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EX-99.5 - EX-99.5 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex99d5.htm
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EX-99.2 - EX-99.2 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex99d2.htm
EX-99.1 - EX-99.1 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex99d1.htm
EX-23.1 - EX-23.1 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex23d1.htm
EX-10.1 - EX-10.1 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex10d1.htm
EX-8.1 - EX-8.1 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex8d1.htm
EX-2.1 - EX-2.1 - OFFICE PROPERTIES INCOME TRUSTa17-15430_1ex2d1.htm
8-K - 8-K - OFFICE PROPERTIES INCOME TRUSTa17-15430_18k.htm

Exhibit 99.6

 

Government Properties Income Trust

Unaudited Pro Forma Condensed Consolidated Financial Statements

 

Introduction to Unaudited Pro Forma Condensed Consolidated Financial Statements

 

The following unaudited pro forma condensed consolidated financial statements give effect to: (i) the proposed offering, or the Offering, by Government Properties Income Trust, or GOV, of 25,000,000 of its common shares of beneficial interest, or Common Shares; (ii) GOV’s proposed acquisition of First Potomac Realty Trust, or FPO, and its operating partnership and majority owned subsidiary, First Potomac Realty Investment Limited Partnership, or FPO LP, pursuant to that certain Agreement and Plan of Merger, or the Merger Agreement, dated as of June 27, 2017, by and among FPO, FPO LP, GOV and GOV NEW OPPTY REIT and GOV NEW OPPTY LP; and (iii) other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements.  Pursuant to the Merger Agreement, subject to the satisfaction or waiver of certain customary conditions, GOV NEW OPPTY LP will merge with and into FPO LP, with FPO LP surviving (such merger, the Partnership Merger) and, immediately following the Partnership Merger, FPO will merge with and into GOV NEW OPPTY REIT, with GOV NEW OPPTY REIT surviving as GOV’s direct, wholly owned subsidiary (such merger, the REIT Merger, and, together with the Partnership Merger and the other transactions contemplated by the Merger Agreement, the Transaction).  Following the REIT Merger, FPO LP will be GOV’s indirect, majority owned subsidiary. The Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements have not been consummated and remain subject to conditions and contingencies.

 

The unaudited pro forma condensed consolidated balance sheet as of March 31, 2017 reflects GOV’s financial position as if the Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements were completed as of March 31, 2017. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2016 and the three months ended March 31, 2017 reflect the results of GOV’s operations as if the Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements were completed as of January 1, 2016. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with (i) the unaudited condensed consolidated financial statements and related notes thereto as of and for the three months ended March 31, 2017 of (a) GOV, which are included in GOV’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, as filed with the Securities and Exchange Commission, or SEC, on April 27, 2017, and (b) FPO, which are included as Exhibit 99.5 to this Current Report on Form 8-K; and (ii) the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2016 of (a) GOV, which are included in GOV’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on February 22, 2017, and (b) FPO, which are included as Exhibit 99.4 to this Current Report on Form 8-K.

 

The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only. In the opinion of management, all adjustments necessary to reflect the effects of the Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements have been included and are based upon available information and assumptions that management believes are reasonable. GOV expects to finance the Transaction on a long term basis with the sale of Common Shares, including through the Offering, additional debt, including senior unsecured notes, mortgage financing and / or bank debt, and /or with proceeds from the sale of certain properties. The unaudited pro forma condensed consolidated financial statements assume that the Transaction is initially financed with the net proceeds of the

 



 

Offering and borrowings under GOV’s existing revolving credit facility and under a new bridge loan facility, or the Bridge Loan Facility. Upon completion of GOV’s expected long term Transaction financing, GOV’s financial position and results of operations may be significantly different than what is presented in the unaudited pro forma condensed consolidated financial statements. Furthermore, the allocation of the estimated Transaction purchase price reflected in the unaudited pro forma condensed consolidated financial statements and described in the notes thereto is based upon GOV’s preliminary estimates of the fair value of assets acquired and liabilities assumed by GOV pursuant to the Transaction. Actual amounts allocated to assets acquired and liabilities assumed could change significantly from those presented in the unaudited pro forma condensed consolidated financial statements.

