News Column

SELECT INCOME REIT - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 28, 2014

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

OVERVIEW We are a real estate investment trust, or REIT, organized under Maryland law. As of June 30, 2014, we owned 50 properties (280 buildings, leasable land parcels and easements), located in 21 states, that contain approximately 27.0 million rentable square feet and were approximately 96.1% leased (based on rentable square feet). For the six months ended June 30, 2014, approximately 39.4% of our total revenue was from 11 properties (229 buildings, leasable land parcels and easements) with 17.8 million rentable square feet that we own on the island of Oahu, HI, or our Hawaii Properties. The remainder of our total revenue for the period ended June 30, 2014 was from 39 properties (51 buildings) located throughout the mainland United States, or our Mainland Properties. As of June 30, 2014, our properties were leased to 263 different tenants, with a weighted average remaining lease term (based on annualized rental revenue) of approximately 10.6 years. Property Operations As of June 30, 2014, 96.1% of our rentable square feet were leased, compared to 95.5% of our rentable square feet as of June 30, 2013. Occupancy data for 2014 and 2013 is as follows (square feet in thousands): All Properties Comparable Properties (1) As of June 30, As of June 30, 2014 2013 2014 2013 Total properties 50 44 41 41



Total rentable square feet (2) 27,040 25,391 24,612 24,612 Percent leased (3)

96.1% 95.5% 95.7% 95.3%



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(1) Consists of 41 properties (267 buildings, leasable land parcels and easements) that we owned continuously since January 1, 2013.

(2) Subject to modest adjustments when space is re-measured or re-configured for new tenants and when land leases are converted to building leases.

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.

While the occupancy increase at our comparable properties from June 30, 2013 to June 30, 2014 positively impacted our June 30, 2014 comparable financial results, our comparable financial results have been primarily impacted by rent increases during the period at some of our comparable leased land properties located in Hawaii, as further described below. The average annualized effective rental rate per square foot, as defined below, for our properties for the periods ended June 30, 2014 and 2013 are as follows: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Average annualized effective rental rate per square foot leased: (1) All Properties $ 8.73 $ 7.53 $ 8.63 $ 7.44 Comparable Properties (2) $ 7.67 $ 7.60 $ 7.17 $ 6.97



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(1) Average annualized effective rental rate per square foot leased represents annualized total revenue during the period specified divided by the average rentable square feet leased during the period specified.

(2) Comparable properties for the three months ended June 30, 2014 and 2013 consist of 44 properties (272 buildings, leasable land parcels and easements) that we owned continuously since April 1, 2013. Comparable properties for the six months ended June 30, 2014 and 2013 consist of 41 properties (267 buildings, leasable land parcels and easements) that we owned continuously since January 1, 2013. During the three months ended June 30, 2014, we entered lease renewals and new leases for approximately 239,000 square feet at weighted average rental rates that were approximately 21.0% higher than prior rates for the same space. The weighted average lease term for new and renewal leases entered during the three months ended June 30, 2014 was 7.0 years. Commitments for tenant improvements, leasing costs and concessions for leases entered during the three months ended June 30, 2014 totaled approximately $647,000, or approximately $0.39 per square foot per year of the weighted average lease term. All leasing activity during the three months ended June 30, 2014 occurred at our Hawaii Properties. 10 -------------------------------------------------------------------------------- During the three months ended June 30, 2014, we also executed 11 rent resets at our Hawaii Properties for approximately 721,000 square feet of land, at weighted average reset rates that were approximately 30.9% higher than prior rates. We currently believe that U.S. real estate leasing market conditions are slowly improving, but remain weak in many U.S. markets. However, because our weighted average remaining lease term (based on annualized rental revenue, as defined in footnote (2) of the table below) was approximately 10.6 years as of June 30, 2014, and because only 0.4% of our total rented square feet is subject to leases scheduled to expire during the remainder of 2014, we do not expect our occupancy rate to materially change through the end of 2014. In addition, despite the recent recession and incomplete recovery of the U.S. economy, revenues from our Hawaii Properties, which represented approximately 39.4% of our total rental revenue for the six months ended June 30, 2014, have generally increased under our ownership as leases for those properties have reset or renewed to the then current fair market value. Nevertheless, because of the current U.S. and global economic uncertainty, there are too many variables for us to reasonably project what the financial impact of changing market conditions will be on our occupancy, rents or financial results. As shown in the table below, approximately 0.4% of our total rented square feet and approximately 0.2% of our total annualized rental revenue (as defined in footnote (2) of the table below) are included in leases scheduled to expire by December 31, 2014. Lease renewals and rental rates for which available space may be relet in the future will depend on prevailing market conditions at the times these renewals, new leases and rent reset rates are negotiated. However, all of our leases scheduled to expire through 2014 relate to our Hawaii Properties, and, as stated above, revenues from these properties have generally increased during our ownership as the leases for those properties have been reset or renewed. As of June 30, 2014, our lease expirations by year are as follows (square feet and dollars in thousands): Cumulative Cumulative Percent of Percent of Percent of Percent of Total Total Number of Total Total Annualized Annualized Annualized Tenants with Rented Rented Rented Rental Rental Rental Expiring Square Feet Square Feet



