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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2013

OR

Commission File Number 1-34364

GOVERNMENT PROPERTIES INCOME TRUST

(Exact Name of Registrant as Specified in Its Charter)

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 x  No o

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 x  No o

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

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

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of August 1, 2013:  54,674,118

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GOVERNMENT PROPERTIES INCOME TRUST

FORM 10-Q

June 30, 2013

INDEX

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PART I.       Financial Information

Item 1.  Financial Statements

GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

See accompanying notes.

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GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

See accompanying notes.

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GOVERNMENT PROPERTIES INCOME TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

See accompanying notes.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 1.   Basis of Presentation

The accompanying condensed consolidated financial statements of Government Properties Income Trust and its subsidiaries, or the Company, we or us, are unaudited.  We operate in one business segment: ownership of properties that are primarily leased to government tenants.  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 financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012, Items 6, 7 and 15 of which were subsequently amended and restated to make reclassifications to reflect properties we sold in 2013 as discontinued operations (See Note 3) and are included in our Current Report on Form 8-K dated July 12, 2013.  We refer in this Quarterly Report to our Annual Report on Form 10-K for the year ended December 31, 2012, as amended and restated in part by our Current Report on Form 8-K dated July 12, 2013, as 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 material intercompany transactions and balances between the Company and its 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.

The preparation of 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 and impairment of real estate and intangible assets.

Note 2.   Recent Accounting Pronouncements

Effective January 2013, we adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income, or AOCI. This standard did not change the requirements for reporting net income or other comprehensive income. However, it requires disclosure of amounts reclassified out of AOCI in their entirety, by component, on the face of the statement of income and comprehensive income or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This update was effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The implementation of this update did not cause any changes to the disclosures in, or the presentation of, our condensed consolidated financial statements.

Note 3. Real Estate Properties

As of June 30, 2013, we owned 82 properties with an undepreciated carrying value of $1,526,678. We generally lease space in our properties on a gross lease or modified gross lease basis pursuant to fixed term operating leases expiring between 2013 and 2033. Certain of our government tenants have the right to terminate their leases before the lease term expires. 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 June 30, 2013, we entered into 16 leases for 314,527 rentable square feet for a weighted average (by square feet) lease term of 13.4 years and we made commitments for approximately $5,191 of leasing related costs. During the six months ended June 30, 2013, we entered into 22 leases for 513,045 rentable square feet for a weighted average (by square feet) lease term of 9.7 years and we made commitments for approximately $9,802 of leasing related costs. We have unspent leasing related obligations of approximately $13,600 as of June 30, 2013.

In February 2013, we sold an office property located in Oklahoma City, OK with 185,881 rentable square feet and a net book value of $8,069 for $16,300, excluding closing costs, and recognized a gain on sale of $8,198.  In March 2013, we sold an office property located in Tucson, AZ with 31,051 rentable square feet and a net book value of $2,080 for $2,189, excluding closing costs, and recognized a loss on sale of $30.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Results of operations for properties sold are included in discontinued operations in our condensed consolidated statements of income and comprehensive income once the criteria for discontinued operations in the Presentation of Financial Statements Topic of the FASB Accounting Standards Codification TM are met.  Summarized income statement information for properties sold is as follows:

In July 2013, we entered an agreement to acquire a warehouse property located in Chester, Virginia with 228,108 rentable square feet.  This property is 100% leased to the U.S. Government and occupied by the United States Army.  The contract price is $12,750, excluding acquisition costs.  This pending acquisition is subject to our satisfactory completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will acquire this property or that the acquisition will not be delayed or that the terms will not change.

Note 4.  Revenue Recognition

Rental income from operating leases is recognized on a straight line basis over the life of lease agreements. We increased rental income to record revenue on a straight line basis by $745 and $694 for the three months ended June 30, 2013 and 2012, respectively, and $1,654 and $1,564 for the six months ended June 30, 2013 and 2012, respectively.  Rents receivable include $9,076 and $7,455 of straight line rent receivables at June 30, 2013 and December 31, 2012, respectively.

Note 5.  Concentration

Tenant and Credit Concentration

We define annualized rental income as the annualized contractual base rents from our tenants pursuant to our lease agreements with them 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, 10 state governments and the United Nations combined were responsible for approximately 94.0% and 92.7% of our annualized rental income as of June 30, 2013 and 2012, respectively. The U.S. Government is our largest tenant by annualized rental income and was responsible for approximately 71.5% and 67.7% of our annualized rental income as of June 30, 2013 and 2012, respectively.

