Select Income REIT Announces 2012 Fourth Quarter and Year End Results

NEWTON, Mass.--(BUSINESS WIRE)--Select Income REIT (NYSE: SIR) today announced financial results for the quarter and year ended December 31, 2012. SIR was formed on December 19, 2011 as a wholly owned subsidiary of CommonWealth REIT (NYSE: CWH), and SIR sold approximately 29.5% of its common shares in an initial public offering, or IPO, on March 12, 2012. Accordingly, SIR’s historical results of operations for the 2011 periods are not comparable to results reported for the current periods; similarly, SIR’s historical results for the years ended December 31, 2011 and 2012 are not comparable to the results which may be expected in future periods.

Results for the Quarter Ended December 31, 2012:

Normalized funds from operations, or Normalized FFO, for the quarter ended December 31, 2012 were $23.6 million, compared to Normalized FFO for the quarter ended December 31, 2011 of $20.1 million. Normalized FFO per share for the quarter ended December 31, 2012 were $0.71 per share.

Net income was $17.2 million for the quarter ended December 31, 2012, compared to $17.2 million for the same quarter last year. Net income per share for the quarter ended December 31, 2012 was $0.52 per share.

The weighted average number of common shares outstanding was 33,070,092 for the quarter ended December 31, 2012. For the quarter ended December 31, 2011, SIR had only a nominal number of shares outstanding.

A reconciliation of net income determined according to U.S. generally accepted accounting principles, or GAAP, to funds from operations, or FFO, and Normalized FFO for the quarters ended December 31, 2012 and 2011 appears later in this press release.

Results for the Year Ended December 31, 2012:

Normalized FFO for the year ended December 31, 2012 were $83.2 million, compared to Normalized FFO for the year ended December 31, 2011 of $80.1 million. Normalized FFO per share for the year ended December 31, 2012 were $3.07 per share.

Net income was $65.9 million for the year ended December 31, 2012, compared to $68.9 million for the year ended December 31, 2011. Net income per share for the year ended December 31, 2012 was $2.43 per share.

The weighted average number of common shares outstanding was 27,121,991 for the year ended December 31, 2012. For the year ended December 31, 2011, SIR had only a nominal number of shares outstanding.

A reconciliation of net income, determined according to GAAP, to FFO and Normalized FFO for the years ended December 31, 2012 and 2011 appears later in this press release.

Occupancy and Leasing Results:

As of December 31, 2012, 95.3% of SIR’s total rentable square feet was leased, compared to 95.3% leased as of December 31, 2011, and 94.9% leased as of September 30, 2012.

SIR entered lease renewals for 375,000 square feet and new leases for 59,000 square feet during the quarter ended December 31, 2012 which had weighted average rental rates that were 35.2% above prior rents for the same square feet. The weighted average lease term for leases entered during the fourth quarter of 2012 was 9.6 years. Commitments for tenant improvement, leasing commission costs and concessions for leases entered during the quarter ended December 31, 2012 totaled approximately $323,000, or approximately $0.08 per square foot per year of the weighted average lease term. All renewal and new leasing activity during the quarter ended December 31, 2012 occurred at SIR’s properties located in Hawaii.

During the quarter ended December 31, 2012, SIR also executed ten rent resets at properties located in Hawaii for approximately 365,000 square feet of land at combined weighted average reset rates that were approximately 59.4% higher than prior rates.

Investment Activities:

Since October 1, 2012, SIR has acquired 9 properties with a combined 1,238,809 square feet for an aggregate purchase price of $282.4 million, excluding closing costs, which are described below.

• In November 2012, SIR acquired a single tenant, net leased office property located in Sunnyvale, CA with 96,415 square feet. The purchase price was $28.1 million, excluding closing costs.
• Also in November 2012, SIR acquired a net leased industrial property located in Honolulu, HI with 49,452 square feet. The purchase price was $6.3 million, excluding closing costs.
• Also in November 2012, SIR acquired three single tenant, net leased office properties located in Sterling, VA with a combined 337,228 square feet. The aggregate purchase price was $85.6 million, excluding closing costs.
• In December 2012, SIR acquired a single tenant, net leased office property located in Ann Arbor, MI with 82,003 square feet. The purchase price was $16.9 million, excluding closing costs.
• Also in December 2012, SIR acquired a single tenant, net leased office property located in Columbia, MD with 119,912 square feet. The purchase price was $40.5 million, excluding closing costs.
• In January 2013, SIR acquired two single tenant, net leased office properties located in Addison, TX with a combined 553,799 square feet. The aggregate purchase price was $105.0 million, excluding closing costs.

