What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-30 · 247 added, 233 removed, 400 unchanged (55% of the section changed)

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We are a real estate investment trust, or REIT, organized under Maryland law.

As of June 30, 2020 , our wholly owned properties were comprised of 184 properties and we had noncontrolling ownership interests in three properties totaling approximately 444,000 rentable square feet through two unconsolidated joint ventures in which we own 51% and 50% interests.

As of June 30, 2020 , our properties are located in 34 states and the District of Columbia and contain approximately 24,909,000 rentable square feet.

As of June 30, 2020 , our properties were leased to 357 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 5.5 years.

Government is our largest tenant, representing approximately 25.2% of our annualized rental income as of June 30, 2020 .

The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of June 30, 2020 , plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

As of September 30, 2020, our wholly owned properties were comprised of 184 properties and we had noncontrolling ownership interests in three properties totaling approximately 444,000 rentable square feet through two unconsolidated joint ventures in which we own 51% and 50% interests.

As of September 30, 2020, our properties are located in 34 states and the District of Columbia and contain approximately 24,909,000 rentable square feet.

As of September 30, 2020, our properties were leased to 357 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 5.2 years.

Government is our largest tenant, representing approximately 25.2% of our annualized rental income as of September 30, 2020.

The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of September 30, 2020, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

COVID-19 Pandemic

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economy are in a recession.

States and municipalities across the United States have been allowing certain businesses to re-open and easing certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time.

States and municipalities across the United States have generally allowed most businesses to re-open and have generally eased certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time, although some states and municipalities have imposed or re-imposed certain restrictions in response to increases in COVID-19 infections experienced since then.

Recently, economic data have indicated that the U.S.

economy has improved since the lowest periods experienced in March and April 2020.

However, certain areas of the United States have experienced increased numbers of COVID-19 infections following the re-openings of their economies and easing of restrictions and, in some cases, certain states have imposed or re-imposed closings of certain business activities and other restrictions in response.

It is unclear whether the increases in the number of COVID-19 infections will continue or amplify or whether any “second wave” of COVID-19 infection outbreaks will occur in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy, our tenants or our business.

economy has improved since the lowest periods experienced in March and April 2020, although the U.S.

gross domestic product remains below pre-pandemic levels.

It is unclear whether the increases in the number of COVID-19 infections will continue or amplify in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy, our tenants or our business.

Our business is focused on leasing office space to primarily single tenants and those with high credit quality characteristics such as government entities.

Although, to date, the COVID-19 pandemic has not had a significant impact on our business, we have received requests from some of our tenants for rent assistance.

As of July 27, 2020, we have granted temporary rent assistance totaling $2,475 to 23 tenants who represent approximately 3.7% of our annualized rental income as of June 30, 2020.

As of June 30, 2020, we recognized an increase in our accounts receivable related to these deferred payments of $2,222 .

This assistance generally entails a deferral of, in most cases, one month of rent until September 2020 when the deferred rent amounts will begin to be payable over a 12-month period.

For the quarter ended June 30, 2020 , we collected approximately 98% of contractual rent obligations and 99% of contractual rent obligations after giving effect to such rent deferrals.

As of October 27, 2020, we have granted temporary rent assistance totaling $2,550 to 19 tenants who represent approximately 3.6% of our annualized rental income as of September 30, 2020.

As of September 30, 2020, deferred payments totaling $2,096 were included in rents receivable in our condensed consolidated balance sheet.

This assistance generally entails a deferral of, in most cases, one month of rent pursuant to deferred payment plans which require the deferred rent amounts be payable over a 12-month period, certain of which commenced in September 2020.

For the quarter ended September 30, 2020, we collected approximately 99% of contractual rent obligations before and after giving effect to such rent deferrals.

We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including:

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We believe that our current financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic and perhaps present opportunities for us to strategically deploy our capital.

As of July 29, 2020, we had:

As of October 29, 2020, we had:

• $750,000 of availability under our revolving credit facility;

only approximately $40,000 of debt maturities until 2022;

62.8% of our annualized rental income, as of June 30, 2020 , derived from investment grade tenants (as described below).

• no significant debt maturities until 2022;

• 64.7% of our annualized rental income, as of September 30, 2020, derived from investment grade tenants (as described below).

We do not have any employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business and property management agreements with RMR LLC.

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• the timing and process for how federal, state and local governments and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic abates, such as what continuing restrictions and protective measures may remain in place or be added and what restrictions and protective measures may be lifted or reduced in order to foster a return of increased economic activity in the United States;

whether, following a recommencing of more normal levels of economic activities, the United States or other countries experience any “second wave” of COVID-19 infection outbreaks and, if so, the responses of governments, businesses and the general public to those events.

• the responses of governments, businesses and the general public to any increased level or rates of COVID-19 infections.

As a result of these uncertainties, we are unable to determine what the ultimate impact will be on our, our tenants’ and other stakeholders’ businesses, operations, financial results and financial position.

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For more information regarding our two unconsolidated joint ventures, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

As of June 30, 2020 , 91.7% of our rentable square feet was leased, compared to 91.6% of our rentable square feet as of June 30, 2019 .

Occupancy data for our properties as of June 30, 2020 and 2019 was as follows (square feet in thousands):

As of September 30, 2020, 91.2% of our rentable square feet was leased, compared to 93.3% of our rentable square feet as of September 30, 2019.

Occupancy data for our properties as of September 30, 2020 and 2019 was as follows (square feet in thousands):

All Properties (1)

Comparable Properties (2)

September 30, September 30,

2020 2019 2020 2019

Total properties (3)

184 200 178 178

Total rentable square feet (4)

24,909 27,290 24,451 24,541

Percent leased (5)

Based on properties we owned on June 30, 2020 and 2019 , respectively.

91.2 % 93.3 % 92.3 % 93.5 %

(1) Based on properties we owned on September 30, 2020 and 2019, respectively.

(2) Based on properties we owned continuously since January 1, 2019;

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(5) 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 effective rental rate per square foot for our properties for the three and six months ended June 30, 2020 and 2019 are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

The average effective rental rate per square foot for our properties for the three and nine months ended September 30, 2020 and 2019 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Average effective rental rate per square foot (1) :

All properties (2)

$ 25.85 $ 26.49 $ 25.89 $ 27.21

Comparable properties (3)

$ 25.86 $ 26.20 $ 25.94 $ 26.06

(1) Average 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.

Based on properties we owned on June 30, 2020 and 2019 , respectively.

Based on properties we owned continuously since April 1, 2019 and January 1, 2019, respectively;

(2) Based on properties we owned on September 30, 2020 and 2019, respectively.

(3) Based on properties we owned continuously since July 1, 2019 and January 1, 2019, respectively;

excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

During the three and six months ended June 30, 2020 , changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

Available for Lease

During the three and nine months ended September 30, 2020, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

Leased Available for Lease Total Leased Available for Lease Total

Beginning of period 22,839 2,070 24,909 23,761 1,965 25,726

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Lease renewals (1)

577 (577) — 1,649 (1,649) —

New leases (1)

18 (18) — 177 (177) —

Remeasurements (2)

1 (1) — (1) (94) (95)

End of period 22,720 2,189 24,909 22,720 2,189 24,909

Based on leases entered during the three and six months ended June 30, 2020 .

(1) Based on leases entered during the three and nine months ended September 30, 2020.

(2) Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants.

Leases at our properties totaling approximately 590,000 and 1,458,000 rentable square feet expired during the three and six months ended June 30, 2020 , respectively.