Square Feet Revenue Revenue Revenue Year

Leases Expiring (1) Expiring (1) Expiring (1) Expiring (2) Expiring (2) Expiring (2) 7/1/2014 - 12/31/2014 9 98 0.4% 0.4% $ 409 0.2% 0.2% 2015 26 605 2.3% 2.7% 6,071 2.7% 2.9% 2016 23 1,107 4.3% 7.0% 8,757 3.9% 6.8% 2017 13 505 1.9% 8.9% 6,141 2.7% 9.5% 2018 14 1,483 5.7% 14.6% 14,862 6.6% 16.1% 2019 17 1,835 7.1% 21.7% 7,374 3.3% 19.4% 2020 5 318 1.2% 22.9% 4,276 1.9% 21.3% 2021 7 795 3.1% 26.0% 7,512 3.4% 24.7% 2022 65 3,028 11.7% 37.7% 24,005 10.7% 35.4% 2023 12 1,837 7.1% 44.8% 36,817 16.4% 51.8% Thereafter 87 14,369 55.2% 100.0% 107,652 48.2% 100.0% 278 25,980 100.0% $ 223,876 100.0% Weighted average remaining lease term (in years) 11.6 10.6

-------------------------------------------------------------------------------- (1) Rented square feet is pursuant to existing leases as of June 30, 2014, and includes (i) space being fitted out for occupancy pursuant to existing leases, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. (2) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of June 30, 2014, including straight line rent adjustments and estimated recurring expense reimbursements, excluding lease value amortization.



A majority of our Hawaii Properties are lands leased for rents that are periodically reset based on fair market values, generally every five to ten years. The following chart shows the annualized rental revenue as of June 30, 2014 scheduled to reset at our Hawaii lands.

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Scheduled Rent Resets At Hawaii Lands (dollars in thousands) Annualized Rental Revenue (1) as of June 30, 2014 Scheduled to Reset Resets open from prior periods $ 3,872 (2) 7/1/2014 - 12/31/2014 884 2015 1,972 2016 - 2017 and thereafter 27,558 Total $ 34,286

-------------------------------------------------------------------------------- (1) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of June 30, 2014, including straight line rent adjustments and estimated recurring expense reimbursements, excluding lease value amortization. (2) Amount includes rents currently being paid, excluding rent resets not yet established. However, rental income in our condensed consolidated statements of income and comprehensive income includes estimated rental rate adjustments for these rent resets. With respect to our Hawaiian land leases, we intend to negotiate with our tenants as rents under their leases are scheduled to reset in order to achieve new rents based on the then current fair market values. If we are unable to reach an agreement with a tenant on a rent reset, our Hawaiian land leases typically provide that rent is reset based on an appraisal process. Despite our prior experience with rent resets in Hawaii, our ability to increase rents when rent resets occur depends upon market conditions, which are beyond our control. Accordingly, we can provide no assurance that the historical increases in rents which we have achieved in the past will be repeated in the future, and it is possible that rents could reset to a lower level if fair market values decrease. We expect to seek to renew or extend the terms of leases relating to our Mainland Properties when they expire. Because of the capital many of these tenants have invested in improvements and because many of our properties may be of strategic importance to the tenants' business, we believe that there may be a greater likelihood that these tenants may renew or extend their leases when they expire as compared to tenants in a property with multiple tenants. However, we also believe that if a building previously occupied by a single tenant becomes vacant, it may take longer and cost more to locate a new tenant than when space becomes vacant in a multi-tenant property because in place improvements designed specifically for the needs of the prior single tenant may need to be replaced. During the third quarter of 2013, one of our mainland tenants defaulted on its obligation to pay real estate taxes and rent under its lease with us. Pursuant to the lease, a portion of this tenant's security deposit was applied to cover all unpaid amounts billed as of June 1, 2014. We commenced litigation to pursue our contractual rights under the lease, including reimbursement of amounts drawn on the security deposit and payment in full of all past due amounts plus amounts that become due if we elect to accelerate the expiration of the lease. On June 19, 2014, we were awarded summary judgment on some of our claims in the litigation, including our claim for restoration of the security deposit, and the tenant has deposited such amounts with us pursuant to the order. The tenant also has paid rent for the month of July 2014. Litigation with this tenant is continuing with respect to our other claims. Whenever we extend, renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. Our principal source of funds for our operations to pay our debt service and our distributions to shareholders is rents from tenants at our properties. Rents are generally received from our tenants monthly in advance. As of June 30, 2014, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands): 12 --------------------------------------------------------------------------------



Tenants Representing 1% or More of Our Total Annualized Rental Revenues:

% of % of Total Annualized Rental Tenant Property Type Sq. Ft. (1) Sq. Ft. (1) Revenue (2) Expiration 1 Tellabs, Inc. Mainland Properties 820 3.2% 7.5% 3/31/2029 2 Bank of America, Mainland N.A. Properties 554 2.1% 6.2% 1/31/2026 3 MeadWestvaco Mainland Corporation Properties 311 1.2% 5.3% 6/30/2023 4 Orbital Sciences Mainland Corporation Properties 337 1.3% 4.6% 6/30/2023 5 Cinram Group, Inc. Mainland Properties 1,371 5.3% 4.1% 8/30/2032 6 Novell, Inc. Mainland Properties 406 1.6% 3.5% 11/30/2024 7 The Southern Company Mainland Properties 448 1.7% 2.1% 12/31/2018 8 Hawaii Independent Hawaii 4/30/2019; Energy, LLC (formerly Properties 12/31/2019; Tesoro) 3,148 12.1% 1.9% 3/31/2024 9 Bookspan Mainland Properties 502 1.9% 1.8% 9/23/2028 10 Vivint, Inc. Mainland Properties 125 0.5% 1.6% 11/30/2024 11 Merkle Group, Inc. Mainland Properties 120 0.5% 1.6% 5/31/2023 12 Micron Technology, Mainland Inc. Properties 96 0.4% 1.6% 4/30/2020 13 Shurtape Mainland Technologies, LLC Properties 645 2.5% 1.6% 5/28/2024 14 Servco Pacific, Hawaii 1/31/2029; Inc. Properties 537 2.1% 1.5% 2/29/2032 15 Stratus Mainland Technologies, Inc. Properties 287 1.1% 1.5% 5/31/2016 16 Colgate - Palmolive Mainland Company Properties 142 0.5% 1.4% 1/31/2024 17 Ruckus Wireless, Mainland Inc. Properties 96 0.4% 1.3% 11/30/2022 18 Hartford Fire Mainland Insurance Company Properties 100 0.4% 1.3% 6/30/2021 19 SunPower Mainland Corporation Properties 129 0.5% 1.2% 4/30/2021 20 Arrowhead General Mainland Insurance Agency, Inc. Properties 95 0.4% 1.2% 7/31/2019 21 Safeway Stores, Hawaii Inc. Properties 146 0.6% 1.1% 10/30/2018 22 Valassis Mainland Communications, Inc. Properties 268 1.0% 1.1% 9/30/2023 23 BCI Coca-Cola Hawaii 12/31/2022; Bottling Company Properties 351 1.4% 1.1% 7/31/2039 24 Sprint Nextel Mainland Corporation Properties 140 0.5% 1.0% 7/31/2018 25 Manheim Services Hawaii Corporation Properties 338 1.3% 1.0% 5/31/2016 Total 11,512 44.3% 58.1%

-------------------------------------------------------------------------------- (1) Square feet is pursuant to existing leases as of June 30, 2014, and includes (i) space being fitted out for occupancy pursuant to existing leases, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. (2) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of June 30, 2014, including straight line rent adjustments and estimated recurring expense reimbursements, excluding lease value amortization.



Investment Activities (dollar amounts in thousands)

During April 2014, we acquired two single tenant, net leased properties (two buildings) with approximately 986,937 of combined rentable square feet for an aggregate purchase price of $207,860, excluding closing costs. For more information regarding properties that we have acquired, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We currently intend to expand our investments by primarily acquiring additional single tenant, net leased properties throughout the mainland United States and we expect to use the extensive nationwide resources of RMR to locate and acquire such properties. However, during most of the past 12 to 18 months property pricing has increased as a result of increased availability of debt and equity capital, making it more difficult for us to find appropriately priced properties that meet our investment criteria. One of our goals in acquiring additional properties will be to further diversify our sources of rents with the intention of improving the security of our revenues. Another goal will be to purchase properties that produce rents, less property operating expenses, that are greater than our capital costs to acquire the properties and, accordingly, allow us to increase distributions to our shareholders over time. We expect that most of our acquisition efforts will focus on office and industrial properties; however, we may consider acquiring other types of properties, including properties which are net leased to single tenants for retail uses and special purpose properties specifically suited to particular tenants' requirements. We also may acquire additional properties in Hawaii, but we currently expect this will not be a significant part of our future acquisitions because there are limited opportunities to acquire properties in Hawaii, especially to acquire lands which are leased to third party tenants.



Financing Activities (dollar amounts in thousands)

In January 2014, we repaid, at par, a $7,500 mortgage note which was secured by a property (one building) located in Chelmsford, MA. This mortgage was scheduled to mature in 2016. 13

-------------------------------------------------------------------------------- During the second quarter of 2014, we sold 10,000,000 of our common shares in a public offering, including 1,000,000 of our common shares sold when the underwriters partially exercised their option to purchase additional shares, at a price of $29.00 per share raising net proceeds of approximately $277,373, after deducting estimated offering expenses and the underwriting discount. We used the net proceeds from this offering to partially repay amounts outstanding under our revolving credit facility and for general business purposes. RESULTS OF OPERATIONS



Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013 (dollars in thousands, except per share data)

Comparable Properties Results (1) Acquired Properties Results (2) Consolidated



Results

Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30, $ % $ $ % 2014 2013 Change Change 2014 2013 Change 2014 2013 Change Change Revenues Rental income $ 39,026$ 38,706$ 320 0.8% $ 9,439 $ - $ 9,439$ 48,465$ 38,706$ 9,759 25.2% Tenant reimbursements and other income 7,512 7,240 272 3.8% 580 - 580 8,092 7,240 852 11.8% Total revenues 46,538 45,946 592 1.3% 10,019 - 10,019 56,557 45,946 10,611 23.1% Operating expenses: Real estate taxes 5,188 5,159 29 0.6% 295 - 295 5,483 5,159 324 6.3% Other operating expenses 4,005 3,852 153 4.0% 497 - 497 4,502 3,852 650 16.9% Total operating expenses 9,193 9,011 182 2.0% 792 - 792 9,985 9,011



974 10.8%

Net operating income (3) $ 37,345$ 36,935$ 410 1.1%

$ 9,227 $ - $ 9,227 46,572 36,935 9,637 26.1% Other expenses Depreciation and amortization 10,495 7,295 3,200 43.9% Acquisition related costs 136 156 (20 ) (12.8)% General and administrative 2,198 2,957 (759 ) (25.7)% Total other expenses 12,829 10,408 2,421 23.3% Operating income 33,743 26,527 7,216 27.2% Interest expense (3,634 ) (3,779 ) 145 (3.8)% Income before income tax expense and equity in earnings of an investee 30,109 22,748 7,361 32.4% Income tax expense (19 ) (40 ) 21 (52.5)% Equity in earnings of an investee 118 79 39 49.4% Net income $ 30,208$ 22,787$ 7,421 32.6% Weighted average common shares outstanding 54,178 39,288 14,890 37.9% Net income per common share $ 0.56$ 0.58$ (0.02 ) (3.4)% Calculation of Funds From Operations and Normalized Funds From Operations (4) Net income $ 30,208$ 22,787 Depreciation and amortization 10,495 7,295 Funds from operations 40,703 30,082 Acquisition related costs 136 156 Estimated business management incentive fees (5) (1,611 ) 196 Normalized funds from operations $ 39,228$ 30,434 Funds from operations per common share $ 0.75$ 0.77 Normalized funds from operations per common share $ 0.72$ 0.77



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(1) Consists of 44 properties (272 buildings, leasable land parcels and easements) that we owned continuously since April 1, 2013.

(2) Consists of six properties (eight buildings) we acquired during the period from April 1, 2013 to June 30, 2014. We did not acquire any properties during the three months ended June 30, 2013. As a result, only the 2014 period reflects results for this category of properties. (3) We calculate net operating income, or NOI, as shown above. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties' results of operations. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our Condensed Consolidated Statements of Income and Comprehensive Income and Condensed Consolidated Statements of Cash Flows. Other REITs and real estate companies may calculate NOI differently than we do. 14

-------------------------------------------------------------------------------- (4) We calculate funds from operations, or FFO, and normalized funds from operations, or 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 certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT's definition of FFO because we exclude acquisition related costs, estimated business management incentive fees and gain on early extinguishment of debt. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, operating income and cash flow from operating activities. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our status as a REIT, limitations in our revolving credit facility agreement and term loan agreement, the availability of debt and equity capital, our expectation of our future capital requirements and operating performance, and our expected needs and availability of cash to pay our obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our Condensed Consolidated Statements of Income and Comprehensive Income and Condensed Consolidated Statements of Cash Flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do. (5) Amounts represent estimated incentive fees under our business management agreement payable in common shares after the end of each calendar year calculated: (i) prior to 2014 based upon increases in annual FFO per share, and (ii) beginning in 2014 based on common share total return. In calculating net income in accordance with GAAP, we recognize estimated business management incentive fee expense each quarter. Although we recognize this expense each quarter for purposes of calculating net income, we do not include these amounts in the calculation of Normalized FFO until the fourth quarter, which is when the actual expense amount for the year is determined. Adjustments were made to prior period amounts to conform to the current period Normalized FFO calculation. References to changes in the income and expense categories below relate to the comparison of results for the three months ended June 30, 2014, compared to the three months ended June 30, 2013. Our acquisition activity reflects our acquisition of six properties (eight buildings) during the period from April 1, 2013 to June 30, 2014, all of which occurred after June 30, 2013. Rental income. The increase in rental income primarily reflects our acquisition activity plus increases from leasing activity and rent resets at our comparable properties located in Hawaii. Rental income includes non-cash straight line rent adjustments totaling approximately $4,595 for the 2014 period and approximately $3,034 for the 2013 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately ($60) for the 2014 period and approximately ($226) for the 2013 period. Tenant reimbursements and other income. The increase in tenant reimbursements and other income primarily reflects our acquisition activity, plus increases in real estate tax and operating expense reimbursements from tenants at various comparable properties. Real estate taxes. The increase in real estate taxes primarily reflects our acquisition activity and tax valuation and rate increases throughout our comparable property portfolio, plus real estate taxes that had previously been paid directly by a tenant now being paid by us and reimbursed to us by the tenant. Other operating expenses. Other operating expenses primarily include property maintenance, environmental remediation, utilities, insurance, bad debt, legal and property management fees. The increase in other operating expenses primarily reflects our acquisition activity, plus an increase in general operating expenses at our comparable properties, including increases in legal fees related to tenant collection efforts, and increases in reimbursable expenses, including parking lot repairs, maintenance, utilities and other expenses. Depreciation and amortization. The increase in depreciation and amortization primarily reflects our acquisition activity, plus a modest increase resulting from depreciation of capital improvements and amortization of leasing costs at our comparable properties. Acquisition related costs. Acquisition related costs for the 2014 period primarily reflect acquisition costs related to our April 2014 acquisition that was accounted for as a business combination. Acquisition related costs for the 2013 period primarily reflect acquisition related costs related to a property acquisition we made in July 2013. General and administrative. General and administrative expenses primarily include fees paid in cash and common shares pursuant to our business management agreement, legal fees, audit fees, trustee fees including non-cash equity compensation expense related to awards to our Trustees, our officers and certain other RMR employees. The decrease in general and administrative expenses primarily reflects the reversal recognized for the three months ended June 30, 2014, of the amount by which the estimated 2014 incentive fee as of March 31, 2014, payable under the base business management agreement in our common shares to be issued in 2015, exceeded the amount of that fee estimated as of June 30, 2014. The decrease in general and administrative expenses for the 2014 period was partially offset by increased business management fees pursuant to our business management agreement resulting from our acquisition activity.



Interest expense. The decrease in interest expense primarily reflects a slightly lower weighted average interest rate during the 2014 period compared to the 2013 period.

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Income tax expense. Income tax expense represents state income taxes.



Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

Net income. The increase in net income for the 2014 period compared to the 2013 period reflects the changes noted above.

Weighted average common shares outstanding. The increase in weighted average common shares outstanding primarily reflects shares that were outstanding for part or all of the quarter ended June 30, 2014, but only partially or not outstanding for any of the corresponding 2013 period, including (i) shares granted to our Trustees in May 2013 and 2014, (ii) shares sold in our public offerings in the third quarter of 2013 and the second quarter of 2014, (iii) shares granted to our officers and certain employees of RMR in September 2013 and (iv) shares issued to RMR during 2014 pursuant to our business management agreement.



Net income per common share. The decrease in net income per common share primarily reflects the increase in weighted average common shares outstanding noted above, as well as the changes to net income noted above.

Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013 (dollars in thousands, except per share data)

Comparable Properties Results (1) Acquired Properties Results (2) Consolidated Results Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30, $ % $ $ % 2014 2013 Change Change 2014 2013 Change 2014 2013 Change Change Revenues Rental income $ 72,067$ 70,271$ 1,796 2.6% $ 21,461$ 5,893$ 15,568$ 93,528$ 76,164$ 17,364 22.8% Tenant reimbursements and other income 12,092 11,220 872 7.8% 3,965 2,422 1,543 16,057 13,642 2,415 17.7% Total revenues 84,159 81,491 2,668 3.3% 25,426 8,315 17,111 109,585 89,806 19,779 22.0% Operating expenses: Real estate taxes 9,339 8,840 499 5.6% 1,596 945 651 10,935 9,785 1,150 11.8% Other operating expenses 6,342 5,608 734 13.1%



2,687 1,492 1,195 9,029 7,100 1,929 27.2% Total operating expenses 15,681 14,448 1,233 8.5%

4,283 2,437 1,846 19,964 16,885 3,079 18.2%

Net operating income (3) $ 68,478$ 67,043$ 1,435 2.1% $ 21,143$ 5,878$ 15,265 89,621 72,921 16,700 22.9% Other expenses Depreciation and amortization 19,789 13,960 5,829 41.8% Acquisition related costs 374 689 (315 ) (45.7)% General and administrative 7,374 5,676 1,698 29.9% Total other expenses 27,537 20,325 7,212 35.5% Operating income 62,084 52,596 9,488 18.0% Interest expense (6,992 ) (7,252 ) 260 (3.6)% Gain on early extinguishment of debt 243 - 243 -



Income before income tax expense and equity in earnings of an investee

55,335 45,344 9,991 22.0% Income tax expense (90 ) (80 ) (10 ) 12.5% Equity in earnings of an investee 21 155 (134 ) (86.5)% Net income $ 55,266$ 45,419$ 9,847 21.7% Weighted average common shares outstanding 52,021 39,285 12,736 32.4% Net income per common share $ 1.06$ 1.16$ (0.10 ) (8.6)% Calculation of Funds From Operations and Normalized Funds From Operations (4) Net income $ 55,266$ 45,419 Depreciation and amortization 19,789 13,960 Funds from operations 75,055 59,379 Acquisition related costs 374 689 Estimated business management incentive fees (5) 427 393 Gain on early extinguishment of debt (243 ) - Normalized funds from operations $ 75,613$ 60,461 Funds from operations per common share $ 1.44$ 1.51 Normalized funds from operations per common share $ 1.45$ 1.54



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(1) Consists of 41 properties (267 buildings, leasable land parcels and easements) that we owned continuously since January 1, 2013.

(2) Consists of nine properties (13 buildings) we acquired during the period from January 1, 2013 to June 30, 2014. Three properties (five buildings) were acquired during the six months ended June 30, 2013, resulting in partial results for these properties for that period. The remaining six properties (eight buildings) were acquired during the period from July 1, 2013 to June 30, 2014, resulting in the results for these properties only being reflected in the six months ended June 30, 2014. (3) See footnote (3) on page 14 for the definition of NOI. 16

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(4) See footnote (4) on page 15 for the definition of FFO and Normalized FFO.

(5) See footnote (5) on page 15 for a description of estimated business management incentive fees.

References to changes in the income and expense categories below relate to the comparison of results for the six months ended June 30, 2014, compared to the six months ended June 30, 2013. Our acquisition activity reflects our acquisition of three properties (five buildings) during the six months ended June 30, 2013 and our acquisition of six properties (eight buildings) during the period from July 1, 2013 to June 30, 2014. Rental income. The increase in rental income primarily reflects our acquisition activity plus increases from leasing activity and rent resets at our comparable properties located in Hawaii. Rental income includes non-cash straight line rent adjustments totaling approximately $8,057 for the 2014 period and approximately $5,655 for the 2013 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $77 for the 2014 period and approximately ($496) for the 2013 period. Tenant reimbursements and other income. The increase in tenant reimbursements and other income primarily reflects our acquisition activity, plus increases in real estate tax and operating expense reimbursements from tenants at various comparable properties.



Real estate taxes. The increase in real estate taxes primarily reflects our acquisition activity and tax valuation and rate increases throughout our comparable property portfolio, plus real estate taxes that had been paid directly by a tenant now being paid by us and reimbursed to us by the tenant.

Other operating expenses. Other operating expenses primarily include property maintenance, environmental remediation, utilities, insurance, bad debt, legal and property management fees. The increase in other operating expenses primarily reflects our acquisition activity, plus an increase in general operating expenses at our comparable properties including increases in legal fees related to tenant collection efforts, and increases in reimbursable expenses, including parking lot repairs, maintenance, utilities and other expenses. Depreciation and amortization. The increase in depreciation and amortization primarily reflects our acquisition activity, plus a modest increase resulting from depreciation of capital improvements and amortization of leasing costs at our comparable properties. Acquisition related costs. Acquisition related costs for the 2014 period primarily reflect acquisition costs related to our April 2014 acquisition that was accounted for as a business combination. Acquisition related costs for the 2013 period primarily reflect acquisition related costs in connection with our acquisition of two properties (three buildings) during the 2013 period that were accounted for as business combinations, plus acquisition related costs related to a property acquisition we made in July 2013. General and administrative. General and administrative expenses primarily include fees paid in cash and common shares pursuant to our business management agreement, legal fees, audit fees, trustee fees including non-cash equity compensation expense related to awards to our Trustees, our officers and certain other RMR employees. The increase in general and administrative expenses primarily reflects increased fees pursuant to our business management agreement resulting from our acquisition activity, plus an increase in other professional and public company fees including the amortization of fees related to our shelf registration statement. Interest expense. The decrease in interest expense reflects (i) a lower average outstanding debt balance for the 2014 period compared to the 2013 period and (ii) a slightly lower weighted average interest rate during the 2014 period compared to the 2013 period. Gain on early extinguishment of debt. The gain on early extinguishment of debt for the 2014 period arose from our prepayment during that period of a mortgage note that had been scheduled to mature in 2016. Income tax expense. Income tax expense represents state income taxes.



Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

Net income. The increase in net income for the 2014 period compared to the 2013 period reflects the changes noted above.

