Market Overview

Select Income REIT Announces Second Quarter 2018 Results

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Select Income REIT (NASDAQ:SIR) today announced financial results for
the quarter and six months ended June 30, 2018.

Results for the Quarter Ended June 30, 2018:

Net income attributed to SIR for the quarter ended June 30, 2018 was
$11.7 million, or $0.13 per diluted share, compared to $26.7 million, or
$0.30 per diluted share, for the same period last year. Net income
attributed to SIR for the quarter ended June 30, 2018 includes: (1) an
unrealized gain on equity securities of $13.5 million, or $0.15 per
diluted share, related to SIR's investment in The RMR Group Inc., or RMR
Inc., which is included in earnings in accordance with U.S. generally
accepted accounting principles, or GAAP, effective January 1, 2018; (2)
a reduction for the non-cash write-off of straight line rents receivable
of $10.6 million, or $0.12 per diluted share, related to a lease
associated with a tenant default; (3) a reduction for estimated business
management incentive fees of $9.5 million, or $0.11 per diluted share;
and (4) a reduction for net income allocated to noncontrolling interest
representing allocations to public shareholders of Industrial Logistics
Properties Trust, or ILPT, SIR's majority owned consolidated subsidiary,
of $5.8 million, or $0.06 per diluted share.

Normalized funds from operations, or Normalized FFO, attributed to SIR
for the quarter ended June 30, 2018 were $40.6 million, or $0.45 per
diluted share, compared to $62.1 million, or $0.70 per diluted share,
for the same period last year. Normalized FFO attributed to SIR for the
quarter ended June 30, 2018 include a reduction for the non-cash
write-off of straight line rents receivable of $10.6 million, or $0.12
per diluted share, related to a lease associated with a tenant default,
and a reduction for Normalized FFO allocated to noncontrolling interest
representing allocations to public shareholders of ILPT of $7.9 million,
or $0.09 per diluted share.

Reconciliations of net income attributed to SIR determined in accordance
with GAAP to funds from operations, or FFO, attributed to SIR and to
Normalized FFO attributed to SIR for the quarters ended June 30, 2018
and 2017 appear later in this press release.

Results for the Six Months Ended June 30, 2018:

Net income attributed to SIR for the six months ended June 30, 2018 was
$44.9 million, or $0.50 per diluted share, compared to $33.4 million, or
$0.37 per diluted share, for the same period last year. Net income
attributed to SIR for the six months ended June 30, 2018 includes: (1)
an unrealized gain on equity securities of $30.4 million, or $0.34 per
diluted share, related to SIR's investment in RMR Inc., which is
included in earnings in accordance with GAAP effective January 1, 2018;
(2) a reduction for the non-cash write-off of straight line rents
receivable of $10.6 million, or $0.12 per diluted share, related to a
lease associated with a tenant default; (3) a reduction for estimated
business management incentive fees of $14.8 million, or $0.17 per
diluted share; and (4) a reduction for net income allocated to
noncontrolling interest representing allocations to public shareholders
of ILPT of $10.2 million, or $0.11 per diluted share. Net income
attributed to SIR for the six months ended June 30, 2017 includes a
reduction for a write-off of straight line rents receivable of $12.5
million, or $0.14 per diluted share, and a reduction for a loss on asset
impairment of $4.0 million, or $0.05 per diluted share, both of which
were related to leases associated with a tenant bankruptcy.

Normalized FFO attributed to SIR for the six months ended June 30, 2018
were $96.6 million, or $1.08 per diluted share, compared to $114.5
million, or $1.28 per diluted share, for the same period last year.
Normalized FFO attributed to SIR for the six months ended June 30, 2018
include a reduction for the non-cash write-off of straight line rents
receivable of $10.6 million, or $0.12 per diluted share, related to a
lease associated with a tenant default, and a reduction for Normalized
FFO allocated to noncontrolling interest representing allocations to
public shareholders of ILPT of $14.1 million, or $0.16 per diluted
share. Normalized FFO attributed to SIR for the six months ended
June 30, 2017 include a reduction for a write-off of straight line rents
receivable of $12.5 million, or $0.14 per diluted share, related to
leases associated with a tenant bankruptcy.

Reconciliations of net income attributed to SIR determined in accordance
with GAAP to FFO attributed to SIR and to Normalized FFO attributed to
SIR for the six months ended June 30, 2018 and 2017 appear later in this
press release.

Consolidated Leasing, Occupancy and Same Property Results:

During the quarter ended June 30, 2018, on a consolidated basis, SIR
entered lease renewals and new leases for approximately 220,000 square
feet, resulting in weighted average (by square feet) rental rates that
were approximately 33.9% more than prior rental rates for the same space
and a weighted average (by square feet) lease term of 11 years.
Commitments for leasing capital and concessions for these leases totaled
approximately $541,000, or approximately $0.22 per square foot per lease
year.