During the three and six months ended June 30, 2020 , we entered leases totaling approximately 642,000 and 1,231,000 rentable square feet, respectively, including lease renewals of approximately 564,000 and 1,072,000 rentable square feet, respectively, and new leases of approximately 78,000 and 159,000 rentable square feet, respectively.

The weighted (by rentable square feet) average rents were 3.9% and 4.0% , respectively, above prior rents for the same space and the weighted (by rentable square feet) average lease term for new and renewal leases entered during the three and six months ended June 30, 2020 was 6.1 years and 5.4 years, respectively.

During the three and six months ended June 30, 2020 , commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows (square feet in thousands):

Three Months Ended June 30, 2020

Leases at our properties totaling approximately 715,000 and 2,173,000 rentable square feet expired during the three and nine months ended September 30, 2020, respectively.

During the three and nine months ended September 30, 2020, we entered leases totaling approximately 595,000 and 1,826,000 rentable square feet, respectively, including lease renewals of approximately 577,000 and 1,649,000 rentable square feet, respectively, and new leases of approximately 18,000 and 177,000 rentable square feet, respectively.

The weighted (by rentable square feet) average rents were 31.0% and 8.0%, respectively, above prior rents for the same space and the weighted (by rentable square feet) average lease term for new and renewal leases entered during the three and nine months ended September 30, 2020 was 10.6 years and 7.1 years, respectively.

During the three and nine months ended September 30, 2020, commitments made for expenditures, such as tenant improvements and leasing costs, in connection with leasing space at our properties were as follows (square feet in thousands):

Three Months Ended September 30, 2020

New Leases Renewals Total

Rentable square feet leased 18 577 595

Tenant leasing costs and concession commitments (1)

$ 193 $ 6,045 $ 6,238

Tenant leasing costs and concession commitments per rentable square foot (1)

$ 10.95 $ 10.48 $ 10.49

Weighted (by square feet) average lease term (years) 4.0 10.8 10.6

Total leasing costs and concession commitments per rentable square foot per year (1)

Six Months Ended June 30, 2020

$ 2.77 $ 0.97 $ 0.99

Nine Months Ended September 30, 2020

New Leases Renewals Total

Rentable square feet leased 177 1,649 1,826

Tenant leasing costs and concession commitments (1)

$ 14,511 $ 21,186 $ 35,697

Tenant leasing costs and concession commitments per rentable square foot (1)

$ 82.21 $ 12.85 $ 19.56

Weighted (by square feet) average lease term (years) 11.0 6.7 7.1

Total leasing costs and concession commitments per rentable square foot per year (1)

$ 7.47 $ 1.91 $ 2.74

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

During the three and six months ended June 30, 2020 , changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and six months ended June 30, 2020 , when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands):

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

During the three and nine months ended September 30, 2020, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and nine months ended September 30, 2020, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands):

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

Old Effective Rent Per Square Foot (1)

New Effective Rent Per Square Foot (1)

Rentable Square Feet

Old Effective Rent Per Square Foot (1)

Rentable Square Feet Old Effective Rent Per Square Foot (1)

New Effective Rent Per Square Foot (1)

Rentable Square Feet

New leases $ 31.85 $ 33.78 73 $ 29.95 $ 29.94 223

Lease renewals $ 15.50 $ 18.24 773 $ 26.91 $ 28.70 1,621

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

During the three and six months ended June 30, 2020 and 2019 , amounts capitalized at our properties for tenant improvements, leasing costs, building improvements and development, redevelopment and other activities were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

During the three and nine months ended September 30, 2020 and 2019, amounts capitalized at our properties for tenant improvements, leasing costs, building improvements and development, redevelopment and other activities were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Tenant improvements (1)

$ 4,513 $ 8,749 $ 15,244 $ 20,784

Leasing costs (2)

2,679 7,139 10,982 21,224

Building improvements (3)

10,579 11,180 29,814 22,805

Recurring capital expenditures 17,771 27,068 56,040 64,813

Development, redevelopment and other activities (4)

5,521 1,206 11,260 2,391

Total capital expenditures $ 23,292 $ 28,274 $ 67,300 $ 67,204

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(4) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue.

As of June 30, 2020 , we have estimated unspent leasing related obligations of $61,720 .

As of June 30, 2020 , we had leases at our properties totaling approximately 707,000 rentable square feet that were scheduled to expire through December 31, 2020.

As of July 29, 2020, tenants with leases totaling approximately 167,000 rentable square feet that are scheduled to expire through December 31, 2020, have notified us that they do not plan to renew their leases upon expiration and we cannot be sure as to whether other tenants may or may not renew their leases upon expiration.

As a result of the COVID-19 pandemic and its economic impact, overall new leasing volume for 2020 has slowed and we expect that trend may continue until market conditions meaningfully improve for a sustained period.

However, we also believe that the current market conditions may result in our overall tenant retention levels increasing.

As of September 30, 2020, we have estimated unspent leasing related obligations of $61,307.

As of September 30, 2020, we had leases at our properties totaling approximately 3,780,000 rentable square feet that were scheduled to expire through December 31, 2021.

As of October 29, 2020, we expect tenants with leases totaling approximately 2,626,000 rentable square feet that are scheduled to expire through December 31, 2021, to not renew their leases upon expiration and we cannot be sure as to whether other tenants may or may not renew their leases upon expiration.

As a result of the COVID-19 pandemic and its economic impact, overall new leasing volume for 2020 has slowed and we expect that trend may continue or remain at a similar level of activity until market conditions meaningfully improve for a sustained period.

However, we remain focused on proactive dialogues with our existing tenants and overall tenant retention.

Prevailing market conditions and government and other tenants’ needs at the time we negotiate and enter leases or lease renewals will generally determine rental rates and demand for leased space at our properties, and market conditions and our tenants’ needs are beyond our control.

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also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations.

As of June 30, 2020 , our lease expirations by year are as follows (square feet in thousands):

Number of Leases Expiring

As of September 30, 2020, our lease expirations by year are as follows (square feet in thousands):

Number of Leases Expiring Leased

Square Feet Expiring (2)

Percent of Total

Cumulative Percent of Total

Annualized Rental Income Expiring

Percent of Total

Cumulative Percent of Total

Percent of Total Cumulative Percent of Total Annualized Rental Income Expiring Percent of Total Cumulative Percent of Total

2020 36 497 2.2 % 2.2 % $ 13,855 2.4 % 2.4 %

2021 61 3,283 14.5 % 16.7 % 59,885 10.3 % 12.7 %

2022 75 1,978 8.7 % 25.4 % 55,426 9.6 % 22.3 %

2023 66 2,410 10.6 % 36.0 % 76,523 13.2 % 35.5 %

2024 57 3,869 17.0 % 53.0 % 101,305 17.5 % 53.0 %

2025 54 2,033 8.9 % 61.9 % 43,664 7.5 % 60.5 %

2026 29 1,703 7.5 % 69.4 % 45,525 7.9 % 68.4 %

2027 31 2,032 8.9 % 78.3 % 52,161 9.0 % 77.4 %

2028 12 872 3.8 % 82.1 % 25,582 4.4 % 81.8 %

2029 and thereafter 53 4,043 17.9 % 100.0 % 104,754 18.2 % 100.0 %

Total 474 22,720 100.0 % $ 578,680 100.0 %

Weighted average remaining lease term (in years)

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Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability.

