NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1. Organization and Basis of Presentation
Industrial Logistics Properties Trust, or, collectively with its consolidated subsidiaries, we, us or our, is a real estate investment trust, or REIT, formed under Maryland law in 2017 as a wholly owned subsidiary of Select Income REIT, or SIR. On January 17, 2018, we completed an initial public offering and listing on The Nasdaq Stock Market LLC, or Nasdaq, of
20,000,000
of our common shares, or our IPO.
The accompanying condensed consolidated financial statements of Industrial Logistics Properties Trust and its consolidated subsidiaries are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2017
, or our 2017 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Because of the significant changes resulting from our IPO on January 17, 2018, the financial results reported may not be indicative of our expected future results. For periods prior to January 17, 2018, our historical operating information and financial position have been derived from the financial statements of SIR.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and the assessments of the carrying values and impairments of long lived assets.
Note 2. Recent Accounting Pronouncements
On January 1, 2018, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2014-09 (and related clarifying guidance issued by the FASB),
Revenue From Contracts With Customers
, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. We have adopted ASU No. 2014-09 using the modified retrospective approach. The adoption of ASU No. 2014-09 did not have a material impact on the amount or timing of our revenue recognition in our condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No.
2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which aligns the measurement and classification guidance for share based payments to nonemployees with the guidance for share based payments to employees, with certain exceptions. ASU No. 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2018-07 will have in our condensed consolidated financial statements.
Note 3. Real Estate Properties
As of
September 30, 2018
, we owned
269
properties with a total of approximately
29,216,000
rentable square feet, including
226
buildings, leasable land parcels and easements with a total of approximately
16,834,000
rentable square feet that are primarily industrial lands located on the island of Oahu, HI, or our Hawaii Properties, and
43
buildings with a total of approximately
12,382,000
rentable square feet that are industrial and logistics properties located in
25
other states, or our Mainland Properties.
We operate in
one
business segment: ownership and leasing of properties that include buildings and leased industrial lands. For the three months ended
September 30, 2018
and 2017, approximately
60.1%
and
60.3%
, respectively, of our total revenues were from our Hawaii Properties. For the
nine
months ended
September 30, 2018
and 2017, approximately
60.3%
and
60.1%
, respectively, of our total revenues were from our Hawaii Properties. In addition,
two
subsidiaries of Amazon.com, Inc., which are tenants of our Mainland Properties, accounted for $
3,874
, or
9.6%
, and $
3,943
, or
10.1%
, of our total revenues for the three months ended
September 30, 2018
and 2017, respectively, and $
12,104
, or
10.0%
, and $
11,980
, or
10.2%
, of our total revenues for the
nine
months ended
September 30, 2018
and 2017, respectively.
During the
nine
months ended
September 30, 2018
, we acquired
three
properties with a combined
666,173
rentable square feet for an aggregate purchase price of
$93,578
, including acquisition related costs of
$1,253
. These acquisitions were accounted for as acquisitions of assets. We allocated the purchase prices of these acquisitions based on the estimated fair values of the acquired assets as follows:
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Rentable
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Acquired
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Number of
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Square
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Purchase
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Buildings and
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Real Estate
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Date
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Location
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Properties
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Feet
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Price
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Land
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Improvements
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Leases
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June 27, 2018
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Doral, FL
(1)
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1
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240,283
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$
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43,326
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$
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15,225
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$
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28,101
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$
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—
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September 20, 2018
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Carlisle, PA
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1
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205,090
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20,451
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3,299
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15,515
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1,637
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September 28, 2018
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Upper Marlboro, MD
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1
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220,800
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29,801
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5,296
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21,833
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2,672
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3
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666,173
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$
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93,578
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$
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23,820
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$
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65,449
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$
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4,309
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(1) This property was acquired and simultaneously leased back to the seller.