As of June 30, 2018, 94.8% of SIR's consolidated total rentable square
feet was leased, compared to 95.8% as of March 31, 2018 and 95.9% as of
June 30, 2017. Consolidated occupancy for properties owned continuously
since April 1, 2017, or on a same property basis, decreased to 94.7% at
June 30, 2018 from 95.9% at June 30, 2017. Consolidated same property
cash basis net operating income, or Cash Basis NOI, decreased 0.7% for
the quarter ended June 30, 2018 compared to the quarter ended June 30,
2017, primarily as a result of a tenant default in May 2018, partially
offset by contractual rent increases for certain properties since April
1, 2017.

In May 2018, one of SIR's tenants defaulted on its lease for a property
located in Naperville, IL with approximately 820,000 rentable square
feet and an original lease expiration date of March 31, 2029. As of June
30, 2018, the annual rent due from the tenant under this lease was $15.2
million. Approximately 468,000 square feet of this property is occupied
by subtenants of the tenant that defaulted, and these subtenants have
received notices to pay rents under the applicable subleases directly to
SIR as a result of this tenant default. Payments directly to SIR under
the applicable subleases aggregated $10.0 million as of June 30, 2018
(or $5.2 million less than the rent due from the tenant that defaulted).
In addition, SIR is currently responsible for certain property level
expenses that were previously paid, or reimbursed to SIR, by the tenant
that defaulted. SIR is evaluating its options to recover and mitigate
its damages. During the three months ended June 30, 2018, SIR recorded a
non-cash charge of $10.6 million to write off straight line rents
receivable related to this lease with the tenant that defaulted.

Reconciliations of net income determined in accordance with GAAP to net
operating income, or NOI, Cash Basis NOI, same property NOI and same
property Cash Basis NOI for the quarters and six months ended June 30,
2018 and 2017 on a total and same property basis appear later in this
press release.

Recent Investment Activities:

In June 2018, ILPT acquired a single tenant, net leased property located
in Doral, FL with 240,283 rentable square feet for a purchase price of
$43.1 million, excluding acquisition related costs. This property is
100% leased and has a lease term of approximately 10 years.

In July 2018, ILPT entered an agreement to acquire a single tenant, net
leased property located in Upper Marlboro, MD with approximately 221,000
rentable square feet for a purchase price of $29.3 million, excluding
acquisition related costs. This property is 100% leased and has a
remaining lease term of approximately 12 years. This acquisition is
expected to occur before the end of the third quarter of 2018.

Recent Disposition Activities:

In May 2018, SIR entered an agreement to sell one of its 100% owned land
parcels in Kapolei, HI with 417,610 rentable square feet for $10.3
million, excluding closing costs. This sale is expected to occur before
the end of the third quarter of 2018.

Presentation:

The amounts reported above are on a consolidated basis, and as such,
include the results of SIR's consolidated subsidiary, ILPT, unless
indicated otherwise. ILPT is itself a public company having common
shares registered under the Securities and Exchange Act of 1934, as
amended. For further information about ILPT, see ILPT's periodic reports
and other filings with the Securities and Exchange Commission, or SEC,
which are available at the SEC's website, www.sec.gov.
References in this press release to ILPT's filings with the SEC are
included as textual references only, and the information in ILPT's
filings with the SEC is not incorporated by reference into this press
release.

Conference Call:

At 10:00 a.m. Eastern Time this morning, President and Chief Executive
Officer, David Blackman, and Chief Financial Officer and Treasurer, John
Popeo, will host a conference call to discuss SIR's second quarter 2018
financial results.

The conference call telephone number is (877) 328-4494. Participants
calling from outside the United States and Canada should dial (412)
317-5433. No pass code is necessary to access the call from either
number. Participants should dial in about 15 minutes prior to the
scheduled start of the call. A replay of the conference call will be
available through 11:59 p.m. on Tuesday, August 7, 2018. To access the
replay, dial (412) 317-0088. The replay pass code is 10121850.

A live audio webcast of the conference call will also be available in a
listen-only mode on SIR's website, which is located at www.sirreit.com.
Participants wanting to access the webcast should visit SIR's website
about five minutes before the call. The archived webcast will be
available for replay on SIR's website following the call for about one
week. The transcription, recording and retransmission in any way of
SIR's second quarter conference call are strictly prohibited without the
prior written consent of SIR.

Supplemental Data:

A copy of SIR's Second Quarter 2018 Supplemental Operating and Financial
Data, which includes both consolidated information and information for
SIR excluding ILPT, is available for download at SIR's website, www.sirreit.com.
SIR's website is not incorporated as part of this press release.

Select Income REIT is a real estate investment trust, or REIT, that owns
properties that are primarily net leased to single tenants. SIR is
managed by the operating subsidiary of The RMR Group Inc. (NASDAQ:RMR),
an alternative asset management company that is headquartered in Newton,
MA.

