Government Properties Income Trust Investor Presentation March 2017

Transcription

1 50 West State Street, Trenton, NJ. Square Feet: 266,995. Primary Tenant: New Jersey Dept. of the Treasury. 801 K Street, Sacramento, CA Square Feet: 337,811 Tenant: State of California Government Properties Income Trust Investor Presentation March 2017

2 Disclaimer. THIS PRESENTATION CONTAINS CERTAIN FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. FORWARD LOOKING STATEMENTS ARE GENERALLY IDENTIFIABLE BY USE OF FORWARD LOOKING TERMINOLOGY SUCH AS BELIEVE, EXPECT, ANTICIPATE, INTEND, PLAN, ESTIMATE, WILL, MAY AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS. ALTHOUGH GOV BELIEVES THAT THE EXPECTATIONS REFLECTED IN THESE FORWARD LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, GOV S ACTUAL RESULTS AND PERFORMANCE COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD LOOKING STATEMENTS. FOR A LIST OF FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON GOV S BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROM OPERATIONS, NET OPERATING INCOME, CASH FLOWS, LIQUIDITY AND PROSPECTS, PLEASE REFER TO GOV S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016 AND SUBSEQUENT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD NOT PLACE UNDUE RELIANCE UPON ANY FORWARD LOOKING STATEMENT. EXCEPT AS REQUIRED BY APPLICABLE LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENT AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. THIS PRESENTATION CONTAINS NON-GAAP FINANCIAL MEASURES INCLUDING NORMALIZED FUNDS FROM OPERATIONS (FFO), ADJUSTED EBITDA, NET OPERATING INCOME (NOI) AND CASH BASIS NOI. RECONCILIATIONS FOR THESE METRICS TO THE CLOSEST U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, OR GAAP, METRICS ARE INCLUDED IN THE APPENDIX. Government Properties Income Trust Note: Unless otherwise noted, data is presented as of December 31, 2016 and excludes properties classified as discontinued operations. 2

3 Company overview. Annualized Rental Income by Tenant (1) Government Properties Income Trust (Nasdaq: GOV) is a real estate investment trust (REIT) focused on owning and operating properties majority leased to government tenants. We are the U.S. Government s largest landlord (3) and own 73 properties located in 31 states and Washington D.C. containing approximately 11.4 million square feet. Properties are 95% leased. 88% of our annualized rental income is paid by the U.S. Government (on behalf of 37 agencies), 13 state governments and 3 other government tenants. Owns 28% of the outstanding shares of Select Income REIT (Nasdaq: SIR). Pays an attractive current dividend yield of 8.4% (2). Investment grade rated by Moody s (Baa3) and S&P (BBB-). U.S. Gov. 60.6% State Gov. 22.3% Gov. Contractor Tenants 4.9% Other-Gov. 5.0% Non-Gov., 7.2% (1) Percentage of annualized rental income is calculated using annualized contractual base rents from our tenants pursuant to our lease agre ements with them as of December 31, 2016, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excludes lease value amortization. Government Properties Income Trust 3 (2) As of market close on March 2,2017. (3) Source: Colliers International Knowledge Leader: Top Federal Property Owners (2016).

4 A conservative strategy designed to provide secure and stable income. Enhancing security through leasing: Approximately 88% of GOV s rental income is paid by investment grade tenants; significantly above the office REIT average. Historically, government tenants remain in place significantly longer than private sector tenants, with U.S. Government tenants historically occupying the same space for more than 20 years. Representative GOV Tenants Enhancing security through fiscal management: We have been investment grade rated since As competition has intensified and capitalization rates have compressed, we significantly slowed our acquisition pace and studied and increased disposition activity. We expect that our acquisitions and dispositions will be modest in the near term. Government Properties Income Trust 4