During the
nine months ended
September 30, 2018
, we committed $
1,006
for expenditures related to tenant improvements and leasing costs for approximately
838,000
square feet of leases executed during the period. Committed but unspent tenant related obligations based on existing leases as of
September 30, 2018
were
$348
.
In October 2018, we acquired a land parcel adjacent to a property we own located in Ankeny, IA for a purchase price of
$450
, excluding
acquisition related costs. This land parcel will be used for a
194,000
square foot expansion for the existing tenant at such property.
Also in October 2018, we acquired a multi-tenant, net leased property located in Maple Grove, MN with approximately
319,000
rentable square feet for a purchase price of
$27,700
, excluding acquisition related costs.
Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed; however, we do not have any present plans to change the use of those lands or to undertake this environmental remediation. As of both
September 30, 2018
and December 31, 2017, accrued environmental remediation costs of
$7,002
were included in accounts payable and other liabilities in our condensed consolidated balance sheets. These accrued environmental
remediation costs relate to maintenance of our properties for current uses, and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as fire or flood, although some of our tenants may maintain such insurance that may benefit us. Although we do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us, we cannot be sure that such conditions are not present at our properties or that costs we incur to remediate any contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs, if any, are included in other operating expenses in our condensed consolidated statements of comprehensive income.
Note 4. Indebtedness
Our principal debt obligations at
September 30, 2018
were: (1)
$380,000
of outstanding borrowings under our
$750,000
unsecured revolving credit facility; and (2) a mortgage note with an outstanding principal amount of
$48,750
.
We have a
$750,000
unsecured revolving credit facility that is available for our general business purposes, including acquisitions. The maturity date of our revolving credit facility is December 29, 2021. We may borrow, repay and reborrow funds under our revolving credit facility until maturity, and no principal repayment is due until maturity. Interest on borrowings under our revolving credit facility is calculated at floating rates based on LIBOR plus a premium that varies based on our leverage ratio. We have the option to extend the maturity date of our revolving credit facility for
two
,
six
month periods, subject to payment of extension fees and satisfaction of other conditions. If we later achieve an investment grade credit rating, we will then be able to elect to continue to have the interest premium based on our leverage ratio or we may instead elect to have the interest premium based on our credit rating, or a ratings election. We are also required to pay a commitment fee on the unused portion of our revolving credit facility until and if such time as we make a ratings election, and thereafter we will be required to pay a facility fee in lieu of such commitment fee based on the maximum amount of our revolving credit facility. The agreement governing our revolving credit facility, or our credit agreement, also includes a feature under which the maximum borrowing availability under our revolving credit facility may be increased to up to
$1,500,000
in certain circumstances. In addition, during the first quarter of 2018, we completed the syndication of our revolving credit facility with a group of institutional lenders. As of
September 30, 2018
and
December 31, 2017
, the interest rate payable on borrowings under our revolving credit facility was
3.50%
and
2.89%
, respectively. The weighted average interest rate for borrowings under our revolving credit facility was
3.39%
and
3.21%
for the three and
nine months ended
September 30, 2018
, respectively. As of
September 30, 2018
and
October 25, 2018
, we had
$380,000
and
$405,000
, respectively, outstanding under our revolving credit facility, and $
370,000
and
$345,000
, respectively, available to borrow under our revolving credit facility.
Our credit agreement provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our credit agreement also contains a number of covenants, including covenants that restrict our ability to incur debts or to make distributions in certain circumstances, and generally requires us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of the covenants under our credit agreement at
September 30, 2018
.
As of
September 30, 2018
, the principal amount outstanding under our mortgage note was
$48,750
. This mortgage note was secured by
one
of our properties with a net book value of
$65,323
as of
September 30, 2018
. This mortgage note is non-recourse, subject to certain limited exceptions, and does not contain any material financial covenants.