 

The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of GOV’s expected financial position or results of operations for any future period. Differences could result from numerous factors, including future changes in GOV’s portfolio of investments, capital structure, property level operating expenses and revenues, including rents expected to be received on GOV’s existing leases or leases GOV may enter into during and after 2017, changes in interest rates and other reasons. The allocation of the estimated purchase price, which includes estimated acquisition related costs, is based on preliminary estimates and may change significantly following the completion of (i) third party appraisals and (ii) GOV’s further analysis of acquired in place leases and building valuations.  Actual future results are likely to be different from amounts presented in the unaudited pro forma condensed consolidated financial statements and such differences could be significant.

 

2



 

Government Properties Income Trust

Unaudited Pro Forma Condensed Consolidated Balance Sheet

March 31, 2017

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

FPO

 

Financing and

 

 

 

 

 

GOV

 

FPO

 

Acquisition

 

Transaction

 

GOV

 

 

 

Historical

 

Historical

 

Adjustments (4)(A)

 

Costs (4)(B)

 

Pro Forma

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

269,410

 

$

269,920

 

$

28,031

 

$

 

$

567,361

 

Buildings and improvements

 

1,640,096

 

981,825

 

(223,179

)

 

2,398,742

 

Total real estate properties, gross

 

1,909,506

 

1,251,745

 

(195,148

)

 

2,966,103

 

Accumulated depreciation

 

(308,241

)

(227,140

)

227,140

 

 

(308,241

)

Total real estate properties, net

 

1,601,265

 

1,024,605

 

31,992

 

 

2,657,862

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investment in Select Income REIT

 

482,103

 

 

 

 

482,103

 

Investment in affiliates

 

 

42,314

 

9,852

 

 

52,166

 

Assets of discontinued operations

 

12,538

 

 

 

 

12,538

 

Acquired real estate leases, net

 

118,065

 

23,622

 

267,672

 

 

409,359

 

Cash and cash equivalents

 

12,808

 

13,269

 

(1,150,322

)

1,148,472

 

24,227

 

Restricted cash

 

703

 

2,348

 

 

 

3,051

 

Rents receivable, net

 

50,459

 

50,822

 

(45,211

)

 

56,070

 

Deferred leasing costs, net

 

21,232

 

41,603

 

(41,603

)

 

21,232

 

Other assets, net

 

77,877

 

5,414

 

(2,312

)

 

80,979

 

Total assets

 

$

2,377,050

 

$

1,203,997

 

$

(929,932

)

$

1,148,472

 

$

3,799,587

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

160,000

 

$

48,758

 

$

(48,758

)

$

590,000

 

$

750,000

 

Unsecured term loans, net

 

547,341

 

299,433

 

(299,433

)

 

547,341

 

Unsecured Bridge Loan Facility, net

 

 

 

 

34,741

 

34,741

 

Senior unsecured notes, net

 

647,213

 

 

 

 

647,213

 

Mortgage notes payable, net

 

27,415

 

295,523

 

(64,163

)

 

258,775

 

Liabilities of discontinued operations

 

52

 

 

 

 

52

 

Accounts payable and other liabilities

 

52,762

 

53,691

 

(23,778

)

 

82,675

 

Due to related persons

 

3,672

 

 

 

 

3,672

 

Assumed real estate lease obligations, net

 

10,025

 

1,716

 

11,076

 

 

22,817

 

Total liabilities

 

1,448,480

 

699,121

 

(425,056

)

624,741

 

2,347,286

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

 

27,516

 

(27,516

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common shares of beneficial interest

 

712

 

59

 

(59

)

250

 

962

 

Additional paid in capital

 

1,473,533

 

916,460

 

(916,460

)

523,481

 

1,997,014

 

Cumulative net income

 

103,744

 

 

 

 

103,744

 

Cumulative other comprehensive income (loss)

 

43,714

 

(273

)

273

 

 

43,714

 

Cumulative common distributions

 

(693,133

)

(438,886

)

438,886

 

 