Geographic Concentration

At June 30, 2013, our 82 properties were located in 31 states and the District of Columbia.  Properties located in Maryland, California, the District of Columbia, Georgia, New York and Massachusetts were responsible for approximately 12.3%, 12.2%, 10.9%, 9.6%, 8.8% and 6.0% of our annualized rental income as of June 30, 2013, respectively.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 6.  Indebtedness

At June 30, 2013 and December 31, 2012, our outstanding indebtedness consisted of the following: 

(1)         We assumed these mortgages in connection with our acquisitions of certain 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 have a $550,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is October 19, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date of our revolving credit facility by one year to October 19, 2016. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1,100,000 in certain circumstances. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium, which was 150 basis points as of June 30, 2013. We also pay a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of June 30, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.7% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.7% for both the three and six months ended June 30, 2013. As of June 30, 2013, we had $25,000 outstanding and $525,000 available under our revolving credit facility.

We have a $350,000 unsecured term loan. Our term loan matures on January 11, 2017, and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium, which was 175 basis points as of June 30, 2013. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of June 30, 2013, the interest rate for the amount outstanding under our term loan was 2.0% and the weighted average interest rate for the amount outstanding under our term loan was 1.9% for both the three and six months ended June 30, 2013.

Our revolving credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us and the termination of our business management agreement or property management agreement with Reit Management & Research LLC, or RMR. Our revolving credit facility agreement and our term loan agreement also contain a number of covenants, including covenants that restrict our ability to incur debts or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.  We believe we were in compliance with the terms and conditions of our revolving credit facility agreement and our term loan agreement at June 30, 2013.

At June 30, 2013, five of our properties with an aggregate net book value of $121,417 secured four mortgage notes that were assumed in connection with the acquisition of such properties. Our mortgage notes are non-recourse and do not contain any material financial covenants.

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

Note 7. Fair Value of Financial Instruments

Our financial instruments at June 30, 2013 include cash and cash equivalents, restricted cash, rents receivable, mortgage notes payable, accounts payable, our revolving credit facility and our term loan, amounts due to related persons, other accrued expenses and security deposits. At June 30, 2013, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements, except as follows:

We estimate 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 8. Shareholders’ Equity

Distributions

On February 22, 2013, we paid a distribution to common shareholders in the amount of $0.43 per share, or $23,497, that was declared on January 10, 2013 and was payable to shareholders of record on January 25, 2013.

On May 24, 2013, we paid a distribution to common shareholders in the amount of $0.43 per share, or $23,505, that was declared on April 10, 2013 and was payable to shareholders of record on April 26, 2013.

On July 10, 2013, we declared a distribution payable to common shareholders of record on July 26, 2013, in the amount of $0.43 per share, or $23,510.  We expect to pay this distribution on or about August 23, 2013 using cash on hand and borrowings under our revolving credit facility.

Share Issuances

As further described in Note 9, on March 27, 2013, under the terms of our business management agreement with RMR, we issued 20,230 of our common shares of beneficial interest, $.01 par value per share, or common shares, to RMR in payment of an incentive fee of approximately $485 for services rendered to us by RMR during 2012.

On May 21, 2013, we granted 2,000 of our common shares, valued at $26.60 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees as part of their annual compensation.

We have no dilutive securities.

Note 9. Related Person Transactions

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

Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, which include CommonWealth REIT, or CWH.  One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR.  Each of our executive officers is also an officer of RMR.  CWH’s

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GOVERNMENT PROPERTIES INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies.  In addition, officers of RMR serve as officers of those companies.

Pursuant to our business management agreement with RMR, we recognized business management fees of $2,528 and $2,028 for the three months ended June 30, 2013 and 2012, respectively, and $4,982 and $4,258 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated financial statements.  In March 2013, we issued 20,230 of our common shares to RMR for the incentive fee payable to RMR for 2012, in accordance with the terms of our business management agreement.

In connection with our property management agreement with RMR, we recognized aggregate property management and construction supervision fees of $1,799 and $1,610 for the three months ended June 30, 2013 and 2012, respectively, and $3,615 and $3,205 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

CWH organized us as a 100% owned subsidiary.  One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of CWH.  Our other Managing Trustee, Mr. Adam Portnoy, is a managing trustee and the President of CWH.  RMR provides management services to both us and CWH.

In 2009, we completed our initial public offering, or our IPO, pursuant to which we ceased to be a majority owned subsidiary of CWH.  In connection with our IPO, we and CWH entered into a transaction agreement that governs our separation from and relationship with CWH.  Pursuant to this transaction agreement, among other things, CWH granted us a right of first refusal to acquire any property owned by CWH that CWH determines to divest if the property is then majority leased to a government tenant, which right of first refusal will also apply in the event of an indirect sale of any such properties resulting from a change of control of CWH.

