreciated. Depreciation and amortization increased $5,974 as a result of the acquired properties. Depreciation and amortization at comparable properties increased $1,262 due primarily to depreciation and amortization of improvements made to certain of our properties after January 1, 2016, partially offset by certain leasing related assets becoming fully depreciated in 2016 and 2017.

Loss on impairment of real estate. We recorded a $230 loss on impairment of real estate in the 2017 period to reduce the carrying value of one property (one building) to its estimated fair value.

General and administrative. The increase in general and administrative expenses is primarily as a result of an increase in business management fees in the 2017 period.

Dividend income. Dividend income consists of dividends received from our investment in RMR Inc.

Interest income. The increase in interest income is primarily the result of higher cash balances in the 2017 period due to our financing activities related to the FPO Transaction.

Loss (gain) on early extinguishment of debt . We recorded a loss on early extinguishment of debt of $1,715 in the 2017 period in connection with the termination of the bridge loan facility. For more information, see Note 7 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q. We recorded a net gain on early extinguishment of debt of $104 in the 2016 period in connection with the prepayment of two mortgage notes.

Income tax expense. The increase in income tax expense reflects lower operating income in certain jurisdictions in the 2017 period that is subject to state income taxes.

Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our investments in SIR and AIC. The decrease in the 2017 period is the result of a decline in SIR's net income for the 2017 period.

Gain on sale of property. Gain on sale of property represents the portion of the gain recognized from the sale of a property accounted for under the installment method during the 2016 period.

Table of Contents

number of weighted average common shares outstanding for the 2017 period as result of our issuance of common shares in an underwritten public offering during the 2017 period.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollar amounts in thousands)

Our principal sources of funds to meet operating and capital expenses, debt service obligations and pay distributions on our common shares are the operating cash flows we generate as rental income from our properties, the distributions we receive from our investments in SIR and RMR Inc. and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses and debt service obligations and pay distributions on our common shares for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:


•	our ability to maintain or increase the occupancy of, and the rental rates at, our properties;


•	our ability to control operating expenses at our properties;


•	our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating expenses; and


•	our receipt of distributions from our investments in SIR and RMR Inc.

Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions. We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.

Our changes in cash flows for the nine months ended September 30, 2017 compared to the same period in 2016 were as follows: (i) cash provided by operating activities increased from $91,674 in 2016 period to $93,726 in the 2017 period; (ii) cash used in investing activities increased from $94,848 in the 2016 period to $662,318 in the 2017 period; and (iii) cash provided by financing activities increased from $8,138 in the 2016 period to $1,090,358 in the 2017 period.

The increase in cash provided by operating activities for the nine month period ended September 30, 2017 as compared to the corresponding prior year period was due primarily to an increase in property NOI from our acquisition activities and favorable changes in working capital partially offset by a decrease in distributions we received from our investment in SIR classified as an operating activity as a result of a decrease in our equity in earnings of SIR and an increase in interest paid in the 2017 period. The increase in cash used in investing activities for the nine month period ended September 30, 2017 as compared to the corresponding prior year period was due primarily to our deposit in escrow of some of the FPO Transaction cash consideration. The increase in cash provided by financing activities for the nine month period ended September 30, 2017 as compared to the corresponding prior year period was due primarily to our FPO Transaction related financing activities during the 2017 period, including issuances of common shares and senior unsecured notes and borrowings under our revolving credit facility.

Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share and per square foot amounts)

In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 unsecured revolving credit facility. The maturity date of our revolving credit facility is January 31, 2019 and, subject to our payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 31, 2020. We are required to pay interest at a rate of LIBOR plus a premium, which was 125 basis points per annum at September 30, 2017 , on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2017 . Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. 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 September 30, 2017 , the annual interest rate payable on borrowings under our revolving credit facility was 2.4% . As of September 30, 2017 and October 30, 2017 , we had $565,000 and $545,000 , respectively, outstanding under our revolving credit facility.

Table of Contents

Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders, which also governs our two unsecured term loans:

•

Our $300,000 term loan, which matures on March 31, 2020, is prepayable without penalty at any time. We are required to pay interest at LIBOR plus a premium, which was 140 basis points per annum at September 30, 2017 , on the amount outstanding under our $300,000 term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2017 , the annual interest rate for the amount outstanding under our $300,000 term loan was 2.6% .