(693,133

)

Total shareholders’ equity

 

928,570

 

477,360

 

(477,360

)

523,731

 

1,452,301

 

Total liabilities, noncontrolling interest and shareholders’ equity

 

$

2,377,050

 

$

1,203,997

 

$

(929,932

)

$

1,148,472

 

$

3,799,587

 

 

3



 

Government Properties Income Trust

Unaudited Pro Forma Condensed Consolidated Statements of Income

For the Year Ended December 31, 2016

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

FPO

 

 

 

Other

 

 

 

 

 

GOV

 

FPO

 

Property Sale

 

Financing

 

Pro Forma

 

GOV

 

 

 

Historical

 

Historical

 

Adjustments (5)(C)

 

Adjustments (5)(D)

 

Adjustments

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

$

258,180

 

$

160,334

 

$

(17,810

)

$

 

$

11,494

 (5)(E)

$

412,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

30,703

 

18,992

 

(1,481

)

 

 

48,214

 

Utility expenses

 

17,269

 

8,168

 

(745

)

 

 

24,692

 

Other operating expenses

 

54,290

 

31,202

 

(2,081

)

 

 (5)(F)

83,411

 

Depreciation and amortization

 

73,153

 

60,862

 

(2,709

)

 

39,553

 (5)(G)

170,859

 

Acquisition related costs

 

1,191

 

 

 

 

 

1,191

 

General and administrative

 

14,897

 

16,976

 

 

 

(10,040

(5)(F)

21,833

 

Loss on impairment of real estate

 

 

2,772

 

(2,772

)

 

 

 

Total expenses

 

191,503

 

138,972

 

(9,788

)

 

29,513

 

350,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

66,677

 

21,362

 

(8,022

)

 

(18,019

)

61,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

971

 

 

 

 

 

971

 

Interest and other income

 

158

 

2,348

 

 

 

 

2,506

 

Interest expense

 

(45,060

)

(26,370

)

436

 

(1,797

)

 

(72,791

)

Gain (loss) on early extinguishment of debt

 

104

 

(48

)

48

 

 

 

104

 

Gain on issuance of shares by Select Income REIT

 

86

 

 

 

 

 

86

 

Income (loss) before income taxes and equity in earnings (losses) of investees, net

 

22,936

 

(2,708

)

(7,538

)

(1,797

)

(18,019

)

(7,126

)

Income tax expense

 

(101

)

 

 

 

 

(101

)

Equity in earnings (losses) of investees, net

 

35,518

 

2,294

 

(340

)

 

(3,484

(5)(H)

33,988

 

Gain (loss) on sale of property

 

 

(1,155

)

1,155

 

 

 

 

Income (loss) from continuing operations

 

58,353

 

(1,569

)

(6,723

)

(1,797

)

(21,503

)

(26,761

)

Less: Net loss attributable to noncontrolling interests

 

 

502

 

 

 

(502

(5)(I)

 

Income (loss) from continuing operations attributable to common shareholders

 

$

58,353

 

$

(1,067

)

$

(6,723

)

$

(1,797

)

$

(22,005

)

$

(26,761

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (diluted)

 

71,071

 

 

 

 

 

25,000

 

 

 

96,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to GOV per common share

 

$

0.82

 

 

 

 

 

 

 

 

 

$

0.28

 

 

4



 

Government Properties Income Trust

Unaudited Pro Forma Condensed Consolidated Statements of Income

For the Three Months Ended March 31, 2017

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

FPO

 

 

 

Other

 

 

 

 

 

GOV

 

FPO

 

Property Sale

 

Financing

 

Pro Forma

 

GOV

 

 

 

Historical

 

Historical

 

Adjustments (5)(C)

 

Adjustments (5)(D)

 

Adjustments

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

$

69,296

 

$

37,823

 

$

(804

)

$

 

$

3,537

 (5)(E)

$

109,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate taxes

 

8,177

 

4,471

 

(116

)

 

 

12,532

 

Utility expenses

 

4,606

 

2,031

 

(2

)

 

 

6,635

 

Other operating expenses

 

13,992

 