Note 5. Fair Value of Assets and Liabilities
Our financial instruments include cash and cash equivalents, rents receivable, our revolving credit facility, a mortgage note payable, accounts payable, rents collected in advance, security deposits and amounts due from or to related persons. At
September 30, 2018
and
December 31, 2017
, the fair value of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or variable interest rates, except as follows:
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At September 30, 2018
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At December 31, 2017
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Carrying
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Estimated
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Carrying
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Estimated
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Value
(1)
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Fair Value
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Value
(1)
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Fair Value
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Mortgage note payable
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$
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49,251
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$
|
48,346
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$
|
49,427
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$
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48,919
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(1)
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Includes unamortized premiums of
$501
and
$677
as of
September 30, 2018
and
December 31, 2017
, respectively.
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We estimate the fair value of our mortgage note payable using a discounted cash flow analysis and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
Note 6. Shareholders’ Equity
Share Issuances:
On January 17, 2018, we issued
20,000,000
of our common shares in our IPO at a price to the public of
$24.00
per common share, raising net proceeds of
$444,309
, after deducting the underwriting discounts and commissions and expenses.
On March 27, 2018, in accordance with our Trustee compensation arrangements, we granted
1,000
of our common shares, valued at
$20.87
per share, the closing price of our common shares on Nasdaq on that day, to each of our
five
Trustees as compensation for the period from our IPO to May 2018.
On May 23, 2018, in accordance with our Trustee compensation arrangements, we granted
3,000
of our common shares, valued at $
20.93
per share, the closing price of our common shares on Nasdaq on that day, to each of our
five
Trustees as part of their annual compensation.
On September 13, 2018, we granted an aggregate of
54,400
of our common shares, valued at $
23.33
per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC under our equity compensation plan.
Share Purchases:
On September 24, 2018, we purchased an aggregate of
2,369
of our common shares, valued at $
22.08
per common share, the closing price of our common shares on Nasdaq on that day, from certain of our officers and certain other employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions:
On May 14, 2018, we paid a prorated distribution of
$0.27
per common share, or
$17,551
, for the period from January 17, 2018 (the date we completed our IPO) through March 31, 2018 to shareholders of record on April 30, 2018. This distribution was based on the then expected regular quarterly distribution of $
0.33
per common share ($
1.32
per common share per year). On August 13, 2018, we paid a regular quarterly distribution of $
0.33
per common share, or $
21,457
, to
shareholders of record on July 30, 2018.
On October 18, 2018, we declared a regular quarterly distribution of $
0.33
per common share, or approximately $
21,500
, to shareholders of record on October 29, 2018. We expect to pay this distribution on or about November 12, 2018.
Additional Paid in Capital Adjustments:
Until January 17, 2018, we were a wholly owned subsidiary of SIR and SIR managed and controlled our cash management function through a series of commingled centralized accounts. As a result, until that date, the cash receipts
collected by SIR on our behalf were accounted for as distributions within shareholders' equity and the cash disbursements paid by SIR on our behalf were accounted for as contributions within shareholders' equity. During the period from January 1, 2018 to January 16, 2018, we recorded net contributions from SIR of
$6,975
as an increase to additional paid in capital.
Note 7. Earnings per Common Share
We calculate basic earnings per common share by dividing net income by the weighted average number of common shares outstanding during the period. We calculate diluted earnings per common share by using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares and the related impact on earnings are considered when calculating diluted earnings per share.
Note 8. Income Taxes
Until January 17, 2018, we were a wholly owned subsidiary of SIR, which is taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, until January 17, 2018, we were a qualified REIT subsidiary and a disregarded entity for federal income tax purposes. We intend to qualify for taxation as a REIT under the IRC for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2018 and to maintain such qualification thereafter. Accordingly, we generally are not, and will not be, subject to U.S. federal income taxes provided that we distribute our taxable income and meet certain other requirements to qualify for taxation as a REIT. We are subject to certain state and local taxes, certain of which amounts are reported as income taxes in our condensed consolidated statements of comprehensive income. We do not currently expect recent amendments to the IRC to have a significant impact on us; however, we will monitor future interpretations of such amendments as they develop, and accordingly, our estimates and disclosures may change.