Please see the pages attached hereto for a more detailed statement of
SIR's operating results and financial condition and for an explanation
of SIR's calculation of NOI, Cash Basis NOI, same property NOI, same
property Cash Basis NOI, FFO attributed to SIR and Normalized FFO
attributed to SIR and a reconciliation of those amounts to amounts
determined according to GAAP.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS PRESS RELEASE CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER SIR USES
WORDS SUCH AS "BELIEVE", "EXPECT", "ANTICIPATE", "INTEND", "PLAN",
"ESTIMATE", "WILL", "MAY" AND NEGATIVES OR DERIVATIVES OF THESE OR
SIMILAR EXPRESSIONS, SIR IS MAKING FORWARD LOOKING STATEMENTS. THESE
FORWARD LOOKING STATEMENTS ARE BASED UPON SIR'S PRESENT INTENT, BELIEFS
OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO
OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CONTAINED IN OR IMPLIED BY SIR'S FORWARD LOOKING STATEMENTS AS A RESULT
OF VARIOUS FACTORS. FOR EXAMPLE:

  • THIS PRESS RELEASE STATES THAT ILPT HAS ENTERED AN AGREEMENT TO
    ACQUIRE A PROPERTY FOR $29.3 MILLION, EXCLUDING ACQUISITION RELATED
    COSTS. THIS ACQUISITION IS SUBJECT TO CONDITIONS. THESE CONDITIONS MAY
    NOT BE MET AND THIS ACQUISITION MAY NOT OCCUR, MAY BE DELAYED OR THE
    TERMS MAY CHANGE,
  • THIS PRESS RELEASE STATES THAT SIR HAS ENTERED AN AGREEMENT TO SELL
    ONE LAND PARCEL IN KAPOLEI, HI FOR $10.3 MILLION, EXCLUDING CLOSING
    COSTS. THIS SALE IS SUBJECT TO CONDITIONS. THESE CONDITIONS MAY NOT BE
    MET AND THIS SALE MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS MAY
    CHANGE, AND
  • THIS PRESS RELEASE STATES THAT A TENANT OF ONE OF SIR'S PROPERTIES HAS
    DEFAULTED ON ITS LEASE. ALTHOUGH THE SUBTENANTS AT THIS PROPERTY HAVE
    RECEIVED NOTICES TO PAY RENTS UNDER THE APPLICABLE SUBLEASES DIRECTLY
    TO SIR, SIR CANNOT BE SURE THAT IT WILL BE SUCCESSFUL IN RECEIVING
    SUCH RENTS, OR THAT IT WILL BE ABLE TO RECOVER OR MITIGATE ITS DAMAGES.

THE INFORMATION CONTAINED IN SIR'S FILINGS WITH THE SEC, INCLUDING UNDER
"RISK FACTORS" IN SIR'S PERIODIC REPORTS, OR INCORPORATED THEREIN,
IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE SIR'S ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE STATED IN OR IMPLIED BY SIR'S FORWARD
LOOKING STATEMENTS. SIR'S FILINGS WITH THE SEC ARE AVAILABLE ON THE
SEC'S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

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

 

Select Income REIT
Condensed Consolidated
Statements of Income

(amounts in thousands, except per
share data)

(unaudited)

       
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Revenues:
Rental income $ 96,415 $ 97,041 $ 196,170 $ 194,385
Tenant reimbursements and other income 19,592   18,829   40,466   37,779  
Total revenues 116,007   115,870   236,636   232,164  
 
Expenses:
Real estate taxes 12,442 10,836 24,230 21,679
Other operating expenses 13,618 13,523 28,900 26,390
Depreciation and amortization 35,009 34,317 69,955 68,057
General and administrative (1) 18,081 8,188 32,022 23,089
Write-off of straight line rents receivable, net (2) 10,626 10,626 12,517
Loss on asset impairment 4,047
Loss on impairment of real estate assets   229     229  
Total expenses 89,776   67,093   165,733   156,008  
 
Operating income 26,231 48,777 70,903 76,156
 
Dividend income 396 396 793 793
Unrealized gain on equity securities (3) 13,488 30,388
Interest income 110 7 620 20
Interest expense (including net amortization of debt issuance costs,
premiums and discounts of $1,735, $1,568, $3,499 and $2,972,
respectively)
(22,667 ) (22,808 ) (46,159 ) (43,895 )
Loss on early extinguishment of debt     (1,192 )  
Income before income tax expense and equity in earnings of an
investee
17,558 26,372 55,353 33,074
Income tax expense (101 ) (85 ) (261 ) (187 )
Equity in earnings of an investee 7   374   51   502  
Net income 17,464 26,661 55,143 33,389
Net income allocated to noncontrolling interest (5,765 )   (10,244 )  
Net income attributed to SIR $ 11,699   $ 26,661   $ 44,899   $ 33,389  
 
Weighted average common shares outstanding - basic 89,393   89,338   89,388   89,334  

Weighted average common shares outstanding - diluted

89,416   89,362   89,398   89,356  
 
Net income attributed to SIR per common share - basic and diluted $ 0.13   $ 0.30   $ 0.50   $ 0.37  
   
(1) General and administrative expenses include estimated business
management incentive fee expense of $9,457 and $920 for the three
months ended June 30, 2018 and 2017, respectively, and $14,815 and
$8,766 for the six months ended June 30, 2018 and 2017, respectively.
 