As of June 30, 2020 , tenants occupying approximately 11.5% of our rentable square feet and responsible for approximately 8.6% of our annualized rental income as of June 30, 2020 currently have exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2020 , 2021 , 2022 , 2023 , 2024 , 2025 , 2026 , 2027 , 2028 , 2030 and 2035 , early termination rights become exercisable by other tenants who currently occupy an additional approximately 2.3% , 1.6% , 2.3% , 1.3% , 1.0% , 2.2% , 1.0% , 0.5% , 1.1% , 0.1% and 0.1% of our rentable square feet, respectively, and contribute an additional approximately 2.8% , 1.8% , 2.4% , 1.5% , 1.6% , 3.9% , 1.3% , 0.7% , 1.4% , 0.2% and 0.1% of our annualized rental income, respectively, as of June 30, 2020 .

In addition, as of June 30, 2020 , pursuant to leases with 14 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets.

These 14 tenants occupy approximately 5.4% of our rentable square feet and contribute approximately 5.8% of our annualized rental income as of June 30, 2020 .

Leased square feet is pursuant to leases existing as of June 30, 2020 , 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.

As of September 30, 2020, tenants occupying approximately 7.5% of our rentable square feet and responsible for approximately 9.2% of our annualized rental income as of September 30, 2020 currently have exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2030 and 2035, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.2%, 1.5%, 2.3%, 1.5%, 1.1%, 2.2%, 1.0%, 0.5%, 1.1%, 0.1% and 0.1% of our rentable square feet, respectively, and contribute an additional approximately 0.2%, 1.6%, 2.4%, 1.7%, 1.7%, 3.9%, 1.3%, 0.7%, 1.4%, 0.2% and 0.1% of our annualized rental income, respectively, as of September 30, 2020.

In addition, as of September 30, 2020, pursuant to leases with 14 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets.

These 14 tenants occupy approximately 5.4% of our rentable square feet and contribute approximately 6.2% of our annualized rental income as of September 30, 2020.

(2) Leased square feet is pursuant to leases existing as of September 30, 2020, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any.

Square feet measurements are subject to changes when space is remeasured or reconfigured for new tenants.

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presidential administration’s views on the size and scope of government employment have resulted in a decrease in government employment.

Furthermore, for the past six years, government tenants have reduced their space utilization per employee and

consolidated government tenants into existing government owned properties.

Furthermore, for the past six years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties.

This activity has reduced the demand for government leased space.

Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations.

Our historical experience with respect to properties of the type we own that are majority leased to

government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations.

However, efforts to reduce space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy.

Also, our government tenants’ desires to reconfigure leased office space to reduce utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations have become more prevalent than our past experiences in instances where efforts by government tenants to reduce their space utilization require a significant reconfiguration of currently leased space.

Also, our government tenants’ desires to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations have become more prevalent than our past experiences in instances where efforts by government tenants to manage their space utilization require a significant reconfiguration of currently leased space.

Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals;

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however, these activities may impact us for some time into the future.

It is also possible that as a result of the COVID-19 pandemic, government tenants may seek to increase space utilization rates in order to provide greater physical distancing for employees.

It is also possible that as a result of the COVID-19 pandemic, government tenants may seek to manage space utilization rates in order to provide greater physical distancing for employees, which may require us to spend significant amounts for tenant improvements.

However, the COVID-19 pandemic and its aftermath have had negative impacts on government budgets and resources and it is unclear what the effect of these impacts will be on government demand for leasing office space.

Given the significant uncertainties as to the COVID-19 pandemic, its economic impact and its aftermath, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances, including as a result of the COVID-19 pandemic, will be on our financial results for future periods.

As of June 30, 2020 , we derive 24.2% of our annualized rental income from our properties located in the metropolitan Washington, D.C.

As of September 30, 2020, we derive 24.1% of our annualized rental income from our properties located in the metropolitan Washington, D.C.

market area, which includes Washington, D.C., Northern Virginia and suburban Maryland.

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and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations.

As of June 30, 2020 , tenants contributing 53.1% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 9.7% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

As of June 30, 2020 , tenants representing 1% or more of our total annualized rental income were as follows:

Credit Rating

Annualized Rental Income

% of Total Annualized Rental Income

Investment Grade

As of September 30, 2020, tenants contributing 57.2% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 7.5% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

As of September 30, 2020, tenants representing 1% or more of our total annualized rental income were as follows:

Tenant Credit Rating Annualized Rental Income % of Total Annualized Rental Income

Government Investment Grade $ 145,953 25.2 %

2 Shook, Hardy & Bacon L.L.P.

State of California

Investment Grade

Bank of America Corporation

Investment Grade

WestRock Company

Investment Grade

Not Rated 19,199 3.3 %

3 State of California Investment Grade 19,083 3.3 %

4 Bank of America Corporation Investment Grade 16,520 2.9 %

5 WestRock Company Investment Grade 12,864 2.2 %

6 F5 Networks, Inc.

Not Rated 12,777 2.2 %

7 Commonwealth of Massachusetts Investment Grade 11,953 2.1 %

8 CareFirst Inc.

Non Investment Grade 11,684 2.0 %

Northrop Grumman Corporation

Investment Grade

9 Northrop Grumman Corporation Investment Grade 11,320 2.0 %

10 Tyson Foods, Inc.

Investment Grade 11,011 1.9 %

Commonwealth of Massachusetts

Investment Grade

Micro Focus International plc

Non Investment Grade

CommScope Holding Company Inc

Non Investment Grade

Technicolor SA

Non Investment Grade

State of Georgia

Investment Grade

11 Micro Focus International plc Non Investment Grade 8,710 1.5 %

12 CommScope Holding Company Inc Non Investment Grade 8,097 1.4 %

13 State of Georgia Investment Grade 7,094 1.2 %

14 PNC Bank Investment Grade 6,902 1.2 %

15 ServiceNow, Inc.

Allstate Insurance Co.

Investment Grade 6,481 1.1 %

Compass Group plc

16 Allstate Insurance Co.

Investment Grade 6,473 1.1 %

17 Compass Group plc Investment Grade 6,399 1.1 %

18 Automatic Data Processing, Inc.

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Non Investment Grade 5,898 1.0 %

Total $ 340,484 58.7 %

(1) On August 2, 2020, Tailored Brands, Inc.

filed for Chapter 11 bankruptcy.

Although the tenant has paid its post-petition rental obligations due for September and October 2020, the tenant owes its August rental obligations, for which a proof of claim has been filed.

On October 27, 2020, Tailored Brands, Inc.

filed a plan supplement in connection with its reorganization plan which included assuming its lease obligation with us.

However, that does not assure entry of a confirmation order by the bankruptcy court or that the tenant will pay its August 2020 or future rents, or that the tenant will not seek to renegotiate its lease obligation as part of its bankruptcy proceeding.

Acquisition Activities

During the six months ended June 30, 2020 , we acquired a property adjacent to a property we own in Boston, MA for $ 11,500 , excluding acquisition related costs.

In July 2020, we entered into an agreement to acquire an office property located in Denver, CO containing approximately 68,000 rentable square feet for a purchase price of $38,100, excluding acquisition related costs.

This acquisition is expected to occur before the end of the third quarter.

However, this acquisition is subject to due diligence and other closing conditions;

accordingly, we cannot be sure that we will complete this acquisition, that this acquisition will not be delayed or that the terms will not change.

During the nine months ended September 30, 2020, we acquired a property adjacent to a property we own in Boston, MA for $11,500, excluding acquisition related costs.