Note 9. Certain Historical Arrangements and Operations Prior to our IPO
In connection with our IPO, on September 29, 2017, SIR contributed to us
266
properties with a total of approximately
28,540,000
rentable square feet, or our Initial Properties. In connection with our formation and this contribution from SIR, we issued to SIR
45,000,000
of our common shares and a $
750,000
non-interest bearing demand note, or the SIR Note, and we assumed
three
mortgage notes totaling $
63,069
, as of September 30, 2017, that were secured by
three
of our Initial Properties. In December 2017, we obtained a $
750,000
secured revolving credit facility, and we used the proceeds of an initial borrowing of $
750,000
under this credit facility to pay the SIR Note in full. Also in December 2017, SIR prepaid on our behalf
two
of the mortgage notes totaling approximately $
14,319
that had encumbered
two
of our Initial Properties. In connection with our IPO, we reimbursed SIR for approximately $
7,271
of costs that SIR incurred in connection with our formation and preparation for our IPO. In addition, SIR collected rents from certain of our tenants for the period subsequent to our IPO, of which SIR owed to us
$1,433
as of September 30, 2018, which amount is presented as due from related persons in our condensed consolidated balance sheet as of September 30, 2018. SIR paid this amount due to us in October 2018.
Neither we nor SIR have any employees. As a wholly owned subsidiary of SIR, until the completion of our IPO, we had received services from RMR LLC under SIR’s business and property management agreements with RMR LLC. For periods prior to the completion of our IPO on January 17, 2018, base management fees payable by SIR under SIR’s business management agreement with RMR LLC were calculated based on the historical costs of our Initial Properties and business management incentive fees and internal audit costs payable by SIR and allocated to us were based on the percentage of our base management fees compared to the total base management fees paid by SIR. During the period from January 1, 2018 to January 16, 2018, the base management fees payable by SIR and allocated to us were $
308
. During the three months ended
September 30,
2017, the base management fees, internal audit costs and estimated business management incentive fees payable by SIR allocated to us were $
1,706
, $
20
and
($1,687)
, respectively. The amount of estimated business management incentive fees for the three months ended
September 30,
2017, reflects the reversal of previously accrued estimated business management incentive fees allocated to us. During the
nine
months ended
September 30,
2017, the base management fees, internal audit costs and estimated business management incentive fees payable by SIR allocated to us were
$5,111
,
$62
and
$1,003
, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income. The property management and construction supervision fees payable by SIR under SIR’s property management agreement with RMR LLC that were allocated to us for services to our Initial Properties for the period from January 1, 2018 to January 16, 2018 and for the three and
nine
months ended
September 30,
2017 were
$230
,
$1,087
and
$3,207
, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. For the period from January 1, 2018 to January 16, 2018 and the three and
nine
months ended
September 30,
2017, the total property management related reimbursements paid under SIR’s property management agreement with RMR LLC for costs incurred by RMR LLC with respect to our Initial Properties were
$120
, $
642
and
$1,912
, respectively. These amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income. All these management fees and reimbursements allocated to us for periods prior to January 17, 2018 were paid by SIR and not us.
In connection with our IPO, we entered into
two
agreements with RMR LLC to provide management services to us. See Notes 10 and 11 for further information regarding our relationships, agreements and transactions with RMR LLC and SIR.
Note 10. Business and Property Management Agreements with RMR LLC
We have
no
employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have
two
agreements with RMR LLC to provide management services to us, which we entered on January 17, 2018 in connection with the completion of our IPO: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations.