Weighted average common shares outstanding. The increase in weighted average common shares outstanding primarily reflects shares that were outstanding for part or all of the six months ended June 30, 2014, but only partially or not outstanding for any of the corresponding 2013 period, including (i) shares granted to our Trustees in May 2013 and May 2014, (ii) shares sold in our public offerings in the third quarter of 2013 and the second quarter of 2014, (iii) shares granted to our officers and certain employees of RMR in September 2013 and (iv) shares issued to RMR during 2014 pursuant to our business management agreement. 17 --------------------------------------------------------------------------------



Net income per common share. The decrease in net income per common share primarily reflects the increase in weighted average common shares outstanding noted above, as well as the changes to net income noted above.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollars in thousands)

Our principal source of funds to meet operating expenses, debt service obligations and pay distributions on our common shares is rents from tenants at our properties. We believe that our operating cash flow will be sufficient to meet our operating expenses, debt service obligations and planned distributions on our common shares for the next 12 months and for the reasonably foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon our ability to:



maintain or improve the occupancy of, and the rent rates at, our properties;

control our operating cost increases; and



purchase additional properties which produce cash flows in excess of our costs of acquisition capital and property operating expenses.

Cash flows provided by (used in) operating, investing and financing activities were approximately $73,958, ($211,077) and $137,898, respectively, for the six months ended June 30, 2014, and $52,553, ($165,459) and $104,814, respectively, for the six months ended June 30, 2013. The increase in the operating activities cash flow for the six months ended June 30, 2014 compared to the corresponding prior year period is primarily due to increased operating cash flow from our acquisition of nine properties (13 buildings) since January 1, 2013. The increase in the cash used in investing activities cash flow for the six months ended June 30, 2014 compared to the corresponding prior year period is primarily due to higher acquisition activity during the six months ended June 30, 2014 compared to the prior year period. The change in the financing activities cash flow for the six months ended June 30, 2014 compared to the corresponding prior year period is primarily due to (i) our common share offering in the second quarter of 2014 and the application of the net proceeds, plus cash from operations, to partially repay amounts outstanding on our revolving credit facility and (ii) distributions to our common shareholders during the six months ended June 30, 2014 in excess of distributions to our common shareholders during the 2013 period due to a greater number of common shares being outstanding and a higher distribution rate paid to common shareholders during the 2014 period.



Our Investment and Financing Liquidity and Resources (dollars in thousands except per share data)

In order to fund acquisitions and to meet cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 revolving credit facility with a group of institutional lenders. The maturity date of our revolving credit facility is March 11, 2016 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date of our revolving credit facility by one year to March 11, 2017. In addition, our revolving credit facility also includes a feature under which maximum borrowings may be increased to up to $1,000,000 in certain circumstances. Borrowings under our revolving credit facility bear interest at LIBOR plus a premium. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our debt leverage or credit ratings. At June 30, 2014, the interest rate premium on our revolving credit facility was 130 basis points and our facility fee was 30 basis points. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of June 30, 2014, the interest rate payable on borrowings under our revolving credit facility was 1.45%. As of June 30, 2014 and July 23, 2014, we had $74,000 and $60,000, respectively, outstanding under our revolving credit facility and $676,000 and $690,000, respectively available to borrow under our revolving credit facility.



We have a $350,000 unsecured term loan that matures on July 11, 2017 and is prepayable by us at any time without penalty. In addition, the term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. As of June 30, 2014, the interest rate payable on borrowings under our term loan was 1.70%.

As of June 30, 2014 and July 23, 2014, we had $20,804 and $15,136 of cash and cash equivalents, respectively. We expect to use cash balances, borrowings under our revolving credit facility, net proceeds from offerings of equity or debt securities and the cash flow from our operations to fund debt repayments, future property acquisitions and other general business purposes. When significant amounts are outstanding under our revolving credit facility, or as the maturity of our revolving credit facility and term loan approaches, we expect to explore alternatives for repaying or refinancing such amounts. Such alternatives may include incurring additional term debt, issuing new equity securities, extending the maturity of our revolving credit facility and 18 -------------------------------------------------------------------------------- entering into a new or expanded revolving credit facility. Although we cannot provide assurance that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but we cannot assure that there will be buyers for such securities. The completion and the costs of any future financings will depend primarily upon market conditions. In particular, the feasibility and cost of any future debt financings will depend primarily on credit markets and our then current creditworthiness. We have no control over market conditions. Potential lenders in future debt transactions will evaluate our creditworthiness and our ability to fund required debt service and repay principal balances when they become due by reviewing our results of operations, financial condition, business practices and plans and our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our business activities in a manner which will continue to afford us reasonable access to capital for investment and financing activities, but we cannot assure that we will be able to successfully carry out this intention. In February 2014, we paid a $0.46 per share distribution to our common shareholders. In April 2014, we announced a new quarterly distribution rate of $0.48 per share which we paid in May 2014. We funded these distributions using existing cash balances and borrowings under our revolving credit facility. In July 2014, we declared a distribution payable to our common shareholders of record on July 25, 2014, in the amount of $0.48 per share. We expect to pay this distribution on or about August 21, 2014 using existing cash balances and borrowings under our revolving credit facility. During the three and six months ended June 30, 2014 and 2013, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (amounts in thousands): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Tenant improvements (1) $ 37 $ 656 $ 37 $ 894 Leasing costs (2) 544 956 889 1,169 Building improvements (3) 218 71 289 86 Development, redevelopment and other activities (4) 298 363 376 68 (5) $ 1,097 $ 2,046 $ 1,591$ 2,217



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(1) Tenant improvements include capital expenditures used to improve tenants' space or amounts paid directly to tenants to improve their space.

(2) Leasing costs include leasing related costs, such as brokerage commissions, legal costs and tenant inducements.

(3) Building improvements generally include: (i) expenditures to replace obsolete building components and (ii) expenditures that extend the useful life of existing assets. (4) Development, redevelopment and other activities generally include: (i) major capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property and (ii) major capital expenditure projects that reposition a property or result in new sources of revenues.



(5) Includes defective building materials received and accrued during the fourth quarter of 2012 that were returned to the supplier during the first quarter of 2013.

During the three months ended June 30, 2014, commitments made for expenditures, such as tenant improvements and leasing costs in connection with leasing space, were as follows (dollars and square feet in thousands, except per square foot amounts): New Leases Renewals Totals Square feet leased during the period 91 148



239

Total leasing costs and concession commitments (1) $ 593$ 54$ 647 Total leasing costs and concession commitments per square foot (1) $ 6.52$ 0.36$ 2.71 Weighted average lease term by square feet (years) 12.5 3.6



7.0

Total leasing costs and concession commitments per square foot per year (1) $ 0.52$ 0.10$ 0.39

-------------------------------------------------------------------------------- (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. 19

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Off Balance Sheet Arrangements

As of June 30, 2014, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Debt Covenants Our principal debt obligations at June 30, 2014 were borrowings outstanding under our revolving credit facility, our term loan and a secured mortgage note assumed in connection with one of our acquisitions. Our mortgage note is non-recourse, subject to certain limitations, and does not contain any material financial covenants. Our revolving credit facility agreement and our term loan agreement contain a number of covenants which restrict our ability to incur debts in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and generally require us to maintain certain financial ratios. Our revolving credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes RMR ceasing to act as our business manager and property manager. We believe we were in compliance with all of the terms and covenants under our revolving credit facility agreement and our term loan agreement at June 30, 2014. Emerging Growth Company We are and we will remain an "emerging growth company", as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, until the earliest to occur of (i) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1.0 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our IPO, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed a large accelerated filer under the Securities Exchange Act of 1934, as amended, or the Exchange Act. We anticipate that we will be deemed a large accelerated filer as of December 31, 2014, and will no longer qualify as an emerging growth company as of that date. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Additionally, we are eligible to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We have chosen to "opt out" of the extended transition period related to new or revised accounting standards, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We have availed ourselves of certain scaled compensation disclosure pursuant to the JOBS Act in the past and may continue to do so and we may elect to take advantage of additional exemptions available to us under the JOBS Act.



Related Person Transactions (dollars in thousands)

We have relationships and historical and continuing transactions with our Trustees, our executive officers, RMR, CWH, AIC and other companies to which RMR provides management services and others affiliated with them. For example, we have no employees and personnel and various services we require to operate our business are provided to us by RMR pursuant to management agreements; and RMR is owned by our Managing Trustees. Also, as a further example, we have relationships with other companies to which RMR provides management services and which have trustees, directors and officers who are also trustees, directors or officers of ours or RMR, including: CWH, which previously wholly owned us, was our largest shareholder until July 9, 2014, and which transferred the Initial Properties to us in connection with our IPO; and we, RMR and five other companies to which RMR provides management services each currently own approximately 14.3% of AIC, and we and the other shareholders of AIC have property insurance in place providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. For further information about these and other such relationships and related person transactions, please see Note 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report on Form 10-Q, including "Warning Concerning Forward Looking Statements" in Part I, and our Annual Report, our definitive Proxy Statement for our 2014 Annual Meeting of Shareholders, or our Proxy Statement, our Current Reports on Form 8-K dated April 1, 2014 and May 12, 2014, and our other filings with the Securities 20 -------------------------------------------------------------------------------- and Exchange Commission, or SEC, including Note 9 to our consolidated financial statements included in our Annual Report, the sections captioned "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations-Related Person Transactions" and "Warning Concerning Forward Looking Statements" of our Annual Report and the section captioned "Related Person Transactions" and the information regarding our Trustees and executive officers in our Proxy Statement. In addition, please see the section captioned "Risk Factors" of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC's website at www.sec.gov. Copies of certain of our agreements with these related parties, including our business management agreement and property management agreement with RMR, various agreements we have entered into with CWH and our shareholders agreement with AIC and its shareholders, are publicly available as exhibits to our public filings with the SEC and accessible at the SEC's website.



We believe that our agreements with RMR, CWH and AIC are on commercially reasonable terms. We also believe that our relationships with RMR and AIC and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business.

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