Until March 15, 2013, CWH was our largest shareholder.  On March 15, 2013, CWH sold all 9,950,000 of our common shares it owned in a public offering.  In connection with this public offering, on March 11, 2013, we entered into a registration agreement with CWH under which CWH agreed to pay all expenses incurred by us relating to the registration and sale of our common shares owned by CWH in the offering, pursuant to which CWH paid us $303. In addition, under the registration agreement, CWH agreed to indemnify us and our officers, Trustees and controlling persons, and we agreed to indemnify CWH, its officers, trustees and controlling persons, against certain liabilities related to the public offering, including liabilities under the Securities Act of 1933, as amended, or the Securities Act; and we and CWH agreed to reimburse payments that the other may make in respect of those liabilities.

We, RMR, CWH and five other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.

As of June 30, 2013, we have invested $5,194 in AIC since we became an equity owner of AIC in December 2009.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,823 and $5,747 as of June 30, 2013 and December 31, 2012, respectively, which amounts are included in other assets on our condensed consolidated balance sheet.  We recognized income of $79 and $76 for the three months ended June 30, 2013 and 2012, respectively, and $155 and $121 for the six months ended June 30, 2013 and 2012, respectively, related to our investment in AIC.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2013 for a one year term, and we paid a premium, including taxes and fees, of $1,161 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in this program.  We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

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

The following discussion and tables should be read in conjunction with the financial statements and notes thereto included in this Quarterly Report on Form 10-Q and in our Annual Report.

OVERVIEW

We are a real estate investment trust, or REIT, organized under Maryland law. As of June 30, 2013, we owned 82 properties located in 31 states and the District of Columbia containing approximately 10 million rentable square feet, of which 67.3% was leased to the U.S. Government, 17.9% was leased to 10 state governments, 1.9% was leased to the United Nations, an international intergovernmental organization, and 6.3% was leased to various non-governmental organizations.  The U.S. Government, 10 state governments and the United Nations combined were responsible for 94.0% and 92.7% of our annualized rental income, as defined below, as of June 30, 2013 and 2012, respectively.

Property Operations

As of June 30, 2013, 93.4% of our rentable square feet were leased, compared to 92.6% of our rentable square feet as of June 30, 2012.  Occupancy data for our properties as of June 30, 2013 and 2012 is as follows (square feet in thousands):

(1)         Based on properties we owned on June 30, 2013.

(2)         Based on properties we owned on June 30, 2013 and which we owned continuously since January 1, 2012.  Our comparable properties increased from 55 properties at June 30, 2012 as a result of 16 acquisitions we completed during the year ended December 31, 2011 and the sale of two properties during the six months ended June 30, 2013.

(3)         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 periods ended June 30, 2013 and 2012 are as follows:

(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.

(2)         Based on properties we owned on June 30, 2013.

(3)         Based on properties we owned on June 30, 2013 and which we owned continuously since January 1, 2012.

We currently believe that U.S. property leasing market conditions are slowly improving, but remain weak in many U.S. markets. Our historical experience, including that of our predecessor, CWH, 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. We believe that current budgetary pressures may cause increased demand for leased space by government tenants, as opposed to new buildings built on behalf of government tenants. However, these same increased budgetary pressures upon the U.S. Government and state governments could also result in a decrease in government employment, an increase in

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space utilization rates by government tenants or consolidation of operations into government owned properties, thereby reducing the need for government leased space. Accordingly, 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.

As of June 30, 2013, we had leases totaling 585,879 rentable square feet that were scheduled to expire through September 30, 2013. Based upon current market conditions and tenant negotiations for leases scheduled to expire through September 30, 2013, we expect that rental rates we are likely to achieve on new or renewed leases will, in the aggregate and on a weighted average basis (based on revenues), be higher than the rates currently being paid, thereby generally resulting in higher revenue from the same space absent an increase in vacancies. However, we cannot assure that the rental rates we expect will occur or that we will not experience material declines in our rental income due to vacancies upon lease expirations. Prevailing market conditions and government tenants’ needs at the time our leases expire will generally determine lease renewals and rental rates for space in our properties; and market conditions and government tenants’ needs are generally beyond our control. As of June 30, 2013, lease expirations at our properties by year are as follows (square feet and dollars in thousands):

(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 June 30, 2013, government tenants occupying approximately 7.5% of our rentable square feet and responsible for approximately 5.6% of our annualized rental income as of June 30, 2013 have currently exercisable rights to terminate their leases before the stated expirations. Also in 2013, 2014, 2015, 2016, 2017, 2018, 2019,  2020 and 2023, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.7%, 4.1%, 3.3%, 6.6%, 2.6%, 1.1%, 3.6%, 0.6% and 1.5% of our rentable square feet, respectively, and contribute an additional approximately 0.6%, 4.6%, 2.7%, 9.4%, 3.6%, 1.4%, 4.2%, 0.7% and 1.3% of our annualized rental income, respectively, as of June 30, 2013.  In addition, as of June 30, 2013, 12 of our state government tenants have currently exercisable rights to terminate their leases if these states do not appropriate rent in their respective annual budgets. These 12 tenants occupy approximately 7.7% of our rentable square feet and contribute approximately 7.5% of our annualized rental income as of June 30, 2013.

(2)                                 Occupied square feet is pursuant to leases existing as of June 30, 2013, 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.

(3)                                 Annualized rental income is the annualized contractual base rents from our tenants pursuant to our lease agreements as of June 30, 2013, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

Acquisition and Disposition Activities (dollar amounts in thousands)

In July 2013, we entered an agreement to acquire a warehouse property located in Chester, Virginia with 228,108 rentable square feet.  This property is 100% leased to the U.S. Government and occupied by the United States Army.  The contract price is $12,750, excluding acquisition costs.  This pending acquisition is subject to our satisfactory completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will acquire this property or that the acquisition will not be delayed or that the terms will not change.

Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants;

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however, we cannot assure that we will reach any agreement to acquire such properties, or that if we do reach any such agreement, that we will complete the acquisitions.

In February 2013, we sold an office property located in Oklahoma City, OK with 185,881 rentable square feet for $16,300, excluding closing costs, and recognized a gain on sale of $8,198. In March 2013, we sold an office property located in Tucson, AZ with 31,051 rentable square feet for $2,189, excluding closing costs, and recognized a loss on sale of $30.

We do not currently plan to dispose of any of our properties, however, we may on occasion offer for sale additional properties. Future changes in market conditions, property performance, our expectation regarding lease renewals or our plans with regard to particular properties may change our disposition strategy.

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

Three Months Ended June 30, 2013, Compared to Three Months Ended June 30, 2012

(1)                                 Comparable properties consist of 69 properties we owned on June 30, 2013 and which we owned continuously since April 1, 2012.

(2)                                 Acquired properties consist of the 13 and three (which three are included in the previously referenced 13) properties we owned on June 30, 2013 and 2012, respectively, which we acquired during the period from April 1, 2012 to June 30, 2013.

(3)                                 We calculate net operating income, or NOI, as shown above. We define NOI as income from our real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions. 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 internally 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 incurred at the property level and may facilitate comparisons of our operating performance between periods. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties’ results of operations. NOI does not represent cash generated by operating activities in

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accordance with GAAP and should not be considered as an alternative to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. We believe that NOI may facilitate an understanding of our consolidated historical operating results. This measure should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our Condensed Consolidated Statements of Income and Comprehensive Income and Condensed Consolidated Statements of Cash Flows. Other real estate investment trusts, or REITs, and real estate companies may calculate NOI differently than we do.

(4)                                 We calculate funds from operations, or FFO, and 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, excluding any gain or loss on sale of properties, as well as other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we exclude acquisition related costs. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, operating income and cash flow from operating activities. 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 between us and 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 status as a REIT, limitations in our revolving credit facility and term loan agreements, the availability of debt and equity capital to us, our expectation of our future capital requirements and operating performance, 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 as alternatives to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. We believe that FFO and Normalized FFO may facilitate an understanding of our consolidated historical operating results. These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our Condensed Consolidated Statements of Income and Condensed Comprehensive Income and Consolidated Statements of Cash Flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.

We refer to the 69 properties we owned on June 30, 2013 and which we have owned continuously since April 1, 2012 as comparable properties.  We refer to the 13 and three (which three are included in the previously referenced 13) properties that we owned as of June 30, 2013 and 2012, respectively, which we purchased during the period from April 1, 2012 to June 30, 2013 as acquired properties.  Our condensed consolidated income statement for the three months ended June 30, 2013 includes the operating results of all of the acquired properties for the entire period, as we purchased all of the acquired properties prior to April 1, 2013 and our condensed consolidated income statement for the three months ended June 30, 2012 includes the operating results of three acquired properties for less than the entire period, as those properties were purchased during that period.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended June 30, 2013, compared to the three month period ended June 30, 2012.

Rental income.  The increase in rental income reflects the effects of acquired properties and an increase in rental income for comparable properties.  Rental income for acquired properties increased $5,753 from properties acquired after June 30, 2012 and $930 from properties acquired during the 2012 period.  Rental income for comparable properties increased $770 primarily due to increases in base rental income and real estate tax expense reimbursement income, partially offset by lower operating expense reimbursement income and a decrease in straight line rent adjustments. Rental income includes non-cash straight line rent adjustments totaling $745 in the 2013 period and $694 in the 2012 period and amortization of acquired leases and assumed lease obligations totaling ($306) in the 2013 period and ($538) in the 2012 period.