5 GOV s diversified portfolio today. U.S. Government Tenant Diversity (1) State Government Tenant Diversity (1) % of Total % of Rentable Rentable Annualized Tenant : Agency Sq. Ft. (2) Sq. Ft. (2) Rental Income (3) U.S. Government: 1 Citizenship and Immigration Services 448, % 8.1 % 2 Internal Revenue Service 1,041, % 7.8 % 3 U.S. Government (4) 406, % 4.5 % 4 Federal Bureau of Investigation 304, % 3.2 % 5 Centers for Disease Control (5) 352, % 2.9 % 6 Department of Justice 227, % 2.9 % 7 Customs and Border Protection 243, % 2.5 % 8 Bureau of Land Management 304, % 2.3 % 9 Department of Veterans Affairs 280, % 2.3 % 10 Defense Intelligence Agency 266, % 1.9 % 11 Immigration and Customs Enforcement 136, % 1.9 % 12 Social Security Administration 189, % 1.7 % 13 Bureau of Reclamation 212, % 1.7 % 14 National Park Service 166, % 1.7 % 15 U.S. Courts 115, % 1.6 % 16 Department of Health and Human Services 128, % 1.2 % 17 National Archives and Record Administration 352, % 1.1 % 18 Drug Enforcement Agency 93, % 1.1 % 19 Department of Energy 140, % 1.0 % 20 Defense Nuclear Facilities Board 60, % 1.0 % 21 Department of State 89, % 0.9 % 22 U.S. Postal Service 321, % 0.8 % 23 Occupational Health and Safety Administration 57, % 0.8 % 24 Bureau of the Fiscal Service 98, % 0.7 % 25 Centers for Medicare and Medicaid Services 78, % 0.7 % 26 Military Entrance Processing Station 56, % 0.7 % 27 Department of Housing and Urban Development 82, % 0.6 % 28 Environmental Protection Agency 43, % 0.6 % 29 Department of the Army 228, % 0.6 % 30 General Services Administration 20, % 0.4 % 31 Bureau of Prisons 51, % 0.4 % 32 Food and Drug Administration 33, % 0.3 % 33 Department of Defense 31, % 0.3 % 34 Equal Employment Opportunity Commission 21, % 0.2 % 35 Small Business Administration 8, % 0.1 % 36 U.S. Coast Guard 4, % 0.0 % 37 Department of Labor 6, % 0.0 % Subtotal U.S. Government 6,703, % 60.6 % % of Total % of Rentable Rentable Annualized Tenant - Agency Sq. Ft. (2) Sq. Ft. (2) Rental Income (3) State Governments: 1 State of California - nine agency occupants 762, % 7.7 % 2 Commonwealth of Massachusetts - three agency occupants 307, % 3.5 % 3 State of Georgia - Department of Transportation 298, % 2.4 % 4 Commonwealth of Virginia - seven agency occupants 255, % 2.1 % 5 State of Oregon - two agency occupants 199, % 1.7 % 6 State of New Jersey - Department of Treasury 173, % 1.6 % 7 State of Washington - Social and Health Services 111, % 1.0 % 8 State of Arizona - Northern Arizona University 66, % 0.5 % 9 State of South Carolina - four agency occupants 121, % 0.5 % 10 State of Maryland - two agency occupants 84, % 0.5 % 11 State of Minnesota - Minnesota State Lottery 61, % 0.4 % 12 State of New York - Department of Agriculture 64, % 0.4 % 13 State of Kansas - Kansas University 4, % 0.0 % Subtotal State Government 2,509, % 22.3 % 3 Other Government Tenants 301, % 5.0 % 3 Government Contractor Tenants 397, % 4.9 % Geographic Diversity (1)(3) Government Properties Income Trust 5 Other MA MD (1) Amounts exclude one property (one building) classified as discontinued operations. (2) Rentable sq. ft. is pursuant to leases existing as of December 31, 2016, and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease, if any. Rentable sq. ft. measurements are subject to changes when space is re-measured or re-configured for new tenants. (3) Percentage of annualized rental income is calculated using annualized contractual base rents from our tenants pursuant to our lease agreements as of December 31, 2016, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization. (4) Agency occupant cannot be disclosed. (5) Square footage excludes a 25,579 square foot expansion to be constructed at an existing property prior to the commencement of the lease. NY CA GA DC VA