In January 2013, SIR entered agreements to acquire three properties with a combined 225,211 square feet for an aggregate purchase price of $53.3 million, excluding closing costs, which are described below.

• In January 2013, SIR entered an agreement to acquire two single tenant, net leased office properties located in Provo, UT with a combined 125,225 square feet. The aggregate purchase price is $34.7 million, excluding closing costs. This acquisition is subject to SIR's satisfactory completion of diligence and other customary closing conditions; accordingly, SIR can provide no assurance that it will acquire these properties for the stated aggregate purchase price or at all.
• Also in January 2013, SIR entered an agreement to acquire a single tenant, net leased office property located in San Antonio, TX with 99,986 square feet. The purchase price is $18.6 million, excluding closing costs. This acquisition is subject to SIR's satisfactory completion of diligence and other customary closing conditions; accordingly, SIR can provide no assurance that it will acquire this property for the stated purchase price or at all.

Financing Activities:

Since October 1, 2012, SIR has completed the following financing activities:

On December 11, 2012, SIR sold 8,050,000 common shares, including 1,050,000 common shares sold when the underwriters exercised in full their option to purchase additional shares, in a public offering at a price of $24.00 per share and raised net proceeds of approximately $182.8 million. The net proceeds from this offering were used to partially repay amounts outstanding under SIR’s revolving credit facility and for general business activities, including the acquisitions described above.

In February 2013, SIR increased the available borrowing amount under its revolving credit facility from $500.0 million to $750.0 million. All other terms and conditions of the revolving credit facility remain unchanged.

Conference Call:

On Friday, February 22, 2013, at 1:00 p.m. Eastern Time, David Blackman, President and Chief Operating Officer, and John Popeo, Treasurer and Chief Financial Officer, will host a conference call to discuss the fourth quarter and year end 2012 financial results.

The conference call telephone number is [phone]. Participants calling from outside the United States and Canada should dial [phone]. No pass code is necessary to access either call. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through 11:59 p.m. Eastern Time on Friday, March 1, 2013. To hear the replay, dial [phone]. The replay pass code is 279894.

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

Supplemental Data:

A copy of SIR’s Fourth Quarter 2012 Supplemental Operating and Financial Data is available for download at SIR’s website, www.sirreit.com. SIR’s website is not incorporated as part of this press release.

Select Income REIT is a real estate investment trust, or REIT, which owns properties that are primarily net leased to single tenants. As of December 31, 2012, SIR owned 267 properties with a total of approximately 24.6 million square feet located in 19 states, including 229 properties with approximately 17.8 million square feet which are primarily leasable industrial and commercial land located on the island of Oahu, HI. SIR is headquartered in Newton, MA.

Please see the pages attached hereto for a more detailed statement of SIR’s operating results and financial condition and for an explanation of SIR’s calculation of FFO and Normalized FFO.

A Maryland Real Estate Investment Trust with transferable shares of beneficial interest listed on the New York Stock Exchange.
No shareholder, Trustee or officer is personally liable for any act or obligation of the Trust.

Select Income REIT
Condensed Consolidated Statements of Income
(amounts in thousands, except per share data)
(unaudited)
	Three Months Ended December 31,					Year Ended December 31,
	2012			2011		2012			2011
Revenues:
Rental income	$	31,287		$	22,588	$	105,559		$	91,775
Tenant reimbursements and other income		5,118			4,104		17,231			16,847
Total revenues		36,405			26,692		122,790			108,622
Expenses:
Real estate taxes		4,157			3,646		15,370			14,709
Other operating expenses		2,811			1,716		8,426			8,237
Depreciation and amortization		5,178			2,844		14,860			11,205
Acquisition related costs		1,212			-		2,470			-
General and administrative		2,539			1,240		8,203			5,528
Total expenses		15,897			9,446		49,329			39,679
Operating income		20,508			17,246		73,461			68,943
Interest expense (including amortization of deferred
financing fees of $382, $0, $1,050 and $0, respectively)		(3,129	)		-		(7,565	)		-
Equity in earnings of an investee		80			-		269			-
Income before income tax expense		17,459			17,246		66,165			68,943
Income tax expense		(290	)		-		(290	)		-
Net income		17,169			17,246		65,875			68,943
Weighted average common shares outstanding		33,070			-		27,122			-
Net income per common share	$	0.52		$	-	$	2.43		$	-