8,117

 

(186

)

 

 (5)(F)

21,923

 

Depreciation and amortization

 

20,505

 

14,566

 

(289

)

 

12,042

 (5)(G)

46,824

 

General and administrative

 

3,962

 

4,497

 

 

 

(2,763

) (5)(F)

5,696

 

Total expenses

 

51,242

 

33,682

 

(593

)

 

9,279

 

93,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

18,054

 

4,141

 

(211

)

 

(5,742

)

16,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

304

 

 

 

 

 

304

 

Interest and other income

 

61

 

210

 

 

 

 

271

 

Interest expense

 

(13,581

)

(6,344

)

 

(557

)

 

(20,482

)

Income (loss) before income taxes and equity in earnings (losses) of investees, net

 

4,838

 

(1,993

)

(211

)

(557

)

(5,742

)

(3,665

)

Income tax expense

 

(18

)

 

 

 

 

(18

)

Equity in earnings (losses) of investees, net

 

2,739

 

4,223

 

(3,895

)

 

(802

) (5)(H)

2,265

 

Gain on sale of property

 

 

42,799

 

(42,799

)

 

 

 

Income (loss) from continuing operations

 

7,559

 

45,029

 

(46,905

)

(557

)

(6,544

)

(1,418

)

Less: Net income attributable to noncontrolling interests

 

 

(1,884

)

 

 

1,884

 (5)(I)

 

Income (loss) from continuing operations attributable to common shareholders

 

$

7,559

 

$

43,145

 

$

(46,905

)

$

(557

)

$

(4,660

)

$

(1,418

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (diluted)

 

71,094

 

 

 

 

 

25,000

 

 

 

96,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributed to GOV per common share

 

$

0.11

 

 

 

 

 

 

 

 

 

$

(0.01

)

 

5



 

(1)                                 Basis of Presentation:

 

As of March 31, 2017, GOV owned 74 properties (96 buildings), excluding one property (one building) classified as discontinued operations, with approximately 11.5 million rentable square feet. As of March 31, 2017, FPO owned 39 properties (74 buildings) with approximately 6.5 million rentable square feet, including equity interests in two properties (three buildings) subject to joint venture arrangements that are accounted for as equity method investments in FPO’s historical financial statements. The unaudited pro forma condensed consolidated financial statements include GOV’s and FPO’s accounts and the accounts of their respective consolidated subsidiaries. All intercompany transactions and balances have been eliminated. Certain reclassifications have been made to FPO’s historical financial statements to conform to GOV’s financial statement presentation.

 

(2)                                 The Offering:

 

Reflects GOV’s issuance of 25,000,000 Common Shares pursuant to the Offering at an assumed public offering price of $21.90 per Common Share (the closing price of the Common Shares on The NASDAQ Stock Market LLC on June 27, 2017), net of a 4.25% underwriting discount and other estimated expenses payable by GOV in connection with the Offering, with such net proceeds being used to partially fund the cash portion of the Transaction consideration. Net proceeds from the Offering were calculated as follows (dollars in thousands):

 

Gross proceeds from the Offering, net of underwriting discount

 

$

524,231

 

Other estimated Offering expenses payable by GOV

 

(500

)

Net proceeds

 

$

523,731

 

 

 

 

 

Common Shares

 

$

250

 

Additional paid-in capital

 

523,481

 

Net proceeds

 

$

523,731

 

 

(3)                                 The Transaction and Related Transactions:

 

The adjustments represent the effects of the Transaction for estimated total consideration of approximately $1.4 billion, including the assumption of approximately $231.7 million of aggregate principal balance of mortgage notes payable and approximately $49.2 million of estimated acquisition related costs. In order to reflect only those assets acquired and liabilities assumed by GOV pursuant to the Transaction, certain pro forma adjustments have been made to FPO’s historical financial statements to adjust for dispositions of properties by FPO during 2016 and the first quarter of 2017, as described in Note (5)(C).

 

GOV expects to fund the cash portion of the Transaction consideration with the net proceeds of the Offering and borrowings under GOV’s existing revolving credit facility and under the Bridge Loan Facility.