(2) In May 2018, one of SIR's tenants defaulted on its lease for a
property located in Naperville, IL with approximately 820 rentable
square feet and an original lease expiration date of March 31, 2029.
As of June 30, 2018, the annual rent due from the tenant under this
lease was $15,219. Approximately 468 square feet of this property is
occupied by subtenants of the tenant that defaulted, and these
subtenants have received notices to pay rents under the applicable
subleases directly to SIR as a result of this tenant default.
Payments directly to SIR under the applicable subleases aggregated
$10,030 as of June 30, 2018 (or $5,189 less than the rent due from
the tenant that defaulted). In addition, SIR is currently
responsible for certain property level expenses that were previously
paid, or reimbursed to SIR, by the tenant that defaulted. During the
three months ended June 30, 2018, SIR recorded a non-cash charge of
$10,626 to write off straight line rents receivable related to this
lease with the tenant that defaulted.
 
(3) Unrealized gain on equity securities represents the adjustment
required to adjust the carrying value of SIR's investment in RMR
Inc. common stock to its fair value as of June 30, 2018 in
accordance with new GAAP standards effective January 1, 2018.
 
 

Select Income REIT
Funds from Operations Attributed
to SIR and Normalized Funds from Operations Attributed to SIR

(1)

(amounts in thousands, except per share data)
(unaudited)

         
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
 
Net income attributed to SIR $ 11,699 $ 26,661 $ 44,899 $ 33,389
Plus: depreciation and amortization 35,009 34,317 69,955 68,057
Plus: loss on impairment of real estate assets 229 229
Plus: net income allocated to noncontrolling interest 5,765 10,244
Less: FFO allocated to noncontrolling interest (7,887 )   (14,117 )
FFO attributed to SIR 44,586 61,207 110,981 101,675
Plus: estimated business management incentive fees (2) 9,457 920 14,815 8,766
Plus: loss on asset impairment 4,047
Plus: loss on early extinguishment of debt 1,192
Less: unrealized gain on equity securities (3) (13,488 )   (30,388 )
Normalized FFO attributed to SIR $ 40,555   $ 62,127   $ 96,600   $ 114,488
 
Weighted average common shares outstanding - basic 89,393   89,338   89,388   89,334
Weighted average common shares outstanding - diluted 89,416   89,362   89,398   89,356
 
FFO attributed to SIR per common share - basic $ 0.50   $ 0.69   $ 1.24   $ 1.14
FFO attributed to SIR per common share - diluted $ 0.50   $ 0.68   $ 1.24   $ 1.14
Normalized FFO attributed to SIR per common share - basic and diluted $ 0.45   $ 0.70   $ 1.08   $ 1.28
Distributions declared per common share $ 0.51   $ 0.51   $ 1.02   $ 1.02
   
(1) SIR calculates FFO attributed to SIR and Normalized FFO attributed
to SIR as shown above. FFO attributed to SIR 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, loss on
impairment of real estate assets and the difference between net
income and FFO allocated to noncontrolling interest, as well as
certain other adjustments currently not applicable to SIR. SIR's
calculation of Normalized FFO attributed to SIR differs from
Nareit's definition of FFO because SIR includes business management
incentive fees, if any, only in the fourth quarter versus the
quarter when they are recognized as expense in accordance with GAAP
due to their quarterly volatility not necessarily being indicative
of SIR's core operating performance and the uncertainty as to
whether any such business management incentive fees will be payable
when all contingencies for determining such fees are known at the
end of the calendar year and SIR excludes loss on asset impairment,
loss on early extinguishment of debt, unrealized gain on equity
securities and Normalized FFO, net of FFO, from noncontrolling
interest, if any. SIR considers FFO attributed to SIR and Normalized
FFO attributed to SIR to be appropriate supplemental measures of
operating performance for a REIT, along with net income, net income
attributed to a REIT and operating income. SIR believes that FFO
attributed to SIR and Normalized FFO attributed to SIR provide
useful information to investors because by excluding the effects of
certain historical amounts, such as depreciation expense, FFO
attributed to SIR and Normalized FFO attributed to SIR may
facilitate a comparison of its operating performance between periods
and with other REITs. FFO attributed to SIR and Normalized FFO
attributed to SIR are among the factors considered by SIR's Board of
Trustees when determining the amount of distributions to SIR's
shareholders. Other factors include, but are not limited to,
requirements to maintain SIR's qualification for taxation as a REIT,
limitations in SIR's credit agreement and public debt covenants, the
availability to SIR of debt and equity capital, SIR's expectation of
its future capital requirements and operating performance, SIR's
receipt of distributions from ILPT and SIR's expected needs for and
availability of cash to pay its obligations. FFO attributed to SIR
and Normalized FFO attributed to SIR do not represent cash generated
by operating activities in accordance with GAAP and should not be
considered alternatives to net income, net income attributed to SIR
or operating income as indicators of SIR's operating performance or
as measures of SIR's liquidity. These measures should be considered
in conjunction with net income, net income attributed to SIR and
operating income as presented in SIR's condensed consolidated
statements of income. Other real estate companies and REITs may
calculate FFO and Normalized FFO differently than SIR does.
 