6 Government leasing dynamics. U.S. Government: General Services Administration (GSA) oversees virtually all U.S. Government real estate, entering gross leases on behalf of agencies with flat rents and annual expense reimbursements over an established base as determined by Regional Consumer Price Index changes plus 100% of real estate tax increases over a base amount. GSA has focused on reducing the amount of space per federal employee, consolidating agencies in underutilized federally owned properties when available, and meeting security requirements and green initiatives. Primary lease terms tend to be for years with renewal options for 5 years. While 3-5 year renewal terms have been prevalent the last few years, GSA is focused on executing minimum lease terms of 10 years for all GSA lease renewals. Many leases provide the agency the right to terminate with notice, but no termination penalty. State governments: Most leases are full service gross with periodic rent increases and no reimbursement of operating expenses. Some state leases are subject to annual budget appropriations, which in GOV s experience rarely result in early terminations. Government Properties Income Trust 6

7 GOV has a history of renewing a high percentage of its leases. LEASE EXPIRATION SCHEDULE (1) As of December 31, 2016 (dollars in thousands) (1) Excludes one property (one building) classified as discontinued operations. (2) The year of lease expiration is pursuant to current contract terms. Some of our government tenants have the right to vacate their space before the stated expirations of their leases. In addition, certain of our government tenants have the right to terminate their leases if their respective legislature or other funding authority does not appropriate rent in their respective annual budgets. (3) Sq. ft. is pursuant to leases existing as of December 31, 2016, and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease, if any. Sq. ft. measurements are subject to changes when space is re-measured or re-configured for new tenants. (4) Annualized rental income is calculated using the annualized contractual base rents from our tenants pursuant to our lease agreements as of December 31, 2016, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excludes lease value amortization. (5) Square footage excludes a 25,579 square foot expansion to be constructed at an existing property prior to the commencement of the lease. Government Properties Income Trust 7

8 Tenant retention expected to remain high. GOV typically begins to discuss renewals with tenants at least two years prior to lease expiration. As of December 31, 2016, leases contributing 20.8% of GOV s annualized rental income were set to expire over the ensuing 24 months. Of this total, GOV currently believes: Total Lease Expirations (1) 2.60% 0.82% 17.38% It will be able to renew or extend leases for the vast majority of this expiring rent; Tenants contributing 2.60% of GOV s annualized rent are expected to vacate; and Will Vacate Tenants contributing 0.82% of GOV s annualized rent are at risk of vacating or downsizing. GOV typically markets its unoccupied space to both government and non-government tenants via separate brokers % At Risk Remaining expirations through 12/31/18 Expirations after 12/31/18 (1) Percentage of annualized rental income, which is calculated using annualized contractual base rents from our tenants pursuant to our lease Government Properties Income Trust agreements with them as of December 31, 2016, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to 8 us, and excludes lease value amortization.

9 Selectively targeting accretive acquisitions. $500 ($ in millions) $400 Acquisition History Through January 31, 2017 $300 $200 $100 $ U.S. Government State Government United Nations Government Contractors GOV remains cautious and disciplined in its strategic investments. Since the end of the third quarter in 2016, GOV purchased three properties for approximately $131.3 million at a weighted avg. cap rate of 8.3% (1) and a weighted avg. remaining lease term of 6.5 years (2). (1) Represents the ratio of (x) annual straight line rental income, excluding the impact of above and below market lease amortization, based on existing leases at the acquisition date, less estimated annual property operating expenses as of the date of the acquisition, excluding depreciation and Government Properties Income Trust 9 amortization expense, to (y) the acquisition purchase price, excluding acquisition costs. (2) Average remaining lease term weighted based on rental income as of the date of acquisition.

10 GOV s capital recycling track record. Since 2013, GOV has identified properties for disposition based upon the following criteria: A property is vacant and the re-leasing prospects are challenged either because of high potential capital costs or a weak leasing environment; or We are uncertain of the government s long term commitment to a property, and we believe the downtime to find a replacement tenant is unacceptably long and/or the leasing cost to retenant the space is uneconomical. From the start of 2013 through December 31, 2016, GOV had sold six properties for an aggregate sale price of $70.2 million, excluding closing costs. Expects dispositions to remain modest, but will continue evaluating the portfolio for potential capital recycling opportunities. Government Properties Income Trust 10