•

Our $250,000 term loan, which matures on March 31, 2022, is prepayable without penalty at any time. We are required to pay interest at LIBOR plus a premium, which was 180 basis points per annum at September 30, 2017 , on the amount outstanding under our $250,000 term loan. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2017 , the annual interest rate for the amount outstanding under our $250,000 term loan was 3.0% .

Our credit agreement also includes a feature under which the maximum borrowing availability may be increased to up to $2,500,000 on a combined basis in certain circumstances.

Our credit agreement for our revolving credit facility and term loans provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under the revolving credit facility and term loans only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in the credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.

Our $350,000 of 3.75% senior unsecured notes due 2019 are governed by an indenture and a supplement to that indenture and require semi-annual payments of interest only through maturity in August 2019 and may be repaid at par (plus accrued and unpaid interest) on or after July 15, 2019 or before that date together with a make whole premium.

Our $310,000 of 5.875% senior unsecured notes due 2046 are governed by an indenture and a supplement to that indenture and require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after May 26, 2021.

Our $300,000 of 4.000% senior unsecured notes due 2022 are governed by an indenture and a supplement to that indenture and require semi-annual payments of interest only through maturity in July 2022 and may be repaid at par (plus accrued and unpaid interest) on or after June 15, 2022.

As of September 30, 2017 , our debt maturities (other than our revolving credit facility) are as follows: $399 in 2017 , $1,671 in 2018 , $359,439 in 2019 , $301,619 in 2020 , $13,230 in 2021 and $860,000 thereafter.

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our $26,358 in mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of September 30, 2017 , we have estimated unspent leasing related obligations of $26,631 and have committed to redevelop and expand an existing property prior to the commencement of the lease with an estimated remaining cost to complete of approximately $3,302 .

As of September 30, 2017 , we had $551,707 of cash and cash equivalents. On October 2, 2017, we used our available cash on hand to fund some of the FPO Transaction cash consideration.

In connection with the FPO Transaction, we assumed five mortgage notes with an aggregate principal balance of $167,549 . These mortgage notes are secured by five properties (five buildings). In connection with the FPO Transaction, we also assumed two mortgage notes with an aggregate principal balance of $82,000 , which are secured by two properties owned by joint ventures in which we acquired FPO's 50% and 51%interests.

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from our property sales, distributions received from our investments in SIR and RMR Inc., assumption of mortgage debt and net proceeds from offerings of equity or debt securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives. Such alternatives may include incurring additional term debt, issuing equity or debt securities, extending the maturity date of our revolving credit facility and entering into a new

Table of Contents

revolving credit facility. We may assume additional mortgage debt in connection with our acquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

To partially finance the FPO Transaction, we entered into a commitment letter with Citigroup Global Markets Inc., or Citigroup, pursuant to which, on and subject to the terms and conditions of the commitment letter, Citigroup and a group of institutional lenders committed to provide us a bridge loan facility. On July 20, 2017, we and the lenders terminated this commitment letter and bridge loan facility after we raised the necessary funding for the FPO Transaction by our issuance of senior unsecured notes and the proceeds from the sale of our common shares in July 2017. As a result of the termination of this bridge loan facility we recognized a loss on extinguishment of debt of $1,715 .

Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner which will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention.

In June 2017, both Moody's Investors Service, or Moody's, and Standard & Poor's Ratings Services, or S&P, updated our ratings outlook to negative as a result of uncertainties arising from the FPO Transaction. Negative outlooks may imply that our debt ratings may be downgraded unless we are successful in reorganizing our financial profile.

On February 23, 2017 and May 22, 2017, we paid a regular quarterly distribution to common shareholders of record on January 23, 2017 and April 21, 2017, of $0.43 per share, or $30,606 on each of those dates. On August 21, 2017, we paid a regular distribution to common shareholders of record on July 24, 2017, of $0.43 per share, or $41,364 . We funded these distributions using cash on hand and borrowings under our revolving credit facility. On October 12, 2017, we declared a regular quarterly distribution payable to common shareholders of record on October 23, 2017 of $0.43 per share, or $42,633 . We expect to pay this distribution on or about November 20, 2017 using cash on hand and borrowings under our revolving credit facility.