(2) Incentive fees under SIR's business management agreements with The
RMR Group LLC are payable after the end of each calendar year, are
calculated based on common share total return, as defined, and are
included in general and administrative expenses in SIR's condensed
consolidated statements of income. In calculating net income in
accordance with GAAP, SIR recognizes estimated business management
incentive fee expense, if any, in the first, second and third
quarters. Although SIR recognizes this expense, if any, in the
first, second and third quarters for purposes of calculating net
income, SIR does not include such expense in the calculation of
Normalized FFO attributed to SIR until the fourth quarter, when the
amount of the business management incentive fee expense for the
calendar year, if any, is determined. Normalized FFO attributed to
SIR excludes $9,457 and $920 of estimated business management
incentive fee expense for the three months ended June 30, 2018 and
2017, respectively, and $14,815 and $8,766 of estimated business
management incentive fee expense for the six months ended June 30,
2018 and 2017, respectively.
 
(3) Unrealized gain on equity securities represents the adjustment
required to adjust the carrying value of SIR's investment in RMR
Inc. common stock to its fair value as of June 30, 2018 in
accordance with new GAAP standards effective January 1, 2018.
 
 

Select Income REIT
Calculation and Reconciliation
of Property Net Operating Income and Cash Basis Net Operating
Income
(1)
(dollars in thousands)
(unaudited)

       
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Calculation of NOI and Cash Basis NOI:
Rental income $ 96,415 $ 97,041 $ 196,170 $ 194,385
Tenant reimbursements and other income 19,592 18,829 40,466 37,779
Real estate taxes (12,442 ) (10,836 ) (24,230 ) (21,679 )
Other operating expenses (13,618 ) (13,523 ) (28,900 ) (26,390 )
NOI $ 89,947   $ 91,511   $ 183,506   $ 184,095  
 
SIR NOI (excluding ILPT) $ 57,933 $ 59,946 $ 119,017 $ 120,161
ILPT NOI 32,014   31,565   64,489   63,934  
NOI $ 89,947   $ 91,511   $ 183,506   $ 184,095  
 
Non-cash straight line rent adjustments included in rental income (2) (2,933 ) (5,389 ) (6,489 ) (10,780 )
Lease value amortization included in rental income (2) (545 ) (527 ) (1,059 ) (961 )
Lease termination fees included in rental income (2) (101 ) (101 )
Non-cash amortization included in other operating expenses (3) (75 ) (213 ) (288 ) (426 )
Cash Basis NOI $ 86,394   $ 85,281   $ 175,670   $ 171,827  
 
SIR Cash Basis NOI (excluding ILPT) $ 55,519 $ 55,425 $ 113,616 $ 111,306
ILPT Cash Basis NOI 30,875   29,856   62,054   60,521  
Cash Basis NOI $ 86,394   $ 85,281   $ 175,670   $ 171,827  
 
Reconciliation of Net Income to NOI and Cash Basis NOI:
Net income $ 17,464 $ 26,661 $ 55,143 $ 33,389
Equity in earnings of an investee (7 ) (374 ) (51 ) (502 )
Income tax expense 101   85   261   187  
Income before income tax expense and equity in earnings of an
investee
17,558 26,372 55,353 33,074
Loss on early extinguishment of debt 1,192
Interest expense 22,667 22,808 46,159 43,895
Interest income (110 ) (7 ) (620 ) (20 )
Unrealized gain on equity securities (13,488 ) (30,388 )
Dividend income (396 ) (396 ) (793 ) (793 )
Operating income 26,231 48,777 70,903 76,156
Loss on impairment of real estate assets 229 229
Loss on asset impairment 4,047
Write-off of straight line rents receivable, net (4) 10,626 10,626 12,517
General and administrative 18,081 8,188 32,022 23,089
Depreciation and amortization 35,009   34,317   69,955   68,057  
NOI 89,947 91,511 183,506 184,095
Non-cash straight line rent adjustments included in rental income (2) (2,933 ) (5,389 ) (6,489 ) (10,780 )
Lease value amortization included in rental income (2) (545 ) (527 ) (1,059 ) (961 )
Lease termination fees included in rental income (2) (101 ) (101 )
Non-cash amortization included in other operating expenses (3) (75 ) (213 ) (288 ) (426 )
Cash Basis NOI $ 86,394   $ 85,281   $ 175,670   $ 171,827  
   
(1) The calculations of NOI and Cash Basis NOI exclude certain
components of net income in order to provide results that are more
closely related to SIR's property level results of operations. SIR
calculates NOI and Cash Basis NOI as shown above. SIR defines NOI as
income from its rental of real estate less its property operating
expenses. NOI excludes amortization of capitalized tenant
improvement costs and leasing commissions that SIR records as
depreciation and amortization. SIR defines Cash Basis NOI as NOI
excluding non-cash straight line rent adjustments, lease value
amortization, lease termination fees, if any, and non-cash
amortization included in other operating expenses. SIR considers NOI
and Cash Basis NOI to be appropriate supplemental measures to net
income because they may help both investors and management to
understand the operations of SIR's properties. SIR uses NOI and Cash
Basis NOI to evaluate individual and company wide property level
performance, and SIR believes that NOI and Cash Basis NOI provide
useful information to investors regarding its results of operations
because they reflect only those income and expense items that are
generated and incurred at the property level and may facilitate
comparisons of SIR's operating performance between periods and with
other REITs. NOI and Cash Basis NOI do not represent cash generated
by operating activities in accordance with GAAP and should not be
considered alternatives to net income, net income attributed to SIR
or operating income as indicators of SIR's operating performance or
as measures of SIR's liquidity. These measures should be considered
in conjunction with net income, net income attributed to SIR and
operating income as presented in SIR's condensed consolidated
statements of income. Other real estate companies and REITs may
calculate NOI and Cash Basis NOI differently than SIR does.
 