11 GOV s sustainability initiatives are enhancing portfolio metrics and earning accolades. The U.S. Government can favor buildings that are ENERGY STAR rated or LEED designated. As a result, since becoming a public company in 2009, GOV has designated significant building improvement capital to green building initiatives, reducing its carbon footprint and enhancing relationships with tenants. 50 GOV buildings currently have ENERGY STAR certifications (1). Buildings consume at least 25% less energy than the national median. 16 GOV buildings currently have LEED certifications (1). Buildings consume less energy and water, have lower maintenance costs, higher occupant satisfaction and lower greenhouse environmental impact. 7 GOV buildings have participate in utility demand response programs whereby revenue is earned by reducing electric demand during load reduction events called by utility companies. Reduces power consumption and greenhouse gas emissions. GOV has been recognized by the U.S. Department of Energy's Better Buildings Alliance and the Institute for Market Transformation as an inaugural Green Lease Leader. Government Properties Income Trust (1) Current certifications are as of December 31,

12 SIR investment adds further stability to cash flows. GOV has established a 28% equity interest in Select Income REIT (Nasdaq: SIR). Like GOV, SIR s business is focused on earning secure cash flows and offering a safe and growing distribution to its shareholders. SIR is an owner of single tenant net leased office and industrial properties and the largest owner of industrial lands in Hawaii. As of December 31, 2016, 39.5% of its rent was paid by investment grade rated tenants, only 10.2% of its rents expires before the end of 2021, and the company has a conservative Normalized FFO dividend payout ratio of 71.8%. GOV expects to receive approximately $51 million annually from SIR in the form of dividends based upon SIR s current distribution rate. SIR s payout ratio remains low relative to its REIT peers, providing GOV with further potential to grow its cash flows. GOV believes its SIR investment has a valuation upside based upon SIR s low trading multiple and the implied cap rate of its property investments. Government Properties Income Trust 12

13 Financials Stevens Center, Richland, WA Two Buildings, Government Square Properties Feet: Income 140,152 Trust Agency Supplemental Occupant: U.S. Operating Department and Financial of Energy Data, March 31, 2016

14 GOV maintains a conservative financial profile. Market Capitalization as of December 31, 2016 ($ in 000s) Key Balance Sheet Metrics as of and for the Quarter Ended December 31, % 6% 20% 24% Total debt (book value)/gross book value of real estate assets and market value of SIR common shares (1)(2)(3) 49.9% Adjusted EBITDA/interest expense (4) 3.9x 1% Unsecured revolving credit facility $ 160,000 Unsecured term loans 547,171 Senior unsecured debt 646,844 Mortgage debt 27,837 Total debt 1,381,852 Debt(book value)/annualized adjusted 7.0x EBITDA (1)(4) Weighted average interest rate 3.55% Market value of common shares (at end of Period) 1,357,364 Total Market Capitalization $ 2,739,216 (1) Debt amounts are net of unamortized premiums, discounts and certain issuance costs. (2) Gross book value of real estate assets is real estate properties, at cost, before purchase price allocations, less impairment writedowns, if any. Excludes one property (one building) classified as held for sale and one property (one building) classified as discontinued operations in the respective periods presented. (3) As of December 31, 2016, we owned 24,918,421 common shares of SIR. The closing price of SIR s common shares on December 30, 2016 was $25.20 per share. (4) See Appendix for the calculation of earnings before interest, taxes, depreciation and amortization, or EBITDA, and Adjusted EBITDA, and a reconciliation of net income determined in accordance with GAAP to those amounts. Government Properties Income Trust 14

15 GOV has manageable, laddered debt maturities. $500,000 Debt Maturity Schedule as of December 31, 2016 ($ in 000s) $519,439 Unsecured Revolving Credit Facility $750 million facility with $590 million available as of 12/31/16. Matures in January 2019 with a one year extension option. $375,000 $250,000 $301,619 $250,000 $310,000 Unsecured Term Loans $300 million loan which matures in March $250 million loan which matures in March Prepayable at any time. (1) $125,000 $- $1,549 $1,671 $13, Weighted average time to maturity is 9.1 years. Unsecured Senior Notes $350 million of fixed rate senior unsecured debt which matures in August 2019 $310 million fixed rate senior unsecured debt which matures in May 2046 (1) Our $300,000 term loan and our $250,000 term loan is prepayable without penalty at any time. Government Properties Income Trust 15

16 Appendix. One Georgia Center, Atlanta, GA Square Feet: 375,952 Tenant: State Properties Commission Government Properties Income Trust 16