Off Balance Sheet Arrangements

As of September 30, 2017 , we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Table of Contents

Debt Covenants (dollars in thousands)

Our principal debt obligations at September 30, 2017 consisted of borrowings under our $750,000 unsecured revolving credit facility, our $300,000 term loan, our $250,000 term loan, an aggregate outstanding principal amount of $960,000 of public issuances of senior unsecured notes and three secured mortgage notes that were assumed in connection with certain of our acquisitions. Our publicly issued senior unsecured notes are governed by indentures and their supplements. In addition, as noted elsewhere in this Quarterly Report on Form 10-Q, on October 2, 2017, we assumed five secured mortgage notes in connection with the FPO Transaction. Also, the two joint venture properties acquired in the FPO Transaction secure two additional mortgage notes. Our senior unsecured notes indentures and their supplements and the credit agreement for our revolving credit facility and our two term loans provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes the RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our senior unsecured notes indentures and their supplements and our credit agreement also contain a number of covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain various financial ratios, and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders in certain circumstances. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. As of September 30, 2017 , we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements.

Neither our credit agreement nor our senior unsecured notes indentures and their supplements contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded, our interest expense and related costs under our credit agreement would increase. As noted above, in June 2017, both Moody's and S&P updated our rating outlook to negative, which may imply that downgrades to our credit rating will occur unless we are successful in reorganizing our financial profile.

Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more. Similarly, our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $25,000 (or up to $50,000 in certain circumstances).

Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., SIR, AIC and others related to them. For example: we have no employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our management agreements with RMR LLC; RMR Inc. is the managing member of RMR LLC; ABP Trust, which is owned by our Managing Trustees, is the controlling shareholder of RMR Inc.; and we own shares of class A common stock of RMR Inc. We also have relationships and historical and continuing transactions with other companies to which RMR LLC provides management services and which may have trustees, directors and officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc., including: SIR, of which we are the largest shareholder, owning, at September 30, 2017, approximately 27.8% of the outstanding SIR common shares; and AIC, of which we, SIR, ABP Trust and four other companies to which RMR LLC provides management services each own 14.3% and which arranges and reinsures in part a combined property insurance program for us and its six other shareholders. For further information about these and other such relationships and related person transactions, see Notes 10, 11 and 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our business and property management agreements with RMR LLC and our shareholders agreement with AIC and its six other shareholders, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov . We may engage in additional transactions with related persons, including businesses to which RMR LLC or its affiliates provide management services.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands, except per share data)

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2016 . Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

Fixed Rate Debt

At September 30, 2017 , our outstanding fixed rate debt consisted of the following:



			Annual		Annual			Interest
	Principal		Interest		Interest			Payments
Debt	Balance ⁽¹⁾		Rate ⁽¹⁾		Expense ⁽¹⁾		Maturity	Due
Senior unsecured notes	$	350,000	3.750	%	$	13,125	2019	Semi-annually
Senior unsecured notes	310,000		5.875	%	18,213		2046	Quarterly
Senior unsecured notes	300,000		4.000	%	12,000		2022	Semi-annually
Mortgage note	13,756		5.877	%	820		2021	Monthly
Mortgage note	8,288		7.000	%	588		2019	Monthly
Mortgage note	4,314		8.150	%	356		2021	Monthly
	$	986,358			$	45,102

(1)

The principal balances and interest rates are the amounts stated in the contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. For more information, see Notes 7 and 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our $350,000 and $300,000 senior unsecured notes require semi-annual interest payments through maturity and our $310,000 senior unsecured notes require quarterly interest payments through maturity. Our mortgages generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are 100 basis points higher or lower than shown above, our per annum interest cost would increase or decrease, respectively, by approximately $10,098 .

Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at September 30, 2017 , and discounted cash flow analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate 100 basis point increase in interest rates would change the fair value of those obligations by approximately $59,302 .

Some of our fixed rate secured debt arrangements allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.

Table of Contents

On October 2, 2017, in connection with the FPO Transaction, we assumed fixed rate debt consisting of the following mortgage notes:



			Annual		Annual			Interest
	Principal		Interest		Interest			Payments
Debt	Balance ⁽¹⁾		Rate ⁽¹⁾		Expense ⁽¹⁾		Maturity	Due
Mortgage note (one property (one building) in Washington, DC)	$	66,780	4.050	%	$	2,705	2030	Monthly
Mortgage note (one property (one building) in Washington, DC)	34,974		4.800	%	1,679		2023	Monthly
Mortgage note (one property (one building) in Washington, DC)	34,598		5.720	%	1,979		2020	Monthly
Mortgage note (one property (one building) in Washington, DC)	27,978		4.220	%	1,181		2022	Monthly
Mortgage note (one property (one building) in Chesapeake, VA)	3,219		4.260	%	137		2020	Monthly
	$	167,549			$	7,681


(1)	The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, our carrying value and recorded interest expense may differ from these amounts because of market conditions at the time we assumed this debt.

Also, in connection with the FPO Transaction, we acquired FPO's 50% and 51% interests in two joint venture arrangements which own properties that are secured by fixed rate debt consisting of the following mortgage notes, which we assumed:



	Our JV			Annual		Annual			Interest
	Ownership	Principal		Interest		Interest			Payments
Debt	Interest	Balance ⁽¹⁾⁽²⁾		Rate ⁽¹⁾		Expense ⁽¹⁾		Maturity	Due
Mortgage note (one property) one building in Washington, DC	50%	$	32,000	3.920	%	$	1,254	2024	Monthly
Mortgage note (one property) one building in Fairfax, VA	51%	50,000		3.910	%	1,955		2029	Monthly
		$	82,000			$	3,209


(1)	The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, our recorded interest expense may differ from these amounts because of market conditions at the time we acquired the joint venture interests.


(2)	Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the part of the joint venture arrangement interests we do not own.

Floating Rate Debt

At September 30, 2017 , our floating rate debt consisted of $565,000 of borrowings under our $750,000 revolving credit facility, our $300,000 term loan and our $250,000 term loan. Our revolving credit facility matures in January 2019 and, subject to the payment of an extension fee and our meeting other conditions, we have the option to extend the stated maturity by one year to January 2020. No principal repayments are required under our revolving credit facility or our term loans prior to maturity, and we can borrow, repay and reborrow funds available under our revolving credit facility, subject to conditions, at any time without penalty. Our $300,000 term loan matures on March 31, 2020. Our $250,000 term loan matures on March 31, 2022. Amounts outstanding under our term loans may be repaid without penalty at any time, but after they are repaid amounts may not be redrawn.

Borrowings under our $750,000 revolving credit facility and term loans are in U.S. dollars and require interest to be paid at a rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of our revolving credit facility or term loans, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.

Table of Contents

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2017 :



	Impact of Changes in Interest Rates
	Annual		Outstanding		Total Interest		Annual Earnings
	Interest Rate ⁽¹⁾		Debt		Expense Per Year		Per Share Impact ⁽²⁾
At September 30, 2017	2.6	%	$	1,115,000	$	29,393	$	0.37
100 bps increase	3.6	%	$	1,115,000	$	40,698	$	0.51


(1)	Weighted based on the respective interest rates and outstanding borrowings under our revolving credit facility and term loans as of September 30, 2017 .


(2)	Based on the weighted average shares outstanding (diluted) for the nine months ended September 30, 2017 .

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2017 if we were fully drawn on our revolving credit facility and our term loans remained outstanding:



	Impact of Changes in Interest Rates
	Annual		Outstanding		Total Interest		Annual Earnings
	Interest Rate ⁽¹⁾		Debt		Expense Per Year		Per Share Impact ⁽²⁾
At September 30, 2017	2.6	%	$	1,300,000	$	34,269	$	0.43
100 bps increase	3.6	%	$	1,300,000	$	47,450	$	0.59


(1)	Weighted based on the respective interest rates and outstanding borrowings under our revolving credit facility (assuming fully drawn) and our term loans as of September 30, 2017 .


(2)	Based on the weighted average shares outstanding (diluted) for the nine months ended September 30, 2017 .

The foregoing tables show the impact of an immediate change in floating interest rates as of September 30, 2017 . If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility, our term loans or our other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q 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 WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “WILL”, “MAY” AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:


•	OUR ACQUISITIONS AND SALES OF PROPERTIES,


•	OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,


•	THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT OR BE NEGATIVELY AFFECTED BY CYCLICAL ECONOMIC CONDITIONS OR GOVERNMENT BUDGET CONSTRAINTS,


•	THE LIKELIHOOD THAT OUR TENANTS WILL RENEW OR EXTEND THEIR LEASES AND NOT EXERCISE EARLY TERMINATION OPTIONS PURSUANT TO THEIR LEASES OR THAT WE WILL OBTAIN REPLACEMENT TENANTS,


•	THE LIKELIHOOD THAT OUR RENTS WILL INCREASE WHEN WE RENEW OR EXTEND OUR LEASES OR ENTER NEW LEASES,


•	OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,


•	OUR EXPECTATION THAT WE BENEFIT FINANCIALLY FROM OUR OWNERSHIP INTEREST IN SIR,


•	OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,


•	THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,


•	OUR EXPECTATION THAT THERE WILL BE OPPORTUNITIES FOR US TO ACQUIRE, AND THAT WE WILL ACQUIRE, ADDITIONAL PROPERTIES INCLUDING PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS OR GOVERNMENT CONTRACTOR TENANTS,


•	OUR EXPECTATIONS REGARDING DEMAND FOR LEASED SPACE BY THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,


•	OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,


•	OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,


•	OUR ABILITY TO APPROPRIATELY BALANCE OUR USE OF DEBT AND EQUITY CAPITAL,


•	OUR CREDIT RATINGS,


•	OUR EXPECTED BENEFITS FROM THE FPO TRANSACTION,


•	OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF RMR INC.,


•	OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AIC AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,


•	THE CREDIT QUALITIES OF OUR TENANTS,


•	OUR QUALIFICATION FOR TAXATION AS A REIT, AND


•	OTHER MATTERS.

Table of Contents

OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:


•	THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,


•	COMPETITION WITHIN THE REAL ESTATE INDUSTRY, PARTICULARLY WITH RESPECT TO THOSE MARKETS IN WHICH OUR PROPERTIES ARE LOCATED AND WITH RESPECT TO GOVERNMENT TENANCIES,


•	THE IMPACT OF CHANGES IN THE REAL ESTATE NEEDS AND FINANCIAL CONDITIONS OF THE U.S. GOVERNMENT AND STATE AND LOCAL GOVERNMENTS,


•	COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,


•	ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES, RMR LLC, RMR INC., SIR, AIC AND OTHERS AFFILIATED WITH THEM,


•	LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY FOR TAXATION AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES, AND


•	ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.

FOR EXAMPLE:

•

OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO MAKE PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, THE CAPITAL COSTS WE INCUR TO LEASE OUR PROPERTIES, OUR WORKING CAPITAL REQUIREMENTS AND OUR RECEIPT OF DISTRIBUTIONS FROM SIR. WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS OR TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS ON OUR COMMON SHARES AND FUTURE DISTRIBUTIONS MAY BE REDUCED OR ELIMINATED,


•	OUR ABILITY TO GROW OUR BUSINESS AND INCREASE DISTRIBUTIONS TO OUR SHAREHOLDERS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND LEASE THEM FOR RENTS, LESS THEIR PROPERTY OPERATING EXPENSES, THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING OR LEASE TERMS FOR NEW PROPERTIES,


•	SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO OBTAIN NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,


•	SOME GOVERNMENT TENANTS MAY EXERCISE THEIR RIGHTS TO VACATE THEIR SPACE BEFORE THE STATED EXPIRATIONS OF THEIR LEASES, AND WE MAY BE UNABLE TO OBTAIN NEW TENANTS TO MAINTAIN THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,


•	RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,


•	CONTINGENCIES IN OUR ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING ACQUISITIONS AND SALES MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE,

Table of Contents


•	CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,


•	ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY OR OTHER FLOATING RATE CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES,


•	THE INTEREST RATES PAYABLE UNDER OUR FLOATING RATE DEBT OBLIGATIONS DEPEND UPON OUR CREDIT RATINGS. BOTH MOODY'S AND S&P HAVE RECENTLY UPDATED OUR RATING OUTLOOK TO NEGATIVE WHICH MAY IMPLY THAT OUR CREDIT RATINGS MAY BE DOWNGRADED. IF OUR CREDIT RATINGS ARE DOWNGRADED, OUR BORROWING COSTS WILL INCREASE,