(2) SIR reports rental income on a straight line basis over the terms of
the respective leases; accordingly, rental income includes non-cash
straight line rent adjustments. Rental income also includes non-cash
amortization of intangible lease assets and liabilities and lease
termination fees, if any.
 
(3) SIR recorded a liability for the amount by which the estimated fair
value for accounting purposes exceeded the price SIR paid for its
investment in RMR Inc. common stock in June 2015. A portion of this
liability is being amortized on a straight line basis through
December 31, 2035 as a reduction to property management fees, which
are included in other operating expenses.
 
(4) In May 2018, one of SIR's tenants defaulted on its lease for a
property located in Naperville, IL with approximately 820,000
rentable square feet and an original lease expiration date of March
31, 2029. As of June 30, 2018, the annual rent due from the tenant
under this lease was $15,219. Approximately 468,000 square feet of
this property is occupied by subtenants of the tenant that
defaulted, and these subtenants have received notices to pay rents
under the applicable subleases directly to SIR as a result of this
tenant default. Payments directly to SIR under the applicable
subleases aggregated $10,030 as of June 30, 2018 (or $5,189 less
than the rent due from the tenant that defaulted). In addition, SIR
is currently responsible for certain property level expenses that
were previously paid, or reimbursed to SIR, by the tenant that
defaulted. During the three months ended June 30, 2018, SIR recorded
a non-cash charge of $10,626 to write off straight line rents
receivable related to this lease with the tenant that defaulted.
 
 

Select Income REIT
Reconciliation of Net Operating
Income to Same Property Net Operating Income and Calculation of
Same Property Cash Basis Net Operating Income
(1)
(dollars
in thousands)

(unaudited)

       
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Reconciliation of NOI to Same Property NOI (2)(3):
Rental income $ 96,415 $ 97,041 $ 196,170 $ 194,385
Tenant reimbursements and other income 19,592 18,829 40,466 37,779
Real estate taxes (12,442 ) (10,836 ) (24,230 ) (21,679 )
Other operating expenses (13,618 ) (13,523 ) (28,900 ) (26,390 )
NOI 89,947 91,511 183,506 184,095
Less:
NOI of properties not included in same property results (2,375 ) (1,354 ) (4,828 ) (1,354 )
Same property NOI $ 87,572   $ 90,157   $ 178,678   $ 182,741  
 
SIR same property NOI (excluding ILPT) $ 55,581 $ 58,592 $ 114,212 $ 118,807
ILPT same property NOI 31,991   31,565   64,466   63,934  
Same property NOI $ 87,572   $ 90,157   $ 178,678   $ 182,741  
 
Calculation of Same Property Cash Basis NOI (2)(3):
Same property NOI $ 87,572 $ 90,157 $ 178,678 $ 182,741
Less:
Non-cash straight line rent adjustments included in rental income (4) (2,760 ) (4,552 ) (6,134 ) (9,943 )
Lease value amortization included in rental income (4) (545 ) (527 ) (1,059 ) (961 )
Lease termination fees included in rental income (4) (101 ) (101 )
Non-cash amortization included in other operating expenses (5) (75 ) (213 ) (288 ) (426 )
Same property Cash Basis NOI $ 84,192   $ 84,764   $ 171,197   $ 171,310  
 
SIR same property Cash Basis NOI (excluding ILPT) $ 53,337 $ 54,908 $ 109,163 $ 110,789
ILPT same property Cash Basis NOI 30,855   29,856   62,034   60,521  
Same property Cash Basis NOI $ 84,192   $ 84,764   $ 171,197   $ 171,310  
   
(1) See footnote (1) on page 9 of this press release for the definitions
of NOI and Cash Basis NOI, a description of why SIR believes they
are appropriate supplemental measures and a description of how SIR
uses these measures.
 
(2) For the three months ended June 30, 2018 and 2017, same property NOI
and same property Cash Basis NOI are based on properties SIR owned
as of June 30, 2018, and which it owned continuously since April 1,
2017.
 
(3) For the six months ended June 30, 2018 and 2017, same property NOI
and same property Cash Basis NOI are based on properties SIR owned
as of June 30, 2018, and which it owned continuously since January
1, 2017.
 
(4) SIR reports rental income on a straight line basis over the terms of
the respective leases; accordingly, rental income includes non-cash
straight line rent adjustments. Rental income also includes non-cash
amortization of intangible lease assets and liabilities and lease
termination fees, if any.
 