17 Condensed consolidated balance sheets. ($ in 000s, except share data) ASSETS Real estate properties: Land Buildings and improvements Total real estate properties, gross Accumulated depreciation Total real estate properties, net Equity investment in Select Income REIT Assets of discontinued operations Assets of property held for sale Acquired real estate leases, net Cash and cash equivalents Restricted cash Rents receivable, net Deferred leasing costs, net Other assets, net Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Unsecured revolving credit facility Unsecured term loans, net Senior unsecured notes, net Mortgage notes payable, net Liabilities of discontinued operations Liabilities of property held for sale Accounts payable and other liabilities Due to related persons Assumed real estate lease obligations, net Total liabilities Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $0.01 par value: 100,000,000 shares authorized, 71,177,906 and 71,126,308 issued and outstanding, respectively Additional paid in capital Cumulative net income Cumulative other comprehensive income (loss) Cumulative common distributions Total shareholders' equity Total liabilities and shareholders' equity As of December 31, $ 267,855 $ 253,058 1,620,905 1,443,074 1,888,760 1,696,132 (296,804) (255,879) 1,591,956 1,440, , ,369 12,541 12,468 3, , ,267 29,941 8, ,022 48,458 45,269 21,079 14,299 68,005 33,680 $ 2,385,066 $ 2,168,510 $ 160,000 $ 117, , , , ,809 27, , ,019 50,543 3,520 2,886 10,626 12,735 1,450,062 1,211, ,473,533 1,472,482 96,329 38,486 26,957 (14,867) (662,527) (540,161) 935, ,651 $ 2,385,066 $ 2,168,510 Government Properties Income Trust 17

18 Condensed consolidated statements of income. ($ in 000s, except share data) Rental income (1) Three Months Ended December 31, Year Ended December 31, 12/31/ /31/ $ 66,030 $ 61,685 $ 258,180 $ 248,549 Expense Real estate taxes 7,893 7,087 30,703 29,906 Utility expenses 3,939 4,128 17,269 17,916 Other operating expenses 14,259 13,766 54,290 50,425 Depreciation and amortization 18,440 17,021 73,153 68,696 Acquisition related costs , General and administrative 3,547 3,395 14,897 14,826 Total expenses 48,906 45, , ,580 Operating income Dividend income Interest income Interest expense (including net amortization of debt premiums and discounts and debt issuance costs of $808, $355, $2,832 and $1,376, respectively) Gain on early extinguishment of debt Loss on distribution to common shareholders of The RMR Group Inc. common stock Net gain (loss) on issuance of shares by Select Income REIT Loss on impairment of Select Income REIT Income (loss) from continuing operations before income taxes and equity in earnings of investees Income tax expense Equity in earnings of investees Income (loss) from continuing operations Loss from discontinued operations Income (loss) before gain on sale of property Gain on sale of property Net Income (loss) 17,124 15,936 66,677 65, (12,774) (9,114) (45,060) (37,008) (12,368) (12,368) (2) 86 (42,145) (203,297) 4,747 (4,735) 22,936 (227,990) (38) (37) (101) (86) 7,516 2,568 35,518 18,640 12,225 (2,204) 58,353 (209,436) (160) (135) (589) (525) 12,065 (2,339) 57,764 (209,961) 79 $ 12,065 $ (2,339) $ 57,843 $ (209,961) Weighted average common shares outstanding (basic) Weighted average common shares outstanding (diluted) Per common share amounts (basic and diluted): Income (loss) from continuing operations Loss from discontinued operations Net income (loss) 71,079 71,030 71,050 70,700 71,079 71,030 71,071 70,700 $ 0.17 $ (0.03) $ 0.82 $ (2.96) $ $ $ (0.01) $ (0.01) $ 0.17 $ (0.03) $ 0.81 $ (2.97) Additional Data: General and administrative expenses / rental income General and administrative expenses / total assets (at end of period) Non-cash straight line rent adjustments (1) Lease value amortization included in rental income (1) Non-cash amortization included in other operating expenses (2) 5.37% 5.50% 5.77% 5.97 % 0.15% 0.16% 0.62% 0.68 % $ 902 $ 1,159 $ 2,691 $ 3,978 $ (355) $ (293) $ (1,457) $ (1,155) $ 121 $ 121 $ 484 $ 246 Non-cash amortization included in general and administrative expenses (2) $ 151 $ 151 $ 603 $ 372 (1) We report 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 expense reimbursements, tax escalations, parking revenues, service income and other fixed and variable charges paid to us by our tenants, as well as the net effect of non-cash amortization of intangible lease assets and liabilities. (2) We recorded a liability for the amount by which the estimated fair value for accounting purposes exceeded the price we paid for our investment in RMR common stock in June A portion of this liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to business management fees and property management fees, which are included in general and administrative and other operating expenses, respectively. Government Properties Income Trust 18