In October 2020, we entered into an agreement to acquire three properties containing approximately 194,000 square feet adjacent to properties we own in an office park in Brookhaven, GA for a purchase price of $15,250, excluding acquisition related costs.

For more information about our acquisition activities, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Disposition Activities

During the six months ended June 30, 2020 , we sold six properties with a combined 734,784 rentable square feet for an aggregate sales price of $ 85,363 , excluding closing costs and including the repayment of one mortgage note with an outstanding principal balance of $13,095, an annual interest rate of 5.9% and a maturity date in August 2021, as part of our capital recycling program.

During the nine months ended September 30, 2020, we sold six properties with a combined 734,784 rentable square feet for an aggregate sales price of $85,363, excluding closing costs and including the repayment of one mortgage note with an outstanding principal balance of $13,095, an annual interest rate of 5.9% and a maturity date in August 2021.

In October 2020, we sold a four property business park located in Fairfax, VA containing approximately 171,000 rentable square feet for a sales price of $25,100, excluding closing costs.

We sold these properties pursuant to our capital recycling program.

Through our capital recycling program, we seek to selectively sell certain properties from time to time to fund future acquisitions and to maintain leverage consistent with our current investment grade ratings with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average lease term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution.

Given the current economic conditions surrounding the COVID-19 pandemic, we are carefully considering our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital during 2020.

In July 2020, we entered into an agreement to sell a four property business park located in Fairfax, VA containing approximately 171,000 rentable square for a gross sales price of $25,400 , excluding closing costs.

This sale is expected to occur

before the end of the third quarter.

However, this sale is subject to conditions;

accordingly, we cannot be sure that we will complete this sale or that this sale will not be delayed or the terms will not change.

Given the current

economic conditions surrounding the COVID-19 pandemic, we are carefully considering our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.

For more information about our disposition activities, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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In March 2020, in connection with the sale of one property, we prepaid, at a premium plus accrued interest, a mortgage note secured by that property with an outstanding principal balance of $13,095, an annual interest rate of 5.9% and a maturity date in August 2021, which was classified in liabilities of properties held for sale in our condensed consolidated balance sheet as of December 31, 2019.

In March 2020, we prepaid, at a premium plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $66,780, an annual interest rate of 4.0% and a maturity date in September 2030 using cash on hand and borrowings under our revolving credit facility.

Also in March 2020, we prepaid, at a premium plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $66,780, an annual interest rate of 4.0% and a maturity date in September 2030 using cash on hand and borrowings under our revolving credit facility.

In April 2020, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $32,677, an annual interest rate of 5.7% and a maturity date in July 2020 using cash on hand and borrowings under our revolving credit facility.

In June 2020, we issued $150,000 of our 6.375% senior unsecured notes due 2050 in an underwritten public offering, raising net proceeds of $144,772 , after deducting underwriters’ discounts and estimated offering expenses.

In June 2020, we issued $150,000 of our 6.375% senior unsecured notes due 2050 in an underwritten public offering.

In connection with this offering, we granted the underwriters a 30 day option to purchase up to an additional $22,500 aggregate principal amount of these notes.

In July 2020, the underwriters partially exercised this option for an additional $12,000 of these notes.

We used the aggregate net proceeds from this offering to repay amounts outstanding under our revolving credit facility and for general business purposes.

In July 2020, the underwriters partially exercised this option to purchase an additional $12,000 of these notes.

The aggregate net proceeds from this offering were $156,186, after underwriters’ discounts and offering expenses, which we used to repay amounts outstanding under our revolving credit facility and for general business purposes.

These notes require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after June 23, 2025.

In August 2020, a mortgage note secured by one of our properties with an outstanding principal balance of $39,635 and an annual interest rate of 2.2% is scheduled to mature.

We will be obligated to pay at that time the outstanding principal at par plus accrued interest.

We plan to use cash on hand and borrowings under our revolving credit facility to fund the repayment of this mortgage.

In August 2020, we repaid at maturity, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $39,635 and an annual interest rate of 2.2% using cash on hand and borrowings under our revolving credit facility.

In September 2020, we issued $250,000 of our 4.50% senior unsecured notes due 2025 in an underwritten public offering.

These senior unsecured notes are a further issuance of our existing $400,000 of senior unsecured notes due 2025 that were initially issued by SIR in February 2015, which we assumed in connection with our acquisition of SIR in a merger transaction on December 31, 2018.

The public offering price of these senior unsecured notes was 101.414% of the principal amount, raising net proceeds of $251,269, after underwriters’ discounts and estimated offering expenses.

These notes require semi-annual payments of interest only through maturity.

Segment Information

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

Three Months Ended June 30, 2020 , Compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020, Compared to Three Months Ended September 30, 2019

Non-Comparable

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Comparable Properties Results (1)

Three Months Ended

Consolidated Results

Three Months Ended June 30,

Three Months Ended Consolidated Results

Three Months Ended September 30, September 30, Three Months Ended September 30,

2020 2019 Change Change 2020 2019 2020 2019 Change Change

Rental income $ 144,910 $ 149,057 $ (4,147) (2.8 %) $ 896 $ 18,354 $ 145,806 $ 167,411 $ (21,605) (12.9 %)

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Property net operating income (2)

$ 95,303 $ 97,874 $ (2,571) (2.6 %) $ 460 $ 10,819 95,763 108,693 (12,930) (11.9 %)

Other expenses:

1 unchanged sentence

Loss on impairment of real estate 2,954 8,521 (5,567) (65.3 %)

Acquisition and transaction related costs

General and administrative 7,059 7,990 (931) (11.7 %)

Total other expenses 72,240 91,450 (19,210) (21.0 %)

Gain (loss) on sale of real restate

Dividend income

Loss on equity securities

Gain on sale of real restate — 11,463 (11,463) n/m

Interest and other income 2 358 (356) (99.4 %)

Interest expense (27,097) (32,367) 5,270 (16.3 %)

Loss on early extinguishment of debt

Income (loss) before income tax (expense) benefit and equity in net losses of investees

Loss on early extinguishment of debt — (284) 284 n/m

Loss before income tax (expense) benefit and equity in net losses of investees (3,572) (3,587) 15 (0.4 %)

Income tax (expense) benefit 54 (156) 210 (134.6 %)

Equity in net losses of investees (279) (196) (83) 42.3 %

Net income (loss)

Net loss $ (3,797) $ (3,939) $ 142 (3.6 %)

Weighted average common shares outstanding (basic and diluted) 48,132 48,073 59 0.1 %

Per common share amounts (basic and diluted):

Net income (loss)

Net loss $ (0.08) $ (0.08) $ — 0.0 %

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Comparable properties consists of 182 properties we owned on June 30, 2020 and which we owned continuously since April 1, 2019 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(1) Comparable properties consists of 178 properties we owned on September 30, 2020 and which we owned continuously since July 1, 2019 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(2) Our definition of property net operating income, or Property NOI, and our reconciliation of net income (loss) to Property NOI are included below under the heading “Non-GAAP Financial Measures.”

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, 2020 , compared to the three month period ended June 30, 2019 .

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three month period ended September 30, 2020, compared to the three month period ended September 30, 2019.

Rental income.

The decrease in rental income reflects decreases in rental income of $26,778 as a result of property dispositions, $2,037 related to a property undergoing significant redevelopment and $1,632 related to comparable properties, offset by an increase in rental income of $18 related to acquired properties.

