##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2006
 COMMISSION
FILE NUMBER 001-31962
 
 GOVERNMENT PROPERTIES TRUST, INC.
  MARYLAND
    
    20-0611663(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)13625 CALIFORNIA STREET, SUITE 310OMAHA, NEBRASKA 68154
    
    (402) 391-0010(Address of principal executive
    
    (Registrants telephone number,offices, including zip code)
    
    including area code)
 þ o
  o þ o
 o þ




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##### 



PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (unaudited)Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
    
    
    2Consolidated Statements of Operations and Comprehensive Income for the three months ended
March 31, 2006 and 2005 (unaudited)
    
    
    3Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
(unaudited).
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5Item 2.
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    
    
    Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1.
    
    
    
    Not Applicable
    
    
    18Item 1A.
    
    
    
    Risk Factors
    
    
    18Item 2.
    
    
    
    Not Applicable
    
    
    18Item 3.
    
    
    
    Not Applicable
    
    
    18Item 4.
    
    
    
    Not Applicable
    
    
    18Item 5.
    
    
    
    Not Applicable
    
    
    18Item 6.
    
    
    
    Exhibits
    
    
    18Signatures
    
    
    19Ratio of Fixed ChargesCertificationCertificationCertificationCertification




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##### Table of Contents



GOVERNMENT
PROPERTIES TRUST, INC.
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSReal estate at cost:Land
    
    $
    35,986
    
    
    $
    32,800Buildings and improvements
    
    
    306,557
    
    
    
    280,861Tenant origination costs
    
    
    72,573
    
    
    
    60,405Real estate under development
    
    
    228
    
    
    
    16,577Furniture and equipment
    
    
    474
    
    
    
    456415,818
    
    
    
    391,099Accumulated depreciation
    
    
    (16,936
    )
    
    
    (13,295
    )398,882
    
    
    
    377,804Cash and cash equivalents
    
    
    2,512
    
    
    
    4,857Restricted cash escrows
    
    
    11,031
    
    
    
    16,887Tenant receivables
    
    
    8,167
    
    
    
    6,873Notes receivable from tenant
    
    
    586
    
    
    
    603Deferred costs, net
    
    
    3,942
    
    
    
    4,020Real estate deposits
    
    
    150
    
    
    
    450Other assets
    
    
    4,068
    
    
    
    1,583Total assets
    
    $
    429,338
    
    
    $
    413,077LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses
    
    $
    9,259
    
    
    $
    8,420Dividends payable
    
    
    3,114
    
    
    
    3,110Lines of credit
    
    
    26,480
    
    
    
    17,500Mortgage notes payable
    
    
    233,304
    
    
    
    225,033Total liabilities
    
    
    272,157
    
    
    
    254,063Stockholders equity:Common stock ($0.01 par value;
50,000,000 shares authorized, 20,763,136
and 20,721,612 shares issued and
outstanding at March 31, 2006 and
December 31, 2005, respectively)
    
    
    206
    
    
    
    206Additional paid-in capital
    
    
    189,548
    
    
    
    189,123Accumulated deficit
    
    
    (34,835
    )
    
    
    (30,916
    )Accumulated other comprehensive income
    
    
    2,262
    
    
    
    601Total stockholders equity
    
    
    157,181
    
    
    
    159,014Total liabilities and stockholders equity
    
    $
    429,338
    
    
    $
    413,077
  2




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##### Table of Contents



GOVERNMENT
PROPERTIES TRUST, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited and in thousands, except per share amounts)
 THREE MONTHS ENDEDMARCH 31,2006
    
    
    2005RevenueRental income
    
    $
    9,800
    
    
    $
    4,324Tenant reimbursements
    
    
    566
    
    
    
    180Total revenue
    
    
    10,366
    
    
    
    4,504ExpensesProperty operations
    
    
    1,811
    
    
    
    855Real estate taxes
    
    
    926
    
    
    
    457Depreciation and amortization
    
    
    3,641
    
    
    
    1,322General and administrative
    
    
    1,309
    
    
    
    1,140Total expenses
    
    
    7,687
    
    
    
    3,774Operating income
    
    
    2,679
    
    
    
    730Other income (expense)Interest income
    
    
    122
    
    
    
    658Interest expense
    
    
    (3,403
    )
    
    
    (1,338
    )Amortization of deferred financing fees
    
    
    (203
    )
    
    
    (110
    )Net loss
    
    $
    (805
    )
    
    $
    (60
    )Earnings per share (basic and diluted)Net loss
    
    $
    (0.04
    )
    
    $
    Distributions declared per share
    
    $
    0.15
    
    
    $
    0.15Weighted average shares outstanding (basic and diluted)
    
    
    20,604
    
    
    
    20,540Net loss
    
    $
    (805
    )
    
    $
    (60
    )Other comprehensive incomeUnrealized derivative gain on forward-starting
interest rate swaps
    
    
    1,660
    
    
    
    Comprehensive income (loss)
    
    $
    855
    
    
    $
    (60
    )
  3




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GOVERNMENT
PROPERTIES TRUST, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 THREE MONTHS ENDEDMARCH 31,2006
    
    
    2005Operating activitiesNet loss
    
    $
    (805
    )
    
    $
    (59
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,641
    
    
    
    1,322Amortization of deferred financing fees
    
    
    203
    
    
    
    110Amortization of premium on mortgage notes payable
    
    
    (26
    )
    
    
    Compensation expense
    
    
    179
    
    
    
    181Changes in assets and liabilities:Tenant receivables
    
    
    (1,294
    )
    
    
    (231
    )Restricted cash escrows
    
    
    551
    
    
    
    (42
    )Other assets
    
    
    (822
    )
    
    
    (1,362
    )Accounts payable and accrued expenses
    
    
    (69
    )
    
    
    744Net cash provided by operating activities
    
    
    1,558
    
    
    
    663Investing activitiesExpenditures for real estate
    
    
    (9,475
    )
    
    
    (50,015
    )Deposits on future real estate purchases
    
    
    (150
    )
    
    
    (967
    )Development of real estate assets
    
    
    (4,749
    )
    
    
    (639
    )Restricted cash escrows
    
    
    5,305
    
    
    
    (12,152
    )Note receivable from tenant
    
    
    17
    
    
    
    15Expenditures for furniture and equipment
    
    
    (17
    )
    
    
    Net cash used in investing activities
    
    
    (9,069
    )
    
    
    (63,758
    )Financing activitiesFinancing fees
    
    
    (125
    )
    
    
    (1,174
    )Net borrowings under lines of credit
    
    
    8,980
    
    
    
    Proceeds from mortgage notes payable
    
    
    
    
    
    
    52,632Principal payments on mortgage notes payable
    
    
    (579
    )
    
    
    (309
    )Dividends paid
    
    
    (3,110
    )
    
    
    (3,104
    )Net cash provided by financing activities
    
    
    5,166
    
    
    
    48,045Net decrease in cash and cash equivalents
    
    
    (2,345
    )
    
    
    (15,050
    )Cash and cash equivalents, beginning of period
    
    
    4,857
    
    
    
    93,815Cash and cash equivalents, end of period
    
    $
    2,512
    
    
    $
    78,765Non-Cash Operating ActivityAccounts payable and accrued expenses included in real estate, net
    
    $
    5,215
    
    
    $
    Non-Cash Financing ActivityAssumption of mortgage note payable included in real estate, net
    
    $
    8,876
    
    
    $
    
  4




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GOVERNMENT
PROPERTIES TRUST, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Basis of Presentation
   Nature of Business and Operations
  Common Stock and Earnings Per Share
  Deferred Costs
  March 31,
    
    
    December 31,2006
    
    
    2005Financing costs
    
    $
    4,781
    
    
    $
    4,656Accumulated amortization
    
    
    (839
    )
    
    
    (636
    )$
    3,942
    
    
    $
    4,020
 Equity Incentive Plan
 Share-Based Payment
  5




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##### Table of Contents



Mortgage Notes Payable and Line-of-Credit
  March 31,
    
    
    December 31,2006
    
    
    2005Mortgage Notes Payable(A),(B),(C)Mortgage notes payable to various financial institutions,
collateralized by various properties, interest at fixed
rates ranging from 5.09% to 8.23% per annum, with principal
and interest payable monthly through 2026. The weighted
average interest rate at March 31, 2006 and December 31, 2005
was 5.80%
    
    $
    231,897
    
    
    $
    223,601Lines of Credit(D)Line-of-credit with a financial institution for property acquisitions
(maximum borrowing level of $50 million and available through
November 20, 2008). The weighted average interest rate at
March 31, 2006 and December 31, 2005 was equal to 5.99%
and 5.57%, respectively. Advances are collateralized
by various properties
    
    $
    26,480
    
    
    $
    17,500
 
 (A)
    
    The mortgages notes payable are subject to various operating covenants. In addition, the
Company must periodically fund and maintain escrow accounts, to make future real estate taxes,
repairs and maintenance and insurance payments, as well as to fund certain tenant releasing
costs. These are included in restricted cash escrows.(B)
    
    Certain of the Companys real estate assets have been pledged as collateral for its mortgages
notes payable. The amount of gross assets that have been encumbered is $331.4 million and
$309.0 million for March 31, 2006 and December 31, 2005, respectively.(C)
    
    Amounts exclude a premium of $1.4 million at March 31, 2006 and December 31, 2005 related to
the above market interest rate on a mortgage assumed.(D)
    
    The line-of-credit facility at March 31, 2006 was obtained in November 2005 and bears an
interest rate equal to either (a) a base rate determined by the higher of the prime rate or
the federal funds rate plus 1/2 of 1%, or (b) an applicable margin, based upon the Companys
total indebtedness to total asset value, plus LIBOR. At March 31, 2006 and December 31, 2005,
the margin is LIBOR plus 1.20%. Payments are interest only through the term and are payable
at least quarterly. The line-of-credit facility contains certain covenants including
maintenance of leverage, minimum fixed charge coverage ratios, minimum tangible net worth and
limitations on certain indebtedness, guarantees and cash dividends. Advances under the
line-of-credit totaled $9.0 million for the three months ended March 31, 2006 and $17.5
million during the year ended December 31, 2005. The line-of-credit facility is guaranteed by
the Company. The amount of gross assets that have been encumbered is $81.5 million for March
31, 2006 and December 31, 2005. In April 2006, the maximum borrowing level of the
line-of-credit was increased to $65 million.  6




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Derivative Instruments and Hedging Activities
     Concentration of Credit Risk
  Related Party Transactions
  Property Acquisitions
  7




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Acquisition
    
    
    MonthProperty
    
    Location
    
    
    Cost
    
    
    Acquired(in thousands)2005 acquisitions(A):1201 Lloyd Boulevard (Portland Property)
    
    Portland, OR
    
    $
    50,653
    
    
    MarchNiagara Center (Buffalo Niagara Center Property)
    
    Buffalo, NY
    
    
    71,673
    
    
    MaySocial Security Administration (Buffalo SSA
Property)
    
    Buffalo, NY
    
    
    5,435
    
    
    MayDrug Enforcement Administration (Sterling DEA
Property)(B)
    
    Sterling, VA
    
    
    21,070
    
    
    JuneInternal Revenue Service (Martinsburg IRS
Property)(C)
    
    Martinsburg, WV
    
    
    30,643
    
    
    JulySocial Security Administration (Dallas SSA
Property)
    
    Dallas, TX
    
    
    9,583
    
    
    SeptemberArmy Corps of Engineers (Vicksburg MS, Inc.)
    
    Vicksburg, MS
    
    
    26,850
    
    
    November$
    215,9072006 acquisitions(A):Riverside County (Riverside Property)(D)
    
    Riverside, CA
    
    $
    18,404
    
    
    February
 
 (A)
    
    In accordance with SFAS 141, the Company allocated the purchase price for these properties to
net tangible and identified intangible assets acquired based on their fair values (including
land, buildings, tenant improvements, acquired above and below market leases and the
origination cost of acquired in-place leases) and acquired liabilities, and allocated the
purchase price based on these assessments, including land at appraised value and buildings at
replacement costs. The Company assessed fair value based on estimated cash flow projections
that utilize discount and capitalization rates deemed appropriate by management and available
market information. Such estimates are subject to refinement as additional valuation
information is received. The value of tenant origination costs are amortized over the
remaining term of the respective leases.(B)
    
    In connection with the purchase of this property, the Company assumed a first mortgage note
in the amount of $15.8 million. Also included in the acquisition cost is an amount of $1.5
million related to the premium recognized on the above market interest rate on the assumed
mortgage.(C)
    
    Under terms of the existing lease, the federal government has an option to purchase the
Martinsburg IRS Property for approximately $24.8 million. Real estate at cost, net of
accumulated depreciation of the Martinsburg IRS Property, was $30.0 million at March 31, 2006.(D)
    
    In connection with the purchase of this property, the Company assumed a first mortgage note
in the amount of $8.9 million. Real Estate Development
  Unaudited Pro Forma Condensed Consolidated Financial Information
  8




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Date PropertyBegan OperationBuffalo SSA Property
    
    June 2005Dallas SSA Property
    
    August 2005
  Pro Forma Condensed Consolidated Financial Information  (Unaudited and in thousands, except per share amounts)
 Three MonthsEnded March 31,2006
    
    
    2005Total revenue
    
    $
    10,686
    
    
    $
    8,556Net loss
    
    $
    (707
    )
    
    $
    (1,319
    )Loss per diluted common share
    
    $
    (0.03
    )
    
    $
    (0.06
    )
 Subsequent Events
  9




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
    
    our estimated general and administrative expense;
    
    our risk mitigation strategy;
    
    our policy to reserve for operating expenses and capital costs:
    
    our distribution policy;
    
    our operating expenses;
    
    our adequacy of our available capital for future capital requirements;
    
    our capital expenditures; and
    
    the impact of changes in interest rates.
         10




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Comparison of three months ended March 31, 2006 to March 31, 2005
   Acquired
    
    
    General &Same Properties Portfolio
    
    
    Properties
    
    
    Administrative
    
    
    Total Portfolio(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    ChangeRevenue:Rental income
    
    $
    4,454
    
    
    $
    4,309
    
    
    $
    145
    
    
    $
    5,346
    
    
    $
    15
    
    
    $
    
    
    
    $
    
    
    
    $
    9,800
    
    
    $
    4,324
    
    
    $
    5,476Tenant reimbursements and other
    
    
    192
    
    
    
    180
    
    
    
    12
    
    
    
    374
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    566
    
    
    
    180
    
    
    
    386Total revenue
    
    
    4,646
    
    
    
    4,489
    
    
    
    157
    
    
    
    5,720
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    10,366
    
    
    
    4,504
    
    
    
    5,862Expenses:Property operations
    
    
    678
    
    
    
    847
    
    
    
    (169
    )
    
    
    1,133
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    1,811
    
    
    
    855
    
    
    
    956Real estate taxes
    
    
    588
    
    
    
    451
    
    
    
    137
    
    
    
    338
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    926
    
    
    
    457
    
    
    
    469Depreciation and amortization
    
    
    1,342
    
    
    
    1,297
    
    
    
    45
    
    
    
    2,280
    
    
    
    18
    
    
    
    19
    
    
    
    7
    
    
    
    3,641
    
    
    
    1,322
    
    
    
    2,319General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,309
    
    
    
    1,140
    
    
    
    1,309
    
    
    
    1,140
    
    
    
    169Total expenses
    
    
    2,608
    
    
    
    2,595
    
    
    
    13
    
    
    
    3,751
    
    
    
    32
    
    
    
    1,328
    
    
    
    1,147
    
    
    
    7,687
    
    
    
    3,774
    
    
    
    3,913Operating income(loss)
    
    
    2,038
    
    
    
    1,894
    
    
    
    144
    
    
    
    1,969
    
    
    
    (17
    )
    
    
    (1,328
    )
    
    
    (1,147
    )
    
    
    2,679
    
    
    
    730
    
    
    
    1,949Interest income
    
    
    96
    
    
    
    29
    
    
    
    67
    
    
    
    16
    
    
    
    
    
    
    
    10
    
    
    
    629
    
    
    
    122
    
    
    
    658
    
    
    
    (536
    )Interest expense
    
    
    (1,680
    )
    
    
    (1,338
    )
    
    
    (342
    )
    
    
    (1,413
    )
    
    
    
    
    
    
    (310
    )
    
    
    
    
    
    
    (3,403
    )
    
    
    (1,338
    )
    
    
    (2,065
    )Amortization of deferred financing fees
    
    
    (54
    )
    
    
    (39
    )
    
    
    (15
    )
    
    
    (15
    )
    
    
    
    
    
    
    (134
    )
    
    
    (71
    )
    
    
    (203
    )
    
    
    (110
    )
    
    
    (93
    )Net loss
    
    $
    400
    
    
    $
    546
    
    
    $
    (146
    )
    
    $
    557
    
    
    $
    (17
    )
    
    $
    (1,762
    )
    
    $
    (589
    )
    
    $
    (805
    )
    
    $
    (60
    )
    
    $
    (745
    )
 11




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##### Table of Contents




    
    acquisition costs, deposits on properties and purchases of properties;
    
    recurring maintenance, repairs and other operating expenses necessary to maintain our properties;
    
    property taxes, state and local tax assessments, and insurance expenses;
    
    interest expense and scheduled principal payments on outstanding indebtedness;
 12




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
    
    capital expenditures incurred to facilitate the leasing of space at our
properties, including tenant improvements and leasing commissions; and
    
    general and administrative expenses.
   Balance as ofLender
    
    Collateral
    
    March 31, 2006(In Millions)CW Capital
    
    Bakersfield DEA property
    
    $
    1.4CW Capital
    
    Baton Rouge VA property
    
    
    4.8LaSalle Bank/GEMSA
    
    Charleston SSA property
    
    
    13.5LaSalle Bank/GEMSA
    
    Clarksburg GSA property
    
    
    8.0Charleston FederalCW Capital
    
    Courthouse property
    
    
    14.4Capital Realty
    
    College Park FDA property
    
    
    16.2Key Bank
    
    Dallas SSA property
    
    
    6.2Bank of America
    
    Kingsport SSA property
    
    
    2.2Wachovia Bank
    
    Lenexa FDA property
    
    
    7.8PNC Bank
    
    Martinsburg IRS property
    
    
    19.6Bank of New York
    
    Parkersburg BPD property
    
    
    31.8PNC Bank
    
    Pittsburgh FBI property
    
    
    20.4Nomura Credit
    
    Pittsburgh USCIS property
    
    
    7.8Wachovia Bank
    
    Portland property
    
    
    39.1Northwestern Mutual
    
    Sterling DEA property
    
    
    15.4J.P. Morgan Chase
    
    Riverside County property
    
    
    8.9Merrill Lynch
    
    Vicksburg property
    
    
    14.4Premium on mortgage debt (Sterling DEA property)
    
    
    1.4Total  Mortgage Notes Payable
    
    $
    233.3
       13




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1 2
       15




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THREE MONTHSENDEDMARCH 31,2006
    
    
    2005Net loss
    
    $
    (805
    )
    
    $
    (60
    )Adjustments to reconcile to funds from operations:Real estate depreciation and amortization (a)
    
    
    3,622
    
    
    
    1,315Funds from operations
    
    $
    2,817
    
    
    
    1,255Funds from operations per common share
    
    $
    0.14
    
    
    $
    0.06Weighted average common shares outstanding
    
    
    20,604
    
    
    
    20,540
 
 (a)
    
    Excludes depreciation of non-real estate assets of $19,000 and $7,000 for the three months
ended March 31, 2006 and 2005, respectively. 16




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##### Table of Contents



2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    THEREAFTER
    
    TOTALMORTGAGE NOTES PAYABLE:Fixed rate amount
    
    $
    3,450
    
    
    $
    4,111
    
    
    $
    4,386
    
    
    $
    30,564
    
    
    $
    4,281
    
    
    
    $185,105
    
    
    $
    231,897Weighted-average interest rate
    
    
    6.02
    %
    
    
    5.96
    %
    
    
    5.97
    %
    
    
    5.56
    %
    
    
    6.06
    %
    
    
    5.82
    %
    
    
    5.80
    %
 
    17




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12.1
    
    
    Ratio of Fixed Charges31.1
    
    
    Certification of Chief Executive Officer pursuant to SEC Rule
13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to SEC Rule
13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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##### Table of Contents



GOVERNMENT PROPERTIES TRUST, INC.Date: May 10, 2006
    
    By: /s/ NANCY D. OLSON

Nancy D. OlsonChief Financial Officer and Treasurer(principal financial officer)
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