(5) SIR recorded a liability for the amount by which the estimated fair
value for accounting purposes exceeded the price SIR paid for its
investment in RMR Inc. common stock in June 2015. A portion of this
liability is being amortized on a straight line basis through
December 31, 2035 as a reduction to property management fees, which
are included in other operating expenses.
 
 

Select Income REIT
Calculation and Reconciliation
of NOI, Cash Basis NOI, Same Property NOI and Same Property Cash
Basis NOI by Segment
(1)
(dollars in
thousands)

(unaudited)

     
Three Months Ended June 30, 2018 Three Months Ended June 30, 2017

SIR
(excluding
ILPT)

  ILPT   Total

SIR
(excluding
ILPT)

  ILPT   Total
Calculation of NOI and Cash Basis NOI:
Rental income $ 62,535 $ 33,880 $ 96,415 $ 63,614 $ 33,427 $ 97,041
Tenant reimbursements and other income 14,052 5,540 19,592 13,651 5,178 18,829
Real estate taxes (7,860 ) (4,582 ) (12,442 ) (6,497 ) (4,339 ) (10,836 )
Other operating expenses (10,794 ) (2,824 ) (13,618 ) (10,822 ) (2,701 ) (13,523 )
NOI 57,933 32,014 89,947 59,946 31,565 91,511
Less:
Non-cash straight line rent adjustments included in rental income (2) (1,895 ) (1,038 ) (2,933 ) (3,914 ) (1,475 ) (5,389 )
Lease value amortization included in rental income (2) (444 ) (101 ) (545 ) (431 ) (96 ) (527 )
Lease termination fees included in rental income (2) (101 ) (101 )
Non-cash amortization included in other operating expenses (3) (75 )   (75 ) (75 ) (138 ) (213 )
Cash Basis NOI $ 55,519   $ 30,875   $ 86,394   $ 55,425   $ 29,856   $ 85,281  
 
Reconciliation of NOI to Same Property NOI (4):
NOI $ 57,933 $ 32,014 $ 89,947 $ 59,946 $ 31,565 $ 91,511
Less:
NOI of properties not included in same property results (2,352 ) (23 ) (2,375 ) (1,354 )   (1,354 )
Same property NOI $ 55,581   $ 31,991   $ 87,572   $ 58,592   $ 31,565   $ 90,157  
 
Reconciliation of Same Property NOI to Same Property Cash Basis
NOI
(4):
Same property NOI $ 55,581 $ 31,991 $ 87,572 $ 58,592 $ 31,565 $ 90,157
Less:
Non-cash straight line rent adjustments included in rental income (2) (1,725 ) (1,035 ) (2,760 ) (3,077 ) (1,475 ) (4,552 )
Lease value amortization included in rental income (2) (444 ) (101 ) (545 ) (431 ) (96 ) (527 )
Lease termination fees included in rental income (2) (101 ) (101 )
Non-cash amortization included in other operating expenses (3) (75 )   (75 ) (75 ) (138 ) (213 )
Same property Cash Basis NOI $ 53,337   $ 30,855   $ 84,192   $ 54,908   $ 29,856   $ 84,764  
   
(1) See footnote (1) on page 9 of this press release for the definitions
of NOI and Cash Basis NOI, a description of why SIR believes they
are appropriate supplemental measures and a description of how SIR
uses these measures.
 
(2) SIR reports rental income on a straight line basis over the terms of
the respective leases; accordingly, rental income includes non-cash
straight line rent adjustments. Rental income also includes non-cash
amortization of intangible lease assets and liabilities and lease
termination fees, if any.
 
(3) SIR recorded a liability for the amount by which the estimated fair
value for accounting purposes exceeded the price SIR paid for its
investment in RMR Inc. common stock in June 2015. A portion of this
liability is being amortized on a straight line basis through
December 31, 2035 as a reduction to property management fees, which
are included in other operating expenses.
 
(4) For the three months ended June 30, 2018 and 2017, same property NOI
and same property Cash Basis NOI are based on properties SIR owned
as of June 30, 2018, and which it owned continuously since April 1,
2017.
 

Select Income REIT
Calculation and Reconciliation
of NOI, Cash Basis NOI, Same Property NOI and Same Property Cash
Basis NOI by Segment
(1)
(dollars in
thousands)

(unaudited)

       
Six Months Ended June 30, 2018 Six Months Ended June 30, 2017

SIR
(excluding
ILPT)

  ILPT   Total

SIR
(excluding
ILPT)

  ILPT   Total
Calculation of NOI and Cash Basis NOI:
Rental income $ 127,481 $ 68,689 $ 196,170 $ 127,088 $ 67,297 $ 194,385
Tenant reimbursements and other income 29,130 11,336 40,466 27,031 10,748 37,779
Real estate taxes (15,063 ) (9,167 ) (24,230 ) (13,001 ) (8,678 ) (21,679 )
Other operating expenses (22,531 ) (6,369 ) (28,900 ) (20,957 ) (5,433 ) (26,390 )
NOI 119,017 64,489 183,506 120,161 63,934 184,095
Less:
Non-cash straight line rent adjustments included in rental income (2) (4,257 ) (2,232 ) (6,489 ) (7,835 ) (2,945 ) (10,780 )
Lease value amortization included in rental income (2) (856 ) (203 ) (1,059 ) (769 ) (192 ) (961 )
Lease termination fees included in rental income (2) (101 ) (101 )
Non-cash amortization included in other operating expenses (3) (288 )   (288 ) (150 ) (276 ) (426 )
Cash Basis NOI $ 113,616   $ 62,054   $ 175,670   $ 111,306   $ 60,521   $ 171,827  
 