The decrease in rental income for comparable properties is primarily due to termination fee revenue recorded at one property in the 2019 period, increased revenue reserves of $579 in the 2020 period primarily due to two of our tenants that represent approximately 0.24% of our annualized revenue as of June 30, 2020 being unable to pay us rent due to the impact of the COVID-19 pandemic and reductions in reimbursement income due to reductions in expenses that are reimbursable to us by our tenants as a result of the COVID-19 pandemic.

The decrease in rental income reflects decreases in rental income of $15,384 as a result of property dispositions, $4,147 related to comparable properties and $2,117 related to a property undergoing significant redevelopment, offset by an increase in rental income of $43 related to acquired properties.

The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our comparable properties in the 2020 period, lower reimbursement income due to reductions in expenses that are reimbursable to us by our tenants as a result of the COVID-19 pandemic and resulting decrease in space utilization and increased revenue reserves of $652 in the 2020 period primarily due to two of our tenants that represent approximately 1.17% of our annualized revenue as of September 30, 2020 being unable to pay us rent due to the impact of the COVID-19 pandemic.

Rental income includes non-cash straight line rent adjustments totaling $3,912 in the 2020 period and $6,904 in the 2019 period, and amortization of acquired leases and assumed lease obligations totaling $(1,312) in the 2020 period and $(35) in the 2019 period.

Real estate taxes.

The decrease in real estate taxes primarily reflects a decrease in real estate taxes associated with property dispositions of $2,467, offset by increases in real estate taxes of $78 for comparable properties, $13 for acquired properties and $10 for a property undergoing significant redevelopment.

Real estate taxes for comparable properties increased primarily due to the effect of higher real estate tax rates and valuation assessments for certain of our properties in the 2020 period.

The decrease in real estate taxes primarily reflects decreases in real estate taxes of $1,979 as a result of property dispositions, $626 for a property undergoing significant redevelopment and $122 for comparable properties, offset by an increase in real estate taxes of $16 related to acquired properties.

Real estate taxes for comparable properties decreased primarily due to successful real estate tax appeals for two of our comparable properties in the 2020 period.

Utility expenses.

The decrease in utility expenses reflects a decrease in utility expenses for comparable properties of $1,297 and a decrease associated with property dispositions of $1,080, offset by an increase in utility expenses for a property undergoing significant redevelopment of $108.

The decrease in utility expenses reflects a decrease in utility expenses of $1,373 as a result of property dispositions and a decrease for comparable properties of $621, offset by an increase in utility expenses of $40 for a property undergoing significant redevelopment.

Utility expenses for comparable properties declined primarily due to a decrease in electricity and water usage resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, as well as the implementation of real time energy management programs at certain of our properties in the 2020 period.

1 unchanged sentence

Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees.

The decrease in other operating expenses primarily reflects a decrease in other operating expenses related to property dispositions of $3,748, a decrease of $106 related to a property undergoing significant redevelopment and a decrease of $79 for comparable properties, offset by an increase of $28 related to acquired properties.

Other operating expenses for comparable properties decreased primarily due to lower cleaning and repairs and maintenance costs as a result of cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID- 19 pandemic, partially offset by higher insurance costs.

The decrease in other operating expenses primarily reflects a decrease of $3,107 as a result of property dispositions, a decrease of $833 for comparable properties and a decrease of $122 related to a property undergoing significant redevelopment, offset by an increase in other operating expenses of $52 for acquired properties.

Other operating expenses for comparable properties decreased primarily due to lower cleaning costs as a result of cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic and lower parking garage maintenance costs at certain of our properties due to lower parking activity resulting from the COVID-19 pandemic.

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects a decrease related to property dispositions of $7,783, a decrease for comparable properties of $1,130 and a decrease related to a property undergoing significant redevelopment of $888, offset by an increase in depreciation and amortization expense of $58 related to acquired properties.

The decrease in depreciation and amortization primarily reflects a decrease for comparable properties of $6,469, a decrease of $5,457 as a result of property dispositions and a decrease of $844 related to a property undergoing significant redevelopment, offset by an increase in depreciation and amortization of $58 for acquired properties.

Depreciation and amortization for comparable properties and the property undergoing significant redevelopment declined due to certain leasing related assets becoming fully depreciated in the 2020 period.

Loss on impairment of real estate.

In the 2019 period, we recorded a $2,380 loss on impairment of real estate to reduce the carrying value of one property to its estimated fair value less costs to sell.

Acquisition and transaction related costs.

Acquisition and transaction related costs in the 2019 period consists of post-merger activity costs incurred in 2019 in connection with our acquisition of Select Income REIT, or SIR, on December 31, 2018 in a merger transaction and other related transactions.

We recorded a $2,954 loss on impairment of real estate in the 2020 period to reduce the carrying value of four properties to their estimated fair value less costs to sell.

In the 2019 period, we recorded a $6,342 loss on impairment of real estate to reduce the carrying value of eight properties to their estimated fair value less costs to sell and a $2,179 loss on impairment of real estate related to the disposal of one property.

General and administrative.

General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company.

The decrease in general and administrative expenses primarily reflects a decrease in business management fees mostly as a result of property sales during 2019 and 2020 and lower legal expenses.

Gain (loss) on sale of real estate.

Gain (loss) on sale of real estate reflects activity related to property sales during the 2019 and 2020 periods.

Dividend income.

Dividend income in the 2019 period consists of distributions received in connection with our former investment in RMR Inc.

that we sold on July 1, 2019.

Loss on equity securities.

Loss on equity securities represents an unrealized loss in the 2019 period to adjust our former investment in RMR Inc.

to its fair value.

The decrease in general and administrative expenses primarily reflects a decrease in business management fees as a result of property sales during 2019 and 2020 and declines in our share price in the 2020 period during the COVID-19 pandemic.

Gain on sale of real estate.

We recorded an $11,463 gain on sale of real estate resulting from the sale of two properties in the 2019 period.

Interest and other income.

The decrease in interest and other income is primarily due to the effect of lower cash balances invested in the 2020 period compared to the 2019 period and lower returns on cash invested.

The decrease in interest and other income is primarily due to the payoff of a mortgage note receivable that we received in June 2020 in connection with a property we sold in 2016, as well as the effect of lower cash balances invested in the 2020 period compared to the 2019 period and lower returns on cash invested.

Interest expense.

senior unsecured notes in January 2020 and the repayment of four mortgage notes with an aggregate principal balance of $152,187 during 2020, as well as lower weighted average interest rates on borrowings during the 2020 period compared to the 2019 period, partially offset by an increase in interest expense resulting from the issuance of $162,000 of our 6.375% senior unsecured notes in June and July 2020 and $250,000 of our 4.50% senior unsecured notes in September 2020.

Loss on early extinguishment of debt.

We recorded a net loss on early extinguishment of debt of $557 in the 2020 period resulting from a loss on the settlement of a mortgage note receivable related to a property sold in 2016, partially offset by the write off of unamortized premiums associated with the prepayment of a mortgage note.

We recorded a loss on early extinguishment of debt of $71 in the 2019 period from the write off of debt issuance costs associated with the repayment of certain of our term loans.

Loss on extinguishment of debt in the 2019 period reflects the write-off of unamortized debt issuance costs and discounts associated with repayments of our unsecured term loan and redemption of our senior unsecured notes due 2019.

Income tax (expense) benefit.

The increase in income tax expense reflects higher operating income in certain jurisdictions in the 2020 period where we are subject to state income taxes.

Income tax benefit, in the 2019 period, is the result of operating income we earned in certain jurisdictions where we are subject to state income taxes.

Income tax (expense) benefit is the result of operating income we earned in certain jurisdictions where we are subject to state income taxes.

Equity in net losses of investees.