Select Income REIT
Funds from Operations and Normalized Funds from Operations((1))
(amounts in thousands, except per share data)
(unaudited)
	Three Months Ended December 31,				Year Ended December 31,
		2012		2011		2012		2011
Net income	$	17,169	$	17,246	$	65,875	$	68,943
Plus:    depreciation and amortization		5,178		2,844		14,860		11,205
FFO		22,347		20,090		80,735		80,148
Plus:    acquisition costs		1,212		-		2,470		-
Normalized FFO	$	23,559	$	20,090	$	83,205	$	80,148
Weighted average common shares outstanding		33,070		-		27,122		-
Per common share
FFO	$	0.68			$	2.98
Normalized FFO	$	0.71			$	3.07

⁽¹⁾ SIR calculates FFO and Normalized FFO as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, plus real estate depreciation and amortization, as well as other adjustments currently not applicable to us. SIR’s calculation of Normalized FFO differs from NAREIT’s definition of FFO because SIR excludes acquisition related costs. SIR considers FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, operating income and cash flow from operating activities. SIR believes that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of its operating performance between periods. FFO and Normalized FFO are among the factors considered by SIR’s Board of Trustees when determining the amount of distributions to SIR’s shareholders. Other factors include, but are not limited to, requirements to maintain SIR’s status as a REIT, limitations in SIR’s revolving credit facility and term loan agreements, the availability of debt and equity capital to SIR, SIR’s expectation of its future capital requirements and operating performance, and SIR’s expected needs and availability of cash to pay its obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of SIR’s financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of SIR’s needs. SIR believes that FFO and Normalized FFO may facilitate an understanding of SIR’s consolidated historical operating results. These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in SIR’s Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than SIR does.

Select Income REIT
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
(unaudited)
		December 31, 2012			December 31, 2011
ASSETS
Real estate properties:
Land	$	675,092		$	614,702
Buildings and improvements		620,686			292,634
		1,295,778			907,336
Accumulated depreciation		(46,697	)		(36,240	)
		1,249,081			871,096
Acquired real estate leases, net		95,248			44,333
Cash and cash equivalents		20,373			-
Restricted cash		42			-
Rents receivable, net of allowance for doubtful
accounts of $644 and $4,067, respectively		38,885			35,024
Deferred leasing costs, net		4,816			3,418
Deferred financing costs, net		5,517			-
Due from related persons		585			-
Other assets		16,105			661
Total assets	$	1,430,652		$	954,532
LIABILITIES AND SHAREHOLDERS' EQUITY
Revolving credit facility	$	95,000		$	-
Term loan		350,000			-
Mortgage notes payable		27,778			-
Accounts payable and accrued expenses		19,703			14,217
Assumed real estate lease obligations, net		20,434			21,005
Rents collected in advance		6,518			6,229
Security deposits		9,335			8,281
Due to related persons		1,701			-
Total liabilities		530,469			49,732
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, 39,282,592 and 1,000
shares issued and outstanding, respectively		393			-
Additional paid in capital		876,920			-
Cumulative net income		51,251			-
Cumulative other comprehensive income		25			-
Cumulative common distributions		(28,406	)		-
Ownership interest		-			904,800
Total shareholders' equity		900,183			904,800
Total liabilities and shareholders' equity	$	1,430,652		$	954,532

WARNING CONCERNING FORWARD LOOKING STATEMENTS

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

• THIS PRESS RELEASE STATES THAT WE HAVE ENTERED AGREEMENTS TO PURCHASE PROPERTIES. THESE TRANSACTIONS ARE SUBJECT TO VARIOUS TERMS AND CONDITIONS TYPICAL OF COMMERCIAL REAL ESTATE TRANSACTIONS. THESE TERMS AND CONDITIONS MAY NOT BE MET. AS A RESULT, THESE TRANSACTIONS MAY NOT OCCUR OR MAY BE DELAYED.

THE INFORMATION CONTAINED IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING UNDER “RISK FACTORS” IN OUR PERIODIC REPORTS, OR INCORPORATED THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE STATED IN OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION ARE AVAILABLE ON ITS WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

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