Reconciliation of NOI to Same Property NOI (4):
NOI $ 119,017 $ 64,489 $ 183,506 $ 120,161 $ 63,934 $ 184,095
Less:
NOI of properties not included in same property results (4,805 ) (23 ) (4,828 ) (1,354 )   (1,354 )
Same property NOI $ 114,212   $ 64,466   $ 178,678   $ 118,807   $ 63,934   $ 182,741  
 
Reconciliation of Same Property NOI to Same Property Cash Basis
NOI
(4):
Same property NOI $ 114,212 $ 64,466 $ 178,678 $ 118,807 $ 63,934 $ 182,741
Less:
Non-cash straight line rent adjustments included in rental income
(2)
(3,905 ) (2,229 ) (6,134 ) (6,998 ) (2,945 ) (9,943 )
Lease value amortization included in rental income (2) (856 ) (203 ) (1,059 ) (769 ) (192 ) (961 )
Lease termination fees included in rental income (2) (101 ) (101 )
Non-cash amortization included in other operating expenses (3) (288 )   (288 ) (150 ) (276 ) (426 )
Same property Cash Basis NOI $ 109,163   $ 62,034   $ 171,197   $ 110,789   $ 60,521   $ 171,310  
   
(1) See footnote (1) on page 9 of this press release for the definitions
of NOI and Cash Basis NOI, a description of why SIR believes they
are appropriate supplemental measures and a description of how SIR
uses these measures.
 
(2) SIR reports rental income on a straight line basis over the terms of
the respective leases; accordingly, rental income includes non-cash
straight line rent adjustments. Rental income also includes non-cash
amortization of intangible lease assets and liabilities and lease
termination fees, if any.
 
(3) SIR recorded a liability for the amount by which the estimated fair
value for accounting purposes exceeded the price SIR paid for its
investment in RMR Inc. common stock in June 2015. A portion of this
liability is being amortized on a straight line basis through
December 31, 2035 as a reduction to property management fees, which
are included in other operating expenses.
 
(4) For the six months ended June 30, 2018 and 2017, same property NOI
and same property Cash Basis NOI are based on properties SIR owned
as of June 30, 2018, and which it owned continuously since January
1, 2017.
 
 

Select Income REIT
Condensed Consolidated Balance
Sheets

(dollars in thousands, except per share data)
(unaudited)

       
June 30, December 31,
2018 2017

ASSETS

Real estate properties:
Land $ 1,056,943 $ 1,041,767
Buildings and improvements 3,217,101   3,178,098  
4,274,044 4,219,865
Accumulated depreciation (354,280 ) (314,249 )
3,919,764 3,905,616
Properties held for sale 5,829 5,829
Acquired real estate leases, net 445,616 477,577
Cash and cash equivalents 31,476 658,719
Restricted cash 1,573 178
Rents receivable, including straight line rents of $117,873 and
$122,010, respectively, net of allowance for doubtful accounts of
$1,765 and $1,396, respectively
122,795 127,672
Deferred leasing costs, net 14,644 14,295
Other assets, net 142,153   113,144  
Total assets $ 4,683,850   $ 5,303,030  
 

LIABILITIES AND SHAREHOLDERS' EQUITY

Unsecured revolving credit facility $ 105,000 $
ILPT revolving credit facility 335,000 750,000
Unsecured term loan, net 348,870
Senior unsecured notes, net 1,429,622 1,777,425
Mortgage notes payable, net 210,715 210,785
Accounts payable and other liabilities 95,921 101,352
Assumed real estate lease obligations, net 64,372 68,783
Rents collected in advance 19,364 15,644
Security deposits 8,483 8,346
Due to related persons 19,742   30,006  
Total liabilities 2,288,219   3,311,211  
 
Commitments and contingencies
 
Shareholders' equity:
Shareholders' equity attributable to SIR:
Common shares of beneficial interest, $.01 par value: 125,000,000
shares authorized; 89,504,754 and 89,487,371 shares issued and
outstanding, respectively
895 895
Additional paid in capital 2,312,339 2,180,896
Cumulative net income 605,366 508,213
Cumulative other comprehensive income 687 52,665
Cumulative common distributions (842,128 ) (750,850 )
Total shareholders' equity attributable to SIR 2,077,159 1,991,819
Noncontrolling interest in consolidated subsidiary 318,472    
Total shareholders' equity 2,395,631   1,991,819  
Total liabilities and shareholders' equity $ 4,683,850   $ 5,303,030  
 

A Maryland Real Estate Investment Trust with transferable shares of
beneficial interest listed on the Nasdaq.

No shareholder,
Trustee or officer is personally liable for any act or obligation of the
Trust.

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