Equity in net losses of investees represents our proportionate share of earnings and losses from our investments in two unconsolidated joint ventures and, in the 2019 period, our investment in AIC.

Net income (loss).

Our net income (loss) and net income (loss) per basic and diluted common share increased in the 2020 period compared to the 2019 period primarily as a result of the changes noted above.

Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures and, in the 2019 period, our investment in AIC.

Net loss decreased in the 2020 period compared to the 2019 period primarily as a result of the changes noted above.

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

Six Months Ended June 30, 2020 , Compared to Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019

Non-Comparable

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Comparable Properties Results (1)

Six Months Ended

Consolidated Results

Six Months Ended June 30,

Nine Months Ended Consolidated Results

Nine Months Ended September 30, September 30, Nine Months Ended September 30,

2020 2019 Change Change 2020 2019 2020 2019 Change Change

Rental income $ 436,764 $ 443,510 $ (6,746) (1.5 %) $ 4,530 $ 74,710 $ 441,294 $ 518,220 $ (76,926) (14.8 %)

5 unchanged sentences

Property NOI (2)

$ 293,227 $ 296,173 $ (2,946) (1.0 %) $ 1,556 $ 50,111 294,783 346,284 (51,501) (14.9 %)

Other expenses:

1 unchanged sentence

Loss on impairment of real estate 2,954 14,105 (11,151) (79.1 %)

Acquisition and transaction related costs

Acquisition and transaction related costs — 682 (682) n/m

General and administrative 21,372 25,457 (4,085) (16.0 %)

1 unchanged sentence

Gain on sale of real estate 10,822 33,538 (22,716) (67.7 %)

Dividend income

Loss on equity securities

Dividend income — 1,960 (1,960) n/m

Loss on equity securities, net — (44,007) 44,007 n/m

Interest and other income 738 847 (109) (12.9 %)

Interest expense (79,461) (104,848) 25,387 (24.2 %)

Loss on early extinguishment of debt

Loss on early extinguishment of debt (3,839) (769) (3,070) n/m

Income (loss) before income tax expense and equity in net losses of investees 9,377 (33,612) 42,989 127.9 %

6 unchanged sentences

n/m - not meaningful

Comparable properties consists of 182 properties we owned on June 30, 2020 and which we owned continuously since January 1, 2019 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(1) Comparable properties consists of 178 properties we owned on September 30, 2020 and which we owned continuously since January 1, 2019 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(2) Our definition of Property NOI and our reconciliation of net income (loss) to Property NOI are included below under the heading “Non-GAAP Financial Measures.”

References to changes in the income and expense categories below relate to the comparison of consolidated results for the six month period ended June 30, 2020 , compared to the six month period ended June 30, 2019 .

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine month period ended September 30, 2020, compared to the nine month period ended September 30, 2019.

Rental income.

The decrease in rental income reflects decreases in rental income of $48,553 as a result of property dispositions, $4,085 related to a property undergoing significant redevelopment and $2,716 related to comparable properties, offset by an increase in rental income of $33 related to acquired properties.

The decrease in rental income for comparable properties is primarily due to termination fee revenue recorded at certain of our comparable properties in the 2019 period and reductions in occupied space at certain of our comparable properties in the 2020 period.

Rental income includes non-cash

straight line rent adjustments totaling $9,051 in the 2020 period and $12,461 in the 2019 period, and amortization of acquired leases and assumed lease obligations totaling $(2,837) in the 2020 period and $(2,593) in the 2019 period.

The decrease in rental income reflects decreases in rental income of $64,054 as a result of property dispositions, $6,746 related to comparable properties and $6,202 related to a property undergoing significant redevelopment, offset by an increase in rental income of $76 related to acquired properties.

The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our comparable properties in the 2020 period, termination fee revenue recorded at certain of our comparable properties in the 2019 period, certain below market lease intangibles becoming fully amortized and reductions in reimbursement income due to reductions in expenses that are

reimbursable to us by our tenants as a result of the COVID-19 pandemic and resulting decrease in space utilization.

Rental income includes non-cash straight line rent adjustments totaling $12,963 in the 2020 period and $19,365 in the 2019 period, and amortization of acquired leases and assumed lease obligations totaling $(4,149) in the 2020 period and $(2,628) in the 2019 period.

Real estate taxes.

The decrease in real estate taxes primarily reflects a decrease in real estate taxes associated with property dispositions of $4,206, offset by increases in real estate taxes of $216 for comparable properties, $22 for acquired properties and $17 for a property undergoing significant redevelopment.

The decrease in real estate taxes primarily reflects a decrease in real estate taxes associated with property dispositions of $6,204 and a decrease in real estate taxes of $609 for a property undergoing significant redevelopment, offset by increases in real estate taxes of $113 for comparable properties and $38 for acquired properties.

Real estate taxes for comparable properties increased primarily due to the effect of higher real estate tax rates and valuation assessments for certain of our properties in the 2020 period.

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The decrease in other operating expenses primarily reflects a decrease in other operating expenses related to property dispositions of $10,718, a decrease of $1,147 for comparable properties and a decrease of $397 related to a property undergoing significant redevelopment, offset by an increase in other operating expenses related to acquired properties of $91.

Other operating expenses for comparable properties decreased primarily due to lower snow removal costs, as well as lower cleaning and repairs and maintenance costs resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, partially offset by higher insurance costs in the 2020 period.

Other operating expenses for comparable properties decreased primarily due to lower cleaning costs resulting from cost savings initiatives implemented by our manager, RMR LLC, in response to decreased space utilization at our properties as a result of the COVID-19 pandemic, lower snow removal costs and lower parking garage maintenance costs due to lower parking activity at certain of our properties resulting from the COVID-19 pandemic, partially offset by higher insurance costs in the 2020 period.

Depreciation and amortization.

2 unchanged sentences

Loss on impairment of real estate.

In the 2019 period, we recorded a $5,137 loss on impairment of real estate to reduce the carrying value of one property to its estimated fair value less costs to sell and a $447 loss on impairment of real estate related to the sale of a portfolio of 34 properties.

We recorded a $2,954 loss on impairment of real estate in the 2020 period to reduce the carrying value of four properties to their estimated fair value less costs to sell.

In the 2019 period, we recorded an $11,479 loss on impairment of real estate to reduce the carrying value of ten properties to their estimated fair value less costs to sell and $2,626 of losses on impairment of real estate related to the sale of 35 properties.

Acquisition and transaction related costs.

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We recorded a $10,822 net gain on sale of real estate resulting from the sale of six properties during the 2020 period.

We recorded a $22,075 gain on sale of real estate resulting from the sale of one property during the 2019 period.

We recorded a $33,538 gain on sale of real estate resulting from the sale of three properties during the 2019 period.

Dividend income.

1 unchanged sentence

that we sold on July 1, 2019.

Loss on equity securities.

Loss on equity securities represents an unrealized loss in the 2019 period to adjust our former investment in RMR Inc.

to its fair value.

Loss on equity securities, net.

Loss on equity securities, net represents a realized loss in the 2019 period from the sale of our 2.8 million shares of class A common stock of RMR Inc.

on July 1, 2019.

Interest and other income.

The increase in interest and other income is primarily due to a settlement we received resulting from a dispute with a vendor, partially offset by the effect of lower cash balances invested in the 2020 period compared to the 2019 period and lower returns on cash invested.

The decrease in interest and other income is primarily due to the effect of lower cash balances invested in the 2020 period compared to the 2019 period, lower returns on cash invested and the payoff of a mortgage note receivable that we received in June 2020 in connection with a property we sold in 2016, partially offset by a settlement we received resulting from a dispute with a vendor.