 

6



 

The following summarizes the estimated total consideration, funding sources and net purchase price for the Transaction as if it had occurred on March 31, 2017 (dollars in thousands):

 

Estimated total purchase price (including acquisition related costs):

 

 

 

Assumed mortgage notes payable, including fair value adjustments

 

$

231,360

 

Assumed net working capital liability

 

5,583

 

Non-cash portion of purchase price

 

236,943

 

Cash purchase of FPO common shares

 

683,372

 

FPO debt expected to be repaid at the Closing

 

417,800

 

Estimated acquisition related costs

 

49,150

 

Cash portion of purchase price

 

1,150,322

 

Estimated purchase price

 

$

1,387,265

 

 

 

 

 

Estimated funding sources (including acquisition related costs):

 

 

 

Net proceeds from the Offering

 

$

523,731

 

Borrowings under GOV’s existing revolving credit facility

 

590,000

 

Borrowings under Bridge Loan Facility

 

36,591

 

Estimated funding total

 

$

1,150,322

 

 

The following summarizes the preliminary purchase price allocation for the Transaction as if it had occurred on March 31, 2017 (dollars in thousands):

 

Land

 

$

297,951

 

Buildings and improvements

 

758,646

 

Acquired real estate leases

 

291,294

 

Investment in affiliates

 

52,166

 

Cash

 

13,269

 

Restricted cash

 

2,348

 

Rents receivable

 

5,611

 

Other assets

 

3,102

 

Total assets

 

1,424,387

 

Mortgage notes payable, including fair value adjustments (1)

 

(231,360

)

Accounts payable and accrued expenses

 

(29,913

)

Assumed real estate lease obligations

 

(12,792

)

Net assets acquired

 

1,150,322

 

Assumed net working capital liability

 

5,583

 

Assumed mortgage notes payable, including fair value adjustments (1)

 

231,360

 

Estimated purchase price (2)

 

$

1,387,265

 

 


(1)                               The aggregate principal balance of the related mortgage notes payable was $231.7 million as of March 31, 2017.

 

(2)                               The allocation of the estimated purchase price, which includes estimated acquisition related costs, is based on preliminary estimates and may change significantly following the completion of (i) third party appraisals and (ii) GOV’s further analysis of acquired in place leases and building valuations.

 

GOV adopted Financial Accounting Standards Board Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business, or ASU No. 2017-01, on January 1, 2017. In accordance with ASU No. 2017-01, GOV will account for the Transaction as an acquisition of assets with GOV treated as the acquirer of FPO

 

7



 

and FPO LP for accounting purposes. Accordingly, the assets acquired and liabilities assumed will be recorded as of the closing of the Transaction, or the Closing, at their respective fair value, and added to those of GOV. For purposes of the unaudited pro forma condensed consolidated financial statements, GOV allocated: (i) a portion of the purchase price of the FPO properties to land and buildings and improvements based on determinations of the fair values of those properties assuming those properties are vacant; (ii) a portion of the purchase price of the FPO properties to above market and below market leases based on the present value (using an estimated discount interest rate which reflects the risks associated with acquired in place leases at the time the FPO properties are expected to be acquired by GOV) of the difference, if any, between (x) the contractual amounts to be paid pursuant to the acquired in place leases and (y) estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective in place leases; and (iii) a portion of the purchase price of the FPO properties to acquired in place leases based upon market estimates to lease up the properties based on leases in place at the time of acquisition. In making these allocations, GOV considered factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time the FPO properties are expected to be acquired by GOV. Consolidated financial statements of GOV issued subsequent to the Closing will include FPO assets acquired by GOV pursuant to the Transaction from the Closing date, but not for prior periods.

 

(4)                                 Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet Adjustments:

 

(A)                             The adjustments represent the preliminary purchase price allocation for the Transaction as if it had occurred on March 31, 2017, assuming a total purchase price of approximately $1.4 billion and including the assumption of approximately $231.7 million aggregate principal balance of mortgage notes payable and approximately $49.2 million of estimated acquisition related costs.