Pursuant to our business management agreement with RMR LLC, we recognized business management fees of $
1,923
for the three months ended
September 30, 2018
and $
5,229
for the period from January 17, 2018 through
September 30, 2018
. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
Pursuant to our property management agreement with RMR LLC, we recognized aggregate property management and construction supervision fees of $
1,205
for the three months ended
September 30, 2018
and $
3,327
for the period from January 17, 2018 through
September 30, 2018
. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants. We reimbursed RMR LLC $
757
for property management related expenses for the three months ended
September 30, 2018
and $
1,943
for the period from January 17, 2018 through
September 30, 2018
. These amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC’s costs for providing our internal audit function. The amount recognized as expense for internal audit costs was $
52
for the three months ended
September 30, 2018
and $
173
for the period from January 17, 2018 through
September 30, 2018
, which amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
See Notes 9 and 11 for further information regarding our relationships, agreements and transactions with RMR LLC.
Note 11. Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC, SIR and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and which have trustees, directors and officers who are also our Trustees or officers.
Our Manager, RMR LLC
. We have
two
agreements with RMR LLC to provide management services to us. See Note 10 for further information regarding our management agreements with RMR LLC.
In September 2018, we granted annual awards of
54,400
of our common shares to our officers and other employees of RMR LLC under our equity compensation plan. In September 2018, we purchased
2,369
of our common shares, valued at the closing price of our common shares on Nasdaq on the applicable date of purchase, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to certain of our officers and other employees of RMR LLC. We include amounts recognized as expense for share awards to our officers and other RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.
SIR
. SIR is our largest shareholder. As of
September 30, 2018
, SIR owned
45,000,000
of our common shares, or approximately
69.2%
of our outstanding common shares. We were SIR’s wholly owned subsidiary until we completed our IPO on January 17, 2018. Adam D. Portnoy, one of our Managing Trustees, is also a managing trustee of SIR. John C. Popeo, our other Managing Trustee and our President and Chief Executive Officer, also serves as the chief financial officer and treasurer of SIR. Mr. Popeo has announced his retirement from his positions with each of us and SIR, effective November 30, 2018. RMR LLC provides management services to SIR and us. In connection with our IPO, we entered a transaction agreement with SIR that governs our separation from and relationship with SIR. The transaction agreement provides that, among other things,
(1) our current assets and current liabilities, as of the time of closing of our IPO, were settled so that SIR retained all pre-closing current assets and pre-closing current liabilities and we assumed all post-closing current assets and post-closing current liabilities, (2) we will indemnify SIR with respect to any of our liabilities, and SIR will indemnify us with respect to any of SIR’s liabilities, after giving effect to the settlement between us and SIR of our current assets and current liabilities and (3) we and SIR will cooperate to enforce the ownership limitations in our and SIR’s respective declaration of trust as may be appropriate to qualify for and maintain qualification for taxation as a REIT under the IRC, and otherwise to ensure each receives the economics of its assets and liabilities and to file future tax returns, including appropriate allocations of taxable income, expenses and other tax attributes.
On September 14, 2018, SIR and Government Properties Income Trust, or GOV, announced that they had entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which, among other things, SIR will merge with and into a wholly owned subsidiary of GOV. Pursuant to the Merger Agreement, SIR and GOV have agreed that, subject to certain conditions, SIR will declare and, at least one business day prior to the completion of the contemplated merger, pay a
pro rata
distribution to its shareholders of all
45,000,000
of our common shares that SIR owns. We cannot be sure that those conditions will be satisfied or waived or that SIR will declare and pay that distribution of our shares to its shareholders.
SIR, ABP Trust and five other companies to which RMR LLC provides management services equally own Affiliates Insurance Company, or AIC, and participate in a combined property insurance program arranged and reinsured in part by AIC. Our properties are included in this program as a majority owned subsidiary of SIR. We pay or reimburse SIR for the part of the premiums allocated to our properties. We paid aggregate annual premiums, including taxes and fees, of approximately
$266
in connection with this insurance program for the policy year ending June 30, 2019, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program. See Note 9 for further information regarding our IPO and our relationships, agreements and transactions with SIR.
For further information about these and other such relationships and certain other related person transactions, refer to our 2017 Annual Report.