19 Calculation of property net operating income (NOI) and cash basis NOI (1). ($ in 000s) For the Three Months Ended For the Year Ended 12/31/2016 9/30/2016 6/30/2016 3/31/ /31/ /31/ /31/2015 Calculation of NOI and Cash Basis NOI (2) : Rental income (3) Property operating expenses Property net operating income (NOI) Non-cash straight line rent adjustments included in rental income (3) Lease value amortization included in rental income (3) Non-cash amortization included in property operating expenses (4) Cash Basis NOI $ 66,030 $ 64,478 $ 64,061 $ 63,611 $ 61,685 $ 258,180 $ 248,549 (26,091) (26,928) (24,505) (24,738) (24,981) (102,262) (98,247) 39,939 37,550 39,556 38,873 36, , ,302 (902) (1,205) (435) (149) (1,159) (2,691) (3,978) ,457 1,155 (121) (121) (121) (121) (121) (484) (246) $ 39,271 $ 36,594 $ 39,425 $ 38,910 $ 35,717 $ 154,200 $ 147,233 Reconciliation of NOI and Cash Basis NOI to Net Income (Loss): Cash Basis NOI Non-cash straight line rent adjustments included in rental income (3) Lease value amortization included in rental income (3) Non-cash amortization included in property operating expenses (4) NOI Depreciation and amortization Acquisition related costs General and administrative Operating income $ 39,271 $ 36,594 $ 39,425 $ 38,910 $ 35,717 $ 154,200 $ 147, , ,159 2,691 3,978 (355) (370) (425) (307) (293) (1,457) (1,155) ,939 37,550 39,556 38,873 36, , ,302 (18,440) (18,404) (17,985) (18,324) (17,021) (73,153) (68,696) (828) (147) (64) (152) (352) (1,191) (811) (3,547) (3,816) (4,008) (3,526) (3,395) (14,897) (14,826) 17,124 15,183 17,499 16,871 15,936 66,677 65,969 Dividend income Interest income Interest expense Gain on early extinguishment of debt Loss on distribution to common shareholders of RMR common stock (5) Gain (loss) on issuance of shares by SIR Loss on impairment of SIR investment Income tax expense Equity in earnings of investees Income (loss) from continuing operations Loss from discontinued operations Income (loss) before gain on sale of property Gain on sale of property Net income (loss) (12,774) (12,608) (10,314) (9,364) (9,114) (45,060) (37,008) (12,368) (12,368) (2) (42,145) (203,297) (38) (13) (35) (15) (37) (101) (86) 7,516 8,668 9,400 9,934 2,568 35,518 18,640 12,225 11,653 16,939 17,536 (2,204) 58,353 (209,436) (160) (154) (126) (149) (135) (589) (525) 12,065 11,499 16,813 17,387 (2,339) 57,764 (209,961) $ 12,065 $ 11,578 $ 16,813 $ 17,387 $ (2,339) $ 57,843 $ (209,961) (1) See definitions of Certain Non-GAAP Financial Measures on page 22 for a definition of NOI and Cash Basis NOI, a description of why we believe they are appropriate supplemental measures and a description of how we use these measures. (2) Excludes one property (one building) classified as discontinued operations. (3) We report rental income on a straight line basis over the terms of the respective leases; as a result, rental income includes non-cash straight line rent adjustments. Rental income also includes expense reimbursements, tax escalations, parking revenues, service income and other fixed and variable charges paid to us by our tenants, as well as the net effect of non-cash amortization of intangible lease assets and liabilities. (4) We recorded a liability for the amount by which the estimated fair value for accounting purposes exceeded the price we paid for our investment in RMR common stock in June 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 property operating expenses. (5) Amount represents a non-cash loss recorded as a result of the closing price of RMR common stock being lower than our carrying amount per share on the day we distributed RMR common stock to our shareholders. Government Properties Income Trust 19

20 Calculation of EBITDA and adjusted EBITDA (1). ($ in 000s) (1) See Definitions of Certain Non-GAAP Financial Measures on page 22 for a definition of EBITDA and Adjusted EBITDA and a description of why we believe they are appropriate supplemental measures. Adjustments were made to certain prior period amounts to conform to the current period Adjusted EBITDA calculation. (2) Amounts represent the portion of business management fees that were payable in our common shares as well as equity based compensation to our trustees, officers and certain other employees of RMR s operating subsidiary, The RMR Group LLC. Beginning June 1, 2015, all business management fees are paid in cash. (3) Amount represents a non-cash loss recorded as a result of the closing price of RMR common stock being lower than our carrying amount per share on December 14, 2015, the day we distributed RMR common stock to our shareholders. Government Properties Income Trust 20

21 Calculation of funds from operations (FFO) and normalized FFO (1). ($ in 000s, except per share amounts) (1) See Definitions of Certain Non-GAAP Financial Measures on page 22 for a definition of FFO and Normalized FFO, a description of why we believe they are appropriate supplemental measures and a description of how we use these measures. (2) Amount represents a non-cash loss recorded as a result of the closing price of RMR common stock being lower than our carrying amount per share on December 14, 2015, the day we distributed RMR common stock to our shareholders. Government Properties Income Trust 21

22 NON-GAAP financial measures definitions. Definition of NOI and Cash Basis NOI We calculate NOI and Cash Basis NOI as shown on page 19. The calculations of NOI and Cash Basis NOI exclude certain components of net income (loss) 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 because we record those amounts as depreciation and amortization. We define Cash Basis NOI as NOI excluding non-cash straight line rent adjustments, lease value amortization and non-cash amortization included in other operating expenses. We consider NOI and Cash Basis NOI to be appropriate supplemental measures to net income (loss) because they may help both investors and management to understand the operations of our properties. We use NOI and Cash Basis NOI to evaluate individual and company wide property level performance, and we believe that NOI and Cash Basis NOI provide useful information to investors regarding our 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 our 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 as alternatives to net income (loss) or operating income as an indicator of our operating performance or as a measure of our liquidity. These measures should be considered in conjunction with net income (loss) and operating income as presented in our Condensed Consolidated Statements of Income (Loss). Other REITs and real estate companies may calculate NOI and Cash Basis NOI differently than we do. Definition of EBITDA and Adjusted EBITDA We calculate EBITDA and Adjusted EBITDA as shown on page 20. We consider EBITDA and Adjusted EBITDA to be appropriate supplemental measures of our operating performance, along with net income (loss) and operating income. We believe that EBITDA and Adjusted EBITDA provide useful information to investors because by excluding the effects of certain historical amounts, such as interest, depreciation and amortization expense, EBITDA and Adjusted EBITDA may facilitate a comparison of current operating performance with our past operating performance. EBITDA and Adjusted EBITDA do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) or operating income as an indicator of operating performance or as a measure of GOV s liquidity. These measures should be considered in conjunction with net income (loss) and operating income as presented in our Condensed Consolidated Statements of Income (Loss). Other REITs and real estate companies may calculate EBITDA and Adjusted EBITDA differently than we do. Definition of FFO and Normalized FFO We calculate FFO and Normalized FFO as shown on page 21. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income (loss), 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 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 the difference between FFO and Normalized 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 ultimately be payable when all contingencies for determining any such fees are determined at the end of the calendar year and we exclude acquisition related costs, gains or losses on early extinguishment of debt, loss on impairment of SIR investment, gains or losses on issuance of shares by SIR and loss on distribution to common shareholders of RMR common stock. We consider FFO and Normalized FFO to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss) 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 as alternatives to net income (loss) or operating income as an indicator of our operating performance or as a measure of our liquidity. These measures should be considered in conjunction with net income (loss) and operating income as presented in our Condensed Consolidated Statements of Income (Loss). Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do. Government Properties Income Trust 22

23 50 West State Street, Trenton, NJ. Square Feet: 266,995. Primary Tenant: New Jersey Dept. of the Treasury. 801 K Street, Sacramento, CA Square Feet: 337,811 Tenant: State of California Government Properties Income Trust Investor Presentation March 2017