•	OUR ABILITY TO ACCESS DEBT CAPITAL AND THE COST OF OUR DEBT CAPITAL WILL DEPEND IN PART ON OUR CREDIT RATINGS. BOTH MOODY'S AND S&P HAVE RECENTLY UPDATED OUR RATING OUTLOOK TO NEGATIVE, WHICH MAY IMPLY THAT OUR CREDIT RATINGS MAY BE DOWNGRADED. IF OUR CREDIT RATINGS ARE DOWNGRADED, WE MAY NOT BE ABLE TO ACCESS DEBT CAPITAL OR THE DEBT CAPITAL WE CAN ACCESS MAY BE EXPENSIVE,


•	WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,


•	THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS MAY BE INCREASED TO UP TO $2.5 BILLION ON A COMBINED BASIS IN CERTAIN CIRCUMSTANCES; HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,


•	WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING OTHER CONDITIONS; HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET,


•	THE BUSINESS AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE CONTINUING 20 YEAR TERMS. HOWEVER, THOSE AGREEMENTS PERMIT EARLY TERMINATION IN CERTAIN CIRCUMSTANCES. ACCORDINGLY, WE CANNOT BE SURE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR CONTINUING 20 YEAR TERMS,


•	WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING RMR LLC, RMR INC., SIR, AIC AND OTHERS AFFILIATED WITH THEM MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. HOWEVER, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE,


•	WE MAY FAIL TO EXECUTE SUCCESSFULLY ON OUR EXPANDED BUSINESS STRATEGY OR INCREASED SCALE RESULTING FROM THE FPO TRANSACTION AND THEREFORE MAY NOT REALIZE THE BENEFITS WE EXPECT FROM THE FPO TRANSACTION,


•	SIR MAY REDUCE THE AMOUNT OF ITS DISTRIBUTIONS TO ITS SHAREHOLDERS, INCLUDING US,


•	RMR INC. MAY REDUCE THE AMOUNT OF ITS DISTRIBUTION TO ITS SHAREHOLDERS, INCLUDING US,


•	WE MAY BE UNABLE TO SELL OUR SIR COMMON SHARES FOR AN AMOUNT EQUAL TO OUR CARRYING VALUE OF THOSE SHARES AND ANY SUCH SALE MAY BE AT A DISCOUNT TO MARKET PRICE BECAUSE OF THE LARGE SIZE OF OUR SIR HOLDINGS OR OTHERWISE; WE MAY REALIZE A LOSS ON OUR INVESTMENT IN OUR SIR SHARES, AND


•	WE EXPECT TO SPEND, AS OF SEPTEMBER 30, 2017, AN ADDITIONAL $3.3 MILLION TO COMPLETE THE REDEVELOPMENT AND EXPANSION OF A PROPERTY WE OWN PRIOR TO THE COMMENCEMENT OF THE LEASE FOR THAT PROPERTY. IN ADDITION, AS OF SEPTEMBER 30 2017, WE HAVE ESTIMATED UNSPENT LEASING RELATED OBLIGATIONS OF $26.6 MILLION, EXCLUDING THE ESTIMATED

Table of Contents

DEVELOPMENT COSTS NOTED IN THE PRECEDING SENTENCE. IT IS DIFFICULT TO ACCURATELY ESTIMATE DEVELOPMENT AND TENANT SPACE PREPARATION COSTS. THIS DEVELOPMENT PROJECT AND OUR UNSPENT LEASING RELATED OBLIGATIONS MAY COST MORE OR LESS AND MAY TAKE LONGER TO COMPLETE THAN WE CURRENTLY EXPECT, AND WE MAY INCUR INCREASING AMOUNTS FOR THESE AND SIMILAR PURPOSES IN THE FUTURE.

CURRENTLY UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS CHANGES IN OUR TENANTS’ NEEDS FOR LEASED SPACE, ACTS OF TERRORISM, NATURAL DISASTERS OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT OR IN OUR OTHER FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

STATEMENT CONCERNING LIMITED LIABILITY

THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING GOVERNMENT PROPERTIES INCOME TRUST, DATED JUNE 8, 2009, AS AMENDED, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF GOVERNMENT PROPERTIES INCOME TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, GOVERNMENT PROPERTIES INCOME TRUST. ALL PERSONS DEALING WITH GOVERNMENT PROPERTIES INCOME TRUST IN ANY WAY SHALL LOOK ONLY TO THE ASSETS OF GOVERNMENT PROPERTIES INCOME TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

Table of Contents

Part II. Other Information

Item 1A. Risk Factors

There have been no material changes to risk factors from those we previously disclosed in our Annual Report and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. As described above, the FPO Transaction was completed on October 2, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended September 30, 2017 :




							Maximum
					Total Number of		Approximate Dollar
					Shares Purchased		Value of Shares that
	Number of		Average		as Part of Publicly		May Yet Be Purchased
	Shares	Price			Announced Plans		Under the Plans or
Calendar Month	Purchased ⁽¹⁾	Paid per Share		or Programs		Programs
September 2017	13,636	$	18.30	$	—	$	—
Total	13,636	$	18.30	$	—	$	—

(1)

These common share withholdings and purchases were made to satisfy employee tax withholding and payment obligations of our officers and certain other RMR LLC employees in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on the Nasdaq on the purchase date.

Table of Contents

Item 6. Exhibits



Exhibit Number	Description



3.1	Composite Copy of Amended and Restated Declaration of Trust, dated June 8, 2009, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.)

3.2	Amended and Restated Bylaws of the Company, adopted September 7, 2016. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 7, 2016.)

4.1	Form of Common Share Certificate. (Incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-11/A, File No. 333-157455.)

4.2	Indenture, dated as of August 18, 2014, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 18, 2014.)

4.3	Supplemental Indenture No. 1, dated as of August 18, 2014, between the Company and U.S. Bank National Association, relating to the Company’s 3.75% Senior Notes due 2019, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 18, 2014.)

4.4	Supplemental Indenture No. 2, dated as of May 26, 2016, between the Company and U.S. Bank National Association, relating to the Company’s 5.875% Senior Notes due 2046, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K dated May 26, 2016.)

4.5	Authentication Order, dated as of June 22, 2016, from the Company to U.S. Bank National Association, relating to the Company’s 5.875% Senior Notes due 2046. (Incorporated by reference to the Company’s Registration Statement on Form 8-A dated June 30, 2016.)

4.6	Indenture, dated as of July 20, 2017, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 20, 2017.)

4.7	Supplemental Indenture No. 1, dated as of July 20, 2017, between the Company and U.S. Bank National Association, relating to the Company’s 4.000% Senior Notes due 2022, including form thereof. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 20, 2017.)

4.8	Registration Rights and Lock-Up Agreement, dated as of June 5, 2015, among the Company, ABP Trust, Barry M. Portnoy and Adam D. Portnoy. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 5, 2015.)

10.1	First Amendment to Credit Agreement, dated as of September 22, 2017, by and among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions party thereto. (Filed herewith.)

12.1	Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.)

31.1	Rule 13a-14(a) Certification. (Filed herewith.)

31.2	Rule 13a-14(a) Certification. (Filed herewith.)

Table of Contents




31.3	Rule 13a-14(a) Certification. (Filed herewith.)

31.4	Rule 13a-14(a) Certification. (Filed herewith.)

32.1	Section 1350 Certification. (Furnished herewith.)

99.1	Letter dated as of October 2, 2017, between the Company and The RMR Group LLC, regarding Second Amended and Restated Business Management Agreement. (Filed herewith.)

101.1	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	GOVERNMENT PROPERTIES INCOME TRUST


	By:	/s/ David M. Blackman
		David M. Blackman President and Chief Operating Officer
		Dated: October 31, 2017

	By:	/s/ Mark L. Kleifges
		Mark L. Kleifges Chief Financial Officer and Treasurer (principal financial and accounting officer)
		Dated: October 31, 2017

TABLE OF CONTENTS

Part I Item 1. Financial Statements Note 1. Basis Of Presentation Note 2. Recent Accounting Pronouncements Note 3. Weighted Average Common Shares Note 4. Real Estate Properties Note 5. Revenue Recognition Note 6. Concentration Note 7. Indebtedness Note 8. Fair Value Of Assets and Liabilities Note 9. Shareholders Equity Note 10. Business and Property Management Agreements with Rmr Llc Note 11. Related Person Transactions Note 12. Equity Investment in Select Income Reit Note 13. Segment Information Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar Amounts in Thousands, Except Per Share Data)Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

Exhibits

OPITQ 10-Q Quarter ended Sept. 30, 2017

Exhibits