Interest expense.

The decrease in interest expense is primarily due to lower average outstanding debt balances in the 2020 period resulting from debt repayment activity in 2019 and 2020, including the repayment of our term loans during 2019, the redemption of all $350,000 of our 3.75% senior unsecured notes in July 2019, the redemption of all $400,000 of our 3.60% senior unsecured notes in January 2020 and the repayment of four mortgage notes with an aggregate principal balance of $152,187 in 2020, as well as lower weighted average interest rates on borrowings during the 2020 period compared to the 2019 period, partially offset by an increase in interest expense resulting from the issuance of $162,000 of our 6.375% senior unsecured notes in June and July 2020 and $250,000 of our 4.50% senior unsecured notes in September 2020.

Loss on early extinguishment of debt.

We recorded a loss on early extinguishment of debt of $3,839 in the 2020 period from prepayment fees incurred, the write off of unamortized discounts, premiums and debt issuance costs associated with the prepayment of three mortgage notes and a loss on the settlement of a mortgage note receivable related to a property sold in 2016.

We recorded a loss on early extinguishment of debt of $485 in the 2019 period from the write off of debt issuance costs associated with the repayment of certain of our term loans.

We recorded a loss on early extinguishment of debt of $3,839 in the 2020 period from prepayment fees incurred and the write off of unamortized discounts, premiums and debt issuance costs associated with the prepayment of three mortgage notes and a loss on the settlement of a mortgage note receivable related to a property sold in 2016.

We recorded a loss on early extinguishment of debt of $769 in the 2019 period from the write off of unamortized debt issuance costs and discounts associated with the repayments of our term loans and redemption of our senior unsecured notes due 2019.

Income tax expense.

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Other real estate companies and REITs may calculate Property NOI differently than we do.

The following table presents the reconciliation of net income (loss) to Property NOI for the three and six months ended June 30, 2020 and 2019.

Three Months Ended June 30,

Six Months Ended June 30,

The following table presents the reconciliation of net income (loss) to Property NOI for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income (loss) $ (3,797) $ (3,939) $ 8,342 $ (34,694)

1 unchanged sentence

Income tax expense (benefit) (54) 156 220 509

Income before income tax expense (benefit) and equity in net losses of investees

Income (loss) before income tax expense (benefit) and equity in net losses of investees (3,572) (3,587) 9,377 (33,612)

Loss on early extinguishment of debt — 284 3,839 769

1 unchanged sentence

Interest and other income (2) (358) (738) (847)

Loss on equity securities

Loss on equity securities, net — — — 44,007

Dividend income — — — (1,960)

(Gain) loss on sale of real estate

Gain on sale of real estate — (11,463) (10,822) (33,538)

General and administrative 7,059 7,990 21,372 25,457

2 unchanged sentences

Depreciation and amortization 62,227 74,939 189,340 226,373

Property NOI $ 95,763 $ 108,693 $ 294,783 $ 346,284

Funds From Operations and Normalized Funds From Operations

5 unchanged sentences

Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

The following table presents the reconciliation of net income (loss) to FFO and Normalized FFO for the three and six months ended June 30, 2020 and 2019.

Three Months Ended June 30,

Six Months Ended June 30,

The following table presents the reconciliation of net income (loss) to FFO and Normalized FFO for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income (loss) $ (3,797) $ (3,939) $ 8,342 $ (34,694)

3 unchanged sentences

Loss on impairment of real estate 2,954 8,521 2,954 14,105

(Gain) loss on sale of real estate

Loss on equity securities

Gain on sale of real estate — (11,463) (10,822) (33,538)

Loss on equity securities, net — — — 44,007

FFO 62,628 69,455 193,536 220,811

Acquisition and transaction related costs — — — 682

3 unchanged sentences

Normalized FFO per common share (basic and diluted)

$ 1.30 $ 1.45 $ 4.10 $ 4.63

LIQUIDITY AND CAPITAL RESOURCES

8 unchanged sentences

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

With $570,000 available under our revolving credit facility as of July 29, 2020 and only approximately $40,000 of debt maturities until 2022, we believe that we are well positioned to weather the present disruptions facing the real estate industry and the economy generally.

With $750,000 available under our revolving credit facility as of October 29, 2020 and no significant debt maturities until 2022, we believe that we are well positioned to weather the present disruptions facing the real estate industry and the economy generally.

As a result of the COVID-19 pandemic, we have received requests from some of our tenants for rent assistance.

As of July 27, 2020, we have granted temporary rent assistance totaling $2,475 to 23 tenants who represent approximately 3.7% of our annualized rental income as of June 30, 2020.

This assistance generally entails a deferral of, in most cases, one month of rent until September 2020 when the deferred rent amounts will begin to be payable over a 12-month period.

Our liquidity has been and will be temporarily impacted by these rent deferrals as follows:

$446, $817, $959, $134, $59 and $59 of granted deferrals in April, May, June, July, August and September 2020, respectively, until these deferrals begin to become obligated to be repaid.

In addition, we also anticipate that our general and administrative expenses will be reduced because of the lower fees we will pay to our manager as a result of the decline in our share price since the COVID-19 pandemic began.

Although some of our tenants have sought temporary rent assistance, we also believe that overall tenant retention levels may increase.

Also, we believe we will benefit from the approximately 62.8% of our annualized rental income as of June 30, 2020 paid by investment grade tenants, the majority of which is made up of government tenants, and the diversity of our tenant base, both geographically and by industry, which may help mitigate the economic impact of the COVID-19 pandemic.

On July 16, 2020, we announced a regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year), maintaining our previous distribution rate.

At this time, we continue to expect that the quarterly distribution rate will remain unchanged for 2020.

As of October 27, 2020, we have granted temporary rent assistance totaling $2,550 to 19 tenants who represent approximately 3.6% of our annualized rental income as of September 30, 2020.

Our liquidity has been temporarily impacted by these rent deferrals with $2,096 of granted rent deferrals for the period of April 2020 through September 2020, until these deferrals begin to become obligated to be repaid.

In addition, we also anticipate that our general and administrative expenses may continue to be reduced because of the lower fees we will pay to our manager as a result of the decline in our share price since the COVID-19 pandemic began.

Although some of our tenants have sought temporary rent assistance, we remain focused on proactive dialogues with our existing tenants and overall tenant retention.

Also, we believe we will benefit from the approximately 64.7% of our annualized rental income as of September 30, 2020 paid by investment grade tenants, the majority of which is made up of government tenants, and the diversity of our tenant base, both geographically and by industry, which may help mitigate the economic impact of the COVID-19 pandemic.

On October 15, 2020, we announced a regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year), maintaining our previous distribution rate.

At this time, we continue to expect that the quarterly distribution rate will remain unchanged.

We determine our distribution payout ratio with consideration for our expected capital expenditures as well as cash flows from operations and debt obligations.

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Pursuant to our capital recycling program, we plan to sell certain properties from time to time to fund future acquisitions and to maintain leverage consistent with our current investment grade ratings with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution.

During the six months ended June 30, 2020, we sold six properties for $85,363 , excluding closing costs.

In July 2020, we entered into an agreement to sell a four property business park for $25,400, excluding closing costs, and an agreement to purchase an office property for $38,100, excluding acquisition related costs, as part of this program.

These transactions are expected to occur before the end of the third quarter.