 

Additional adjustments have been made to record acquired land, buildings and improvements, acquired real estate leases and assumed real estate lease obligations at their estimated fair value, as described in Note (3). Further adjustments include:

 

(i)                                   Investment in affiliates: Adjustment of $9.9 million to reflect the estimated fair value of FPO’s equity interests in two existing joint ventures as if GOV acquired these interests on March 31, 2017.

 

(ii)                                Rents receivable, net: Adjustment of $45.2 million to eliminate FPO’s accumulated straight line rent receivable balance for tenant leases. FPO’s pro forma rents receivable balance of $5.6 million represents the fair value of accounts receivable from tenants as of March 31, 2017.

 

(iii)                             Deferred leasing costs, net: Adjustment of $41.6 million to eliminate FPO’s unamortized deferred leasing costs.

 

(iv)                            Other assets, net: Adjustments to eliminate fair value adjustments of $0.1 million related to FPO’s interest rate swap agreements that are expected to be terminated at the Closing and to eliminate $2.2 million of leasehold improvements related to FPO’s corporate and regional offices and certain other FPO assets.

 

(v)                               Accounts payable and accrued expenses: Adjustments of $23.8 million to eliminate the following FPO balances: (1) $19.1 million of deferred income; (2) $3.6 million of accrued straight line rent liabilities; and (3) $1.0 million of accrued interest expected to be paid at the Closing.

 

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Additional adjustments have been made to reflect the expected repayment at the Closing of: (1) $51.0 million of outstanding borrowings under FPO’s revolving credit facility; (2) FPO’s $300.0 million unsecured term loan; and (3) two FPO mortgage notes payable with an aggregate outstanding principal balance of approximately $66.8 million. In May 2017, FPO repaid at maturity one of these mortgage notes with an outstanding principal balance of $32.2 million at March 31, 2017. A $0.4 million adjustment was also made to decrease the carrying value of FPO’s mortgage notes payable to reflect the effect of current market interest rates on the estimated fair value of FPO’s fixed rate mortgages expected to be assumed by GOV at the Closing.

 

Pursuant to the Merger Agreement, units of limited partnership interest in FPO LP (other than those held by FPO) will be converted into the right to receive cash consideration of $11.15 per limited partnership unit, except that holders of FPO LP limited partnership interests may instead elect to have their units of limited partnership interests in FPO LP converted into an equal number of units of preferred limited partnership interests in FPO LP. The adjustment to eliminate FPO’s obligation for noncontrolling interests in FPO LP reflects GOV’s assumption that all of the issued and outstanding units of limited partnership interest in FPO LP (other than those held by FPO) will be converted into the right to receive the cash consideration.

 

(B)                               The adjustments represent the Offering, as described in Note (2), borrowings under GOV’s existing revolving credit facility and under the Bridge Loan Facility, net of $1.9 million of estimated debt issuance costs, and the aggregate net adjustment to GOV’s and FPO’s respective outstanding revolving credit facility balances. The aggregate net revolving credit facility adjustment includes borrowings of $590.0 million under GOV’s existing revolving credit facility to partially fund the cash portion of the Transaction consideration and the expected repayment of outstanding borrowings under FPO’s revolving credit facility of $51.0 million at the Closing. There were $160.0 million and $155.0 million in outstanding borrowings and $590.0 million and $595.0 million in available borrowings under GOV’s existing revolving credit facility as of both March 31, 2017 and June 21, 2017, respectively.

 

(5)                                 Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income Adjustments:

 

(C)                               From the period from January 1, 2016 through March 31, 2017, FPO sold four properties and equity interests in three unconsolidated joint venture arrangements. The pro forma adjustments related to those dispositions are as follows:

 

Rental income: Adjustment to eliminate rental income for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.

 

Real estate taxes, utility expenses and other operating expenses: Adjustment to eliminate property operating expenses for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.

 

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Depreciation and amortization: Adjustment to eliminate depreciation and amortization for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.

 

Loss on impairment of real estate: Adjustment to eliminate loss on impairment of real estate for a property sold during 2016 as if that property was sold as of January 1, 2016.

 

Interest expense: Adjustment to eliminate $0.4 million of interest expense related to a mortgage note repaid in connection with the sale of a property during 2016 as if that property was sold and the mortgage note repaid as of January 1, 2016.

 

Loss on extinguishment of debt: Adjustment to eliminate a loss on extinguishment of debt related to a mortgage note repaid in connection with the sale of a property during 2016 as if that property was sold and the mortgage note repaid as of January 1, 2016.

 

Equity in earnings (losses) of investees, net: Adjustment to eliminate the equity in earnings of investees for 2016 and the first quarter of 2017 related to the equity interests in three unconsolidated joint venture arrangements which were sold in March 2017 as if those interests were sold as of January 1, 2016.

 

Gain (loss) on sale of property: Adjustment to eliminate gain or loss, as applicable, on sale for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.

 

(D)                               The adjustments represent the effect on interest expense of the assumed borrowings under GOV’s existing revolving credit facility and under the Bridge Loan Facility to partially fund the cash portion of the Transaction consideration, as described in Note (4)(B), and the expected repayment of outstanding FPO debt balances, as described in Note (4)(A).

 

Estimated interest expense related to borrowings under GOV’s revolving credit facility is determined as follows (dollars in thousands, except percentages):

 

 

 

For the Three
Months
Ended 3/31/17

 

For the Year
Ended
12/31/16

 

Estimated incremental borrowings on revolving credit facility

 

$

590,000

 

$

590,000

 

Interest rate (1)

 

2.44

%

2.44

%

Annual interest expense

 

$

14,396

 

$

14,396

 

Percent of annual days adjusted

 

25.0

%

100.0

%

Total adjustment

 

$

3,559

 

$

14,396

 

 


(1) Contractual interest rate is LIBOR plus a 125 basis point spread subject to adjustment based on GOV’s credit ratings.

 

An increase or decrease in the variable interest rate of 1/8 of a percent would increase or decrease, respectively, annual interest expense under the revolving credit facility interest expense by approximately $0.7 million.

 

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Estimated interest expense related to borrowings under the Bridge Loan Facility is determined as follows (dollars in thousands):

 

 

 

For The Three
Months
Ended
3/31/2017

 

For the Year
Ended
12/31/2016

 

Borrowings under Bridge Loan Facility

 

$

36,591

 

$

36,591

 

Interest rate (1)

 

2.59

%

2.59

%

Interest expense before amortization of debt issuance costs

 

$

948

 

$

948

 

Amortization of related debt issuance costs (2)

 

1,850

 

1,850

 

Annual interest expense

 

$

2,798

 

$

2,798

 

Percent of annual days in period

 

25.0

%

100.0

%

Estimated interest expense

 

$

700

 

$

2,798

 

 


(1) Contractual interest rate is LIBOR plus a 140 basis points spread subject to adjustment based on GOV’s credit ratings.

 

(2) The Bridge Loan Facility matures on the first anniversary of the Closing. Pro forma interest expense excludes additional fees payable under the Bridge Loan Facility if borrowings remain outstanding for 90 days or more as follows (dollars in thousands):

 

Days Outstanding

 

Basis Points

 

Additional Fees

 

At least 90 days but less than 180 days

 

25

 

$

91

 

At least 180 days but less than 270 days

 

50

 

183

 

At least 270 days

 

75

 

274

 

Total

 

150

 

$

549

 

 

An increase or decrease in the variable interest rate of 1/8 of a percent would increase or decrease, respectively, estimated annual interest expense under the Bridge Loan Facility by approximately $0.04 million.

 

The estimated increase in interest expense resulting from assumed borrowings under GOV’s existing revolving credit facility and under the Bridge Loan Facility has been partially offset by the effect of the expected repayment at the Closing of $51.0 million of outstanding borrowings under FPO’s revolving credit facility, FPO’s $300.0 million unsecured term loan and two FPO mortgages notes with an aggregate outstanding principal balance of approximately $66.8 million as if those repayments had occurred as of January 1, 2016. The decrease in interest expense associated with these expected repayments is $15.4 million and $3.7 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively.

 

The increase of 25,000,000 Common Shares as described in Note (2) assumes the Offering to partially fund the cash portion of the Transaction was completed on January 1, 2016.

 

(E)                                The adjustments represent non-cash straight line rent and non-cash amortization of above and below market leases related to acquired FPO leases. The calculation of non-cash straight line rent assumes that the term of the acquired FPO leases commenced as of January 1, 2016. Capitalized acquired above and below market lease values are amortized as a reduction or an increase, respectively, to rental income over the weighted average lease term. The weighted average lease term for above and below market leases is 4.9 years and 6.7 years, respectively, as of March 31, 2017. The components of the rental income adjustment are as follows (dollars in thousands):

 

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For the Three
Months Ended
3/31/2017

 

For the Year
Ended
12/31/16

 

Non-cash, straight line rent adjustments

 

$

3,779

 

$

12,363

 

Non-cash, net above and below market lease amortization

 

(242

)

(869

)

 

 

$

3,537

 

$

11,494

 

 

(F)                                 GOV has no employees.  The personnel and various services GOV requires to operate its business are provided to it by The RMR Group LLC, or RMR LLC. GOV has two agreements with RMR LLC to provide management services to it: (i) a business management agreement, which relates to its business generally; and (ii) a property management agreement, which relates to its property level operations.

 

FPO’s historical other operating expenses include costs incurred by FPO to manage its properties. Under the terms of GOV’s property management agreement, GOV will pay RMR LLC a property management fee equal to 3% of gross rents collected for the FPO properties and reimburse RMR LLC for allocated personnel and certain other costs to manage the FPO properties. No pro forma adjustment has been included in the unaudited condensed consolidated statements of income related to property management costs as GOV’s estimated costs to manage the FPO properties under the RMR LLC property management agreement are currently expected to approximate FPO’s historical property management costs for the FPO properties.

 

The adjustment to general and administrative expense eliminates FPO’s historical general and administrative expenses of $17.0 million and $4.5 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, and includes general and administrative expenses of $6.9 million and $1.7 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, based on GOV’s contractual obligation under its business management agreement with RMR LLC. The business management fee under GOV’s business management agreement with RMR LLC is based upon a percentage of the lower of GOV’s total real estate investments or total market capitalization, both as described in GOV’s business management agreement with RMR LLC. GOV currently expects not to incur any additional recurring general and administrative expenses as a direct result of the Transaction.

 

(G)                               The adjustment eliminates FPO’s historical depreciation and amortization expenses of $58.2 million and $14.3 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, net of depreciation and amortization of FPO properties sold during 2016 and 2017 as described in Note (5)(C). The adjustment also includes estimated depreciation and amortization expenses based on the preliminary purchase price allocation described in Note (3) of $97.7 million and $26.3 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively. Real estate investments are depreciated on a straight line basis over estimated useful lives generally ranging up to 40 years. Capitalized acquired in place leases, exclusive of the value of acquired above market and below market lease values, are amortized on a straight line basis over the 6.3 year weighted average remaining lease term at March 31, 2017.

 

(H)                              The adjustment to FPO’s historical equity in earnings of investees for the equity interests in two joint venture arrangements that GOV expects to acquire pursuant to the Transaction reflects the depreciation and amortization expense based on the estimated fair value of those interests at the

 

6



 

Closing date, as well as the effect of other pro forma adjustments, including non-cash straight line rent and non-cash net above and below market leases.

 

(I)                                   The adjustment to eliminate FPO’s historical equity in earnings of investees net (income) loss attributable to noncontrolling interests reflects the assumed conversion of all of the issued and outstanding units of limited partnership interest in FPO LP (other than those held by FPO) into the right to receive cash consideration of $11.15 per limited partnership unit (see Note (4)(A)).

 

GOV has been operating so as to qualify for taxation as a real estate investment trust for U.S. federal and state income tax purposes. Therefore, certain activities, including the Transaction, are not subject to U.S. federal income tax. Accordingly, no adjustment to pro forma income tax expense has been reflected in the unaudited pro forma combined statements of operations.

 

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