XNYS:FPO First Potomac Realty Trust Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission File Number 1-31824

 

 

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   37-1470730

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7600 Wisconsin Avenue, 11th Floor,

Bethesda, MD

  20814
(Address of principal executive offices)   (Zip Code)

(301) 986-9200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filter,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated Filer   x    Accelerated Filer   ¨
Non-accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x

As of August 9, 2012, there were 51,069,419 common shares, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

FIRST POTOMAC REALTY TRUST

FORM 10-Q

INDEX

 

     Page  

Part I: Financial Information

  

Item 1. Condensed Consolidated Financial Statements

  

Consolidated balance sheets as of June 30, 2012 (unaudited) and December 31, 2011

     3   

Consolidated statements of operations (unaudited) for the three and six months ended June  30, 2012 and 2011

     4   

Consolidated statements of comprehensive (loss) income (unaudited) for the three and six months ended June 30, 2012 and 2011

     5   

Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2012 and 2011

     6   

Notes to condensed consolidated financial statements (unaudited)

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     59   

Item 4. Controls and Procedures

     59   

Part II: Other Information

  

Item 1. Legal Proceedings

     62   

Item 1A. Risk Factors

     62   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     63   

Item 3. Defaults Upon Senior Securities

     63   

Item 4. Mine Safety Disclosures

     63   

Item 5. Other Information

     63   

Item 6. Exhibits

     63   

Signatures

     64   

 

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FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

 

     June 30, 2012     December 31, 2011  
     (unaudited)        

Assets:

    

Rental property, net

   $ 1,434,840      $ 1,439,661   

Assets held-for-sale

     3,568        5,297   

Cash and cash equivalents

     16,140        16,749   

Escrows and reserves

     13,651        18,455   

Accounts and other receivables, net of allowance for doubtful accounts of $3,077 and $3,065, respectively

     10,711        11,404   

Accrued straight-line rents, net of allowance for doubtful accounts of $373 and $369, respectively

     22,242        18,028   

Notes receivable, net

     54,696        54,661   

Investment in affiliates

     73,365        72,518   

Deferred costs, net

     37,806        34,683   

Prepaid expenses and other assets

     8,438        9,275   

Intangible assets, net

     53,022        59,021   
  

 

 

   

 

 

 

Total assets

   $ 1,728,479      $ 1,739,752   
  

 

 

   

 

 

 

Liabilities:

    

Mortgage loans

   $ 384,752      $ 432,023   

Senior notes

     —          75,000   

Secured term loans

     20,000        30,000   

Unsecured term loan

     300,000        225,000   

Unsecured revolving credit facility

     224,000        183,000   

Accounts payable and other liabilities

     60,284        53,507   

Accrued interest

     2,467        2,782   

Rents received in advance

     10,197        11,550   

Tenant security deposits

     5,978        5,603   

Deferred market rent, net

     4,266        4,815   
  

 

 

   

 

 

 

Total liabilities

     1,011,944        1,023,280   
  

 

 

   

 

 

 

Noncontrolling interests in the Operating Partnership

     35,563        39,981   

Equity:

    

Preferred Shares, $0.001 par value, 50,000 shares authorized;

    

Series A Preferred Shares, $25 liquidation preference, 6,400 and 4,600 shares issued and outstanding, respectively

     160,000        115,000   

Common shares, $0.001 par value, 150,000 shares authorized; 50,991 and 50,321 shares issued and outstanding, respectively

     51        50   

Additional paid-in capital

     802,804        798,171   

Noncontrolling interests in consolidated partnerships

     4,298        4,245   

Accumulated other comprehensive loss

     (9,663     (5,849

Dividends in excess of accumulated earnings

     (276,518     (235,126
  

 

 

   

 

 

 

Total equity

     680,972        676,491   
  

 

 

   

 

 

 

Total liabilities, noncontrolling interests and equity

   $ 1,728,479      $ 1,739,752   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Revenues:

        

Rental

   $ 37,582      $ 34,584      $ 75,044      $ 66,081   

Tenant reimbursements and other

     10,306        7,781        19,455        15,616   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     47,888        42,365        94,499        81,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Property operating

     10,194        9,349        21,591        19,726   

Real estate taxes and insurance

     4,845        4,038        9,669        7,914   

General and administrative

     7,245        4,185        12,142        8,192   

Acquisition costs

     23        552        41        2,737   

Depreciation and amortization

     16,169        16,533        32,211        28,976   

Impairment of real estate assets

     —          —          1,949        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     38,476        34,657        77,603        67,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     9,412        7,708        16,896        14,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses, net:

        

Interest expense

     10,983        10,437        22,186        19,029   

Interest and other income

     (1,499     (1,410     (3,008     (2,235

Equity in (earnings) losses of affiliates

     (24     —          22        32   

Loss on debt extinguishment

     13,221        —          13,221        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

     22,681        9,027        32,421        16,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (13,269     (1,319     (15,525     (2,674
  

 

 

   

 

 

   

 

 

   

 

 

 

(Provision) benefit for income taxes

     (101     148        (162     461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (13,370     (1,171     (15,687     (2,213
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Loss from operations of disposed properties

     (10     (31     (1,168     (2,882

Gain on sale of real estate property, net

     161        1,954        161        1,954   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     151        1,923        (1,007     (928
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (13,219     752        (16,694     (3,141
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net loss attributable to noncontrolling interests

     789        65        1,108        203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to First Potomac Realty Trust

     (12,430     817        (15,586     (2,938
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Dividends on preferred shares

     (3,100     (2,228     (5,764     (4,010
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (15,530   $ (1,411   $ (21,350   $ (6,948
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share:

        

Loss from continuing operations

   $ (0.31   $ (0.07   $ (0.41   $ (0.13

Income (loss) from discontinued operations

     —          0.04        (0.02     (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (0.31   $ (0.03   $ (0.43   $ (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic and diluted

     50,098        49,283        49,940        49,259   

See accompanying notes to condensed consolidated financial statements.

 

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

(Amounts in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Net (loss) income

   $ (13,219   $ 752      $ (16,694   $ (3,141

Unrealized gain on derivative instruments

     87        55        73        108   

Unrealized loss on derivative instruments

     (4,831     (595     (4,089     (391
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

     (17,963     212        (20,710     (3,424

Net loss attributable to noncontrolling interests

     789        65        1,108        203   

Net loss from derivative instruments attributable to noncontrolling interests

     242        27        202        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to First Potomac Realty Trust

   $ (16,932   $ 304      $ (19,400   $ (3,202
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (16,694   $ (3,141

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Discontinued operations:

    

Gain on sale of real estate property, net

     (161     (1,954

Depreciation and amortization

     131        836   

Impairment of real estate assets

     1,072        2,711   

Depreciation and amortization

     32,211        29,379   

Stock based compensation

     1,445        1,387   

Bad debt expense

     248        518   

Deferred income taxes

     (240     (461

Amortization of deferred market rent

     40        (502

Amortization of financing costs and discounts

     1,013        2,460   

Equity in losses of affiliates

     22        32   

Distributions from investments in affiliates

     770        83   

Loss on debt extinguishment

     2,379        —     

Impairment of real estate assets

     1,949        —     

Changes in assets and liabilities:

    

Escrows and reserves

     5,237        (7,698

Accounts and other receivables

     493        (1,056

Accrued straight-line rents

     (4,367     (3,208

Prepaid expenses and other assets

     2,200        1,317   

Tenant security deposits

     350        96   

Accounts payable and accrued expenses

     3,948        2,809   

Accrued interest

     (316     427   

Rents received in advance

     (1,346     (102

Deferred costs

     (7,702     (7,387
  

 

 

   

 

 

 

Total adjustments

     39,376        19,687   
  

 

 

   

 

 

 

Net cash provided by operating activities

     22,682        16,546   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase deposit on future acquisitions

     —          (20,319

Proceeds from sale of real estate assets

     10,838        26,883   

Change in escrow and reserve accounts

     (10     (2,249

Investment in note receivable

     —          (29,181

Acquisition of rental property and associated intangible assets

     —          (12,513

Additions to rental property

     (31,904     (16,552

Acquisition of land parcel

     —          (7,500

Additions to construction in progress

     (3,085     (8,879

Investment in affiliates

     (1,639     (260
  

 

 

   

 

 

 

Net cash used in investing activities

     (25,800     (70,570
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Financing costs

     (2,005     (2,224

Issuance of preferred shares, net

     43,518        110,997   

Issuance of common shares, net

     3,599        —     

Issuance of debt

     267,000        78,000   

Repayments of debt

     (282,881     (130,826

Contributions from joint venture partner

     —          1,000   

Dividends to common shareholders

     (20,301     (19,989

Dividends to preferred shareholders

     (5,328     (2,896

Distributions to noncontrolling interests

     (1,120     (667

Stock option exercises

     27        64   
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,509        33,459   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (609     (20,565

Cash and cash equivalents, beginning of period

     16,749        33,280   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 16,140      $ 12,715   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows – Continued

(unaudited)

Supplemental disclosure of cash flow information for the six months ended June 30 is as follows (amounts in thousands):

 

     2012      2011  

Cash paid for interest, net

   $  21,086       $ 17,530   

Cash paid for income based franchise taxes

     714         242   

Non-cash investing and financing activities:

     

Debt assumed in connection with acquisitions of real estate

     —           139,373   

Contingent consideration recorded at acquisition

     —           9,356   

Conversion of Operating Partnership units into common shares

     3,042         19   

Issuance of Operating Partnership units in connection with the acquisition of real estate

     —           21,721   

Cash paid for interest on indebtedness is net of capitalized interest of $1.5 million and $0.9 million for the six months ended June 30, 2012 and 2011, respectively.

During the six months ended June 30, 2012, 243,757 Operating Partnership units were redeemed for an equivalent number of the Company’s common shares. During the six months ended June 30, 2011, 1,300 Operating Partnership units were redeemed for an equivalent number of the Company’s common shares.

During the six months ended June 30, 2011, the Company acquired four consolidated properties at an aggregate purchase price of $189.6 million, including the assumption of $139.4 million of mortgage debt and the issuance of 1,418,715 Operating Partnership units valued at $21.7 million on the date of acquisition. The 2011 acquisitions included 840 First Street, NE, which was acquired for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property. As a result, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease through August 2023 on the entire building with the exception of two floors. As a result, the Company issued 544,673 Operating Partnership units to satisfy $7.1 million of its contingent consideration obligation.

 

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FIRST POTOMAC REALTY TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

References in these unaudited condensed consolidated financial statements to “we,” “our” or “First Potomac,” refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of June 30, 2012, owned a 95.0% interest in the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and the remainder of which are owned by other unrelated parties.

At June 30, 2012, the Company wholly-owned or had a controlling interest in properties totaling 13.8 million square feet and had a noncontrolling ownership interest in properties totaling an additional 1.0 million square feet through six unconsolidated joint ventures. The Company also owned land that can support approximately 2.4 million square feet of additional development. The Company’s consolidated properties were 84.0% occupied by 612 tenants at June 30, 2012. The Company did not include square footage that was in development or redevelopment, which totaled 0.5 million square feet at June 30, 2012, in its occupancy calculation. The Company derives substantially all of its revenue from leases of space within its properties. As of June 30, 2012, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for over 25% of the Company’s total annualized base rent. The U.S. Government accounted for approximately 15% of the Company’s outstanding accounts receivable at June 30, 2012. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership and the subsidiaries in which the Company or Operating Partnership has a controlling interest, which includes First Potomac Management LLC, a wholly-owned subsidiary that manages the majority of the Company’s properties. All intercompany balances and transactions have been eliminated in consolidation.

The Company has condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the accompanying unaudited condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011 and as updated from time to time in other filings with the Securities and Exchange Commission.

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly the Company’s financial position as of June 30, 2012, the results of its operations and its comprehensive (loss) income for the three and six months ended June 30, 2012 and 2011 and its cash flows for the six months ended June 30, 2012 and 2011. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions, costs associated with the Company’s internal investigation, and the impact of acquisitions and dispositions throughout the year as well as the seasonality of certain operating expenses such as utility expense and snow and ice removal costs.

 

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(b) Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible; recoverability of notes receivable, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill; derivative valuations; market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.

(c) Rental Property

Rental property is initially recorded at fair value, if acquired in a business combination, or initial cost when constructed or acquired in an asset purchase, less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at fair value when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:

 

Buildings

   39 years

Building improvements

   5 to 20 years

Furniture, fixtures and equipment

   5 to 15 years

Lease related intangible assets

   The term of the related lease

Tenant improvements

   Shorter of the useful life of the asset or the term of the
related lease

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the fair value of a property, an impairment analysis is performed. The Company assesses potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property less anticipated selling costs. The Company is required to make estimates as to whether there are impairments in the carrying values of its investments in real estate. Further, the Company will record an impairment loss if it expects to dispose of a property, in the near term, at a price below carrying value. In such an event, the Company will record an impairment loss based on the difference between a property’s carrying value and its projected sales price less any estimated costs to sell.

The Company will classify a building as held-for-sale in accordance with GAAP in the period in which it has made the decision to dispose of the building, the Company’s Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will cease depreciation of the asset. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its consolidated statements of operations for all periods presented and classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in the period the held-for-sale criteria are met. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by the Company after the disposition.

The Company recognizes the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.

 

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The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include its investment in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. The Company will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress and interest on the direct compensation costs of the Company’s construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. The Company does not capitalize any other general administrative costs such as office supplies, office rent expense or an overhead allocation to its development or redevelopment projects. Capitalized compensation costs were immaterial for the three and six months ended June 30, 2012 and 2011. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. The Company will also place redevelopment and development assets in service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(d) Notes Receivable

The Company provides loans to the owners of real estate properties, which can be collateralized by interest in the real estate property. The Company records these investments as “Notes receivable, net” in its consolidated balance sheets. The investments are recorded net of any discount or issuance costs, which are amortized over the life of the respective note receivable using the effective interest method. The Company records interest earned from notes receivable and amortization of any discount or issuance costs within “Interest and other income” in its consolidated statements of operations.

The Company will establish a provision for anticipated credit losses associated with its notes receivable and debt investments when it anticipates that it may be unable to collect any contractually due amounts. This determination is based upon such factors as delinquencies, loss experience, collateral quality and current economic or borrower conditions. The Company’s collectability of its notes receivable may be adversely impacted by the financial stability of the Washington, D.C. region and the ability of its underlying assets to keep current tenants or attract new tenants. Estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that the Company estimates to be adequate based on these factors. Based on the review of the above criteria, the Company did not record an allowance for credit losses for its notes receivable during the three and six months ended June 30, 2012 and 2011.

(e) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation, primarily as a result of reclassifying the operating results of several properties as discontinued operations. For more information, see footnote 7, Discontinued Operations.

(3) Earnings Per Common Share

Basic earnings or loss per common share (“EPS”) is calculated by dividing net income or loss attributable to common shareholders by the weighted average common shares outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented, which include stock options, non-vested shares, preferred shares and exchangeable senior notes. The Company applies the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in total earnings attributable to common shareholders in the Company’s computation of EPS.

 

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The following table sets forth the computation of the Company’s basic and diluted earnings per common share (amounts in thousands, except per share amounts):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Numerator for basic and diluted earnings per common share:

        

Loss from continuing operations

   $ (13,370   $ (1,171   $ (15,687   $ (2,213

Income (loss) from discontinued operations

     151        1,923        (1,007     (928
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (13,219     752        (16,694     (3,141

Less: Net loss from continuing operations attributable to noncontrolling interests

     796        152        1,052        221   

Less: Net (income) loss from discontinued operations attributable to noncontrolling interests

     (7     (87     56        (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to First Potomac Realty Trust

     (12,430     817        (15,586     (2,938

Less: Dividends on preferred shares

     (3,100     (2,228     (5,764     (4,010
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common shareholders

     (15,530     (1,411     (21,350     (6,948

Less: Allocation to participating securities

     (165     (155     (306     (292
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (15,695   $ (1,566   $ (21,656   $ (7,240
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for basic and diluted earnings per common share:

        

Weighted average common shares outstanding – basic and diluted

     50,098        49,283        49,940        49,259   

Basic and diluted earnings per common share:

        

Loss from continuing operations

   $ (0.31   $ (0.07   $ (0.41   $ (0.13

Income (loss) from discontinued operations

     —          0.04        (0.02     (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (0.31   $ (0.03   $ (0.43   $ (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

In accordance with accounting requirements regarding earnings per common share, the Company did not include the following potential common shares in its calculation of diluted earnings per common share as they are anti-dilutive (amounts in thousands):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Stock option awards

     1,495         920         1,478         911   

Non-vested share awards

     504         388         526         415   

Conversion of exchangeable senior notes(1)

     —           854         —           854   

Series A Preferred Shares(2)

     13,122         7,313         11,186         7,284   
  

 

 

    

 

 

    

 

 

    

 

 

 
     15,121         9,475         13,190         9,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

On December 15, 2011, the Company repaid the outstanding balance of $30.4 million on its exchangeable senior notes. At June 30, 2011, each $1,000 principal amount of the exchangeable senior notes was convertible into 28.039 common shares.

(2)

The Company’s Series A Preferred Shares, which have a $25 per share liquidation value, are only convertible into the Company’s common shares upon certain changes in control of the Company. The dilutive shares are calculated as the daily average of the face value of the Series A Preferred Shares divided by the outstanding common share price. In March 2012, the Company issued an additional 1.8 million Series A Preferred Shares. As of June 30, 2012, the Company had a total of 6.4 million Series A Preferred Shares outstanding.

 

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(4) Rental Property

Rental property represents property, net of accumulated depreciation, and developable land that are wholly-owned or owned by an entity in which the Company has a controlling interest. All of the Company’s rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (amounts in thousands):

 

     June 30, 2012     December 31, 2011  

Land and land improvements

   $ 386,479      $ 384,409   

Buildings and improvements

     1,058,185        1,052,341   

Construction in process

     60,060        70,362   

Tenant improvements

     133,171        116,148   

Furniture, fixtures and equipment

     5,415        5,400   
  

 

 

   

 

 

 
     1,643,310        1,628,660   

Less: accumulated depreciation

     (208,470     (188,999
  

 

 

   

 

 

 
   $ 1,434,840      $ 1,439,661   
  

 

 

   

 

 

 

Development and Redevelopment Activity

The Company constructs office buildings, business parks and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 2.4 million square feet of additional building space. Below is a summary of the approximate building square footage that can be developed on the Company’s developable land and the Company’s current development and redevelopment activity as of June 30, 2012 (amounts in thousands):

 

Reporting Segment

   Developable
Square Feet
     Square Feet
Under
Development
    Cost to Date of
Development
Activities(1)
    Square Feet
Under
Redevelopment
    Cost to Date of
Redevelopment
Activities(1)
 

Washington, D.C.

     713         —        $ —          135      $ 4,267   

Maryland

     250         —          —          —          —     

Northern Virginia

     568         —          —          191        11,607   

Southern Virginia

     841         166        617        —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     2,372         166      $ 617        326      $ 15,874   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Costs to date amounts exclude tenant improvement and leasing commission costs.

During the second quarter of 2012, the Company placed in-service redevelopment activities totaling 17,500 square feet in its Northern Virginia reporting segment that were completed in 2011 at a cost of $0.6 million. No development activities were placed in-service during the second quarter of 2012.

At June 30, 2012, the Company had substantially completed redevelopment activities that have yet to be placed in service on 191,000 square feet, at a cost of $11.6 million, in its Northern Virginia reporting segment, which primarily relate to redevelopment activities at Three Flint Hill. The Company will place completed construction activities in service upon the shorter of a tenant taking occupancy or twelve months from substantial completion.

 

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(5) Notes Receivable

Below is a summary of the Company’s notes receivable at June 30, 2012 (dollars in thousands):

 

     Balance at June 30, 2012               

Issued

   Face Amount      Unamortized
Origination Costs
    Balance      Interest Rate     Property  

December 2010

   $ 25,000       $ (190   $ 24,810         12.5     950 F Street, NW   

April 2011

     30,000         (114     29,886         9.0     America’s Square   
  

 

 

    

 

 

   

 

 

      
   $ 55,000       $ (304   $ 54,696        
  

 

 

    

 

 

   

 

 

      
     Balance at December 31, 2011               

Issued

   Face Amount      Unamortized
Origination Costs
    Balance      Interest Rate     Property  

December 2010

   $ 25,000       $ (211   $ 24,789         12.5     950 F Street, NW   

April 2011

     30,000         (128     29,872         9.0     America’s Square   
  

 

 

    

 

 

   

 

 

      
   $ 55,000       $ (339   $ 54,661        
  

 

 

    

 

 

   

 

 

      

The Company recorded interest income of $1.5 million and $3.0 million for the three and six months ended June 30, 2012, respectively, and $1.4 million and $2.2 million for the three and six months ended June 30, 2011, respectively, related to its notes receivable.

The notes require monthly payments of interest to the Company. The Company recorded income from the amortization of origination costs of $17 thousand and $35 thousand for the three and six months ended June 30, 2012, respectively, and $17 thousand and $27 thousand for the three and six months ended June 30, 2011, respectively. The amortization of origination costs are recorded within “Interest and other income” in the Company’s consolidated statements of operations.

(6) Investment in Affiliates

The Company owns an interest in several properties in which it does not control the activities that are most significant to the operations of the properties. As a result, the assets, liabilities and operating results of these noncontrolled properties are not consolidated within the Company’s condensed consolidated financial statements. The Company’s investment in these properties is recorded as “Investment in affiliates” in its consolidated balance sheets. The Company’s investment in affiliates consisted of the following at June 30, 2012 (dollars in thousands):

 

     Reporting Segment    Ownership
Interest
    Company
Investment
 

1200 17th Street, NW

   Washington, D.C.      95   $ 21,965   

Metro Place III & IV

   Northern Virginia      51     27,507   

1750 H Street, NW

   Washington, D.C.      50     16,346   

Aviation Business Park

   Maryland      50     4,618   

RiversPark I and II

   Maryland      25     2,929   
       

 

 

 
        $ 73,365   
       

 

 

 

 

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The net assets of the Company’s unconsolidated joint ventures consisted of the following (amounts in thousands):

 

     June 30, 2012      December 31, 2011  

Assets:

     

Rental property, net

   $ 243,744       $ 242,767   

Cash and cash equivalents

     7,128         4,009   

Other assets

     19,897         22,734   
  

 

 

    

 

 

 

Total assets

     270,769         269,510   
  

 

 

    

 

 

 

Liabilities:

     

Mortgage loans(1)

     130,910         132,370   

Other liabilities

     9,909         7,207   
  

 

 

    

 

 

 

Total liabilities

     140,819         139,577   
  

 

 

    

 

 

 

Net assets

   $ 129,950       $ 129,933   
  

 

 

    

 

 

 

 

(1)

Of the total mortgage debt that encumbers the Company’s unconsolidated properties, $7.0 million is recourse to the Company. The fair value of the potential liability to the Company is inconsequential as the likelihood of the debt being called is remote.

The Company’s share of earnings or losses related to its unconsolidated joint ventures is recorded in its consolidated statements of operations as “Equity in (earnings) losses of affiliates.” The following table summarizes the results of operations of the Company’s unconsolidated joint ventures, which due to its varying ownership interests in the joint ventures and the varying operations of the joint ventures may or may not be reflective of the amounts recorded in its consolidated statements of operations (amounts in thousands):

 

     Three Months Ended     Six Months Ended  
   June 30,     June 30,  
     2012     2011     2012     2011  

Total revenues

   $ 6,241      $ 2,886      $  12,321      $ 5,964   

Total operating expenses

     (1,808     (786     (3,576     (1,922
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     4,433        2,100        8,745        4,042   

Depreciation and amortization

     (3,168     (1,259     (6,336     (2,561

Other expenses, net

     (1,083     (852     (2,165     (1,575
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 182      $ (11   $ 244      $ (94
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company earns various fees from several of its unconsolidated joint ventures, which include management fees, leasing commissions and construction management fees. The Company recognizes fees only to the extent of the third party ownership interest in its unconsolidated joint ventures. The Company recognized fees from its unconsolidated joint ventures of $121 thousand and $201 thousand for the three and six months ended June 30, 2012, respectively, and $51 thousand and $99 thousand for the three and six months ended June 30, 2011, respectively.

(7) Discontinued Operations

In May 2012, the Company sold Goldenrod Lane, a 24,000 square foot office building in Germantown, Maryland for net sale proceeds of $2.7 million. The Company reported a gain on the sale of the property of $0.2 million in its second quarter results. In May 2012, the Company sold Woodlands Business Center, a 38,000 square foot office building in Largo, Maryland for net sale proceeds of $2.9 million and recorded an inconsequential gain on the sale of the property. The Company recorded impairment charges in 2011 and the first quarter of 2012 based on the difference between the contractual sales price less anticipated selling costs and the carrying value of the property. Both Goldenrod Lane and Woodlands Business Center were acquired as part of a portfolio acquisition in 2004.

 

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In June 2012, the Company entered into a binding contract to sell two buildings at Owings Mills Business Park, a six-building, 219,000 square foot business park in Owings Mills, Maryland. The sale is expected to be completed in the third quarter of 2012. At June 30, 2012, the two buildings at Owings Mills Business Park met the Company’s held-for-sale criteria (described in footnote 2(c), Rental Property) and, therefore, the assets of the two buildings were classified within “Assets held-for-sale” and the liabilities of the two buildings, which were immaterial, were classified within “Accounts payable and other liabilities” in the Company’s consolidated balance sheets. In the first quarter of 2012, the Company recorded a $2.7 million impairment charge at Owings Mills Business Park, which included $0.8 million for the two buildings classified as held-for-sale. The impairment charge was based on the difference between the contractual sales price less anticipated selling costs and the carrying value of the property.

The following table is a summary of property dispositions whose operating results are reflected as discontinued operations in the Company’s consolidated statements of operations for the periods presented:

 

     Reporting Segment    Disposition Date   Property Type    Square
Feet
 

Owings Mills Business Park(1)

   Maryland    September  2012(2)   Business Park      38,779   

Goldenrod Lane

   Maryland    5/31/2012   Office      23,518   

Woodlands Business Center

   Maryland    5/8/2012   Office      37,887   

Airpark Place Business Center

   Maryland    3/22/2012   Business Park      82,429   

Aquia Commerce Center I & II

   Northern Virginia    6/22/2011   Office      64,488   

Gateway West

   Maryland    5/27/2011   Office      111,481   

Old Courthouse Square

   Maryland    2/18/2011   Retail      201,208   

 

(1) 

Represents two buildings, of the six building, 219,284 square foot office park, that were held-for-sale at June 30, 2012.

(2) 

Anticipated date of disposal.

The Company has had, and will have, no continuing involvement with any of its disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes for the periods presented. The Company did not dispose of or enter into any binding agreements to sell any other properties during the six months ended June 30, 2012 and 2011.

The following table summarizes the components of net income (loss) from discontinued operations (amounts in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Revenues

   $ 186      $ 863      $ 555      $ 2,045   

Net loss, before taxes

     (10     (31     (1,168     (2,882

Gain on sale of real estate property, net

     161        1,954        161        1,954   

The Company did not record any impairment charges on its real estate assets for the three months ended June 30, 2012 and 2011. For the six months ended June 30, 2012 and 2011, net income (loss) from discontinued operations reflects impairment charges of $1.1 million and $2.7 million, respectively.

 

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(8) Debt

The Company’s borrowings consisted of the following (amounts in thousands):

 

     June 30, 2012      December 31, 2011  

Mortgage loans, effective interest rates ranging from 4.40% to 7.29%, maturing at various dates through July 2022

   $ 384,752       $ 432,023   

Series A senior notes, effective interest rate of 6.41%(1)

     —           37,500   

Series B senior notes, effective interest rate of 6.55%(1)

     —           37,500   

Secured term loan, effective interest rate of LIBOR plus 4.50%, with maturity dates in January 2013 and January 2014(2)(3)

     20,000         30,000   

Unsecured term loan, effective interest rates ranging from LIBOR plus 2.40% to LIBOR plus 2.55%, with staggered maturity dates ranging from July 2016 to July 2018(3)

     300,000         225,000   

Unsecured revolving credit facility, effective interest rate of LIBOR plus 2.75%, maturing January 2015(3)(4)

     224,000         183,000   
  

 

 

    

 

 

 
   $ 928,752       $ 945,023   
  

 

 

    

 

 

 

 

(1)

On June 11, 2012, the Company prepaid the entire $75.0 million principal amount outstanding under its Series A and Series B senior notes with borrowings under the Company’s unsecured revolving credit facility. See footnote 8(b), Senior Notes for more information.

(2)

On January 1, 2012, the loan’s applicable interest rate increased to LIBOR plus 4.50% and will increase to LIBOR, plus 550 basis points in January 2013.

(3)

At June 30, 2012, LIBOR was 0.25%.

(4) 

The unsecured revolving credit facility matures in January 2014 with a one-year extension at the Company’s option, which it intends to exercise.

(a) Mortgage Loans

The following table provides a summary of the Company’s mortgage debt at June 30, 2012 and December 31, 2011 (dollars in thousands):

 

Encumbered Property

   Contractual
Interest Rate
    Effective
Interest
Rate
    Maturity
Date
     June 30,
2012
    December 31,
2011
 

Campus at Metro Park North(1)

     7.11     5.25     February 2012       $ —        $ 21,692   

One Fair Oaks(2)

     6.31     6.72     June 2012         —          52,604   

1434 Crossways Blvd Building II(3)

     7.05     5.38     August 2012         8,899        9,099   

Crossways Commerce Center

     6.70     6.70     October 2012         23,481        23,720   

Newington Business Park Center

     6.70     6.70     October 2012         14,812        14,963   

Prosperity Business Center

     6.25     5.75     January 2013         3,312        3,381   

Cedar Hill

     6.00     6.58     February 2013         15,624        15,838   

Merrill Lynch Building

     6.00     7.29     February 2013         13,431        13,571   

1434 Crossways Blvd Building I

     6.25     5.38     March 2013         7,797        7,943   

Linden Business Center

     6.01     5.58     October 2013         6,834        6,918   

840 First Street, NE

     5.18     6.05     October 2013         55,231        55,745   

Owings Mills Business Center

     5.85     5.75     March 2014         5,281        5,338   

Annapolis Business Center

     5.74     6.25     June 2014         8,293        8,360   

Cloverleaf Center(4)

     6.75     6.75     October 2014         16,753        16,908   

Plaza 500, Van Buren Office Park,
Rumsey Center, Snowden Center,
Greenbrier Technology Center II,
Norfolk Business Center,
Northridge and 15395 John
Marshall Highway

     5.19     5.19     August 2015         96,916        97,681   

Hanover Business Center:

           

Building D

     8.88     6.63     August 2015         457        520   

Building C

     7.88     6.63     December 2017         857        920   

Chesterfield Business Center:

           

Buildings C,D,G and H

     8.50     6.63     August 2015         1,206        1,369   

Buildings A,B,E and F

     7.45     6.63     June 2021         2,149        2,235   

Mercedes Center– Note 1(4)

     4.67     6.04     January 2016         4,695        4,713   

Mercedes Center – Note 2(4)

     6.57     6.30     January 2016         9,610        9,722   

Gateway Centre Manassas Building I

     7.35     5.88     November 2016         926        1,016   

Hillside Center

     5.75     4.62     December 2016         13,932        14,122   

500 First Street, NW

     5.72     5.79     July 2020         38,007        38,277   

Battlefield Corporate Center

     4.26     4.40     November 2020         4,077        4,149   

Airpark Business Center

     7.45     6.63     June 2021         1,172        1,219   

1211 Connecticut Avenue, NW

     4.22     4.47     July 2022         31,000        —     
         

 

 

   

 

 

 
       5.75 %(5)         384,752        432,023   

Unamortized fair value adjustments

            (756     (1,147
         

 

 

   

 

 

 

Principal balance

          $ 383,996      $ 430,876   
         

 

 

   

 

 

 

 

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Table of Contents
(1)

The loan was repaid in February 2012 with borrowings under the Company’s unsecured revolving credit facility.

(2)

The loan was repaid in June 2012 with the issuance of a $40.0 million senior secured term loan, which was subsequently repaid in late June 2012, and borrowings under the Company’s unsecured revolving credit facility.

(3) 

The loan was repaid on August 6, 2012 with borrowings under the Company’s unsecured revolving credit facility.

(4) 

Of the mortgage loan totals, $3.5 million encumbered by Cloverleaf Center and $5.0 encumbered by Mercedes Center are recourse to the Company.

(5) 

Weighted average interest rate on total mortgage debt.

(b) Senior Notes

On June 11, 2012, the Company prepaid the entire $75.0 million principal amount outstanding under its Series A and Series B Senior Notes (collectively, the “Senior Notes”). As a result of the prepayment, the Company paid a $10.2 million make-whole amount and $2.4 million of accrued interest to the holders of the notes. The prepayment of the Senior Notes, the make-whole amount, and the accrued interest on the notes were paid with borrowings under the Company’s unsecured revolving credit facility. The make-whole amount and the write-off of $0.2 million of unamortized deferred financing costs associated with the Senior Notes were recorded within “Loss on debt extinguishment” in the Company’s consolidated statements of operations in the second quarter of 2012.

(c) Term Loans

Unsecured Term Loan

The table below shows the outstanding balances of the three tranches of the $300.0 million unsecured term loan at June 30, 2012 (dollars in thousands):

 

     Maturity Date      Amount      Interest Rate  

Tranche A

     July 2016       $ 60,000         LIBOR, plus 240 basis points   

Tranche B

     July 2017         147,500         LIBOR, plus 250 basis points   

Tranche C

     July 2018         92,500         LIBOR, plus 255 basis points   
     

 

 

    
      $ 300,000      
     

 

 

    

The term loan agreement contains various restrictive covenants substantially similar to those contained in the Company’s revolving credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the agreement requires that the Company satisfy certain financial covenants that are also substantially similar to those contained in the Company’s revolving credit facility. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the agreement to be immediately due and payable.

Senior Secured Term Loan

On June 11, 2012, the Company entered into a three-month, $40.0 million senior secured term loan, with an interest rate of LIBOR plus 275 basis points. The proceeds from the loan, together with a draw on the Company’s unsecured revolving credit facility were used to repay a $52.4 million mortgage loan encumbering One Fair Oaks. On June 28, 2012, the Company repaid the $40.0 million senior secured term loan and all accrued interest thereunder with proceeds from the issuance of a $31.0 million mortgage loan that closed on June 28, 2012, with a contractual interest rate of 4.22%, encumbering 1211 Connecticut Avenue, NW and a draw on the Company’s unsecured revolving credit facility.

Secured Term Loan

Of the $20.0 million balance outstanding on the Company’s secured term loan at June 30, 2012, $10.0 million matures in January 2013 and $10.0 million matures in January 2014. At June 30, 2012, the loan’s applicable interest rate was LIBOR plus 450 basis points, which will increase to 550 basis points in January 2013. The Company’s secured term loan contains several restrictive covenants, which in the event of non-compliance may cause the outstanding balance of the loan and accrued interest to become immediately due and payable.

 

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(d) Unsecured Revolving Credit Facility

During the second quarter of 2012, the Company drew $117.0 million under its unsecured revolving credit facility to prepay its Senior Notes, which includes a $10.2 million make-whole amount and accrued interest on the notes, to partially fund the repayment of both the $40.0 million senior secured term loan and the One Fair Oaks mortgage loan and for general corporate purposes. For the three and six months ended June 30, 2012, the Company’s weighted average borrowings on its unsecured revolving credit facility were $133.5 million and $147.2 million, respectively, with a weighted average interest rate of 3.0% and 2.9%, respectively, compared with weighted average borrowings of $151.1 million and $132.9 million with a weighted average interest rate of 3.1% and 3.2% for the three and six months ended June 30, 2011, respectively. The Company’s maximum outstanding borrowings were $224.0 million for both the three and six months ended June 30, 2012 compared with maximum outstanding borrowings of $164.0 million and $191.0 million for the three and six months ended June 30, 2011, respectively. At June 30, 2012, outstanding borrowings under the unsecured revolving credit facility were $224.0 million with a weighted average interest rate of 3.0%. The Company is required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility. At June 30, 2012, the available capacity under the unsecured revolving credit facility was $31.0 million. The Company borrowed $13.0 million under its revolving credit facility on August 6, 2012 to repay the $8.9 million mortgage loan that encumbered 1434 Crossways and for other general corporate purposes. The Company’s ability to borrow under the credit facility is subject to its satisfaction of certain financial and restrictive covenants.

(e) Interest Rate Swap Agreements

During the second quarter of 2012, the Company entered into two interest rate swap agreements that fixed LIBOR on $75.0 million of its variable rate debt. At June 30, 2012, the Company had fixed LIBOR, at a weighted average interest rate of 1.5%, on $350.0 million of its variable rate debt through twelve interest rate swap agreements. See footnote 10, Derivative Instruments, for more information about the Company’s interest rate swap agreements.

(f) Financial Covenants

The Company’s outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by the Company or may be impacted by a decline in operations. These covenants differ by debt instrument and relate to the Company’s allowable leverage, minimum tangible net worth, fixed charge coverage and other financial metrics. As of June 30, 2012, the Company was in compliance with the covenants of its unsecured term loan, secured term loan and unsecured revolving credit facility.

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, on May 10, 2012, the Company and its bank lenders amended the Company’s unsecured revolving credit facility, unsecured term loan and secured loan (together, the “Bank Debt”) to, among other things, revise certain financial and other covenants that provided additional operating flexibility for the Company to execute its business strategy and clarify the treatment of certain covenant compliance-related definitions. In addition, the unsecured revolving credit facility and the unsecured term loan were amended to give the lenders the right, at their option, to record mortgages on substantially all of the Company’s unencumbered properties, which they have not yet elected to do as of the date of this Quarterly Report on Form 10-Q. The unsecured term loan was also amended to convert the facility from a fixed interest rate spread over LIBOR to an interest rate spread that floats based on the Company’s leverage levels. The floating rate spread increased the pricing of the unsecured term loan by 25 basis points and can increase by an additional 25 basis points to the extent the Company’s leverage levels increase further or can revert to the original pricing if the Company’s leverage ratio improves. In connection with these amendments, the lenders under those loan agreements waived (i) all financial covenant non-compliance, if any, and any cross-defaults related thereto, that may have existed with respect to periods prior to the date of such amendments and (ii) any claim to increased or additional interest that may have accrued and been owing by the Company as a result of any such default or event of default described in clause (i). Such waivers are effective with respect to such default or event of default, if any, as of the date such default or event of default occurred. During the second quarter of 2012, the Company paid $1.2 million in financing fees to the lenders in connection with the foregoing amendments and expensed $2.2 million of previously deferred financing costs associated with the unsecured term loan.

The Company’s continued ability to borrow under the revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility. These debt agreements also contain cross-default provisions that would be triggered if the Company is in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and the Company may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on the Company’s liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

 

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(9) Income Taxes

The Company owns properties located in Washington, D.C. that are subject to local income based franchise taxes at an effective rate of 9.975%. During the three and six months ended June 30, 2012, the Company recognized a provision for income taxes of $0.1 million and $0.2 million, respectively, and recognized a benefit from income taxes of $0.1 million and $0.5 million during the three and six months ended June 30, 2011, respectively. The Company also has interests in two unconsolidated joint ventures that own real estate in Washington, D.C. that are subject to the franchise tax. The impact for income taxes related to these unconsolidated joint ventures is reflected within “Equity in (earnings) losses of affiliates” in the Company’s consolidated statements of operations.

The Company recognizes deferred tax assets only to the extent that it is more likely than not that deferred tax assets will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. The Company expects to amortize its current deferred tax assets over the life of their respective underlying assets or 39 years. The Company’s deferred tax assets and liabilities are primarily associated with differences in the GAAP and tax basis of recently acquired real estate assets, particularly acquisition costs, but also including intangible assets and deferred market rent assets and liabilities, that are associated with properties located in Washington, D.C. and recorded in its consolidated balance sheets.

The Company has not recorded a valuation allowance against its deferred tax assets as it determined that it is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. The Company has not recognized any deferred tax assets or liabilities as a result of uncertain tax positions and has no material net operating loss, capital loss or alternative minimum tax carryovers. There was no benefit or provision for income taxes associated with the Company’s discontinued operations for any periods presented. At June 30, 2012 and December 31, 2011, the Company had deferred tax assets totaling $2.2 million and $1.4 million, respectively, and deferred tax liabilities totaling $5.5 million and $5.0 million, respectively. At June 30, 2012 and December 31, 2011, the Company recorded its deferred tax assets within “Prepaid expenses and other assets” and recorded its deferred tax liabilities within “Accounts payable and other liabilities” in the Company’s consolidated balance sheets.

As the Company believes it both qualifies as a REIT and will not be subject to federal income tax, a reconciliation between the income tax provision calculated at the statutory federal income tax rate and the actual income tax provision has not been provided.

(10) Derivative Instruments

The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage exposures that arise from business activities in which its future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. The Company does not use derivatives for trading or speculative purposes and intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate the Company from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect the Company or adversely affect it because, among other things:

 

   

available interest rate hedging may not correspond directly with the interest rate risk for which the Company seeks protection;

 

   

the duration of the hedge may not match the duration of the related liability;

 

   

the party owing money in the hedging transaction may default on its obligation to pay; and

 

   

the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the Company’s ability to sell or assign its side of the hedging transaction.

The Company enters into interest rate swap agreements to hedge its exposure on its variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instrument’s applicable interest rate. During the second quarter of 2012, the Company entered into two interest rate swap agreements that fixed LIBOR on $75.0 million of its variable rate debt.

 

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At June 30, 2012, the Company had fixed LIBOR at a weighted average interest rate of 1.5% on $350.0 million of its variable rate debt through twelve interest rate swap agreements that are summarized below (dollars in thousands):

 

Effective Date

  Maturity Date   Amount     Interest Rate
Contractual
Component
    Fixed LIBOR
Interest Rate
 
January 2011   January 2014   $  50,000        LIBOR        1.474
July 2011   July 2016     35,000        LIBOR        1.754
July 2011   July 2016     25,000        LIBOR        1.7625
July 2011   July 2017     30,000        LIBOR        2.093
July 2011   July 2017     30,000        LIBOR        2.093
September 2011   July 2018     30,000        LIBOR        1.660
January 2012   July 2018     25,000        LIBOR        1.394
March 2012   July 2017     25,000        LIBOR        1.129
March 2012   July 2017     12,500        LIBOR        1.129
March 2012   July 2018     12,500        LIBOR        1.383
June 2012   July 2017     50,000        LIBOR        0.955
June 2012   July 2018     25,000        LIBOR        1.1349
   

 

 

     
      $350,000       
   

 

 

     

The Company’s interest rate swap agreements are designated as cash flow hedges and the Company records any unrealized gains associated with the change in fair value of the swap agreements within “Accumulated other comprehensive loss” and “Prepaid expenses and other assets” and any unrealized losses within “Accumulated other comprehensive loss” and “Accounts payable and other liabilities” on its consolidated balance sheets. The Company records its proportionate share of any unrealized gains or losses on its cash flow hedges associated with its unconsolidated joint ventures within “Accumulated other comprehensive loss” and “Investment in affiliates” on its consolidated balance sheets. The Company records any cash received or paid as a result of each interest rate swap agreement’s fixed rate deviating from its respective loan’s contractual rate within “Interest expense” in its consolidated statements of operations. The Company did not have any ineffectiveness associated with its cash flow hedges during the three and six months ended June 30, 2012 and 2011, which would have been recorded in earnings, and does not expect any future ineffectiveness. Therefore, as of June 30, 2012, no amounts have been or are expected to be reclassified from “Accumulated other comprehensive loss” into earnings.

(11) Fair Value Measurements

The Company adopted accounting provisions that outline a valuation framework and create a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The new disclosures increase the consistency and comparability of fair value measurements and the related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability between willing third parties at the measurement date (an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair value, and the Company provides the necessary disclosures that are required for items measured at fair value as outlined in the accounting requirements regarding fair value.

Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.

The three levels are as follows:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

 

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In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of the Company’s consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of June 30, 2012 and December 31, 2011 (amounts in thousands):

 

     Balance at
June 30,  2012
     Level 1      Level 2      Level 3  

Recurring Measurements:

           

Derivative instrument-swap liabilities

   $ 10,146       $ —         $ 10,146       $ —     

Contingent consideration related to acquisition of:

           

Corporate Campus at Ashburn Center

     1,448         —           —           1,448   

840 First Street, NE

     745         —           —           745   

 

     Balance at
December 31, 2011
     Level 1      Level 2      Level 3  

Non-recurring Measurements:

           

Impaired real estate assets

   $ 10,583       $ —         $ 5,250       $ 5,333   

Recurring Measurements:

           

Derivative instrument-swap liabilities

     6,129         —           6,129         —     

Contingent consideration related to acquisition of:

           

Corporate Campus at Ashburn Center

     1,448         —           —           1,448   

840 First Street, NE

     745         —           —           745   

There were no assets or liabilities measured on a non-recurring basis at June 30, 2012. With the exception of its contingent consideration obligations, the Company did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured on a recurring basis during the six months ended June 30, 2012 and 2011. Also, no transfers into and out of fair value measurements levels for assets or liabilities that are measured on a recurring basis occurred during the six months ended June 30, 2012 and 2011.

Interest Rate Derivatives

The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date. The Company uses a third party to value its interest rate swap agreements. The third party takes a daily “snapshot” of the market to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are then compiled through a valuation process that generates daily valuations, which are used to value the Company’s interest rate swap agreements.

Contingent Consideration

On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable in Operating Partnership units upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property through November 2013. Based on assessment of the probability of renewal and anticipated lease rates, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease through August 2023 on the entire building with the exception of two floors. As a result, the Company issued 544,673 Operating Partnership units to satisfy $7.1 million of its contingent consideration obligation. The Company recognized a $1.5 million gain associated with the issuance of the additional units, which represented the difference between the contractual value of the units and the fair value of the units at the date of issuance. The fair value of the contingent consideration obligation was determined based on several probability weighted discounted cash flow scenarios that projected stabilization being achieved at certain timeframes. The fair value was based, in part, on significant inputs, which are not observable in the market, thus representing a Level 3 measurement in accordance with the fair value hierarchy. At June 30, 2012, the contingent consideration obligation was $0.7 million, which may result in the issuance of additional units depending on the leasing of any of the vacant space.

 

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The Company has a contingent consideration obligation associated with the 2009 acquisition of Corporate Campus at Ashburn Center. As part of the acquisition price of Corporate Campus at Ashburn Center, the Company entered into a fee agreement with the seller under which the Company will be obligated to pay additional consideration upon the property achieving stabilization per specified terms of the agreement. The Company determines the fair value of the obligation through an income approach based on discounted cash flows that project stabilization being achieved within a certain timeframe. The more significant inputs associated with the fair value determination of the contingent consideration include estimates of capitalization rates, discount rates and various assumptions regarding the property’s operating performance and profitability. The fair value was based, in part, on significant inputs, which are not observable in the market, thus representing a Level 3 measurement in accordance with the fair value hierarchy. At June 30, 2012, the contingent consideration obligation was $1.4 million.

The Company did not recognize any additional gains or losses associated with its contingent consideration, as there was no change in the fair value of the contingent consideration, for the three and six months ended June 30, 2012 and 2011.

Impairment of Real Estate Assets

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of a property, an impairment analysis is performed. For the three months ended June 30, 2012, the Company did not record any impairment on its real estate assets.

During the fourth quarter of 2011, the Company reduced its intended holding period for its Woodlands Business Center and Goldenrod Lane properties, which are both located in the Company’s Maryland reporting segment. Based on an analysis of each property’s cash flows over the Company’s reduced holding period for each respective property, the Company recorded impairment charges of $1.6 million and $0.9 million, respectively, in the fourth quarter of 2011. In April 2012, the Company entered into a binding contract to sell its Woodlands Business Center property and recorded an additional impairment charge of $0.2 million to reduce the Woodlands Business Center property’s carrying value to reflect its fair value, less anticipated selling costs at March 31, 2012. The Company sold both its Woodlands Business Center and Goldenrod Lane properties in May 2012 for total net proceeds of $5.5 million. The Company determined the fair value of the properties based on the execution of a contract to sell.

During the third quarter of 2011, the Company reduced its intended holding period for its Airpark Place Business Center property, which is located in its Maryland reporting segment. Based on an analysis of the property’s anticipated cash flows over the Company’s reduced holding period for the property, the Company recorded an impairment charge of $3.1 million in the third quarter of 2011. In January 2012, the Company entered into a binding contract to sell the property and recorded an impairment charge of $0.4 million to reduce the property’s carrying value to reflect its fair value, less anticipated selling costs at December 31, 2011. The property was sold in March 2012 for net proceeds of $5.2 million. The Company determined the fair value of the property based on the execution of a contract to sell.

Financial Instruments

The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and other liabilities, with the exception of any items listed above, approximate their fair values due to their short-term maturities. The Company determines the fair value of its notes receivable and debt instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. The Company deems the fair value measurement of its debt instruments as a Level 2 measurement as the Company uses quoted interest rates for similar debt instruments to value its debt instruments. The Company also uses quoted market interest rates to value its notes receivable, which the Company considers a Level 2 measurement as it does not believe notes receivable trade in an active market.

 

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The carrying amount and estimated fair value of the Company’s notes receivable and debt instruments at June 30, 2012 and December 31, 2011 are as follows (amounts in thousands):

 

     June 30, 2012      December 31, 2011  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Financial Assets:

           

Notes receivable(1)

   $ 54,696       $ 55,000       $ 54,661       $ 55,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities:

           

Mortgage debt

   $ 384,752       $ 393,011       $ 432,023       $ 437,593   

Series A senior notes(2)

     —           —           37,500         39,128   

Series B senior notes(2)

     —           —           37,500         41,383   

Secured term loans

     20,000         20,000         30,000         29,990   

Unsecured term loan

     300,000         300,000         225,000         224,388   

Unsecured revolving credit facility

     224,000         224,000         183,000         182,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 928,752       $ 937,011       $ 945,023       $ 955,222   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The face value of the Company’s notes receivable was $55.0 million at June 30, 2012 and December 31, 2011.

(2) 

During the second quarter of 2012, the Company prepaid the entire $75.0 million principal amount outstanding under its Senior Notes with borrowings under the Company’s unsecured revolving credit facility.

(12) Equity

On May 11, 2012, the Company paid a dividend of $0.20 per common share to common shareholders of record as of May 4, 2012 and, on May 15, 2012, paid a dividend of $0.484375 per share to preferred shareholders of record as of May 4, 2012. On July 23, 2012, the Company declared a dividend of $0.20 per common share, equating to an annualized dividend of $0.80 per common share. The dividend will be paid on August 10, 2012 to common shareholders of record as of August 3, 2012. The Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The dividend will be paid on August 15, 2012 to preferred shareholders of record as of August 3, 2012. Dividends on all non-vested share awards are recorded as a reduction of shareholders’ equity. For each dividend paid by the Company on its common shares, the Operating Partnership distributes an equivalent distribution on its Operating Partnership common units.

The Company’s unsecured revolving credit facility, unsecured term loan and secured term loan contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit the Company’s ability to make distributions to its common and preferred shareholders. Further, distributions with respect to the Company’s common shares are subject to its ability to first satisfy its obligations to pay distributions to the holders of its Series A Preferred Shares.

As a result of the redemption feature of the Operating Partnership units requiring delivery of registered shares of the Company, the noncontrolling interests associated with the Operating Partnerhsip are recorded outside of permanent equity. The Company’s equity and redeemable noncontrolling interests are as follows (amounts in thousands):

 

     First
Potomac
Realty Trust
    Non-
redeemable
noncontrolling
interests
     Total Equity     Redeemable
noncontrolling
interests
 

Balance at December 31, 2011

   $ 672,246      $ 4,245       $ 676,491      $ 39,981   

Net (loss) income

     (15,586     44         (15,542     (1,152

Changes in ownership, net

     49,457        9         49,466        (1,945

Distributions to owners

     (25,629     —           (25,629     (1,119

Other comprehensive loss

     (3,814     —           (3,814     (202
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2012

   $ 676,674      $ 4,298       $ 680,972      $ 35,563   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     First
Potomac
Realty Trust
    Non-
redeemable
noncontrolling
interests
     Total Equity     Redeemable
noncontrolling
interests
 

Balance at December 31, 2010

   $ 614,983      $ 3,077       $ 618,060      $ 16,122   

Net loss

     (2,938     —           (2,938     (203

Changes in ownership, net

     111,477        1,002         112,479        21,142   

Distributions to owners

     (22,885     —           (22,885     (667

Other comprehensive income

     (264     —           (264     (19
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

   $ 700,373      $ 4,079       $ 704,452      $ 36,375   
  

 

 

   

 

 

    

 

 

   

 

 

 

A summary of the Company’s accumulated other comprehensive loss is as follows (amounts in thousands):

 

     2012     2011  

Beginning balance at January1,

   $ (5,849   $ (545

Net loss on derivative instruments

     (4,016     (282

Net loss attributable to noncontrolling interests

     202        19   
  

 

 

   

 

 

 

Ending balance at June 30,

   $ (9,663   $ (808
  

 

 

   

 

 

 

(13) Noncontrolling Interests

(a) Noncontrolling Interests in the Operating Partnership

Noncontrolling interests relate to the common interests in the Operating Partnership not owned by the Company. Interests in the Operating Partnership are owned by limited partners who contributed buildings and other assets to the Operating Partnership in exchange for common Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at the Company’s option, common shares of the Company on a one-for-one basis or cash based on the fair value of the Company’s common shares at the date of redemption. Unitholders receive a distribution per unit equivalent to the dividend per common share. Differences between amounts paid to redeem noncontrolling interests and their carrying values are charged or credited to equity. As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity.

Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. The Company accounts for issuances of common Operating Partnership units individually, which could result in some portion of its noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing share price of the Company’s common stock at June 30, 2012, the cost to acquire, through cash purchase or issuance of the Company’s common shares, all of the outstanding common Operating Partnership units not owned by the Company would be approximately $31.5 million. At June 30, 2012, the Company recorded an adjustment of $3.3 million to present certain noncontrolling interests at the greater of their carrying value or redemption value.

At December 31, 2011, 2,920,561 of the total common Operating Partnership units, or 5.5%, were not owned by the Company. During the six months ended June 30, 2012, 243,757 common Operating Partnership units were redeemed for 243,757 common shares. As a result, 2,676,804 of the total common Operating Partnership units, or 5.0%, were not owned by the Company at June 30, 2012. There were no common Operating Partnership units redeemed with available cash during the six months ended June 30, 2012.

(b) Noncontrolling Interests in the Consolidated Partnerships

When the Company is deemed to have a controlling interest in a partially-owned entity, it will consolidate all of the entity’s assets, liabilities and operating results within its condensed consolidated financial statements. The net assets contributed to the consolidated entity by the third party, if any, will be reflected within permanent equity in the Company’s consolidated balance sheets to the extent they are not mandatorily redeemable. The amount will be recorded based on the third party’s initial investment in the consolidated entity and will be adjusted to reflect the third party’s share of earnings or losses in the consolidated entity and any distributions received or additional contributions made by the third party. The earnings or losses from the entity attributable to the third party are recorded as a component of “Net loss attributable to noncontrolling interests” in the Company’s consolidated statements of operations.

 

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At June 30, 2012, the Company’s consolidated joint ventures owned the following properties:

 

Property

  

Acquisition Date

  

Reporting Segment

   First Potomac
Controlling
Interest
    Square
Footage
 

1005 First Street, NE

   August 2011    Washington, D.C.      97     30,414 (1) 

Redland Corporate Center

   November 2010    Maryland      97     348,469   

 

(1) 

The site is currently occupied by Greyhound Bus Lines, Inc., which has announced its intention to relocate. Upon the tenant leaving, the Company intends on re-developing the site, which can accommodate up to 712,000 square feet of office space.

(14) Share-Based Compensation

The Company records costs related to its share-based compensation based on the grant-date fair value calculated in accordance with GAAP. The Company recognizes share-based compensation costs on a straight-line basis over the requisite service period for each award and these costs are recorded within “General and administrative expense” or “Property operating expense” in the Company’s consolidated statements of operations based on the employee’s job function.

Option Exercises

The Company received approximately $17 thousand and $46 thousand from the exercise of stock options during the three months ended June 30, 2012 and 2011, respectively, and $27 thousand and $64 thousand for the six months ended June 30, 2012 and 2011, respectively. Shares issued as a result of stock option exercises are funded through the issuance of new shares. The total intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 were $6 thousand and $25 thousand, respectively, and $9 thousand and $34 thousand for the six months ended June 30, 2012 and 2011, respectively.

Non-vested share awards

The Company issues non-vested share awards that either vest over a specific time period that is identified at the time of issuance or vest upon the achievement of specific performance goals that are identified at the time of issuance. The Company issues new shares, subject to restrictions, upon each grant of non-vested share awards. On May 23, 2012, the Company granted a total of 27,894 restricted shares to its non-employee trustees, all of which will vest on the first anniversary of the award date and fair value was determined based on the share price of the underlying common shares on the date of issuance.

The Company recognized $0.6 million of compensation expense associated with its non-vested share awards during both the three months ended June 30, 2012 and 2011, and $1.2 million during both the six months ended June 30, 2012 and 2011. Dividends on all non-vested share awards are recorded as a reduction of equity. The Company applies the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of dividends over earnings related to participating securities are shown as a reduction in net income available to common shareholders in the Company’s computation of EPS.

A summary of the Company’s non-vested share awards as of June 30, 2012 is as follows:

 

     Non-vested
Shares
    Weighted
Average Grant
Date Fair Value
 

Non-vested at March 31, 2012

     827,408      $ 12.83   

Granted

     27,894        11.83   

Vested

     (45,506     13.01   
  

 

 

   

Non-vested at June 30, 2012

     809,796        12.78   
  

 

 

   

As of June 30, 2012, the Company had $6.4 million of unrecognized compensation cost related to non-vested shares. The Company anticipates this cost will be recognized over a weighted-average period of 3.7 years.

 

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(15) Commitments and Contingencies

The Company is subject to legal proceedings and claims arising in the ordinary course of its business. In the opinion of the Company’s management and legal counsel, the amount of ultimate liability with respect to these actions will not have a material effect on the results of operations, financial position or cash flows of the Company.

(16) Segment Information

The Company’s reportable segments consist of four distinct reporting and operational segments within the greater Washington D.C, region in which it operates: Maryland, Washington, D.C., Northern Virginia and Southern Virginia. The Company evaluates the performance of its segments based on the operating results of the properties located within each segment, which excludes large non-recurring gains and losses, gains from sale of real estate assets, interest expense, general and administrative costs, acquisition costs or any other indirect corporate expense to the segments. In addition, the segments do not have significant non-cash items other than straight-line and deferred market rent amortization reported in their operating results. There are no inter-segment sales or transfers recorded between segments.

 

 

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The results of operations for the Company’s four reportable segments are as follows (dollars in thousands):

 

     Three months ended June 30, 2012  
     Maryland     Washington, D.C.     Northern Virginia     Southern Virginia     Consolidated  

Number of buildings

     64        4        55        57        180   

Square feet

     3,816,137        666,714        3,655,043        5,648,491        13,786,385   

Total revenues

   $ 15,128      $ 7,165      $ 13,083      $ 12,512      $ 47,888   

Property operating expense

     (3,106     (1,001     (2,820     (3,267     (10,194

Real estate taxes and insurance

     (1,243     (1,233     (1,348     (1,021     (4,845
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total property operating income

   $ 10,779      $ 4,931      $ 8,915      $ 8,224        32,849   
  

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation and amortization expense

             (16,169

General and administrative

             (7,245

Acquisition costs

             (23

Other expenses, net

             (22,681

Provision for income taxes

             (101

Income from discontinued operations

             151   
          

 

 

 

Net loss

           $ (13,219
          

 

 

 

Capital expenditures(1)

   $ 4,979      $ 842      $ 6,019      $ 3,824      $ 16,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2011  
     Maryland     Washington, D.C.     Northern Virginia     Southern Virginia     Consolidated  

Number of buildings

     67        4        57        55        183   

Square feet

     3,875,172        633,452        3,662,616        5,478,909        13,650,149   

Total revenues

   $ 11,948      $ 5,938      $ 12,272      $ 12,207      $ 42,365   

Property operating expense

     (2,722     (1,147     (2,615     (2,865     (9,349

Real estate taxes and insurance

     (1,179     (667     (1,212     (980     (4,038
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total property operating income

   $ 8,047      $ 4,124      $ 8,445      $ 8,362        28,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation and amortization expense

             (16,533

General and administrative

             (4,185

Acquisition costs

             (552

Other expenses, net

             (9,027

Benefit from income taxes

             148   

Income from discontinued operations

             1,923   
          

 

 

 

Net income

           $ 752   
          

 

 

 

Capital expenditures(1)

   $ 6,002      $ 418      $ 7,604      $ 1,784      $ 16,321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Six months ended June 30, 2012  
     Maryland     Washington, D.C.     Northern Virginia     Southern Virginia     Consolidated  

Total revenues

   $ 29,373      $ 13,991      $ 26,398      $ 24,737      $ 94,499   

Property operating expense

     (6,823     (2,189     (5,932     (6,647     (21,591

Real estate taxes and insurance

     (2,430     (2,274     (2,900     (2,065     (9,669
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total property operating income

   $ 20,120      $ 9,528      $ 17,566      $ 16,025        63,239   
  

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation and amortization expense

             (32,211

General and administrative

             (12,142

Acquisition costs

             (41

Impairment of real estate assets

             (1,949

Other expenses, net

             (32,421

Provision for income taxes

             (162

Loss from discontinued operations

             (1,007
          

 

 

 

Net loss

           $ (16,694
          

 

 

 

Total assets(2)(3)

   $ 490,788      $ 333,345      $ 455,675      $ 367,528      $ 1,728,479   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures(1)

   $ 13,031      $ 1,705      $ 12,477      $ 6,836      $ 34,989   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2011  
     Maryland     Washington, D.C.     Northern Virginia     Southern Virginia     Consolidated  

Total revenues

   $ 24,613      $ 9,508      $ 22,800      $ 24,776      $ 81,697   

Property operating expense

     (6,300     (1,867     (5,593     (5,966     (19,726

Real estate taxes and insurance

     (2,276     (1,240     (2,400     (1,998     (7,914
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total property operating income

   $ 16,037      $ 6,401      $ 14,807      $ 16,812        54,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation and amortization expense

             (28,976

General and administrative

             (8,192

Acquisition costs

             (2,737

Other expenses, net

             (16,826

Benefit from income taxes

             461   

Loss from discontinued operations

             (928
          

 

 

 

Net loss

           $ (3,141
          

 

 

 

Total assets(2)(3)

   $ 476,878      $ 269,393      $ 420,927      $ 344,694      $ 1,608,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures(1)

   $ 8,801      $ 678      $ 11,212      $ 3,539      $ 25,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $336 and $513 for the three months ended June 30, 2012 and 2011, respectively, and $940 and $1,201 for the six months ended June 30, 2012 and 2011, respectively.

(2) 

Total assets include the Company’s investment in properties that are owned through joint ventures that are not consolidated within the Company’s financial statements. For more information on the Company’s unconsolidated investments, including location within the Company’s reportable segments, see footnote 6, Investment in Affiliates.

(3) 

Corporate assets not allocated to any of our reportable segments totaled $81,143 and $96,658 at June 30, 2012 and 2011, respectively.

 

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Table of Contents

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust.

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of June 30, 2012, owned a 95.0% interest in the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

At June 30, 2012, the Company wholly-owned or had a controlling interest in properties totaling 13.8 million square feet and had a noncontrolling ownership interest in properties totaling an additional 1.0 million square feet through six unconsolidated joint ventures. The Company also owned land that can accommodate approximately 2.4 million square feet of additional development. The Company’s consolidated properties were 84.0% occupied by 612 tenants. The Company does not include square footage that is in development or redevelopment in its occupancy calculation, which totaled 0.5 million square feet at June 30, 2012. The Company derives substantially all of its revenue from leases of space within its properties. As of June 30, 2012, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for over 25% of the Company’s total annualized base rent.

The primary source of the Company’s revenue and earnings is rent received from tenants under long-term (generally three to ten years) operating leases at its properties, including reimbursements from tenants for certain operating costs. Additionally, the Company may generate earnings from the sale of assets either outright or contributed into joint ventures.

The Company’s long-term growth will principally be driven by its ability to:

 

   

maintain and increase occupancy rates and/or increase rental rates at its properties;

 

   

sell assets to third parties, or contribute properties to joint ventures, at favorable prices; and

 

   

continue to grow its portfolio through acquisition of new properties, potentially through joint ventures.

Executive Summary

The Company incurred a net loss of $13.2 million and $16.7 million for the three and six months ended June 30, 2012, respectively, compared with net income of $0.8 million and a net loss of $3.1 million for the three and six months ended June 30, 2011, respectively. The increase in the Company’s net loss for the three and six months ended June 30, 2012 compared with the same periods in 2011 was due to $13.2 million of debt extinguishment charges and $2.5 million of legal and accounting fees associated with the Company’s internal investigation, both of which were incurred in the second quarter of 2012.

 

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The Company’s funds from operations (“FFO”) available to common shareholders were $1.2 million, or $0.02 per diluted share, and $15.6 million, or $0.29 per diluted share, for the three and six months ended June 30, 2012, respectively, compared with FFO of $14.0 million, or $0.27 per diluted share, and $24.4 million, or $0.48 per diluted share, for the three and six months ended June 30, 2011, respectively. The decline in FFO for the three and six months ended June 30, 2012 compared with the same periods in 2011 was also due to the above mentioned debt extinguishment charges and legal and accounting fees. FFO is a non-GAAP financial measure. For a description of FFO, including why management believes its presentation is useful and a reconciliation of FFO to net loss attributable to First Potomac Realty Trust, see “Funds From Operations.”

Significant Transactions

 

   

Executed 560,000 square feet of leases, including 147,000 square feet of new leases;

 

   

Prepaid the entire $75.0 million principal balance of its Series A and Series B Senior Notes and paid a $10.2 million make-whole amount associated with the prepayment; and

 

   

Amended its unsecured revolving credit facility, unsecured term loan and secured loan to, among other things, revise certain financial and other covenants to provide additional operating flexibility for the Company to execute its business strategy and clarify the treatment of certain covenant compliance-related definitions.

Internal Investigation

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, management identified a material weakness in the Company’s internal control over financial reporting as of December 31, 2011. In response to this material weakness, on March 20, 2012, the Company’s Board of Trustees appointed a special committee of independent trustees to review the facts and circumstances relating to the material weakness determination and the Company’s processes surrounding the monitoring and oversight of compliance with its financial covenants. The Board of Trustees determined in late April 2012 that a more detailed internal investigation (the “Internal Investigation”) of these matters should be undertaken by the Audit Committee of the Board of Trustees (the “Audit Committee”) with the assistance of independent outside professionals. The Audit Committee has completed this Internal Investigation and has briefed the Board of Trustees regarding the results of the Internal Investigation and recommendations as to certain remedial measures.

With respect to the factual matters reviewed, the Audit Committee determined that the Company lacked sufficient controls surrounding the monitoring and oversight of the Company’s compliance with financial covenants under its debt agreements. This included that the Company’s interpretations of the appropriate methodology for calculating the applicable financial covenants, and the processes for reviewing debt covenant calculations, were not sufficiently exacting. In addition, the Internal Investigation found that there was insufficient internal communication regarding these matters. As a result, as previously disclosed, the Audit Committee determined that the Company would not have been in compliance with certain of the financial covenants under the documents governing its senior notes for one or more prior periods, including the fourth quarter of 2010. However, as previously disclosed, in connection with the amendments to the Company’s unsecured revolving credit facility, unsecured term loans and secured term loans described below, the Company has remedied such matters and was in full compliance with applicable financial covenants as of June 30, 2012.

In response to the material weakness determination previously disclosed, as well as the findings of the Internal Investigation and the recommendations of the Audit Committee, the Board of Trustees has adopted a number of remedial actions that the Company is in the process of implementing and which will continue to be implemented going forward. These remedial actions include enhancements to debt covenant compliance controls, enhancements to financial reporting controls, enhancement of the role of the Company’s legal department and accounting functions, general control enhancements regarding, among other things, enterprise risk management and communication by management with the Audit Committee and outside legal counsel, and other potential remedial measures, including personnel actions. For more information regarding these matters, see the section entitled “Item 4. Controls and Procedures—Remediation of Material Weakness.” Several of the foregoing remedial actions are already underway, including the engagement of a new third-party accounting firm to perform the Company’s internal audit function. Management is working with the Audit Committee to develop a detailed plan for the full implementation of these remedial measures and will provide periodic reports on the implementation of these measures to the Audit Committee. See “Item 1A. Risk Factors.”

 

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Properties:

The following sets forth certain information for the Company’s consolidated properties by segment as of June 30, 2012 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON, D.C. REGION

 

Property

   Buildings      Sub-Market(1)    Square Feet      Annualized
Cash Basis
Rent(2)
     Leased at
June 30, 2012(3)
    Occupied at
June 30, 2012(3)
 

Downtown DC-Office

                

500 First Street, NW

     1       Capitol Hill      129,035       $ 4,458         100.0     100.0

840 First Street, NE

     1       NoMA      247,146         6,841         100.0     100.0

1005 First Street, NE(4)

     1       NoMA      30,414         2,496         100.0     100.0

1211 Connecticut Avenue, NW

     1       CBD      125,119         3,380         96.2     96.2
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total

     4            531,714         17,175         99.1     99.1
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Redevelopment

                

440 First Street, NW

     1       Capitol Hill      135,000         —           —          —     

Joint Venture Properties (unconsolidated)

                

1750 H Street, NW

     1       CBD      111,373         4,038         100.0     100.0

1200 17th Street, NW (Development)

     1       CBD      170,000         N/A         N/A        N/A   
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 
     2            281,373         4,038         100.0     100.0
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Region Total

     7            948,087       $ 21,213         99.3     99.3
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

CBD = Central Business District; NoMA = North of Massachusetts Avenue.

(2) 

Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

(3)

Does not include space in development or redevelopment.

(4) 

The property was acquired through a consolidated joint venture in which the Company has a 97% controlling economic interest.

 

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MARYLAND REGION

 

Property

   Buildings      Location    Square Feet      Annualized
Cash Basis
Rent(1)
     Leased at
June 30, 2012(2)
    Occupied at
June 30, 2012(2)
 

SUBURBAN MD

                

Business Park

                

Ammendale Business Park(3)

     7       Beltsville      311,636       $ 3,960         97.3     88.1

Gateway 270 West

     6       Clarksburg      255,415         3,032         87.7     81.9

Girard Business Center(4)

     7       Gaithersburg      298,009         3,062         88.8     88.8

Rumsey Center

     4       Columbia      134,619         1,188         81.3     72.6

Snowden Center

     5       Columbia      144,726         2,075         95.7     91.6
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Business Park

     29            1,144,405         13,317         90.9     85.5

Office

                

Worman’s Mill Court

     1       Frederick      40,051         367         87.7     87.7

Annapolis Business Center

     2       Annapolis      101,898         1,547         98.8     98.8

Campus at Metro Park North

     4       Rockville      190,720         3,324         93.4     78.4

Cloverleaf Center

     4       Germantown      173,655         2,434         86.1     86.1

Gateway Center

     2       Gaithersburg      44,249         636         92.4     92.4

Hillside Center

     2       Columbia      86,189         1,282         100.0     100.0

Merrill Lynch Building

     1       Columbia      136,554         1,589         77.5     75.4

Patrick Center

     1       Frederick      66,469         953         77.8     77.8

Redland Corporate Center

     2       Rockville      348,469         6,779         88.0     85.8

West Park

     1       Frederick      28,554         356         92.9     92.9
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Office

     20            1,216,808         19,267         88.9     85.6

Industrial

                

Frederick Industrial Park(5)

     3       Frederick      550,490         4,063         91.5     91.5

Glenn Dale Business Center

     1       Glenn Dale      315,962         1,521         86.9     86.9
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Industrial

     4            866,452         5,584         89.8     89.8

Total Suburban Maryland

     53            3,227,665         38,168         89.8     86.7
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

BALTIMORE

                

Business Park

                

Owings Mills Business Park(6)

     6       Owings Mills      219,284         1,675         58.8     58.8

Triangle Business Center

     4       Baltimore      74,182         357         47.8     47.8
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Business Park

     10            293,466         2,032         56.0     56.0

Industrial

                

Mercedes Center

     1       Hanover      295,006         1,297         74.0     74.0
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Baltimore

     11            588,472         3,329         65.0     65.0
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Consolidated

     64            3,816,137         41,497         86.0     83.4
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Joint Venture Properties (Unconsolidated)

                

RiversPark I and II

     6       Columbia      307,567         3,651         87.5     87.5

Aviation Business Park

     3       Glen Burnie      120,662         568         32.4     26.3
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Joint Ventures

     9            428,229         4,219         72.0     70.3
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

RegionTotal

     73            4,244,366       $ 45,716         84.6     82.1
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

(2) 

Does not include space in development or redevelopment.

(3) 

Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court.

(4)

Girard Business Center consists of the following properties: Girard Business Center and Girard Place.

(5)

Frederick Industrial Park consists of the following properties: 4451 Georgia Pacific Boulevard, 4612 Navistar Drive, and 6900 English Muffin Way.

(6)

Owings Mills Business Park consists of the following properties: Owings Mills Business Center and Owings Mills Commerce Center. In June 2012, the Company entered into a binding contract to sell two buildings totaling 39,000 square feet at Owings Mills Business Park. The sale is expected to be completed in the third quarter of 2012.

 

32


Table of Contents

NORTHERN VIRGINIA REGION

 

Property

   Buildings      Location   Square Feet      Annualized
Cash Basis
Rent(1)
     Leased at
June 30,
2012(2)
    Occupied at
June 30,
2012(2)
 

Business Park

               

Corporate Campus at Ashburn Center

     3       Ashburn     194,184       $ 2,844         100.0     100.0

Gateway Centre Manassas

     3       Manassas     102,388         541         51.1     51.1

Linden Business Center

     3       Manassas     109,724         777         62.4     62.4

Prosperity Business Center

     1       Merrifield     71,343         882         100.0     84.9

Sterling Park Business Center(3)

     7       Sterling     436,363         3,739         88.1     80.5
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Total Business Park

     17           914,002         8,783         84.3     79.5

Office

               

Atlantic Corporate Park

     2       Sterling     221,372         1,078         29.8     29.8

Cedar Hill

     2       Tysons Corner     102,632         2,164         100.0     100.0

Herndon Corporate Center

     4       Herndon     127,918         1,723         89.3     89.3

Lafayette Business Center(4)

     6       Chantilly     253,867         3,465         82.2     82.2

One Fair Oaks

     1       Fairfax     214,214         5,150         100.0     100.0

Reston Business Campus

     4       Reston     83,210         938         72.2     61.0

Three Flint Hill

     1       Oakton     55,181         1,034         100.0     100.0

Van Buren Office Park

     4       Herndon     81,564         880         77.2     77.2

Windsor at Battlefield

     2       Manassas     155,511         2,004         90.3     90.3
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Total Office

     26           1,295,469         18,436         79.1     78.3

Industrial

               

13129 Airpark Road

     1       Culpeper     149,888         630         75.9     75.9

I-66 Commerce Center(5)

     1       Haymarket     236,082         3,470         100.0     100.0

Interstate Plaza

     1       Alexandria     109,029         1,124         98.9     98.9

Newington Business Park Center

     7       Lorton     254,272         2,465         86.6     84.2

Plaza 500

     2       Alexandria     505,074         5,148         77.8     77.8
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Total Industrial

     12           1,254,345         12,837         85.4     84.9
  

 

 

              

Total Consolidated

     55           3,463,816         40,056         82.7     81.0
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Total Development / Redevelopment(6)

     1       Various(6)     191,227         —           —          —     

Joint Venture Property (Unconsolidated)

               

Metro Place III & IV

     2       Merrifield     325,328         5,832         100.0     100.0
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Region Total

     58           3,980,371       $ 45,888         84.2     82.7
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

(2) 

Does not include space in development or redevelopment.

(3) 

Sterling Park Business Center consists of the following properties: 403/405 Glenn Drive, Davis Drive, and Sterling Park Business Center.

(4) 

Lafayette Business Center consists of the following properties: Enterprise Center and Tech Court.

(5) 

Previously referred to as 15395 John Marshall Highway.

(6) 

Includes development at Sterling Park Business Center and redevelopment at Three Flint Hill, Sterling Park and Van Buren Office Park.

 

33


Table of Contents

SOUTHERN VIRGINIA REGION

 

Property

   Buildings      Location    Square Feet      Annualized
Cash Basis
Rent(1)
     Leased at
June  30,
2012(2)
    Occupied at
June  30,
2012(2)
 

RICHMOND

                

Business Park

                

Chesterfield Business Center(3)

     11       Richmond      320,429       $ 1,839         87.9     86.3

Hanover Business Center

     4       Ashland      183,643         789         67.1     67.1

Park Central

     3       Richmond      204,762         1,902         79.7     77.9

Virginia Center Technology Park

     1       Glen Allen      118,579         1,237         85.2     85.2
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Business Park

     19            827,413         5,767         80.9     79.8

Industrial

                

Northridge

     2       Ashland      139,346         776         82.9     82.9

River’s Bend Center(4)

     6       Chester      795,080         4,596         95.6     95.6
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

Total Industrial

     8            934,426         5,372         93.7     93.7

Total Richmond

     27            1,761,839         11,139         87.7     87.2
  

 

 

       

 

 

    

 

 

    

 

 

   

 

 

 

NORFOLK

                

Business Park

                

Crossways Commerce Center(5)

     9       Chesapeake      1,087,250