However, these transactions are subject to conditions;

accordingly, we cannot be sure that we will complete these transactions or that these transactions will not be delayed or the terms will not change.

Given the current economic conditions, we are carefully considering our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital in 2020.

During the nine months ended September 30, 2020, we sold six properties for $85,363, excluding closing costs.

In October 2020, we sold a four property business park located in Fairfax, VA containing approximately 171,000 rentable square feet for a sales price of $25,100, excluding closing costs.

Also in October 2020, we entered into an agreement to acquire three properties adjacent to properties we own in an office park in Brookhaven, GA for $15,250, excluding acquisition related costs.

Given the current economic conditions, we are carefully considering our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.

Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions.

We generally do not intend to purchase “turn around” properties, or properties which do not generate positive cash flows.

Our changes in cash flows for the six months ended June 30, 2020 compared to the same period in 2019 were as follows:

Our changes in cash flows for the nine months ended September 30, 2020 compared to the same period in 2019 were as follows:

(i) cash flows provided by operating activities increased from $148,138 in the 2019 period to $166,098 in the 2020 period;

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The increase in cash provided by operating activities for the 2020 period as compared to the 2019 period was a result of favorable changes in working capital in the 2020 period compared to the 2019 period.

The decrease in cash provided by investing activities in the 2020 period as compared to the 2019 period is primarily due to lower cash proceeds received from our sales of properties in the 2020 period compared to the 2019 period and higher real estate acquisition and improvement activities in the 2020 period.

The decrease in cash used in financing activities in the 2020 period as compared to the 2019 period is primarily due to the issuance of $150,000 of our 6.375% senior unsecured notes due 2050 in the 2020 period and a decrease in net debt repayment activity, due to repayments of our unsecured term loans and net repayment activity on our revolving credit facility using cash on hand and proceeds from sales of properties in the 2019 period compared to increased borrowings under our revolving credit facility in the 2020 period in order to facilitate the repayment of other debts, including the redemption of all $400,000 of our 3.60% senior unsecured notes in January 2020.

The decrease in cash provided by investing activities in the 2020 period as compared to the 2019 period is primarily due to lower cash proceeds received from our sales of properties in the 2020 period compared to the 2019 period, the sale of 2.8 million shares of Class A common stock of RMR Inc.

in the 2019 period and higher real estate acquisition and improvement activities in the 2020 period.

The decrease in cash used in financing activities in the 2020 period as compared to the 2019 period is primarily due to the issuance of $162,000 of our 6.375% senior unsecured notes due 2050 and $250,000 of our 4.50% senior unsecured notes due 2025 in the 2020 period and a decrease in net debt repayment activity, due to repayments of our unsecured term loans and net repayment activity on our revolving credit facility using cash on hand and proceeds from sales of properties in the 2019 period compared to increased borrowings under our revolving credit facility in the 2020 period in order to facilitate the repayment of other debts, including the redemption of all $400,000 of our 3.60% senior unsecured notes in January 2020 and the repayment of $152,187 of mortgage debt.

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

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The maturity date of our revolving credit facility is January 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by two additional six month periods.

We can borrow,

repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.

We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at June 30, 2020 , on the amount outstanding under our revolving credit facility.

We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at June 30, 2020 .

We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.

We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at September 30, 2020, on the amount outstanding under our revolving credit facility.

We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2020.

Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings.

As of June 30, 2020 , the annual interest rate payable on borrowings under our revolving credit facility was 1.2% .

As of June 30, 2020 and July 29, 2020, we had $200,000 and $180,000 , respectively, outstanding under our revolving credit facility, and $550,000 and $570,000 , respectively, available for borrowing under our revolving credit facility.

As of September 30, 2020, the annual interest rate payable on borrowings under our revolving credit facility was 1.2%.

As of September 30, 2020 and October 29, 2020, we had no amounts outstanding under our revolving credit facility and $750,000 available for borrowing.

Our credit agreement includes a feature under which the maximum borrowing availability may be increased to up to $1,950,000 in certain circumstances.

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In June 2020, we issued $150,000 of our 6.375% senior unsecured notes due 2050 in an underwritten public offering.

In connection with this offering, we granted the underwriters a 30 day option to purchase up to an additional $22,500 aggregate principal amount of these notes.

In July 2020, the underwriters partially exercised this option for an additional $12,000 of these notes.

The aggregate net proceeds of this offering were $156,186, after underwriters’ discounts and offering expenses.

We used the aggregate net proceeds from this offering to repay amounts outstanding under our revolving credit facility and for general business purposes.

These notes require quarterly payments of interest only through maturity and may be repaid at par (plus accrued and unpaid interest) on or after June 23, 2025.

In addition, in August 2020, we plan to repay at maturity, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $39,635 and an annual interest rate of 2.2% using cash on hand and borrowings under our revolving credit facility.

As of June 30, 2020 , our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows:

Debt Maturities

In September 2020, we issued $250,000 of our 4.50% senior unsecured notes due 2025 in an underwritten public offering.

These notes are a further issuance of our existing $400,000 of senior unsecured notes due 2025 that were initially issued by SIR in February 2015, which we assumed in connection with our acquisition of SIR in a merger transaction on December 31, 2018.

The public offering price of these notes was 101.414% of the principal amount, raising net proceeds of $251,269, after underwriters’ discounts and estimated offering expenses.

These notes require semi-annual payments of interest only through maturity.

As of September 30, 2020, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows:

Year Debt Maturities

2025 and thereafter 1,122,000

Total $ 2,243,475

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates.

Our $171,475 in mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of June 30, 2020 , we have estimated unspent leasing related obligations of $61,720 .

In addition to our debt obligations, as of September 30, 2020, we have estimated unspent leasing related obligations of $61,307.

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from property sales, incurrences or assumptions of mortgage debt and net proceeds from offerings of debt or equity securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions.

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Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.

During the six months ended June 30, 2020 , we paid quarterly distributions to our common shareholders totaling $53,021 using cash on hand and borrowings under our revolving credit facility.

On July 16, 2020 , we declared a regular quarterly distribution payable to common shareholders of record on July 27, 2020 of $0.55 per share, or approximately $26,500 .

We expect to pay this distribution on or about August 20, 2020 using cash on hand and borrowings under our revolving credit facility.

During the nine months ended September 30, 2020, we paid quarterly distributions to our common shareholders totaling $79,546 using cash on hand and borrowings under our revolving credit facility.

On October 15, 2020, we declared a regular quarterly distribution payable to common shareholders of record on October 26, 2020 of $0.55 per share, or approximately $26,600.

We expect to pay this distribution on or about November 19, 2020 using cash on hand and borrowings under our revolving credit facility.

For more information regarding the distributions we paid during 2020, see Note 9 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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For more information on the financial condition and results of operations of these joint ventures, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other than these joint ventures, as of June 30, 2020 , we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Other than these joint ventures, as of September 30, 2020, we had no off balance sheet arrangements that

have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants (dollars in thousands)

Our principal debt obligations at June 30, 2020 consisted of borrowings under our $750,000 revolving credit facility, an aggregate outstanding principal balance of $1,810,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $211,796 , that were assumed in connection with certain of our acquisitions.

Our principal debt obligations at September 30, 2020 consisted of an aggregate outstanding principal balance of $2,072,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $171,475, that were assumed in connection with certain of our acquisitions.

Also, the three properties owned by two joint ventures in which we own 51% and 50% interests secure two additional mortgage notes.

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Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business and property manager.

comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances.

As of June 30, 2020 , we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements.

Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances.

As of September 30, 2020, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements.

Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis