Attached files
file | filename |
---|---|
8-K - FORM 8-K - FIRST POTOMAC REALTY TRUST | c18607e8vk.htm |
EX-12 - EXHIBIT 12 - FIRST POTOMAC REALTY TRUST | c18607exv12.htm |
EX-23 - EXHIBIT 23 - FIRST POTOMAC REALTY TRUST | c18607exv23.htm |
EX-99.1 - EXHIBIT 99.1 - FIRST POTOMAC REALTY TRUST | c18607exv99w1.htm |
EX-99.2 - EXHIBIT 99.2 - FIRST POTOMAC REALTY TRUST | c18607exv99w2.htm |
EXHIBIT 99.3
FIRST POTOMAC REALTY TRUST
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements and schedule of First Potomac Realty Trust and
Subsidiaries and report of our independent registered public accounting firm thereon are attached
hereto:
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Page | ||||
Report of independent registered public accounting firm |
2 | |||
Consolidated Balance Sheets as of December 31, 2010 and 2009 |
3 | |||
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 |
4 | |||
Consolidated Statements of Equity and Comprehensive Income (Loss) for the years ended
December 31, 2010, 2009 and 2008 |
5 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 |
6 | |||
Notes to consolidated financial statements |
8 | |||
FINANCIAL STATEMENT SCHEDULE |
||||
Schedule III: Real Estate and Accumulated Depreciation |
47 |
All other schedules are omitted because they are not applicable, or because the required
information is included in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders
First Potomac Realty Trust:
First Potomac Realty Trust:
We have audited the accompanying consolidated balance sheets of First Potomac Realty Trust and
subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of
operations, equity and comprehensive income (loss), and cash flows for each of the years in the
three year period ended December 31, 2010. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule of real estate and
accumulated depreciation. These consolidated financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Potomac Realty Trust and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 2010, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
McLean, Virginia
March 10, 2011, except as to notes 1, 2, 4, 9, 17 and 18, which are as of June 13, 2011
March 10, 2011, except as to notes 1, 2, 4, 9, 17 and 18, which are as of June 13, 2011
2
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2010 and 2009
(Amounts in thousands, except per share amount)
Consolidated Balance Sheets
December 31, 2010 and 2009
(Amounts in thousands, except per share amount)
2010 | 2009 | |||||||
Assets: |
||||||||
Rental property, net |
$ | 1,217,897 | $ | 987,475 | ||||
Cash and cash equivalents |
33,280 | 9,320 | ||||||
Escrows and reserves |
8,070 | 9,978 | ||||||
Accounts and other receivables, net of allowance for
doubtful accounts of $3,246 and $2,346, respectively |
7,238 | 7,049 | ||||||
Accrued straight-line rents, net of allowance for
doubtful accounts of $849 and $1,185, respectively |
12,771 | 10,967 | ||||||
Notes receivable, net |
24,750 | | ||||||
Investment in affiliates |
23,721 | 1,819 | ||||||
Deferred costs, net |
20,174 | 17,837 | ||||||
Prepaid expenses and other assets |
14,230 | 6,625 | ||||||
Intangible assets, net |
34,551 | 20,103 | ||||||
Total assets |
$ | 1,396,682 | $ | 1,071,173 | ||||
Liabilities: |
||||||||
Mortgage loans |
$ | 319,096 | $ | 301,463 | ||||
Exchangeable senior notes, net |
29,936 | 48,718 | ||||||
Senior notes |
75,000 | 75,000 | ||||||
Secured term loans |
110,000 | 60,000 | ||||||
Unsecured revolving credit facility |
191,000 | 159,900 | ||||||
Financing obligation |
| 5,066 | ||||||
Accounts payable and other liabilities |
16,827 | 13,100 | ||||||
Accrued interest |
2,170 | 2,072 | ||||||
Rents received in advance |
7,049 | 7,267 | ||||||
Tenant security deposits |
5,390 | 5,235 | ||||||
Deferred market rent, net |
6,032 | 6,008 | ||||||
Total liabilities |
762,500 | 683,829 | ||||||
Noncontrolling interests in the Operating Partnership |
16,122 | 9,585 | ||||||
Equity: |
||||||||
Series A Preferred Shares, $25 par value, 4,600 shares
authorized and none outstanding |
| | ||||||
Common shares, $0.001 par value, 150,000 shares authorized;
49,922 and 30,589 shares issued and outstanding,
respectively |
50 | 31 | ||||||
Additional paid-in capital |
794,051 | 517,940 | ||||||
Noncontrolling interests in consolidated partnerships |
3,077 | | ||||||
Accumulated other comprehensive loss |
(545 | ) | (1,879 | ) | ||||
Dividends in excess of accumulated earnings |
(178,573 | ) | (138,333 | ) | ||||
Total equity |
618,060 | 377,759 | ||||||
Total liabilities, noncontrolling interests and equity |
$ | 1,396,682 | $ | 1,071,173 | ||||
See accompanying notes to consolidated financial statements.
3
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands, except per share amounts)
Consolidated Statements of Operations
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands, except per share amounts)
2010 | 2009 | 2008 | ||||||||||
Revenues: |
||||||||||||
Rental |
$ | 111,860 | $ | 106,122 | $ | 99,003 | ||||||
Tenant reimbursements and other |
26,687 | 24,526 | 21,895 | |||||||||
Total revenues |
138,547 | 130,648 | 120,898 | |||||||||
Operating expenses: |
||||||||||||
Property operating |
33,714 | 32,150 | 26,497 | |||||||||
Real estate taxes and insurance |
12,954 | 12,666 | 11,859 | |||||||||
General and administrative |
14,523 | 13,219 | 11,938 | |||||||||
Acquisition costs |
7,169 | 1,076 | | |||||||||
Depreciation and amortization |
42,613 | 40,174 | 36,260 | |||||||||
Impairment of real estate assets |
2,386 | | | |||||||||
Contingent consideration related to acquisition of property |
710 | | | |||||||||
Total operating expenses |
114,069 | 99,285 | 86,554 | |||||||||
Operating income |
24,478 | 31,363 | 34,344 | |||||||||
Other expenses, net: |
||||||||||||
Interest expense |
33,758 | 32,412 | 35,628 | |||||||||
Interest and other income |
(634 | ) | (516 | ) | (660 | ) | ||||||
Equity in losses of affiliates |
124 | 95 | | |||||||||
Gains on early retirement of debt |
(164 | ) | (6,167 | ) | (4,374 | ) | ||||||
Total other expenses, net |
33,084 | 25,824 | 30,594 | |||||||||
(Loss) income from continuing operations before income taxes |
(8,606 | ) | 5,539 | 3,750 | ||||||||
Provision for income taxes |
(31 | ) | | | ||||||||
(Loss) income from continuing operations |
(8,637 | ) | 5,539 | 3,750 | ||||||||
Discontinued operations: |
||||||||||||
(Loss) income from operations of disposed properties |
(3,595 | ) | (1,483 | ) | 2,117 | |||||||
Gain on sale of real estate properties |
557 | | 14,274 | |||||||||
Income from discontinued operations |
(3,038 | ) | (1,483 | ) | 16,391 | |||||||
Net (loss) income |
(11,675 | ) | 4,056 | 20,141 | ||||||||
Less: Net loss (income) attributable to noncontrolling
interests |
232 | (124 | ) | (615 | ) | |||||||
Net (loss) income attributable to common shareholders |
$ | (11,443 | ) | $ | 3,932 | $ | 19,526 | |||||
Net (loss) income attributable to common shareholders per
share basic and diluted: |
||||||||||||
(Loss) income from continuing operations |
$ | (0.25 | ) | $ | 0.17 | $ | 0.13 | |||||
Income from discontinued operations |
(0.08 | ) | (0.05 | ) | 0.64 | |||||||
Net (loss) income |
$ | (0.33 | ) | $ | 0.12 | $ | 0.77 | |||||
Weighted average common shares outstanding basic |
36,984 | 27,956 | 24,838 | |||||||||
Weighted average common shares outstanding diluted |
36,984 | 28,045 | 24,858 |
See accompanying notes to consolidated financial statements.
4
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Equity and Comprehensive Income (Loss)
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
Consolidated Statements of Equity and Comprehensive Income (Loss)
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
Accumulated | Noncontrolling | Dividends in | ||||||||||||||||||||||||||
Common | Other | Interests in | Excess of | |||||||||||||||||||||||||
Shares | Additional | Comprehensive | Consolidated | Accumulated | Comprehensive | |||||||||||||||||||||||
Par Value | Paid-in Capital | Loss | Partnerships | Earnings | Total Equity | Income (Loss) | ||||||||||||||||||||||
Balance at December 31, 2007 |
$ | 24 | $ | 438,566 | $ | | $ | | $ | (101,070 | ) | $ | 337,520 | |||||||||||||||
Net income |
| | | 20,141 | 20,141 | $ | 20,141 | |||||||||||||||||||||
Other comprehensive loss |
| | (3,931 | ) | | | (3,931 | ) | (3,931 | ) | ||||||||||||||||||
Total comprehensive income |
16,210 | |||||||||||||||||||||||||||
Attributable to noncontrolling
Interests |
| | 108 | | (615 | ) | (507 | ) | (507 | ) | ||||||||||||||||||
Total comprehensive income attributable to common
shareholders |
$ | 15,703 | ||||||||||||||||||||||||||
Dividends paid to shareholders |
| | | | (34,192 | ) | (34,192 | ) | ||||||||||||||||||||
Acquisition of partnership units |
| (34 | ) | | | | (34 | ) | ||||||||||||||||||||
Shares issued in exchange for
Operating Partnership units |
| 358 | | | | 358 | ||||||||||||||||||||||
Restricted stock expense |
| 1,791 | | | | 1,791 | ||||||||||||||||||||||
Exercise of stock options |
| 38 | | | | 38 | ||||||||||||||||||||||
Stock option expense |
| 201 | | | | 201 | ||||||||||||||||||||||
Issuance of common stock |
3 | 43,905 | | | | 43,908 | ||||||||||||||||||||||
Balance at December 31, 2008 |
27 | 484,825 | (3,823 | ) | | (115,736 | ) | 365,293 | ||||||||||||||||||||
Net income |
| | | | 4,056 | 4,056 | $ | 4,056 | ||||||||||||||||||||
Other comprehensive income |
| | 1,314 | | | 1,314 | 1,314 | |||||||||||||||||||||
Total comprehensive income |
5,370 | |||||||||||||||||||||||||||
Attributable to noncontrolling
Interests |
| | (32 | ) | | (124 | ) | (156 | ) | (156 | ) | |||||||||||||||||
Total comprehensive income attributable to
common shareholders |
$ | 5,214 | ||||||||||||||||||||||||||
Dividends paid to shareholders |
| | | | (26,529 | ) | (26,529 | ) | ||||||||||||||||||||
Acquisition of partnership units |
| 1 | | | | 1 | ||||||||||||||||||||||
Shares issued in exchange for Operating Partnership units |
| 483 | | | | 483 | ||||||||||||||||||||||
Restricted stock expense |
| 2,906 | | | | 2,906 | ||||||||||||||||||||||
Stock option expense |
| 207 | | | | 207 | ||||||||||||||||||||||
Issuance of common stock |
4 | 29,518 | 29,522 | |||||||||||||||||||||||||
Deconsolidation of joint venture |
| | 662 | | | 662 | ||||||||||||||||||||||
Balance at December 31, 2009 |
31 | 517,940 | (1,879 | ) | | (138,333 | ) | 377,759 | ||||||||||||||||||||
Net loss |
| | | | (11,675 | ) | (11,675 | ) | $ | (11,675 | ) | |||||||||||||||||
Other comprehensive income |
| | 1,067 | | | 1,067 | 1,067 | |||||||||||||||||||||
Total comprehensive loss |
(10,608 | ) | ||||||||||||||||||||||||||
Attributable to noncontrolling
Interests |
| | (23 | ) | | 232 | 209 | 209 | ||||||||||||||||||||
Total comprehensive loss attributable to common shareholders |
$ | (10,399 | ) | |||||||||||||||||||||||||
Dividends paid to shareholders |
| | | | (28,797 | ) | (28,797 | ) | ||||||||||||||||||||
Acquisition of partnership units |
| (1 | ) | | | | (1 | ) | ||||||||||||||||||||
Shares issued in exchange for Operating Partnership units |
| 55 | | | | 55 | ||||||||||||||||||||||
Restricted stock expense |
| 3,465 | | | | 3,465 | ||||||||||||||||||||||
Exercise of stock options |
| 44 | | | | 44 | ||||||||||||||||||||||
Stock option and employee stock purchase plan expense |
| 270 | | | | 270 | ||||||||||||||||||||||
Issuance of common stock, net of net settlements |
19 | 275,872 | | | | 275,891 | ||||||||||||||||||||||
Adjustment of Operating Partnership units to fair value |
| (3,594 | ) | | | | (3,594 | ) | ||||||||||||||||||||
Noncontrolling interest in consolidated joint venture, at
acquisition |
| | | 3,079 | | 3,079 | ||||||||||||||||||||||
Loss attributable to noncontrolling interest in consolidated
joint venture |
| | | (2 | ) | | (2 | ) | ||||||||||||||||||||
Deconsolidation of joint venture |
| | 290 | | | 290 | ||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 50 | $ | 794,051 | $ | (545 | ) | $ | 3,077 | $ | (178,573 | ) | $ | 618,060 | ||||||||||||||
See accompanying notes to consolidated financial statements.
5
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
Consolidated Statements of Cash Flows
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
2010 | 2009 | 2008 | ||||||||||
Cash flow from operating activities: |
||||||||||||
Net (loss) income |
$ | (11,675 | ) | $ | 4,056 | $ | 20,141 | |||||
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
||||||||||||
Discontinued operations: |
||||||||||||
Gain on sale of properties |
(557 | ) | | (14,274 | ) | |||||||
Depreciation and amortization |
597 | 698 | 1,427 | |||||||||
Impairment of real estate assets |
4,013 | 2,541 | | |||||||||
Depreciation and amortization |
43,439 | 41,039 | 37,131 | |||||||||
Stock based compensation |
3,735 | 3,113 | 1,985 | |||||||||
Bad debt expense |
1,290 | 2,302 | 533 | |||||||||
Amortization of deferred market rent |
(1,356 | ) | (1,572 | ) | (1,730 | ) | ||||||
Amortization of financing costs and fair value discounts |
757 | 445 | 3,208 | |||||||||
Equity in losses of affiliates |
124 | 95 | | |||||||||
Distributions from investments in affiliates |
623 | 107 | | |||||||||
Contingent consideration related to acquisition of property |
710 | | | |||||||||
Impairment of real estate assets |
2,386 | | | |||||||||
Change in financing obligation |
| (378 | ) | (81 | ) | |||||||
Gains on early retirement of debt |
(164 | ) | (6,167 | ) | (4,374 | ) | ||||||
Changes in assets and liabilities: |
||||||||||||
Escrows and reserves |
69 | (1,454 | ) | 4,552 | ||||||||
Accounts and other receivables |
(1,844 | ) | (1,937 | ) | (2,936 | ) | ||||||
Accrued straight-line rents |
(1,711 | ) | (1,180 | ) | (1,081 | ) | ||||||
Prepaid expenses and other assets |
107 | (658 | ) | (661 | ) | |||||||
Tenant security deposits |
382 | 28 | (179 | ) | ||||||||
Accounts payable and accrued expenses |
3,372 | 3,139 | 2,414 | |||||||||
Accrued interest |
150 | (334 | ) | (285 | ) | |||||||
Rents received in advance |
(172 | ) | 2,543 | 143 | ||||||||
Deferred costs |
(7,611 | ) | (6,418 | ) | (7,869 | ) | ||||||
Total adjustments |
48,339 | 35,952 | 17,923 | |||||||||
Net cash provided by operating activities |
36,664 | 40,008 | 38,064 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase deposit on future acquisitions |
(7,403 | ) | (500 | ) | | |||||||
Investment in note receivable |
(24,750 | ) | | | ||||||||
Proceeds from sale of real estate assets |
11,414 | | 50,573 | |||||||||
Distributions from joint venture for contribution of real estate assets |
| | 11,572 | |||||||||
Additions to rental property |
(18,917 | ) | (21,928 | ) | (26,502 | ) | ||||||
Additions to construction in progress |
(5,793 | ) | (1,200 | ) | (10,328 | ) | ||||||
Cash held by joint venture at deconsolidation |
(896 | ) | | | ||||||||
Investment in unconsolidated joint ventures |
(21,015 | ) | | | ||||||||
Acquisition of land parcel |
(3,200 | ) | | | ||||||||
Acquisition of rental property and associated intangible assets |
(279,248 | ) | (39,310 | ) | (46,377 | ) | ||||||
Net cash used in investing activities |
(349,808 | ) | (62,938 | ) | (21,062 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Financing costs |
(1,745 | ) | (3,234 | ) | (1,145 | ) | ||||||
Issuance of debt |
361,998 | 109,500 | 217,300 | |||||||||
Issuance of stock, net |
264,573 | 29,522 | 43,908 | |||||||||
Repayments of debt |
(258,331 | ) | (92,640 | ) | (230,555 | ) | ||||||
Distributions to noncontrolling interests |
(631 | ) | (718 | ) | (1,057 | ) | ||||||
Dividends to shareholders |
(28,797 | ) | (26,529 | ) | (34,192 | ) | ||||||
Redemption of partnership units |
(5 | ) | (3 | ) | (145 | ) | ||||||
Stock option exercises |
42 | | 38 | |||||||||
Net cash provided by (used in) financing activities |
337,104 | 15,898 | (5,848 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
23,960 | (7,032 | ) | 11,154 | ||||||||
Cash and cash equivalents, beginning of year |
9,320 | 16,352 | 5,198 | |||||||||
Cash and cash equivalents, end of year |
$ | 33,280 | $ | 9,320 | $ | 16,352 | ||||||
See accompanying notes to consolidated financial statements.
6
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
Years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows Continued
Years ended December 31, 2010, 2009 and 2008
Supplemental disclosure of cash flow information (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
Cash paid for interest, net |
$ | 32,769 | $ | 32,638 | $ | 35,928 | ||||||
Non-cash investing and financing activities: |
||||||||||||
Debt assumed in connection with
acquisitions of real estate |
14,699 | | | |||||||||
Conversion of Operating Partnership units
into common shares |
55 | 483 | 358 | |||||||||
Issuance of Operating Partnership units in
exchange for limited partnership interests |
3,519 | | |
Cash paid for interest on indebtedness is net of capitalized interest of $0.8 million, $0.4
million and $1.6 million in 2010, 2009 and 2008, respectively. During 2010, the Company did not pay
any cash for franchise taxes levied by the city of Washington D.C. Prior to 2010, the Company did
not own any properties in Washington D.C. and, therefore was not subject to any Washington D.C
franchise taxes.
During 2010, 2009 and 2008, 5 thousand, 40 thousand and 26 thousand Operating Partnership
units, respectively, were redeemed for an equivalent number of the Companys common shares.
On June 7, 2010, the Company issued 880,648 common shares in exchange for $13.03 million of
Exchangeable Senior Notes.
On January 1, 2010 and March 17, 2009, the Company deconsolidated the joint ventures that own
RiversPark I and II, respectively, and removed all related assets and liabilities from its
consolidated balance sheets as of the date of deconsolidation. Amounts shown on the statements of
cash flows represent cash held by RiversPark I, which was included in the Companys consolidated
balance sheets at December 31, 2009, and subsequently removed on its date of deconsolidation. For
more information, see footnote 5 Investment in Affiliates.
During 2010, the Company acquired eight consolidated properties at an aggregate purchase price
of $286.2 million, including the assumption of $14.7 million of mortgage debt and the issuance of
230,876 Operating Partnership units valued at $3.5 million on the date of acquisition.
7
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO 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 three distinct segments, which it refers to as
the 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 Companys 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 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 Companys operating partnership (the Operating Partnership). At December 31, 2010, the
Company was the sole general partner of, and owned a 98.1% interest in, the Operating Partnership.
The remaining interests in the Operating Partnership, which are presented as noncontrolling in the
Operating Partnership interests in the accompanying consolidated financial statements, are limited
partnership interests, some of which are owned by several of the Companys executive officers and
trustees who contributed properties and other assets to the Company upon its formation, and other
unrelated parties.
At December 31, 2010, the Company wholly-owned or had a controlling interest in properties
totaling 13.2 million square feet and had an ownership interest in properties totaling an
additional 0.5 million square feet through four unconsolidated joint ventures. The Companys
consolidated properties were 82.3% occupied by 592 tenants. Excluding the Companys fourth quarter
2010 acquisitions of Atlantic Corporate Park, which was vacant at acquisition, and Redland
Corporate Center II, which was 99% vacant at acquisition, the Companys consolidated portfolio was
85.2% occupied at December 31, 2010. The Company does not include square footage that is in
development or redevelopment in its occupancy calculation, which totaled 0.4 million square feet at
December 31, 2010. As of December 31, 2010, the Companys largest tenant was the U.S. Government,
which along with government contractors, accounted for over 20% of the Companys total annualized
rental revenue. The Company also owned land that can accommodate approximately 1.7 million square
feet of additional development. The Company derives substantially all of its revenue from leases of
space within its properties. The Company operates so as to qualify as a real estate investment
trust (REIT) for federal income tax purposes.
For the year ended December 31, 2010, the Company had consolidated net revenues of
approximately $139 million and consolidated total assets of $1.4 billion. Financial information
related to the Companys three reporting segments is set forth in footnote 18, Segment Information,
to the Companys consolidated financial statements.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Company, the
Operating Partnership, the subsidiaries of the Operating Partnership in which it has a controlling
interest and First Potomac Management LLC, a wholly-owned subsidiary that manages the majority of
the Companys properties. All intercompany balances and transactions have been eliminated in
consolidation.
8
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles (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 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; 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) Revenue Recognition and Accounts Receivable
The Company generates substantially all of its revenue from leases on its office and
industrial properties as well as business parks. The Company recognizes rental revenue on a
straight-line basis over the term of its leases, which include fixed-rate renewal periods leased at
below market rates at acquisition or inception. Accrued straight-line rents represent the
difference between rental revenue recognized on a straight-line basis over the term of the
respective lease agreements and the rental payments contractually due for leases that contain
abatement or fixed periodic increases. The Company considers current information, credit quality,
historical trends, economic conditions and other events regarding the tenants ability to pay their
obligations in determining if amounts due from tenants, including accrued straight-line rents, are
ultimately collectible. The uncollectible portion of the amounts due from tenants, including
accrued straight-line rents, is charged to property operating expense in the period in which the
determination is made. The Company considers similar criteria in assessing impairment associated
with outstanding loans or notes receivable and whether any allowance for anticipated credit loss is
appropriate.
Tenant leases generally contain provisions under which the tenants reimburse the Company for a
portion of property operating expenses and real estate taxes incurred by the Company. Such
reimbursements are recognized in the period in which the expenses are incurred. The Company records
a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk
of loss on specific accounts. Lease termination fees are recognized on the date of termination
when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably
assured and the Company has possession of the terminated space. The Company recognized lease
termination fees included in Tenant reimbursement and other revenues in its consolidated
statements of operations of $1.0 million, $0.4 million and $1.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Concurrent with the Companys August and September 2008 acquisitions of Triangle Business
Center and RiversPark I, respectively, the former owner entered into master lease agreements for
vacant space that was not producing rent at the time of the acquisitions. Payments received under
the master lease agreements are recorded as a reduction to rental property rather than as rental
income as the payments were determined to be a reduction in the purchase consideration at the time
of acquisition, respectively. Payments received under these master lease agreements totaled $0.5
million and $1.4 million for the years ended December 31, 2009 and 2008, respectively.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the
date of purchase to be cash equivalents.
(e) Escrows and Reserves
Escrows and reserves represent cash restricted for debt service, real estate taxes, insurance,
capital items and tenant security deposits.
9
(f) Deferred Costs
Financing costs related to long-term debt are deferred and amortized over the remaining life
of the debt using a method that approximates the effective interest method. Leasing costs related
to the execution of tenant leases are deferred and amortized over the term of the related leases.
Accumulated amortization of these combined costs was $16.1 million and $11.5 million at December
31, 2010 and 2009, respectively.
The following table sets forth scheduled future amortization for deferred financing and
leasing costs at December 31, 2010 (amounts in thousands):
Deferred Financing | Leasing(1) | |||||||
2011 |
$ | 2,148 | $ | 3,565 | ||||
2012 |
1,778 | 2,904 | ||||||
2013 |
412 | 2,247 | ||||||
2014 |
296 | 1,412 | ||||||
2015 |
182 | 1,028 | ||||||
Thereafter |
206 | 2,146 | ||||||
$ | 5,022 | $ | 13,302 | |||||
(1) | Excludes the amortization of $1.5 million of leasing costs that have
yet to be placed in-service as the associated tenants have not moved into their
related spaces and, therefore, the future amortization of these leasing costs have
yet to be determined. |
(g) Rental Property
Rental property is carried at initial cost less accumulated depreciation and, when
appropriate, impairment losses. Improvements and replacements are capitalized at cost 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 Companys assets, by class, are as follows:
Buildings
|
39 years | |
Building improvements
|
5 to 20 years | |
Furniture, fixtures and equipment
|
5 to 15 years | |
Tenant improvements
|
Shorter of the useful lives of the assets or the terms of the related leases |
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions, changes in managements
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 propertys 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. 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 propertys carrying value and its projected sales price less
any estimated costs to sell.
The Company will classify a building as held-for-sale in the period in which it has made the
decision to dispose of the building, the Companys Board of Directors or a designated delegate has
approved the sale, a binding agreement to purchase the property has been signed under which the
buyer has committed 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
10
cease
depreciation of the asset and will record an impairment loss if the fair value, less anticipated selling costs, is lower than the
carrying amount of the property. The Company will classify any impairment loss, together with the
buildings 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 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 secured 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.
The Company capitalizes interest costs incurred on qualifying expenditures for real estate
assets 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. 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. Capitalized interest is
depreciated over the useful life of the underlying assets, commencing when those assets are placed
into service.
(h) Purchase Accounting
Acquisitions of rental property from third parties are accounted for at fair value. Any
liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The
fair value of the acquired property is allocated between land and building (on an as-if vacant
basis) based on managements estimate of the fair value of those components for each type of
property and to tenant improvements based on the depreciated replacement cost of the tenant
improvements, which approximates their fair value. The fair value of the in-place leases is
recorded as follows:
| the fair value of leases in-place on the date of acquisition is based on absorption
costs for the estimated lease-up period in which vacancy and foregone revenue are avoided
due to the presence of the acquired leases; |
||
| the fair value of above and below-market in-place leases based on the present value
(using a discount rate that reflects the risks associated with the acquired leases) of the
difference between the contractual rent amounts to be paid under the assumed lease and the
estimated market lease rates for the corresponding spaces over the remaining non-cancelable
terms of the related leases, which range from one to fifteen years; and |
||
| the fair value of intangible tenant or customer relationships. |
The Companys determination of these fair values requires it to estimate market rents for each
of the leases and make certain other assumptions. These estimates and assumptions affect the rental
revenue, and depreciation and amortization expense recognized for these leases and associated
intangible assets and liabilities.
(i) Investment in Affiliates
The Company may continue to grow its portfolio by entering into ownership arrangements with
third parties for which it does not have a controlling interest. The structure of the arrangement
affects the Companys accounting treatment as the Company adheres to requirements regarding
consolidation of variable interest entities (VIE). In determining whether to consolidate an
entity, the Company assesses the structure and intent of the entity relationship as well its power
to direct major decisions regarding the entitys operations and whether the Companys portion of
the earnings, distributions and liability for obligations are in accordance with the Companys
ownership percentage. When the Companys investment in an entity meets the requirements for the
equity method of accounting, it will record its initial investment in its consolidated balance
sheets as Investment in affiliates. The initial investment in
the entity is adjusted to recognize the Companys share of earnings, losses, distributions
received or additional contributions from the entity. The Companys respective share of all
earnings or losses from the entity will be recorded in its consolidated statements of operations as
Equity in earnings or losses of affiliates.
11
When the Company is deemed to have a controlling interest in a partially-owned entity, it will
consolidate all of the entitys assets, liabilities and operating results within its consolidated
financial statements. The cash contributed to the consolidated entity by the third party, if any,
will be reflected in the permanent equity section of the Companys consolidated balance sheets to
the extent they are not mandatorily redeemable. The amount will be recorded based on the third
partys initial investment in the consolidated entity and will be adjusted to reflect the third
partys share of earnings or losses in the consolidated entity and for 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 (income) attributable to
non-controlling interests.
(j) Sales of Real Estate
The Company accounts for sales of real estate in accordance with the requirements for full
profit recognition, which occurs when the sale is consummated, the buyer has made adequate initial
and continuing investments in the property, the Companys receivable is not subject to future
subordination, and the seller does not have a substantial continuing involvement with the property,
the related assets and liabilities are removed from the balance sheet and the resultant gain or
loss is recorded in the period the sale is consummated. For sales transactions that do not meet the
criteria for full profit recognition, the Company accounts for the transactions as partial sales or
financing arrangements required by GAAP. For sales transactions with continuing involvement after
the sale, if the continuing involvement with the property is limited by the terms of the sales
contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss
related to the nature of the continuing involvement. Sales to entities in which the Company has or
receives an interest are accounted for as partial sales.
For sales transactions that do not meet sale criteria, the Company evaluates the nature of the
continuing involvement, including put and call provisions, if present, and accounts for the
transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other
alternate method of accounting rather than as a sale, based on the nature and extent of the
continuing involvement. Some transactions may have numerous forms of continuing involvement. In
those cases, the Company determines which method is most appropriate based on the substance of the
transaction.
If the Company has an obligation to repurchase the property at a higher price or at a future
indeterminable value (such as fair value), or it guarantees the return of the buyers investment or
a return on that investment for an extended period, the Company accounts for such transaction as a
financing transaction. If the Company has an option to repurchase the property at a higher price
and it is likely it will exercise this option, the transaction is accounted for as a financing
transaction. For transactions treated as financings, the Company records the amounts received from
the buyer as a Financing Obligation and continues to consolidate the property and its operating
results in its consolidated statements of operations. The results of operations of the property are
allocated to the joint venture partner for their equity interest and reflected as interest
expense on the Financing Obligation.
(k) Intangible Assets
Intangible assets include the fair value of acquired tenant or customer relationships and the
fair value of in-place leases at acquisition. Customer relationship fair values are determined
based on the Companys evaluation of the specific characteristics of each tenants lease and its
overall relationship with the tenant. Characteristics the Company considers include the nature and
extent of its existing business relationships with the tenant, growth prospects for developing new
business with the tenant, the tenants credit quality and expectations of lease renewals. The fair
value of customer relationship intangible assets is amortized to expense over the lesser of the
initial lease term and any expected renewal periods or the remaining useful life of the building.
The Company determines the fair value of the in-place leases at acquisition by estimating the
leasing commissions avoided by having in-place tenants and the operating income that would have not
been recognized during the estimated time required to lease the space
occupied by existing tenants at the acquisition date. The fair value attributable to existing
tenants is amortized to expense over the initial term of the respective leases. Should a tenant
terminate its lease, the unamortized portion of the in-place lease fair value is charged to expense
by the date of termination.
12
Deferred market rent liability consists of the acquired leases with below-market rents at the
date of acquisition. The fair value attributed to deferred market rent assets, which consist of
above-market rents at the date of acquisition, is recorded as a component of deferred costs. Above
and below-market lease fair values are determined on a lease-by-lease basis based on the present
value (using a discounted rate that reflects the risks associated with the acquired leases) of the
difference between the contractual rent amounts to be paid under the lease and the estimated market
lease rates for the corresponding spaces over the remaining non-cancelable terms of the related
leases including any below-market fixed rate renewal periods. The capitalized below-market lease
fair values are amortized as an increase to rental revenue over the initial term and any
below-market fixed-rate renewal periods of the related leases. Capitalized above-market lease fair
values are amortized as a decrease to rental revenue over the initial term of the related leases.
In conjunction with the Companys initial public offering and related formation transactions,
First Potomac Management, Inc. contributed all of the capital interests in First Potomac Management
LLC. The $2.1 million fair value of the in-place workforce acquired has been classified as goodwill
and is included as a component of intangible assets on the consolidated balance sheets. In
accordance with accounting requirements regarding goodwill and other intangibles, all acquired
goodwill that relates to the operations of a reporting unit and is used in determining the fair
value of a reporting unit is allocated to the Companys appropriate reporting unit in a reasonable
and consistent manner. The Company assesses goodwill for impairment annually at the end of its
fiscal year and in interim periods if certain events occur indicating the carrying value may be
impaired. The Company performs its analysis for potential impairment of goodwill in accordance with
GAAP, which requires that a two-step impairment test be performed on goodwill. In the first step,
the fair value of the reporting unit is compared with its carrying value. If the fair value exceeds
its carrying value, goodwill is not impaired, and no further testing is required. If the carrying
value of the reporting unit exceeds its fair value, then a second step must be performed in order
to determine the implied fair value of the goodwill and compare it to the carrying value of the
goodwill. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is
recorded equal to the difference. No goodwill impairment losses were recognized during the years
ended December 31, 2010, 2009 and 2008.
(l) Derivatives and Hedging
In the normal course of business, the Company is exposed to the effect of interest rate
changes. The Company may enter into derivative agreements to mitigate exposure to unexpected
changes in interest rates and may use interest rate protection or cap agreements to reduce the
impact of 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.
The Company may designate a derivative as either a hedge of the cash flows from a debt
instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt
instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair
value. For effective hedging relationships, the change in the fair value of the assets or
liabilities is recorded within equity (cash flow hedge) or through earnings (fair value hedge).
Ineffective portions of derivative transactions will result in changes in fair value recognized in
earnings. For a cash flow hedge, the Company records its proportionate share of unrealized gains or
losses on its derivative instruments associated with its unconsolidated joint ventures within
equity and Investment in Affiliates. The Company incorporates credit valuation adjustments to
appropriately reflect both its own nonperformance risk and the respective counterpartys
nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of nonperformance risk, the Company has considered the impact of netting
any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and
guarantees.
13
(m) Income Taxes
The Company has elected to be taxed as a REIT. To maintain its status as a REIT, the Company
is required to distribute at least 90% of its ordinary taxable income annually to its shareholders
and meet other organizational and operational requirements. As a REIT, the Company will not be
subject to federal income tax and any non-deductible
excise tax if it distributes at least 100% of its REIT taxable income to its shareholders. If
the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income
tax on its taxable income at regular corporate tax rates. The Company has certain subsidiaries,
including a taxable REIT subsidiary (TRS) and an entity that has elected be taxed as a REIT
(which indirectly owns 500 First Street, NW) that may be subject to federal, state or local taxes,
as applicable. A designated REIT will not be subject to federal income tax so long as it meets the
REIT qualification requirements and distributes 100% of its REIT taxable income to its
shareholders. The Companys TRS was inactive in 2010, 2009 and 2008. During 2010, certain of the
Companys subsidiaries acquired properties located in Washington D.C., which are subject to local
franchise taxes. During 2010, the Company recorded a provision for income tax of $31 thousand
related to franchise taxes levied by the city of Washington D.C. Since the Company did not own any
properties in Washington D.C. prior to 2010, it was not subject to any franchise taxes in 2009 and
2008.
The Company accounts for deferred income taxes using the asset and liability method. Under
this method, deferred income taxes are recognized for temporary differences between the financial
reporting basis of assets and liabilities and their respective tax bases and for operating losses,
capital losses and tax credit carryovers based on tax rates to be effective when amounts are
realized or settled. The Company will recognize deferred tax assets only to the extent that it is
more likely than not that they will be realized based on available evidence, including future
reversals of existing temporary differences, future projected taxable income and tax planning
strategies. The Company may recognize a tax benefit from an uncertain tax position when it is
more-likely-than-not (defined as a likelihood of more than 50%) that the position will be sustained
upon examination, including resolutions of any related appeals or litigation processes, based on
the technical merits. If a tax position does not meet the more-likely-than-not recognition
threshold, despite the Companys belief that its filing position is supportable, the benefit of
that tax position is not recognized in the statements of operations. The Company recognizes
interest and penalties, as applicable, related to unrecognized tax benefits as a component of
income tax expense. The Company recognizes unrecognized tax benefits in the period that the
uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the
applicable taxing authority, or by expiration of the applicable statute of limitation. For the
years ended December 31, 2010, 2009 and 2008, the Company did not record any uncertain tax
positions.
For federal income tax purposes, dividends to shareholders may be characterized as ordinary
income, return of capital or capital gains. The characterization of the Companys dividends for
2010, 2009 and 2008 are as follows:
2010 | 2009 | 2008 | ||||||||||
Ordinary income |
70.38 | % | 100.00 | % | 59.42 | % | ||||||
Return of capital |
29.62 | % | | | ||||||||
Long-term capital gain |
| | 40.58 | % |
(n) Noncontrolling Interests in Operating Partnership
Noncontrolling interests relate to the 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 Operating Partnership
units. Limited partners have the right to tender their units for redemption in exchange for, at
the Companys option, common shares of the Company on a one-for-one basis or cash based on the fair
value of the Companys 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, losses, distributions received or additional contributions. Based
on the closing share price of the Companys common stock at December 31, 2010, the cost to acquire,
through cash purchase or issuance of the Companys common shares, all of the outstanding Operating
Partnership units not owned by the Company would be approximately $16.1 million, which exceeded the
noncontrolling interests cost basis by $3.6 million. At December 31, 2009, the Company presented
its noncontrolling interests in the Operating Partnership at their cost basis, which exceeded their
fair value
basis.
14
The Company owned 98.1%, 97.7% and 97.3% of the outstanding Operating Partnership units at
December 31, 2010, 2009 and 2008, respectively. The Companys percentage ownership in outstanding
Operating Partnership units increased in 2010 due to the Companys common stock issuances as for
each share of common stock issued, the Company issues an equivalent Operating Partnership unit.
During 2010, 2009 and 2008, the Company issued shares of its common stock of 18.3 million, 2.8
million and 2.9 million, respectively.
During 2010, the Company issued 230,876 Operating Partnership units fair valued at $3.5
million to partially fund the acquisition of Battlefield Corporate Center. There were also 4,519
Operating Partnership units redeemed for 4,519 common shares fair valued at $0.1 million and 329
Operating Partnership units were acquired, from unaffiliated limited partners, for $5 thousand in
cash resulting in 958,473 Operating Partnership units outstanding as of December 31, 2010. During
2009, 40,000 Operating Partnership units were redeemed for 40,000 common shares fair valued at $0.5
million and 267 Operating Partnership units were acquired, from unaffiliated limited partners, for
$3 thousand in cash resulting in 732,445 Operating Partnership units outstanding as of December 31,
2009. During 2008, 26,181 Operating Partnership units were redeemed for 26,181 common shares fair
valued at $0.4 million and 8,340 Operating Partnership units were acquired, from unaffiliated
limited partners, for $0.1 million in cash resulting in 772,712 Operating Partnership units
outstanding as of December 31, 2008.
On November 10, 2010, the Company acquired Redland Corporate Center II and III, in Rockville,
Maryland for $83.1 million in a joint venture with a third party. As part of the joint venture
agreement, the Company receives a preferred return as the result of its retirement, upon
acquisition, of the existing $71.3 million mortgage loan that encumbered the property. The
Companys interest in the joint venture consists of a $74.5 million preferred equity interest with
a preferred return of initially 8.5%, which will be reduced to 7.5% and then further to 6.5%, if
occupancy increases, with the balance representing a common equity interest in the joint venture.
As a result, the Company has a 97% economic interest in the joint venture and the third party has
the remaining 3% interest. Since the Company has a controlling interest in the joint venture, it
consolidates the joint ventures assets, liabilities and operating results within its financial
statements. The Company reflects its joint venture partners interest in the joint venture within
the permanent equity section of its consolidated balance sheets. As of December 31, 2010, the
Company recorded noncontrolling interests of $3.1 million, which reflects the third partys common
equity interest in Redland Corporate Center II and III.
(o) Earnings Per Share
Basic earnings (loss) per share (EPS) is calculated by dividing net (loss) income available
to common shareholders by the weighted average common shares outstanding for the period. Diluted
EPS is computed after adjusting the basic EPS computation for the effect of dilutive common
equivalent shares outstanding during the period. The effect of stock options, non-vested shares and
Exchangeable Senior Notes, if dilutive, is computed using the treasury stock method. 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 Companys excess of
distributions over earnings related to participating securities are shown as a reduction in total
earnings (loss) attributable to common shareholders in the Companys computation of EPS.
15
The following table sets forth the computation of the Companys basic and diluted
earnings (loss) per share (amounts in thousands, except per share amounts):
2010 | 2009 | 2008 | ||||||||||
Numerator for basic and diluted (loss) earnings
per share calculations: |
||||||||||||
(Loss) income from continuing operations |
$ | (8,637 | ) | $ | 5,539 | $ | 3,750 | |||||
(Loss) income from discontinued operations |
(3,038 | ) | (1,483 | ) | 16,391 | |||||||
Net (loss) income |
(11,675 | ) | 4,056 | 20,141 | ||||||||
Less: Net loss (income) from continuing
operations attributable to noncontrolling
interests |
174 | (156 | ) | (111 | ) | |||||||
Less: Net loss (income) from discontinued
operations attributable to noncontrolling
interests |
58 | 32 | (504 | ) | ||||||||
Net (loss) income attributable to common
shareholders |
(11,443 | ) | 3,932 | 19,526 | ||||||||
Less: Allocation to participating securities |
(596 | ) | (516 | ) | (419 | ) | ||||||
Total (loss) earnings attributable to
common shareholders |
$ | (12,039 | ) | $ | 3,416 | $ | 19,107 | |||||
Denominator for basic and diluted (loss) earnings
per share calculations: |
||||||||||||
Weighted average shares outstanding basic |
36,984 | 27,956 | 24,838 | |||||||||
Effect of dilutive shares: |
||||||||||||
Employee stock options and non-vested shares |
| 89 | 20 | |||||||||
Weighted average shares outstanding diluted |
36,984 | 28,045 | 24,858 | |||||||||
Amounts attributable to common shareholders per
share basic and diluted: |
||||||||||||
(Loss) income from continuing operations |
$ | (0.25 | ) | $ | 0.17 | $ | 0.13 | |||||
(Loss) income from discontinued operations |
(0.08 | ) | (0.05 | ) | 0.64 | |||||||
Net (loss) income |
$ | (0.33 | ) | $ | 0.12 | $ | 0.77 | |||||
In accordance with accounting requirements regarding earnings per share, the Company did
not include the following potential common shares in its calculation of diluted earnings per share
as they would be anti-dilutive (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
Stock option awards |
836 | 767 | 706 | |||||||||
Non-vested share awards |
323 | 228 | 88 | |||||||||
Conversion of Exchangeable Senior Notes(1) |
1,098 | 1,735 | 2,780 | |||||||||
2,257 | 2,730 | 3,574 | ||||||||||
(1) | At December 31, 2010, 2009 and 2008, each $1,000 principal amount of the
Exchangeable Senior Notes was convertible into 28.039 shares. |
(p) Share-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. For options awards, the Company uses a
Black-Scholes option-pricing model. Expected volatility is based on an assessment of the Companys
realized volatility over the preceding five years, which is equivalent to the awards expected life.
The expected term represents the period of time the options are anticipated to remain outstanding
as well as the Companys historical experience for groupings of employees that have similar
behavior and considered separately for valuation purposes. For non-vested share awards that vest
over a predetermined time period, the Company uses the outstanding share price at the date of
issuance to fair value the awards. For non-vested shares awards that vest based on performance
conditions, the Company uses a Monte Carlo simulation (risk-neutral approach) to determine the
value and derived service period of each tranche.
16
The expense associated with the share based awards will be recognized over the period during
which an employee is required to provide services in exchange for the award the requisite
service period (usually the vesting period). The fair value for all share-based payment
transactions are recognized as a component of income from continuing operations.
(q) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Impairments in the amount of $2.5 million for the year ended December 31, 2009 were reclassified
from income from continuing operations to loss from discontinued operations. This amount is
considered immaterial to the prior period to which it relates.
(r) Application of New Accounting Standards
In June 2009, new accounting requirements became effective, which amend previous guidance
regarding the consolidation of VIEs in the determination of whether a reporting entity is required
to consolidate another entity based on, among other things, the other entitys purpose and design
and the reporting entitys ability to direct the activities of the other entity that most
significantly impacts the other entitys economic performance. The new guidance require a company
to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the
entity (1) has the power to direct matters that most significantly impact the activities of the
VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. Additionally, they require an ongoing reconsideration
of the primary beneficiary and provide a framework for the events that trigger a reassessment of
whether an entity is a VIE. These new requirements were effective for fiscal years beginning after
November 15, 2009. The Company adopted the new requirements on January 1, 2010. The adoption of
the new accounting requirements resulted in the deconsolidation of a joint venture that owned
RiversPark I from the Companys consolidated financial statements effective January 1, 2010. See
footnote 5, Investment in Affiliates for further information. The adoption of this standard did not
have a material impact on the Companys operating results.
In January 2010, new accounting requirements became effective regarding fair-value
measurements. Companies are required to make additional disclosures about recurring or nonrecurring
fair value measurements and separately disclose any significant transfers into and out of
measurements in the fair-value hierarchy. These new requirements also involve disclosing fair value
measurements by class instead of major category and disclosing the valuation technique and the
inputs used in determining the fair value for each class of assets and liabilities. Disclosure
requirements regarding Level 1 and Level 2 fair-value measurements were effective for fiscal years
beginning after December 15, 2009, and new disclosure requirements for Level 3 fair-value
measurements were effective for fiscal years beginning after December 15, 2010. Early adoption was
permitted. The Company adopted the Level 1 and Level 2 accounting requirements on January 1, 2010
and adopted Level 3 accounting requirements on January 1, 2011. See footnote 10, Fair Value
Measurements for further information. The adoption of these accounting requirements did not have a
material impact on the Companys consolidated financial statements.
In February 2010, new accounting guidance was issued regarding subsequent events. This
guidance removes the requirement for a Securities and Exchange Commission (SEC) filer to disclose
the date through which subsequent events have been evaluated in both issued and revised financial
statements. This amendment alleviates potential conflicts between GAAP and SEC requirements. The
new guidance became effective immediately upon final issuance. The Companys adoption of this
standard did not have a material effect on its consolidated financial statements.
In July 2010, new accounting guidance regarding specific disclosures was issued that will be
required for the allowance for credit losses and all finance receivables. Finance receivables
include loans, lease receivables and other arrangements with a contractual right to receive money
on demand or on fixed or determinable dates that is recognized as an asset on an entitys statement
of financial position. The amendment requires companies to provide disaggregated levels of
disclosure by portfolio segment and class to enable
17
users
of the consolidated financial statements to understand the nature of credit risk, how the risk is analyzed in determining
the related allowance for credit losses and changes to the allowance during the reporting period.
The required disclosures under this amendment as of the end of a reporting period are effective for
the Companys December 31, 2010 reporting period and disclosures regarding activities during a
reporting period are effective for the Companys March 31, 2011 interim reporting period. The
Companys adoption of this standard did not have a material effect on the Companys consolidated
financial statements.
(3) Rental Property
Rental property represents property, net of accumulated depreciation, and developable land
that are wholly or majority owned by the Company. All of the Companys rental properties are
located within the greater Washington, D.C. region. Rental property consists of the following at
December 31 (amounts in thousands):
2010 | 2009 | |||||||
Land |
$ | 315,229 | $ | 237,385 | ||||
Buildings and improvements |
930,077 | 795,901 | ||||||
Construction in process |
41,685 | 9,832 | ||||||
Tenant improvements |
92,002 | 75,940 | ||||||
Furniture, fixtures and equipment |
9,894 | 9,898 | ||||||
1,388,887 | 1,128,956 | |||||||
Less: accumulated depreciation |
(170,990 | ) | (141,481 | ) | ||||
$ | 1,217,897 | $ | 987,475 | |||||
Depreciation of rental property is computed on a straight-line basis over the estimated useful
lives of the assets. The estimated lives of the Companys assets range from 5 to 39 years or to the
term of the underlying lease. The tax basis of the Companys real estate assets was $1,422 million
and $1,135 million at December 31, 2010 and 2009, respectively.
Development and Redevelopment Activity
The Company constructs office, business parks and/or industrial buildings on a build-to-suit
basis or with the intent to lease upon completion of construction. At December 31, 2010, the
Company had 0.1 million square feet under development, which consisted of 57 thousand square feet
in its Northern Virginia reporting segment and 48 thousand square feet in its Southern Virginia
reporting segment. At December 31, 2010, the Company had 0.3 million square feet under
redevelopment, which consisted of 12 thousand square feet in its Maryland reporting segment, 279
thousand square feet in its Northern Virginia reporting segment and 39 thousand square feet in its
Southern Virginia reporting segment. The Company anticipates the majority of the development and
redevelopment efforts on these projects will be completed in 2011.
During 2010, the Company completed and placed in-service redevelopment efforts on 98 thousand
square feet of space, which includes 30 thousand square feet in its Maryland reporting segment, 37
thousand square feet in its Northern Virginia reporting segment and 31 thousand square feet in its
Southern Virginia reporting segment. No development efforts were placed in-service in 2010.
During 2009, the Company completed and placed in-service development and redevelopment efforts
on 151 thousand square feet of space, which includes 16 thousand square feet in its Maryland
reporting segment, 127 thousand square feet in its Northern Virginia reporting segment and 8
thousand square feet in its Southern Virginia reporting segment.
At December 31, 2010, the Company owned developable land that can accommodate approximately
1.7 million square feet of additional building space, which includes 0.1 million square feet in its
Maryland reporting segment, 0.6 million square feet in its Northern Virginia reporting segment and
1.0 million square feet in its Southern Virginia reporting segment.
18
(4) Acquisitions
The Company acquired all or a controlling interest in the following properties, which are
included in its consolidated financial statements from the date of acquisition, in 2010 and 2009
(dollars in thousands):
Leased | Occupied | Aggregate | ||||||||||||||||||||||||
Acquisition | Property | at | at | Purchase | ||||||||||||||||||||||
Location | Date | Type | Square Feet | 12/31/10 | 12/31/10 | Price | ||||||||||||||||||||
2010: |
||||||||||||||||||||||||||
Three Flint Hill |
Oakton, VA | 4/28/2010 | Office | 173,762 | 0 | %(1) | 0 | %(1) | $ | 13,653 | ||||||||||||||||
500 First Street, NW |
Washington, DC | 6/30/2010 | Office | 129,035 | 100 | % | 100 | % | 67,838 | |||||||||||||||||
Battlefield Corporate Center |
Chesapeake, VA | 10/28/2010 | Office park | 96,720 | 100 | % | 100 | % | 8,310 | (2) | ||||||||||||||||
Redland Corporate Center |
Rockville, MD | 11/10/2010 | Office | 347,462 | 44 | % | 40 | % | 86,358 | (3) | ||||||||||||||||
Atlantic Corporate Park |
Sterling, VA | 11/19/2010 | Office | 220,610 | 4 | %(4) | 0 | %(4) | 22,550 | |||||||||||||||||
1211 Connecticut Ave, NW |
Washington, DC | 12/9/2010 | Office | 125,119 | 100 | % | 100 | % | 49,500 | |||||||||||||||||
440 First Street, NW |
Washington, DC | 12/28/2010 | Office | 105,000 | 0 | %(5) | 0 | %(5) | 15,311 | (5) | ||||||||||||||||
7458 Candlewood Road |
Hanover, MD | 12/29/2010 | Industrial | 295,673 | 99 | % | 92 | % | 22,641 | (6) | ||||||||||||||||
1,493,381 | $ | 286,161 | ||||||||||||||||||||||||
2009: |
||||||||||||||||||||||||||
Cloverleaf Center |
Germantown, MD | 10/08/2009 | Office park | 173,655 | 100 | % | 100 | % | $ | 25,310 | (7) | |||||||||||||||
Ashburn Center |
Ashburn, VA | 12/31/2009 | Business park | 194,183 | 100 | % | 76 | % | 14,688 | |||||||||||||||||
367,838 | $ | 39,998 | ||||||||||||||||||||||||
(1) | The property was vacant at acquisition. The Company began redevelopment efforts and
plans to fully renovate the building. |
|
(2) | The Company issued a new $4.3 million mortgage loan to partial fund the acquisition
of the property. |
|
(3) | The property was acquired through a consolidated joint venture in which the Company
has a 97% economic interest. |
|
(4) | The property was vacant at acquisition. |
|
(5) | The property was vacant at acquisition. The Company intends to complete
redevelopment of the property and may add an additional 13,000 square feet. On January 11,
2011, the Company purchased the fee interest in the propertys ground lease for $8.0 million
of available cash. Also, on February 24, 2011, the Company acquired transferable development
rights for 30 thousand square feet for approximately $0.3 million. |
|
(6) | The Company assumed two mortgage loans totaling $14.7 million to partially fund the
acquisition. |
|
(7) | The Company issued a new $17.5 million mortgage to partially fund the acquisition. |
The Company incurred $7.2 million and $1.1 million of acquisition-related due diligence
and closing costs during 2010 and 2009, respectively.
As part of the consideration for Ashburn Center, the Company recorded contingent consideration
arising from a fee agreement entered into with the seller in which the Company will be obligated to
pay additional consideration if certain returns are achieved over the five year term of the
agreement or if the property is sold within the term of the five year agreement. As of December 31,
2010, the Company had leased the entire property, but it had not achieved the specified returns
identified in the agreement to be obligated to pay the seller. As a result, the Company recognized
$0.7 million through its statement of operations to reflect the fair value of this obligation based
on leasing activity. At December 31, 2010, the Company had accrued $1.4 million of contingent
consideration, which it expects to pay the seller in 2011, upon achieving the specified returns.
The fair value of the contingent consideration was determined based on several probability weighted
discounted cash flow scenarios that projected stabilization being achieved at certain timeframes.
The fair value was based on significant inputs, some of which are not observable in the market,
thus representing a Level 3 measurement in accordance with the fair value hierarchy. The Company
has classified the contingent consideration as a liability and any changes in its fair value in
subsequent reporting periods will be charged to earnings. For more information on the assumptions
used by the Company in determining fair value, see footnote 12, Fair Value Measurements for more
information.
19
The fair values of the acquired assets and liabilities in 2010 and 2009 are as follows
(amounts in thousands):
2010 | 2009 | |||||||
Land |
$ | 87,786 | $ | 9,779 | ||||
Acquired tenant improvements |
9,858 | 3,285 | ||||||
Building and improvements |
151,190 | 20,382 | ||||||
Construction in progress |
15,311 | | ||||||
In-place leases |
15,736 | 5,578 | ||||||
Acquired leasing commissions |
4,386 | 798 | ||||||
Customer relationships |
651 | | ||||||
Above-market leases acquired |
712 | 420 | ||||||
Total assets acquired |
285,630 | 40,242 | ||||||
Below-market leases acquired |
(1,855 | ) | (244 | ) | ||||
Debt assumed |
(14,699 | ) | | |||||
Acquisition related contingent consideration |
| (688 | ) | |||||
Net assets acquired |
$ | 269,076 | $ | 39,310 | ||||
The fair values for the 2010 acquired assets and liabilities are preliminary as the Company
continues to assess its initial fair value determination of its acquired assets and liabilities.
During the fourth quarter of 2010, the Company adjusted its initial land valuation of its 500 First
Street property, which was acquired in June 2010, and is located in the Companys Northern Virginia
reporting segment, resulting in a $7.4 million increase in land with a corresponding reduction in
building and improvements.
On December 29, 2010, the Company acquired 7458 Candlewood Road, which is located in the
Companys Maryland reporting segment, for $22.6 million. On January 6, 2011, the Company was
notified that the largest tenant at the property filed for Chapter 11 bankruptcy protection. As a
result, the Company recorded an impairment charge of $2.4 million associated with the
non-recoverable value of the intangible assets associated with the tenants lease.
The weighted average amortization period of the Companys consolidated intangible assets
acquired is 6.7 years in 2010, compared with 6.2 years in 2009. The intangible assets acquired in
2010 are comprised of the following categories with their respective weighted average amortization
periods: in-place leases 6.7 years; acquired leasing commissions 7.2 years; customer relationships
5.6 years; above market leases 5.8 years; and below market leases 8.3 years.
Pro Forma Financial Information
The unaudited pro forma financial information set forth below presents results as of December
31 as if all of the Companys 2010 and 2009 acquisitions, and related financings, had occurred on
January 1, 2009. The pro forma information is not necessarily indicative of the results that
actually would have occurred nor does it intend to indicate future operating results (amounts in
thousands, except per share amounts):
2010 | 2009 | |||||||
Pro forma total revenues |
$ | 152,773 | $ | 155,107 | ||||
Pro forma net loss |
$ | (3,883 | ) | $ | (7,295 | ) | ||
Pro forma net loss per share basic and diluted |
$ | (0.08 | ) | $ | (0.15 | ) |
20
(5) Investment in Affiliates
The Company owns properties through joint ventures in which it does not own a controlling
interest. As a result, the assets, liabilities and operating results of these non-controlled
properties are not consolidated within the Companys consolidated financial statements. The
Companys investment in these properties is recorded as
Investment in affiliates in its consolidated balance sheets. The Companys investments in
affiliates consisted of the following at December 31 (dollars in thousands):
2010 | ||||||||||||||||
Ownership | Company | |||||||||||||||
Interest | Investment | Debt | Recourse Debt | |||||||||||||
1750 H Street, NW |
50 | % | $ | 16,830 | $ | 31,287 | $ | | ||||||||
Aviation Business Park |
50 | % | 4,190 | | | |||||||||||
RiversPark I and II |
25 | % | 2,701 | 28,000 | 7,000 | |||||||||||
$ | 23,721 | $ | 59,287 | $ | 7,000 | |||||||||||
2009 | ||||||||||||||||
Ownership | Company | |||||||||||||||
Interest | Investment | Debt | Recourse Debt | |||||||||||||
RiversPark II |
25 | % | $ | 1,819 | $ | 18,144 | $ | 4,536 | ||||||||
On October 28, 2010, the Company acquired 1750 H Street, NW, in Washington, D.C. for
$65.0 million in an unconsolidated joint venture with AEW Capital Management, L.P., which it has a
50% interest. The property is a ten-story, 111,000 square foot Class A office building in
Washington, D.C., located approximately three blocks from the White House. The property is 100%
leased to six tenants, including 47,000 square feet that was leased back to the seller at closing.
The acquisition was funded, in part, through the assumption of a $31.4 million mortgage loan. The
balance of the purchase price was funded 50% by the Company using a draw on its unsecured revolving
credit facility and available cash and 50% by AEW Capital Management, L.P.
During the third quarter of 2010, the Company used available cash to acquire a $10.6 million
first mortgage loan collateralized by Aviation Business Park for $8.0 million. Aviation Business
Park is a three-building, single-story, office park totaling 121,000 square feet in Glen Burnie,
Maryland. On December 29, 2010, the Company entered into an unconsolidated joint venture with AEW
Capital Management, L.P., which it has a 50% interest, and took title to the property through a
deed-in-lieu of foreclosure in return for additional consideration to the owner if certain future
leasing hurdles are met. The joint venture recognized the acquisition date fair value of $126
thousand in contingent consideration related to the expected payments due to meeting certain
leasing hurdles under the terms of a fee agreement with the former owner. As of December 31, 2010,
the Company remains liable, in the event of default by the joint venture, for contingent
consideration of $63 thousand, or 50% of the total, which reflects its ownership percentage.
On December 12, 2008, the Company entered into separate joint venture arrangements to own a
25% interest in both RiversPark I and II, with a third party owning the remaining 75% interests.
As a condition of the joint venture arrangements, the Company provided guarantees to the joint
venture for four separate lease agreements entered into by the former owner for certain vacancy at
RiversPark I and rental payments in the event a specified tenant did not renew its lease at
RiversPark II.
On March 17, 2009, the Company deconsolidated RiversPark II, as the specified tenant renewed
its lease, which effectively terminated the Companys lease guarantee related to RiversPark II. As
of January 1, 2010, three of the four lease agreement guarantees had been terminated at RiversPark
I as a result of entering into third-party leases. In accordance with the adoption of new
accounting standards, the Company determined that deconsolidating the joint venture that owns
RiversPark I, on January 1, 2010, was appropriate based on its lack of control over major decisions
through its ownership interest in the joint venture and, with the exception of the minimal
remaining lease guarantee, it does not have any exposure to risks in excess of its stated ownership
percentage. There was no significant gain or loss recognized upon the deconsolidation of RiversPark
I or RiversPark II.
21
The net assets of the Companys unconsolidated joint ventures consisted of the following at
December 31 (amounts in thousands):
2010 | 2009 | |||||||
Assets: |
||||||||
Rental property, net |
$ | 104,559 | $ | 25,037 | ||||
Cash and cash equivalents |
1,706 | 357 | ||||||
Other assets |
11,442 | 1,879 | ||||||
Total assets |
117,707 | 27,273 | ||||||
Liabilities: |
||||||||
Mortgage loans |
59,914 | 18,144 | ||||||
Other liabilities |
4,316 | 1,443 | ||||||
Total liabilities |
64,230 | 19,587 | ||||||
Net assets |
$ | 53,477 | $ | 7,686 | ||||
The following table summarizes the results of operations of the Companys unconsolidated joint
ventures. The Companys share of earnings or losses related to its unconsolidated joint ventures is
recorded in its consolidated statements of operations as Equity in Losses of Affiliates (amounts
in thousands):
The period from | ||||||||
March 17, 2009 | ||||||||
Year Ended | through | |||||||
December 31, 2010 | December 31, 2009 | |||||||
Total revenues
|
$ | 5,923 | $ | 2,121 | ||||
Total operating expenses
|
(1,547 | ) | (458 | ) | ||||
Net operating income
|
4,376 | 1,663 | ||||||
Depreciation and amortization
|
(2,695 | ) | (1,087 | ) | ||||
Interest expense, net
|
(2,160 | ) | (955 | ) | ||||
Income tax expense
|
(24 | ) | | |||||
Net loss
|
$ | (503 | ) | $ | (379 | ) | ||
(6) Note Receivable
On December 21, 2010, the Company provided a $25.0 million subordinated loan to the owners of
950 F Street, NW, a ten-story, 287,000 square-foot, Class-A office/retail building located in
Washington, D.C. The building is currently 94% leased to nine tenants and subject to a $149.7
million mortgage loan. The Companys loan is secured by a portion of the owners interest in the
property. The loan has a fixed interest rate of 12.5%, matures on April 1, 2017 and is repayable in
full on or after December 21, 2013. The transaction was funded by a draw on the Companys unsecured
revolving credit facility. The loan is recorded, net of $0.3 million of issuance costs, as Note
receivable, net in the Companys consolidated balance sheets. The Company recorded interest income
of $0.1 million during 2010, and payments under the loan were current at December 31, 2010. The
Company records the interest received from the note receivable in Interest and other income and
the amortization of the issuance costs in Interest expense. In determining the collectability of
the note receivable, the Company takes into consideration the financial stability of the owners,
the operations of 950 F Street and other economic conditions that could impact collectability.
22
(7) Intangible Assets
Intangible assets and deferred market rent liabilities consisted of the following at December
31 (amounts in thousands):
2010 | 2009 | |||||||||||||||||||||||
Gross | Accumulated | Net | Gross | Accumulated | Net | |||||||||||||||||||
Intangibles | Amortization | Intangibles | Intangibles | Amortization | Intangibles | |||||||||||||||||||
In-place leases |
$ | 53,974 | $ | (29,548 | ) | $ | 24,426 | $ | 42,097 | $ | (27,706 | ) | $ | 14,391 | ||||||||||
Customer relationships |
884 | (248 | ) | 636 | 235 | (184 | ) | 51 | ||||||||||||||||
Leasing commissions |
7,906 | (2,039 | ) | 5,867 | 3,887 | (1,562 | ) | 2,325 | ||||||||||||||||
Deferred market rent asset |
2,525 | (1,003 | ) | 1,522 | 3,059 | (1,823 | ) | 1,236 | ||||||||||||||||
Goodwill |
2,100 | | 2,100 | 2,100 | | 2,100 | ||||||||||||||||||
$ | 67,389 | $ | (32,838 | ) | $ | 34,551 | $ | 51,378 | $ | (31,275 | ) | $ | 20,103 | |||||||||||
Deferred market rent
liability |
$ | 11,822 | $ | (5,790 | ) | $ | 6,032 | $ | 13,973 | $ | (7,965 | ) | $ | 6,008 | ||||||||||
The Company recognized $5.5 million, $5.2 million and $7.5 million of amortization expense on
intangible assets for the years ended December 31, 2010, 2009 and 2008, respectively. The Company
also recognized $1.4 million, $1.6 million and $1.7 million of rental revenue through the net
amortization of deferred market rent assets and deferred market rent liabilities for the years
ended December 31, 2010, 2009 and 2008, respectively. Losses due to termination of tenant leases
and defaults, which resulted in the write-offs of intangible assets, were $0.2 million, $0.2
million and $1.4 million during 2010, 2009 and 2008, respectively.
Projected amortization of intangible assets, including deferred market rent assets and
liabilities, as of December 31, 2010, for each of the five succeeding fiscal years is as follows
(amounts in thousands):
2011 |
$ | 6,075 | ||
2012 |
4,893 | |||
2013 |
4,008 | |||
2014 |
3,323 | |||
2015 |
2,746 | |||
Thereafter |
5,374 | |||
$ | 26,419 | |||
(8) Income Taxes
The Company has elected to be taxed as a REIT. To maintain its status as a REIT, the Company
is required to distribute at least 90% of its ordinary taxable income annually to its shareholders
and meet other organizational and operational requirements. As a REIT, the Company will not be
subject to federal income tax and any non-deductible excise tax if it distributes at least 100% of
its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any
taxable year, it will be subject to federal income tax on its taxable income at regular corporate
tax rates.
23
The Company has certain subsidiaries, including a TRS and an entity that has elected be taxed
as a REIT (which indirectly owns 500 First Street, NW) that may be subject to federal, state or
local taxes, as applicable. The REIT will not be subject to federal income tax so long as it meets
the REIT qualification requirements and distributes 100% of its REIT taxable income to its
shareholders. The Companys TRS was inactive in 2010, 2009 and 2008.
During 2010, certain of the Companys subsidiaries acquired properties located in Washington
D.C., which are subject to local franchise taxes. During 2010, the Company recorded a provision for
income tax of $31 thousand related to franchise taxes levied by the city of Washington D.C. at an
effective rate of 9.975%. Since the Company did not own any properties in Washington D.C. prior to
2010, it was not subject to any franchise taxes in 2009 or 2008.
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 Companys deferred tax assets and liabilities are primarily associated
with differences in its GAAP and tax basis of its real estate assets arising from acquisition
costs, 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
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 Companys
consolidated balance sheets, both of which were inconsequential as of December 31, 2010.
The Company has not recorded a valuation allowance against its deferred tax assets as it
expects 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 net operating loss, capital loss or alternative minimum tax
carryovers. There was no (benefit) provision for income taxes associated with the Companys
discontinued operations for any period presented.
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.
(9) Discontinued Operations
Net (loss) income from discontinued operations represents the operating results and all costs
associated with Old Courthouse Square, Deer Park and 7561 Lindbergh Drive, all of which were
formerly in the Companys Maryland reporting segment and Alexandria Corporate Park, formerly in the
Companys Northern Virginia reporting segment.
In February 2011, the Company sold its Old Courthouse Square property in Martinsburg, West
Virginia for net proceeds of $10.8 million. The property was acquired as part of a portfolio
acquisition in 2004, and was the Companys only retail asset. During the third quarter of 2010, the
Company recorded a $3.4 million impairment charge based on the difference between the contractual
sales price less anticipated selling costs and the carrying value of the property.
In June 2010, the Company sold 7561 Lindbergh Drive, for net proceeds of $3.9 million. The
Company reported a gain on the sale of $0.6 million.
In April 2010, the Company sold Deer Park for net proceeds of $7.5 million. The property was
acquired as part of a portfolio acquisition in 2004 and was located in a non-core submarket of
Baltimore, Maryland. During the first quarter of 2010, the Company recorded a $0.6 million
impairment charge based on the contractual sale price and did not recognize a gain on the sale.
In June 2008, the Company sold Alexandria Corporate Park for net proceeds of $50.6 million.
The property was among several properties that served as collateral on a $100 million fixed-rate
mortgage loan issued by Jackson National Life Insurance Company. In June 2008, the Company removed
Alexandria Corporate Park from the loans collateral base and replaced it with two properties,
Northridge I & II and 15395 John Marshall Highway. The Company incurred approximately $0.2 million
of deferred financing costs associated with the transaction. Since the debt remained encumbered to
properties that are wholly-owned by the Company, interest expense was not reclassified to
discontinued operations.
24
The Company has had, and will have, no continuing involvement with Old Courthouse Square, 7561
Lindbergh
Drive, Deer Park or Alexandria Corporate Park subsequent to their disposal. The Company did
not dispose of or enter into any binding agreements to sell any other properties during 2010, 2009
and 2008.
The following table summarizes the components of net (loss) income from discontinued
operations for the years ended December 31 (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 1,743 | $ | 3,229 | $ | 5,868 | ||||||
Property operating expenses |
(734 | ) | (1,487 | ) | (1,780 | ) | ||||||
Depreciation and amortization |
(597 | ) | (698 | ) | (1,427 | ) | ||||||
Interest expense, net of interest income |
6 | 14 | (544 | ) | ||||||||
Impairment of real estate assets |
(4,013 | ) | (2,541 | ) | | |||||||
(Loss) income from operations of disposed
properties |
(3,595 | ) | (1,483 | ) | 2,117 | |||||||
Gain on sale of real estate properties |
557 | | 14,274 | |||||||||
Net (loss) income from discontinued operations |
$ | (3,038 | ) | $ | (1,483 | ) | $ | 16,391 | ||||
(10) Debt
The Companys borrowings consisted of the following at December 31 (amounts in thousands):
2010 | 2009 | |||||||
Mortgage loans, effective interest rates ranging from 4.26% to 7.28%, maturing at various dates
through June 2021 |
$ | 319,096 | $ | 301,463 | ||||
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing December
2011(1) |
29,936 | 48,718 | ||||||
Series A senior notes, effective interest rate of 6.41%, maturing June 2013 |
37,500 | 37,500 | ||||||
Series B senior notes, effective interest rate of 6.55%, maturing June 2016 |
37,500 | 37,500 | ||||||
Secured term loan, effective interest rate of LIBOR plus 2.50%, maturing January 2014(2) |
40,000 | 40,000 | ||||||
Secured term loan, effective interest rate of LIBOR plus 2.50%, maturing August 2011 |
20,000 | 20,000 | ||||||
Secured term loan, effective interest rate of LIBOR plus 3.50%, maturing May 2011(3) |
50,000 | | ||||||
Unsecured revolving credit facility, effective interest rate of LIBOR plus 3.00%, maturing January
2014(4) |
191,000 | 159,900 | ||||||
$ | 725,032 | $ | 645,081 | |||||
(1) | The principal balance of the Exchangeable Senior Notes was $30.4
million and $50.5 million at December 31, 2010 and 2009, respectively. |
|
(2) | The loan is divided into four $10 million loans, with their maturities
staggered in one-year intervals beginning January 15, 2011 and ending on January 15, 2014. The
Company repaid $10 million of the outstanding loan balance in January 2011. Interest on the
loan is LIBOR plus 250 basis points, which increases by 100 basis points each year beginning
on January 1, 2011, to a maximum of 550 basis points. |
|
(3) | In February 2011, the Company extended the maturity date of the loan to
May 2011. |
|
(4) | The unsecured revolving credit facility matures in January 2013 with a
one-year extension at the Companys option, which it intends to exercise. |
25
(a) Mortgage Loans
The following table provides a summary of the Companys mortgage debt at December 31, 2010 and
2009 (dollars in thousands):
Effective | ||||||||||||||||||||
Contractual | Interest | Maturity | December 31, | December 31, | ||||||||||||||||
Encumbered Property | Interest Rate | Rate | Date | 2010 | 2009 | |||||||||||||||
4212 Tech Court(1) |
8.53 | % | 8.53 | % | | $ | | $ | 1,665 | |||||||||||
Park Central II(2) |
8.32 | % | 5.66 | % | | | 5,591 | |||||||||||||
Enterprise Center (3) |
8.03 | % | 5.20 | % | | | 17,393 | |||||||||||||
Indian Creek Court (4) |
7.80 | % | 5.90 | % | January 2011 | 11,982 | 12,413 | |||||||||||||
403/405 Glenn Drive |
7.60 | % | 5.50 | % | July 2011 | 7,960 | 8,252 | |||||||||||||
4612 Navistar Drive (5) |
7.48 | % | 5.20 | % | July 2011 | 12,189 | 12,672 | |||||||||||||
RiversPark I (6) |
LIBOR+2.50% | 5.97 | % | September 2011 | | 9,856 | ||||||||||||||
Campus at Metro Park (5) |
7.11 | % | 5.25 | % | February 2012 | 22,556 | 23,376 | |||||||||||||
1434 Crossways Blvd Building II |
7.05 | % | 5.38 | % | August 2012 | 9,484 | 9,852 | |||||||||||||
Crossways Commerce Center |
6.70 | % | 6.70 | % | October 2012 | 24,179 | 24,607 | |||||||||||||
Newington Business Park Center |
6.70 | % | 6.70 | % | October 2012 | 15,252 | 15,522 | |||||||||||||
Prosperity Business Center |
6.25 | % | 5.75 | % | January 2013 | 3,502 | 3,627 | |||||||||||||
Aquia Commerce Center I |
7.28 | % | 7.28 | % | February 2013 | 353 | 486 | |||||||||||||
1434 Crossways Blvd Building I |
6.25 | % | 5.38 | % | March 2013 | 8,225 | 8,493 | |||||||||||||
Linden Business Center |
6.01 | % | 5.58 | % | October 2013 | 7,080 | 7,224 | |||||||||||||
Owings Mills Business Center |
5.85 | % | 5.75 | % | March 2014 | 5,448 | 5,552 | |||||||||||||
Annapolis Commerce Park East |
5.74 | % | 6.25 | % | June 2014 | 8,491 | 8,613 | |||||||||||||
Cloverleaf Center |
6.75 | % | 6.75 | % | October 2014 | 17,204 | 17,490 | |||||||||||||
Plaza 500, Van Buren Business
Park, Rumsey Center, Snowden
Center, Greenbrier Technology
Center II, Norfolk Business
Center, Northridge I & II and
15395 John Marshall Highway |
5.19 | % | 5.19 | % | August 2015 | 99,151 | 99,625 | |||||||||||||
Hanover Business Center: |
||||||||||||||||||||
Building D |
8.88 | % | 6.63 | % | August 2015 | 642 | 756 | |||||||||||||
Building C |
7.88 | % | 6.63 | % | December 2017 | 1,041 | 1,154 | |||||||||||||
Chesterfield Business Center: |
||||||||||||||||||||
Buildings C,D,G and H |
8.50 | % | 6.63 | % | August 2015 | 1,681 | 1,972 | |||||||||||||
Buildings A,B,E and F |
7.45 | % | 6.63 | % | June 2021 | 2,398 | 2,540 | |||||||||||||
7458 Candlewood Road Note 1 |
6.57 | % | 6.30 | % | January 2016 | 9,938 | | |||||||||||||
7458 Candlewood Road Note 2 |
4.67 | % | 6.04 | % | January 2016 | 4,761 | | |||||||||||||
Gateway Centre, Building I |
7.35 | % | 5.88 | % | November 2016 | 1,189 | 1,340 | |||||||||||||
500 First Street, NW |
5.72 | % | 5.79 | % | July 2020 | 38,793 | | |||||||||||||
Battlefield Corporate Center |
4.26 | % | 4.40 | % | November 2020 | 4,289 | | |||||||||||||
Airpark Business Center |
7.45 | % | 6.63 | % | June 2021 | 1,308 | 1,392 | |||||||||||||
Total Mortgage Debt |
5.71 | %(7) | $ | 319,096 | $ | 301,463 | ||||||||||||||
(1) | The loan was repaid in June 2010. |
|
(2) | The loan was repaid in November 2010. |
|
(3) | The loan was repaid in December 2010. |
|
(4) | The loan was repaid in January 2011. |
|
(5) | The maturity date presented for these loans represents the anticipated
repayment date of the loans, after which date the interest rates on the loans will increase to
a predetermined amount identified in the debt agreement. The effective interest rate was
calculated based on the anticipated period the debt is expected to be outstanding. |
|
(6) | On January 1, 2010, the Company deconsolidated RiversPark I and,
therefore, the assets and liabilities, which include $9.9 million of mortgage debt, and the
operating results of RiversPark I, are no longer included in the Companys consolidated
financial statements. For more information see footnote 5, Investment in Affiliates. |
|
(7) | Weighted average interest rate on total mortgage debt. |
26
On December 29, 2010, the Company acquired 7458 Candlewood Road, which is located in the
Companys Maryland reporting segment, for $22.6 million. The acquisition was funded through the
assumption of two mortgage loans totaling $14.7 million and a draw on the Companys unsecured
revolving credit facility. The mortgage loans consist of two notes; the first note of $9.9 million
has a fixed contractual interest rate of 6.57% and the second note of $4.8 million has a fixed
contractual interest rate of 4.67%. Both notes mature in January 2016.
On October 28, 2010, the Company acquired Battlefield Corporate Center in Chesapeake, Virginia
for $8.0 million. The acquisition was funded with a new $4.3 million mortgage loan, the issuance of
230,876 Operating Partnership units and available cash. The mortgage loan has a fixed contractual
interest rate of 4.26% and matures in November 2020.
On June 30, 2010, the Company acquired 500 First Street, NW in Washington, D.C., for $67.8
million. The acquisition was funded with a new $39.0 million mortgage loan, a $26.3 million draw on
the Companys unsecured revolving credit facility and available cash. The mortgage loan has a fixed
contractual interest rate of 5.72% and matures in July 2020.
On October 8, 2009, the Company acquired Cloverleaf Center, which was funded with a $17.5
million mortgage loan and available cash that was funded with proceeds from shares issued through
the Companys controlled equity offering agreement. The mortgage loan has a fixed interest rate of
6.75% and matures in October 2014, with two one-year extension options. The Company has the right
to exercise the extension options, which provide for a fixed interest rate to be calculated at the
beginning of each extension period and not to be lower than 6.50%.
The Company has repaid the following mortgages since January 1, 2009 (dollars in thousands):
Effective | ||||||||||||||||
Month | Year | Property | Interest Rate | Amount | ||||||||||||
January |
2011 | Indian Creek Court | 5.90 | % | $ | 11,982 | ||||||||||
December |
2010 | Enterprise Center | 5.20 | % | 16,712 | |||||||||||
November |
2010 | Park Central II | 5.66 | % | 5,305 | |||||||||||
June |
2010 | 4212 Tech Court | 8.53 | % | 1,654 | |||||||||||
November |
2009 | Park Central I | 5.66 | % | 4,540 | |||||||||||
October |
2009 | 4200 Tech Court | 8.07 | % | 1,706 | |||||||||||
May |
2009 | Glen Dale Business Center | 5.13 | % | 8,033 | |||||||||||
$ | 49,932 | |||||||||||||||
On September 26, 2008, the Company entered into a $28.0 million mortgage loan with U.S. Bank
N.A. to fund part of its RiversPark I and II acquisition. Borrowings on the loan bear interest at a
rate of LIBOR plus 250 basis points. On September 29, 2008, the Company entered into an interest
rate swap agreement that fixed the underlying interest rate on the loan at 5.97% for its initial
three-year term. On December 12, 2008, the Company contributed RiversPark I and II and its related
mortgage debt to separate consolidated joint ventures, which are both owned 25% by the Company and
75% by an outside affiliate. On March 17, 2009 and January 1, 2010, the Company deconsolidated
RiversPark II and RiversPark I, respectively, therefore, the assets, liabilities and operating
results of RiversPark II were no longer considered on the Companys consolidated financial
statements at the date of deconsolidation.
The Companys mortgage debt is recourse solely to specific assets. The Company had 30 and 31
consolidated properties that secured mortgage debt at December 31, 2010 and 2009, respectively.
27
Non-Financial Covenants in Mortgage Loan Documents
Certain of the Companys subsidiaries are borrowers on mortgage loans, the terms of which
prohibit certain direct or indirect transfers of ownership interests in the borrower subsidiary (a
Prohibited Transfer). Under the terms of the mortgage loan documents, a lender could assert that
a Prohibited Transfer includes the trading of the Companys common shares on the NYSE, the issuance
of common shares by the Company, or the issuance of units of limited partnership interest in the
Companys operating partnership. As of December 31, 2010, the Company believes that there were
eleven mortgage loans with such Prohibited Transfer provisions, representing an aggregate principal
amount outstanding of approximately $112 million. Two of these mortgage loans were entered into
prior to the Companys initial public offering (IPO) in 2003 and nine were assumed subsequent to
its IPO. In January 2011, the Company repaid, with available cash, a $12.0 million mortgage with a
Prohibited Transfer provision that was assumed subsequent to its IPO. In addition, in January 2011,
the Company agreed to a modification of a $22.1 million mortgage loan to expressly permit such
trading and issuances. In each instance, the Company received the consent of the mortgage lender to
consummate its IPO (for the two pre-IPO loans) or to acquire the property or the ownership
interests of the borrower (for the post-IPO loans), including the assumption by its subsidiary of
the mortgage loan. Generally, the underlying mortgage documents, previously applicable to a
privately held owner, were not changed at the time of the IPO or the later loan assumptions,
although the Company believes that each of the lenders or servicers was aware that the borrowers
ultimate parent was or would become a publicly traded company. Subsequent to the IPO and the
assumption of these additional mortgage loans, the Company has issued new common shares and shares
of the Company have been transferred on the New York Stock Exchange. Similarly, the Companys
operating partnership has issued units of limited partnership interest. To date, no lender or
servicer has asserted that a Prohibited Transfer has occurred as a result of any such transfer of
shares or units of limited partnership interest. If a lender were to be successful in any such
action, the Company could be required to immediately repay or refinance the amounts outstanding, or
the lender may be able to foreclose on the property securing the loan or take other adverse
actions. In addition, in certain cases a Prohibited Transfer could result in the loan becoming
fully recourse to the Company or its Operating Partnership. In addition, if a violation of a
Prohibited Transfer provision were to occur that would permit the Companys mortgage lenders to
accelerate the indebtedness owed to them, it could result in an event of default under the
Companys Senior Unsecured Series A and Series B Notes, its unsecured revolving credit facility,
its two Secured Term Loans and its Exchangeable Senior Notes.
(b) Exchangeable Senior Notes
On December 11, 2006, the Company issued $125.0 million of 4.0% Exchangeable Senior Notes for
net proceeds of approximately $122.2 million. The Exchangeable Senior Notes mature on December 15,
2011 and are equal in right of payment with all of the Companys other senior unsubordinated
indebtedness. Interest is payable on June 15 and December 15 of each year beginning on June 15,
2007. Holders may, under certain conditions, exchange their notes for cash or a combination of cash
and the Companys common shares, at the Companys option, at any time after October 15, 2011. The
Exchangeable Senior Notes are exchangeable into the Companys common shares, which are adjusted
for, among other things, the payment of dividends to the Companys common shareholders subject to a
maximum exchange rate. At December 31, 2010, each $1,000 principal amount of the Exchangeable
Senior Notes was convertible into 28.039 shares for a total of approximately 0.9 million shares,
which is equivalent to an exchange rate of $35.66 per Company common share. Holders may exchange
their notes prior to maturity under certain conditions, including during any calendar quarter
beginning after December 31, 2006 (and only during such calendar quarter), if and only if, the
closing sale price of the Companys common shares for at least 20 trading days in the period of 30
trading days ending on the last trading day of the preceding quarter is greater than 130% of the
exchange price on the applicable trading day. The Exchangeable Senior Notes have been registered
under the Securities Act. The notes are senior unsecured obligations of the Operating Partnership
and guaranteed by the Company. As of December 31, 2010, the Company was in compliance with all of
the financial covenants of its Exchangeable Senior Notes.
28
The Company used $7.6 million of the proceeds to purchase a capped call option. The capped
call option is designed to reduce the potential dilution of common shares upon the exchange of the
notes and protects the Company against any dilutive effects of the conversion feature if the market
price of the Companys common shares is between $36.12 and $42.14 per share. This option allows the
Company to receive shares of the Companys common stock from a counterparty equal to the amount of
common stock and/or cash related to the excess conversion value that the Company would pay the
holders of the Exchangeable Senior Notes upon conversion. The
option will terminate upon the earlier of the maturity date of the notes or the first day in
which the notes are no longer outstanding due to repurchase, conversion or otherwise. The option
was recorded as a reduction of equity. To the extent the then fair value per Company common share
exceeds the cap price during the observation period relating to an exchange of notes, the reduction
in potential dilution will be limited to the difference between the strike price and the cap price.
During 2010, the Company issued 880,648 common shares in exchange for retiring $13.03 million
of its Exchangeable Senior Notes and used $6.9 million of available cash to retire $7.02 million of
its Exchangeable Senior Notes. The retirement of Exchangeable Senior Notes in 2010 resulted in a
gain of $0.2 million, net of the accelerated amortization of deferred financing costs and
discounts.
During 2009, the Company retired $34.5 million of its Exchangeable Senior Notes at a discount,
which resulted in a gain of $6.3 million, net of deferred financing costs and discounts. As of
December 31, 2010, the Company used $66.3 million in cash and $12.4 million of the Companys common
shares to repurchase $94.6 million of its Exchangeable Senior Notes. The capped call option
associated with all the repurchased notes was effectively terminated on the notes repurchase date.
The balances of the Companys Exchangeable Senior Notes were as follows at December 31 (in
thousands):
2010 | 2009 | |||||||
Principal amount |
$ | 30,450 | $ | 50,500 | ||||
Unamortized discount |
(514 | ) | (1,782 | ) | ||||
$ | 29,936 | $ | 48,718 | |||||
Equity component |
$ | 8,696 | $ | 8,696 | ||||
The allocation of the equity component resulted in an effective interest rate of 5.84% on the
notes. Total interest expense related to the Companys Exchangeable Senior Notes is as follows for
the years ended December 31 (in thousands):
2010 | 2009 | 2008 | ||||||||||
Contractual cash interest |
$ | 1,609 | $ | 2,484 | $ | 4,018 | ||||||
Amortization of the discount on the
liability component |
540 | 866 | 1,385 | |||||||||
Amortization of the issuance discount |
175 | 280 | 448 |
(c) Senior Notes
On June 22, 2006, the Operating Partnership completed a private placement of unsecured Senior
Notes totaling $75.0 million. The transaction was comprised of $37.5 million in 7-year Series A
Senior Notes, maturing on June 15, 2013 and bearing a fixed interest rate of 6.41%, and $37.5
million in 10-year Series B Senior Notes, maturing on June 15, 2016 and bearing a fixed interest
rate of 6.55%. Interest is payable for the Series A and Series B Senior Notes on June 15 and
December 15 of each year beginning December 15, 2006. The Senior Notes are equal in right of
payment with all the Operating Partnerships other senior unsubordinated indebtedness. As of
December 31, 2010, the weighted average interest rate on the Senior Notes was 6.48%.
29
On November 8, 2010, the Company, the Operating Partnership, certain of the Companys
subsidiaries and certain holders of the Companys Series A and Series B Senior Notes sufficient to
effect the Amendment (as herein defined) (the Noteholders) entered into a First Amendment,
Consent and Waiver dated as of November 5, 2010 to the Note Purchase Agreement dated as of June 22,
2006 (the Amendment). Pursuant to the Amendment, the Company added certain subsidiaries as
guarantors of the Companys Series A and Series B Senior Notes and agreed that, to the extent the
Company or any of its subsidiaries (other than certain excluded subsidiaries) provides a lien for
the benefit of the lenders or administrative agent under the Companys unsecured revolving
credit facility, the Company or its subsidiaries, as applicable, will grant the holders of the
Companys Series A and Series B Senior Notes a similar first priority lien over the same assets,
property and undertaking as those encumbered in respect of the unsecured revolving credit facility.
In addition, the Company agreed to add a covenant to the terms of the Companys Series A and Series
B Senior Notes that as of the end of any fiscal quarter, (a) for the fourth quarter of 2010 through
the third quarter of 2011, its Consolidated Debt Yield (as defined in the revolving credit
agreement) will not be less than 10.5%, and (b) for each quarter thereafter, its Consolidated Debt
Yield will not be less than 11.0%. The Company also agreed to add a covenant to the terms of the
Companys Senior Unsecured Series A and Series B Notes that, as of the end of any fiscal quarter
after giving effect to the Amendment, its ratio of (i) Adjusted Net Operating Income (as defined in
the unsecured revolving credit facility) for the applicable quarter, annualized, divided by (ii)
its Unsecured Interest Expense (as defined in the revolving credit facility) for the applicable
quarter, annualized, shall not be less than 1.75 to 1.0. The covenants mirror already existing
covenants contained in the Companys unsecured revolving credit agreement. In exchange for these
modifications, the Noteholders agreed to waive the Companys previous failure to provide certain
subsidiary guarantees. The Company agreed to pay a waiver and consent fee to the holders of the
Companys Series A and Series B Senior Notes in an aggregate amount equal to $37,500. As of
December 31, 2010, the Company was in compliance with all the financial covenants of its Senior
Notes.
(d) Secured Term Loans
On November 10, 2010, the Company entered into a $50.0 million senior secured term loan with
Key Bank, N.A., which originally matured in February 2011. During 2011, the Companys exercised a
three month extension, which extended the loans maturity date until May 2011. The loan has an
interest rate of LIBOR plus 350 basis points. The proceeds from the loan were used to partially
finance the acquisition of Redland Corporate Center.
On December 29, 2009, the Company refinanced a $50.0 million secured term loan, issued in
August 2007, which resulted in the repayment of $10.0 million of the principal balance and the
restructuring of the remaining balance. The remaining balance was divided into four $10 million
loans, with their maturities staggered in one-year intervals beginning January 15, 2011 and ending
on January 15, 2014. On January 14, 2011, the Company repaid the first $10.0 million loan with
available cash. At December 31, 2010, the loan bears interest at LIBOR plus 250 basis points, which
increased by 100 basis points on January 1, 2011 and will increase by 100 basis points every year,
to a maximum of 550 basis points. Interest on the loan is payable on a monthly basis.
On December 29, 2009, the Company repaid $30.0 million of the $50.0 outstanding balance of a
secured term loan, which was issued in August 2008, with borrowings on its unsecured revolving
credit facility. The repayment did not impact the terms of the secured term loan. During 2010, the
Company exercised a one-year extension option on the remaining $20 million secured term loan. The
loan will mature in August 2011.
The Companys secured term loans contain several restrictive covenants, which in the event of
non-compliance may cause the outstanding balance of the loan to become immediately payable. As of
December 31, 2010, the Company was in compliance with all the financial covenants of its secured
term loans.
(e) Unsecured Revolving Credit Facility
On December 29, 2009, the Company replaced its $125.0 million unsecured revolving credit
facility with a new $175.0 million facility. In the second quarter of 2010, the Company expanded
the unsecured revolving credit facility to $225.0 million with the addition of two new lenders and
eliminated the 1% LIBOR floor associated with the facilitys applicable interest rate. The
unsecured revolving credit facility matures in January 2013 with a one-year extension at the
Companys option, which it intends to exercise. The variable interest rate on the unsecured
revolving credit facility is LIBOR plus a spread of 275 to 375 basis points, depending on the
Companys overall leverage. At December 31, 2010, the applicable spread was 300 basis points and
LIBOR was 0.26%. The unsecured revolving credit facility requires a minimum EBITDA to total debt
requirement of 10.0%, which increased to 10.5% on December 31, 2010 and will increase to 11.0% on
December 31, 2011.
30
The weighted average borrowings outstanding on the unsecured revolving credit facility were
$123.4 million with a weighted average interest rate of 3.5% during 2010, compared with $95.2
million and 1.6%, respectively, during 2009. The Companys maximum outstanding borrowings were
$202.0 million and $159.9 million during 2010 and 2009, respectively. At December 31, 2010,
outstanding borrowings under the unsecured revolving credit facility were $191.0 million with a
weighted average interest rate of 3.3%. 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. As of
December 31, 2010, the available capacity on the unsecured revolving credit facility was $33.9
million. As of December 31, 2010, the Company was in compliance with all the financial covenants of
the unsecured revolving credit facility. In January 2011, the Company repaid $105.0 million of the
outstanding balance of its unsecured revolving credit facility with proceeds from the issuance of
its Series A Cumulative Redeemable Perpetual Preferred Shares (the Series A Preferred Shares).
(f) Interest Rate Swap Agreements
In July 2010, the Company entered into an interest rate swap agreement that, beginning on
January 18, 2011, fixed LIBOR at 1.474% on $50.0 million of the Companys variable rate debt. The
interest rate swap will mature on January 15, 2014.
During September 2008, the Company entered into a swap agreement that fixed the $28.0 million
variable rate mortgage encumbering RiversPark I and II at 5.97%. The mortgage has a contractual
interest rate of LIBOR plus 2.50%. On March 17, 2009 and January 1, 2010, the Company
deconsolidated the joint ventures that own RiversPark II and RiversPark I, respectively. As a
result, the $28.0 million mortgage loan and related interest rate swap for RiversPark I and II are
no longer consolidated in the Companys consolidated financial statements.
During January 2008 and August 2008, the Company entered into a two swap agreements that fixed
LIBOR at 2.71% on $50.0 million of its outstanding variable rate debt and at 3.33% on $35.0 million
of its outstanding variable rate debt, respectively. Both swap agreements matured in August 2010.
Aggregate Debt Maturities
The Companys aggregate debt maturities as of December 31, 2010 are as follows (amounts in
thousands):
2011(1) |
$ | 149,348 | ||
2012 |
87,552 | |||
2013 |
66,198 | |||
2014(2) |
234,324 | |||
2015 |
108,451 | |||
Thereafter |
79,673 | |||
725,546 | ||||
Discount on Exchangeable Senior Notes |
(514 | ) | ||
$ | 725,032 | |||
(1) | In January 2011, the Company repaid the $12.0 million mortgage loan encumbering
Indian Creek Court and repaid a $10.0 million principal payment on one of the secured term
loans. |
|
(2) | The Companys unsecured revolving credit facility matures in January 2013 and
provides for a one-year extension of the maturity date at the Companys option, which it
intends to exercise. The table above assumes the Company exercises the one-year extension. |
31
(11) Derivative Instruments and Comprehensive (Loss) Income
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. 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 Companys 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 instruments applicable interest rate. During the third
quarter of 2010, the Company entered into a forward swap agreement that began on January 18, 2011.
The Company had two interest rate swap agreements, which were entered into during 2008 and matured
in August 2010. The table below summarizes the Companys interest rate swap agreements as of
December 31, 2010 (dollars in thousands):
Interest Rate | ||||||||||||||||||||
Contractual | Fixed Effective | |||||||||||||||||||
Transaction Date | Maturity Date | Amount | Component | Interest Rate | ||||||||||||||||
Consolidated: |
July 2010 | January 2014 | $ | 50,000 | LIBOR | 1.474 | % | |||||||||||||
Unconsolidated: |
September 2008 | September 2011 | 28,000 | (1) | LIBOR | 3.47 | % |
(1) | The Company remains liable, in the event of default by the joint venture, for
$7.0 million, or 25% of the total, which reflects its ownership percentage in the joint
venture. |
The Companys interest rate swap agreements are designated as effective cash flow hedges
and the Company records any unrealized gains associated with the change in fair value of the swap
agreements within equity and Prepaid expenses and other assets and any unrealized losses within
shareholders equity and Accounts payable and other liabilities. The Company records its
proportionate share of unrealized gains or losses on its cash flow hedges associated with its
unconsolidated joint ventures within equity and Investment in affiliates.
Total comprehensive (loss) income is summarized as follows (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
Net (loss) income |
$ | (11,675 | ) | $ | 4,056 | $ | 20,141 | |||||
Unrealized gain (loss) on derivative instruments |
1,067 | 1,314 | (3,931 | ) | ||||||||
Total comprehensive (loss) income |
(10,608 | ) | 5,370 | 16,210 | ||||||||
Comprehensive loss (income) attributable to
noncontrolling interests |
209 | (156 | ) | (507 | ) | |||||||
Comprehensive (loss) income attributable to
common shareholders |
$ | (10,399 | ) | $ | 5,214 | $ | 15,703 | |||||
(12) 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 entitys 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.
32
The Company has a contingent consideration obligation associated with the 2009 acquisition of
Ashburn Center, which was based on several probability weighted discounted cash flow scenarios that
projected stabilization being achieved at certain timeframes. The more significant inputs
associated with the fair value determination of the contingent consideration include estimates of
cap rates, discount rates, debt financing and various assumptions regarding revenue, expense and
capital expenditures based on our expectations regarding the propertys operating performance and
profitability.
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 Companys assumptions about the pricing of an asset or liability.
In accordance with accounting provisions and the fair value hierarchy described above, the
following table shows the fair value of the Companys consolidated assets and liabilities that are
measured on a non-recurring and recurring basis as of December 31, 2010 (amounts in thousands):
Balance at | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
Non-recurring Measurements: |
||||||||||||||||
Impaired real estate and intangible assets |
$ | 10,950 | $ | | $ | 10,950 | $ | | ||||||||
Recurring Measurements: |
||||||||||||||||
Derivative instrument-swap agreement |
396 | | 396 | | ||||||||||||
Contingent consideration related to
acquisition of property |
1,398 | | | 1,398 |
Balance at | ||||||||||||||||
December 31, | ||||||||||||||||
2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
Non-recurring Measurements: |
||||||||||||||||
Impaired real estate asset |
$ | 8,175 | $ | | $ | 8,175 | $ | | ||||||||
Recurring Measurements: |
||||||||||||||||
Derivative instrument-swap agreements |
1,741 | | 1,741 | | ||||||||||||
Contingent consideration related to
acquisition of property |
688 | | | 688 |
33
Impairment of Real Estate and Intangible Assets
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions, changes in managements
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.
On December 29, 2010, the Company acquired 7458 Candlewood Road, which is located in the
Companys Maryland reporting segment. On January 6, 2011, the Company was notified that the largest
tenant at the property, which currently leases approximately 217,400 square feet (or approximately
74% of the gross leasable area of the building) under a lease that represents approximately $1.5
million of annualized base rent in 2011, filed for Chapter 11 bankruptcy protection. As a result,
the Company recorded an impairment charge of $2.4 million to reflect the fair value of the
intangible asset associated with the tenants lease, which was determined to have no value. The
non-recoverable value of the intangible assets was based on, among other items, an analysis of
current market rates, the present value of future cash flows that were discounted using
capitalization rates, lease renewal probabilities, hypothetical leasing timeframes, historical
leasing commissions, expected value of tenant improvements and recently executed leases.
In September 2010, the Company, based on its desire to divest itself of a non-core asset,
adjusted its anticipated holding period for its Old Courthouse Square property, which is located in
the Companys Maryland reporting segment. The Company entered into a non-binding contract to sell
the asset in October 2010. As a result, the Company recorded a $3.4 million impairment charge to
reduce the propertys carrying value to reflect its fair value, less any potential selling costs.
The property was sold on February 18, 2011 for net proceeds of $10.8 million. The Company
determined the fair value of the property through an assessment of market data in working with a
real estate broker on the transaction and based on the execution of a non-binding letter of intent.
The fair value was further validated through an income approach based on discounted cash flows that
reflected a reduced holding period.
During the fourth quarter of 2009, the Company recorded an impairment loss of $2.5 million on
a property located in the Baltimore submarket of the Companys Maryland reporting segment. The
propertys fair value was determined based on the negotiated contract price with a prospective
buyer, and the Company anticipates disposing of this property during 2010. The Company did not
record any additional impairment of real estate assets during 2009 and 2008.
Interest Rate Derivatives
In July 2010, the Company entered into an interest rate swap agreement that beginning on
January 18, 2011, fixed LIBOR at 1.474% on $50.0 million of the Companys variable rate debt. The
interest rate swap derivative will mature on January 15, 2014. The derivative is fair valued based
on the prevailing market yield curve on the measurement date. Also, the Company evaluates
counter-party risk in calculating the fair value of the interest rate swap derivative instrument.
The Companys interest rate swap derivative is an effective cash flow hedge and any change in fair
value is recorded in the Companys equity section under Accumulated Other Comprehensive Loss.
During January 2008, the Company entered into a swap agreement that fixed LIBOR at 2.71% on
$50.0 million of its outstanding variable rate debt. During August 2008, the Company entered into a
separate swap agreement that fixed LIBOR at 3.33% on $35.0 million of its outstanding variable rate
debt. The swap agreements, which both matured in August 2010. During September 2008, the Company
entered into a swap agreement that fixed the $9.9 million variable rate mortgage that encumbers
RiversPark I at 5.97%. The Company deconsolidated all the assets and liabilities, including the
swap agreement, associated with RiversPark I on January 1, 2010.
The Company uses a third party to assist with the valuation of 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 than compiled
through a valuation process that generates daily valuations, which are used to value the Companys
interest rate swap agreements.
34
Contingent Consideration
As part of the acquisition price of 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 propertys
operating performance and profitability. During the first quarter of 2010, the Company fully leased
the property, which resulted in an increase in its potential obligation, and recorded a $0.7
million increase in its contingent consideration to reflect the increase in the Companys potential
obligation with a corresponding entry to Contingent Consideration Related to Acquisition of
Property in its consolidated statements of operations. There was no significant change in the fair
value of the contingent consideration during the remainder of 2010.
A summary of the Companys consolidated contingent consideration obligation as of December 31,
2010 is as follows (amounts in thousands):
Balance at December 31, 2009 |
$ | 688 | ||
Contingent consideration charge recognized in earnings |
710 | |||
Balance at December 31, 2010 |
$ | 1,398 | ||
With the exception of the re-measurement of its contingent consideration obligation, 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 years ended December
31, 2010 and 2009. Also, no transfers into and out of fair value measurements levels occurred
during the years ended December 31, 2010 and 2009.
Financial Instruments
With the exception of the Companys $25.0 million note receivable, the carrying amounts of
cash equivalents, accounts and other receivables and accounts payable approximate their fair values
due to their short-term maturities. Since the Companys note receivable was issued on December 21,
2010 and negotiated at arms length. Due to the brief period of time from the origination of the
note and year end, the notes $25.0 million face amount approximates its fair value at December 31,
2010. The Companys management believes that the note was not issued with a premium or discount.
The Company calculates fair value of its 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 carrying amount and estimated fair value of the
Companys debt instruments at December 31 are as follows (amounts in thousands):
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Mortgage debt |
$ | 319,096 | $ | 316,169 | $ | 301,463 | $ | 289,679 | ||||||||
Exchangeable senior notes(1) |
29,936 | 30,412 | 48,718 | 48,164 | ||||||||||||
Series A senior notes |
37,500 | 37,850 | 37,500 | 37,118 | ||||||||||||
Series B senior notes |
37,500 | 37,251 | 37,500 | 36,146 | ||||||||||||
Secured term loans |
110,000 | 109,976 | 60,000 | 54,390 | ||||||||||||
Unsecured revolving credit facility |
191,000 | 191,073 | 159,900 | 143,953 | ||||||||||||
Total |
$ | 725,032 | $ | 722,731 | $ | 645,081 | $ | 609,450 | ||||||||
(1) | The face value of the notes were $30.4 million and $50.5 million at
December 31, 2010 and 2009, respectively. |
35
(13) Commitments and Contingencies
(a) Operating Leases
The Companys rental properties are subject to non-cancelable operating leases generating
future minimum contractual rental payments, which as of December 31, 2010 are as follows (dollars
in thousands):
% of square feet | ||||||||
Future | under leases | |||||||
minimum rents | expiring | |||||||
2011 |
$ | 123,503 | 20 | % | ||||
2012 |
110,502 | 18 | % | |||||
2013 |
95,614 | 16 | % | |||||
2014 |
72,309 | 12 | % | |||||
2015 |
58,358 | 10 | % | |||||
Thereafter |
142,118 | 24 | % | |||||
$ | 602,404 | 100 | % | |||||
At December 31, 2010, the Companys consolidated portfolio was 82.3% occupied by 592 tenants.
Excluding the Companys fourth quarter 2010 acquisitions of Atlantic Corporate Park, which was
vacant at acquisition, and Redland Corporate Center II, which was 99% vacant at acquisition, the
Companys consolidated portfolio was 85.2% occupied at December 31, 2010. The Company does not
include square footage that is in development or redevelopment in its occupancy calculation.
The Company rents office space for its corporate office under a non-cancelable operating
lease, which it entered into upon relocating its corporate offices in 2005. The Company subleased
its former corporate office space to three tenants, including one related party (see footnote 14,
Related Party Transaction). The lease on the Companys former corporate office, along with the
three related sublease agreements, expired on December 31, 2010 and the Company was released from
all its obligations under the terms of the original lease on its former corporate office space.
Rent expense incurred under the terms of the corporate office leases, net of subleased
revenue, was $0.6 million for each of the years ended December 31, 2010, 2009 and 2008,
respectively.
Future minimum rental payments under the corporate office lease, expiring in December 2012,
are summarized as follows (amounts in thousands):
Future | ||||
minimum rent | ||||
expense, net | ||||
2011 |
$ | 619 | ||
2012 |
534 | |||
$ | 1,153 | |||
(b) Legal Proceedings
The Company is subject to legal proceedings and claims arising in the ordinary course of its
business. In the opinion of the Companys 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 or financial position of the Company.
36
(c) Guarantees
On December 12, 2008, the Company entered into joint venture arrangements with a third party
to own RiversPark I and II. The Company guaranteed to the joint ventures the rental payments
associated with four lease agreements with the former owner for certain vacancy at RiversPark I.
Subsequently, three of the four leases were terminated for a total fee paid to the Company of $1.3
million, which was treated as an adjustment to the basis of the property. At December 31, 2010, the
maximum potential amount of future payments the Company could be required to make related to the
remaining lease guarantee is $0.1 million.
(d) Contingent Consideration
In 2009, the Company recognized the acquisition date fair value of $0.7 million in contingent
consideration related to Ashburn Center under the terms of a fee agreement with the former owner
(See footnote 4, Acquisitions, for further information). During the first quarter of 2010, the
Company leased the remaining vacant space at the property and recorded a contingent consideration
charge of $0.7 million, which reflects an increase in the anticipated fee to the seller. There was
no significant change in the fair value of the contingent consideration for the remainder of 2010.
As of December 31, 2010, the Companys total contingent consideration obligation to the former
owner of Ashburn Center was approximately $1.4 million.
The Company entered into an unconsolidated joint venture with AEW Capital Management, L.P. to
own a 50% interest in Aviation Business Park (see footnote 5, Investment in Affiliates). The joint
venture recognized the acquisition date fair value of $126 thousand in contingent consideration
related to Aviation Business Park under the terms of a fee agreement with the former owner. The
assets, liabilities and operating results of Aviation Business Park are not consolidated on the
Companys consolidated financial statements. As of December 31, 2010, the Company remains liable,
in the event of default by the joint venture, for approximately $63 thousand, or 50% of the total,
which reflects its ownership percentage.
(e) Capital Commitments
As of December 31, 2010, the Company had development and redevelopment contractual obligations
of $8.5 million outstanding, primarily related to construction activities at Three Flint Hill,
which is undergoing a complete renovation, and capital improvement obligations of $0.2 million
outstanding. Capital improvement obligations represent commitments for roof, asphalt, HVAC and
common area replacements contractually obligated as of December 31, 2010. Also, as of December 31,
2010, the Company had $10.7 million of tenant improvement obligations, primarily related to a
tenant at Indian Creek Court, which it expects to incur on its in-place leases. The Company had no
other material contractual obligations as of December 31, 2010.
The Company remains liable, for its proportionate ownership percentage, to fund any capital
shortfalls or commitments from properties owned through joint ventures.
The Company has various obligations to certain local municipalities associated with its
development projects that will require completion of specified site improvements, such as sewer and
road maintenance, grading and other general landscaping work. As of December 31, 2010, the Company
remained liable to the local municipalities for $3.6 million in the event that it does not complete
the specified work. The Company intends to complete the improvements in satisfaction of these
obligations.
(f) Deposits
As of December 31, 2010, the Company had $7.4 million in deposits outstanding related to the
potential acquisitions. These amounts are recorded in Prepaid expenses and other assets in the
Companys consolidated balance sheets. Of the $7.4 million of deposits outstanding at December 31,
2010, the Company applied $1.3 million toward its first quarter 2011 portfolio acquisition of Cedar
Hill I & III and The Merrill Lynch Building.
37
(g) Insurance
The Company carries insurance coverage on its properties with policy specifications and
insured limits that it believes are adequate given the relative risk of loss, cost of the coverage
and standard industry practice. However, certain types of losses (such as from earthquakes and
floods) may be either uninsurable or not economically insurable. Further, certain of the properties
are located in areas that are subject to earthquake activity and floods. Should a property sustain
damage as a result of an earthquake or flood, the Company may incur losses due to insurance
deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the
Company could lose some or all of its capital investment, cash flow and anticipated profits related
to one or more properties.
(14) Related Party Transaction
In September 2005, the Company subleased a portion of its former corporate office space to
Donatelli Development, Inc. (formerly Donatelli & Klein), a privately held real estate investment
firm that develops multifamily properties, which is owned by a former member of the Companys Board
of Trustees. The rental rate under the sublease was representative of market rates on the date the
sublease was executed. The lease expired on December 31, 2010 and all rents due under the terms of
the sublease were paid in full as of December 31, 2010.
(15) Equity
On November 16, 2010, the Company issued 11.5 million common shares at a price of $15.50 per
share, which generated net proceeds of approximately $170.4 million, net of issuance costs. The
Company used the majority of the proceeds to pay down a portion of the outstanding balance on its
unsecured revolving credit facility, to fund the acquisition of Atlantic Corporate Park and for
other general corporate purposes. During the second quarter of 2010, the Company issued 880,648
common shares in exchange for $13.03 million of Exchangeable Senior Notes. During the first quarter
of 2010, the Company issued 6.3 million common shares at a price of $14.50 per share, which
generated net proceeds of $87.1 million, net of issuance costs. The Company used $82.9 million of
the proceeds to pay down a portion of the outstanding balance on its unsecured revolving credit
facility and the remainder for other general corporate purposes.
During 2010, the Company increased the amount of its common shares that could be issued
through its controlled equity offering program by 5 million common shares. In 2010, the Company
sold 0.5 million common shares through its controlled equity offering program at a weighted average
offering price of $15.46 per share, which generated net proceeds of approximately $7.3 million. The
Company used the proceeds and available cash totaling $8.0 million to purchase a $10.6 million loan
that encumbers Aviation Business Park. At December 31, 2010, the Company had 4.8 million common
shares available for issuance under its controlled equity offering program.
During 2009, the Company issued 2.8 million common shares through its controlled equity
offering program at a weighted average offering price of $11.00 per share, generating net proceeds
of approximately $29.5 million. The Company used the proceeds to retire a portion of its
Exchangeable Senior Notes at a discount, to reduce a portion of its unsecured revolving credit
facility, to repay two outstanding mortgage loans, to fund the cash portion of the Cloverleaf
Center acquisition and for other general corporate purposes.
The Company declared dividends per share on its common stock of $0.80, $0.94 and $1.36 during
2010, 2009 and 2008, respectively. On January 25, 2011, the Company declared a dividend of $0.20
per common share. The dividend was paid on February 11, 2011 to common shareholders of record as of
February 4, 2011.
In January 2011, the Company issued 4.6 million 7.750% Series A Preferred Shares at a price of
$25.00 per share, which generated net proceeds of $111.3 million, net of issuance costs. Dividends
on the Series A Preferred Shares are cumulative from the date of original issuance and payable on a
quarterly basis beginning on February 15, 2011. The Company used the proceeds from the issuance of
its Series A Preferred Shares to pay down $105.0 million of the outstanding balance on its
unsecured revolving credit facility and for other general corporate purposes.
38
As a result of the redemption feature of the Operating Partnership units, the noncontrolling
interests are recorded outside of permanent equity. The Companys equity and redeemable
noncontrolling interests for the three years ended December 31 are as follows (amounts in
thousands):
Redeemable | ||||||||
First Potomac | noncontrolling | |||||||
Realty Trust | interests | |||||||
Balance, December 31, 2008 |
$ | 365,293 | $ | 10,627 | ||||
Net income |
3,932 | 124 | ||||||
Changes in ownership, net(1) |
33,781 | (480 | ) | |||||
Distributions to owners |
(26,529 | ) | (718 | ) | ||||
Other comprehensive income |
1,282 | 32 | ||||||
Balance, December 31, 2009 |
377,759 | 9,585 | ||||||
Net loss |
(11,443 | ) | (230 | ) | ||||
Changes in ownership, net(1) |
279,497 | 7,375 | ||||||
Distributions to owners |
(28,797 | ) | (631 | ) | ||||
Other comprehensive income |
1,044 | 23 | ||||||
Balance, December 31, 2010 |
$ | 618,060 | $ | 16,122 | ||||
(1) | Includes a joint venture partners portion of accumulated other
comprehensive loss related to RiversPark II and RiversPark I, which were
deconsolidated from the Companys consolidated financial statements on March 17, 2009
and January 1, 2010, respectively. |
(16) Benefit Plans
(a) Share-based compensation
The Company has issued share-based compensation in the form of stock options and non-vested
shares as permitted in the Companys 2003 Equity Compensation Plan (the 2003 Plan), which was
amended in 2005, and the 2009 Equity Compensation Plan (the 2009 Plan), which was amended in
2010. In 2010, the Company received shareholder approval to authorize an additional 2,250,000
shares for issuance. Total combined awards authorized under the 2003 Plan and the 2009 Plan are
4,460,800 common share equity awards. The compensation plans provide for the issuance of options to
purchase common shares, share awards, share appreciation rights, performance units and other
equity-based awards. Stock options granted under the plans are non-qualified, and all employees and
non-employee trustees are eligible to receive grants. Under the terms of the amendment to the 2009
Plan, every stock option granted by the Company reduces the awards available for issuance on a
one-for-one basis. However, for every restricted award issued, the awards available for issuance
are reduced by 3.44 awards. At December 31, 2010, 2,366,896 common equity awards remained available
for issuance by the Company.
The Company records costs related to its share-based compensation based on the grant-date fair
value calculated in accordance with the accounting provisions. 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 in General and administrative expense or Property operating expense
based on the employees job function.
Stock Options Summary
As of December 31, 2010, 1,137,000 stock options were awarded of which 811,580 remained
outstanding. Options vest 25% on the first anniversary of the date of grant and 6.25% in each
subsequent calendar quarter thereafter until fully vested. The term of the options granted is ten
years. The Company recognized $0.2 million of compensation expense associated with these awards
for each of the years ended December 31, 2010, 2009 and 2008, respectively.
39
The following table summarizes the option activity in the compensation plans for the three
years ended December 31:
Weighted | ||||||||||||||||
Average | Weighted Average | Aggregate | ||||||||||||||
Exercise | Remaining | Intrinsic | ||||||||||||||
Shares | Price | Contractual Term | Value | |||||||||||||
Balance, December 31, 2007 |
637,470 | $ | 19.11 | 6.6 years | $ | 815,455 | ||||||||||
Granted |
99,500 | 17.24 | ||||||||||||||
Exercised |
(2,500 | ) | 15.00 | |||||||||||||
Forfeited |
(51,001 | ) | 23.86 | |||||||||||||
Balance, December 31, 2008 |
683,469 | 18.49 | 5.9 years | $ | | |||||||||||
Granted |
103,250 | 9.30 | ||||||||||||||
Forfeited |
(35,315 | ) | 17.74 | |||||||||||||
Balance, December 31, 2009 |
751,404 | 17.27 | 5.4 years | $ | 307,380 | |||||||||||
Granted |
106,750 | 12.57 | ||||||||||||||
Exercised |
(4,931 | ) | 9.30 | |||||||||||||
Forfeited |
(41,643 | ) | 16.92 | |||||||||||||
Balance, December 31, 2010 |
811,580 | $ | 16.72 | 4.8 years | $ | 1,641,148 | ||||||||||
Exercisable at December 31: |
||||||||||||||||
2010 |
646,804 | $ | 17.78 | 3.9 years | $ | 889,576 | ||||||||||
2009 |
593,369 | $ | 18.13 | 4.6 years | $ | | ||||||||||
2008 |
545,965 | $ | 17.77 | 5.3 years | $ | | ||||||||||
Options expected to vest,
December 31, 2010 |
147,664 | $ | 12.28 | 8.4 years | $ | 687,151 |
The following table summarizes information about stock options at December 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted Average | Weighted | Weighted | ||||||||||||||||||||||
Year | Range of | Remaining | Average | Average | ||||||||||||||||||||
Issued | Exercise Prices | Shares | Contractual Life | Exercise Price | Shares | Exercise Price | ||||||||||||||||||
2003 |
$ | 15.00 | 343,469 | 2.7 years | $ | 15.00 | 343,469 | $ | 15.00 | |||||||||||||||
2004 |
18.70 19.78 | 65,000 | 3.4 years | 19.03 | 65,000 | 19.03 | ||||||||||||||||||
2005 |
22.42 22.54 | 68,750 | 4.0 years | 22.46 | 68,750 | 22.46 | ||||||||||||||||||
2006 |
26.60 | 33,450 | 5.0 years | 26.60 | 33,450 | 26.60 | ||||||||||||||||||
2007 |
29.11 29.24 | 54,063 | 6.0 years | 29.12 | 50,925 | 29.12 | ||||||||||||||||||
2008 |
14.32 17.29 | 71,687 | 7.0 years | 17.23 | 50,385 | 17.23 | ||||||||||||||||||
2009 |
9.30 | 81,911 | 8.0 years | 9.30 | 34,825 | 9.30 | ||||||||||||||||||
2010 |
12.57 | 93,250 | 9.0 years | 12.57 | | | ||||||||||||||||||
811,580 | 646,804 | |||||||||||||||||||||||
As of December 31, 2010, the Company had $0.3 million of unrecognized compensation cost, net
of estimated forfeitures, related to stock option awards. The Company anticipates this cost will be
recognized over a weighted-average period of approximately 2.5 years. The Company calculates the
grant date fair value of option awards using a Black-Scholes option-pricing model. Expected
volatility is based on an assessment of the Companys realized volatility over the preceding five
years, which is equivalent to the awards expected life. The expected term represents the period of
time the options are anticipated to remain outstanding as well as the Companys historical
experience for groupings of employees that have similar behavior and considered separately for
valuation purposes. The risk-free rate is based on the U.S. Treasury rate at the time of grant for
instruments of similar term.
40
The assumptions used in the fair value determination of stock options granted for the years
ended December 31 are summarized as follows:
2010 | 2009 | 2008 | ||||||||||
Risk-free interest rate |
2.69 | % | 1.55 | % | 3.45 | % | ||||||
Expected volatility |
46.6 | % | 39.6 | % | 24.6 | % | ||||||
Expected dividend yield |
5.15 | % | 5.54 | % | 4.04 | % | ||||||
Weighted average expected life of options |
5 years | 5 years | 5 years |
The weighted average grant date fair value of the stock options issued in 2010, 2009 and 2008
was $3.51, $1.97 and $2.89, respectively.
Option Exercises
The Company received approximately $46 thousand and $38 thousand from the exercise of stock
options during 2010 and 2008, respectively. No stock options were exercised during 2009. Shares
issued as a result of stock option exercises are funded through the issuance of new shares.
The total intrinsic value of options exercised was $29 thousand in 2010 and $5 thousand in
2008.
Non-vested share awards
The Company issues restricted share awards that either vest over a specific time period that
is indentified at the time of issuance or vest upon the achievement of specific performance goals
that are identified at the time of issuance. In February 2010, the Company granted 197,468
restricted common shares in two separate awards to its officers. The first award of 98,734 common
shares will vest ratably over a four year award term and was fair valued based on the outstanding
share price at the date of issuance. The second award of 98,734 common shares will vest in four
separate tranches based upon the Companys achievement of specified performance conditions.
The Company recognized $3.2 million, $2.6 million and $1.5 million of compensation expense
associated with its restricted share based awards in 2010, 2009 and 2008, respectively. Dividends
on all restricted 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 Companys excess of distributions over
earnings related to participating securities are shown as a reduction in income available to common
shareholders in the Companys computation of EPS.
Independent members of our Board of Trustees received annual grants of common shares as a
component of compensation for serving on the Companys Board of Trustees. In May 2010, the Company
issued a total of 20,274 common shares to all independent trustees, all of which will vest on the
completion of a twelve-month period from the award date. The trustee shares were fair valued based
on the outstanding share price at the date of issuance. The Company recognized $0.3 million of
compensation expense associated with trustee share based awards for each of the years ended
December 31, 2010, 2009 and 2008, respectively.
41
A summary of the Companys non-vested share awards as of December 31, 2010 is as follows:
Weighted Average | ||||||||
Non-vested | Grant Date | |||||||
Shares | Fair Value | |||||||
Non-vested at December 31, 2007 |
$ | 175,091 | $ | 23.26 | ||||
Granted |
198,367 | 9.46 | ||||||
Vested |
(19,060 | ) | 26.69 | |||||
Non-vested at December 31, 2008 |
354,398 | 15.35 | ||||||
Granted |
437,976 | 9.03 | ||||||
Vested |
(26,060 | ) | 20.93 | |||||
Non-vested at December 31, 2009 |
766,314 | 11.55 | ||||||
Granted |
217,742 | 12.91 | ||||||
Vested |
(272,024 | ) | 12.01 | |||||
Expired |
(9,279 | ) | 16.09 | |||||
Non-vested at December 31, 2010 |
702,753 | 11.76 | ||||||
As of December 31, 2010, the Company had $3.1 million of unrecognized compensation cost
related to non-vested shares. The Company anticipates this cost will be recognized over a
weighted-average period of 2.1 years.
The Company values its non-vested time-based awards at the grant date fair value. For the
non-vested performance-based share awards issued in 2010, 2009 and 2008, the Company used a Monte
Carlo Simulation (risk-neutral approach) to determine the fair value and derived service period of
each tranche of the award. The following assumptions were used in determining the fair value of the
awards and the derived service period:
2010 | 2009 | 2008 | ||||||||||
Risk-free interest rate |
3.6 | % | 3.3 | % | 3.2 | % | ||||||
Volatility |
42.4 | % | 43.5 | % | 26.0 | % |
The weighted average grant date fair value of the shares issued in 2010, 2009 and 2008 was
$12.91, $9.03 and $9.46, respectively. The total fair value of shares vested was $3.3 million, $0.5
million and $0.5 million at December 31, 2010, 2009 and 2008, respectively. The Company issues new
shares, subject to restrictions, upon each grant of non-vested share awards.
(b) 401(k) Plan
The Company has a 401(k) defined contribution plan covering all employees in accordance with
the Internal Revenue Code. The maximum employer or employee contribution cannot exceed the IRS
limits for the plan year. Employees are eligible to contribute after one year of consecutive
service. The Company matches employee contributions after one year of service up to a specified
percentage of a participants annual compensation. The Company matched employee contributions up to
6% for each of the three years presented. Employee contributions vest immediately. Employer
contributions vest immediately for employees hired prior to January 1, 2009. For employees hired
after January 1, 2009, the vesting of the employer contributions occurs in 25% increments over four
years. The Company pays for administrative expenses and matching contributions with available cash.
The
Companys plan does not allow for the Company to make additional discretionary contributions.
The Companys contributions were $0.3 million for each of the years ended December 31, 2010, 2009
and 2008, respectively. The employer match payable to the 401(k) plan was fully funded as of
December 31, 2010.
42
(c) Employee Share Purchase Plan
In 2009, the Companys shareholders approved the First Potomac Realty Trust 2009 Employee
Share Purchase Plan (the Plan). The Plan allows participating employees to acquire common shares
of the Company, at a discounted price, through payroll deductions or cash contributions. Under the
Plan, a total of 200,000 common shares may be issued and the offering periods of the Plan will not
exceed five years. Each offering period will commence on the first day of each calendar quarter
(offering date) and will end on the last business day of the calendar quarter (purchase date) in
which the offering period commenced. The purchase price at which common shares will be sold in any
offering period will be the lower of: a) 85 percent of the fair value of common shares on the
offering date or b) 85 percent of the fair value of the common shares on the purchase date. The
first offering period began during the fourth quarter of 2009. The Company issued common shares of
9,850 and 1,908 under the Plan during the years ended December 31, 2010 and 2009, respectively,
which resulted in compensation expense totaling $32 thousand and $5 thousand, respectively.
(17) Subsequent Events
On January 25, 2011, the Company formed a joint venture with an affiliate of The Akridge
Company (Akridge) to acquire, for $39.6 million, a property located at 1200 17th Street, NW, in
Washington, DC, and to redevelop the property. The property currently consists of a land parcel
that contains an existing 85,000 square foot office building. The joint venture intends to demolish
the existing office building and develop a new Class A office building expected to have
approximately 170,000 square feet of gross leasable area. When the joint venture is fully
capitalized, the Company anticipates owning 95% of the joint venture (subject to adjustment
depending on each partys capital contributions and subject to a promoted interest granted to
Akridge after specified returns are achieved by the Company). The Companys total capital
commitment to the joint venture (including acquisition and development costs) is anticipated to be
approximately $109 million, less amounts funded through acquisition and construction financing. The
acquisition of the property is not expected to occur until late 2011 and is subject to various
contingencies. Construction is currently expected to commence in 2012 and is expected to be
completed in late 2014.
On February 22, 2011, the Company acquired a two property portfolio consisting of Cedar Hill I
& III and The Merrill Lynch Building for an aggregate purchase price of $33.8 million. Cedar Hill I
& III consist of two three-story office buildings in Tysons Corner, Virginia totaling 103,000
square feet and is 100% leased to two tenants. The Merrill Lynch Building is a 12-story, 138,000
square foot office building in Columbia, Maryland and is 70% leased to over 25 tenants. The
acquisition was funded by the assumption of two mortgage loans totaling $26.7 million, a draw on
the Companys unsecured revolving credit facility and available cash. The Company is assessing its
initial fair value determination of its acquired assets and liabilities.
(18) Segment Information
The Companys reportable segments consist of three distinct reporting and operational segments
within the broader greater Washington D.C, region in which it operates: Maryland, Northern Virginia
and Southern Virginia. During 2010, the Company acquired three properties in Washington, D.C. The
Company currently includes these properties in its Northern Virginia reporting segment as all
operational and management decisions are currently handled by the Companys Northern Virginia
management team.
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.
43
The results of operations for the Companys three reportable segments for the three years
ended December 31 are as follows (dollars in thousands):
2010 | ||||||||||||||||
Maryland | Northern Virginia(1) | Southern Virginia | Consolidated | |||||||||||||
Number of buildings |
71 | 55 | 55 | 181 | ||||||||||||
Square feet |
4,052,196 | 3,769,139 | 5,359,763 | 13,181,098 | ||||||||||||
Total revenues |
$ | 44,324 | $ | 45,354 | $ | 48,869 | $ | 138,547 | ||||||||
Property operating expense |
(11,258 | ) | (10,425 | ) | (12,031 | ) | (33,714 | ) | ||||||||
Real estate taxes and insurance |
(4,348 | ) | (4,518 | ) | (4,088 | ) | (12,954 | ) | ||||||||
Total property operating income |
$ | 28,718 | $ | 30,411 | $ | 32,750 | 91,879 | |||||||||
Depreciation and amortization
expense |
(42,613 | ) | ||||||||||||||
General and administrative |
(14,523 | ) | ||||||||||||||
Acquisition costs |
(7,169 | ) | ||||||||||||||
Other expenses, net |
(36,211 | ) | ||||||||||||||
Loss from discontinued operations |
(3,038 | ) | ||||||||||||||
Net loss |
$ | (11,675 | ) | |||||||||||||
Total assets(2) |
$ | 491,566 | $ | 488,592 | $ | 338,319 | $ | 1,396,682 | ||||||||
Capital expenditures(3) |
$ | 5,765 | $ | 10,046 | $ | 8,579 | $ | 24,710 | ||||||||
2009 | ||||||||||||||||
Maryland | Northern Virginia | Southern Virginia | Consolidated | |||||||||||||
Number of buildings |
76 | 51 | 54 | 181 | ||||||||||||
Square feet |
3,784,099 | 3,016,035 | 5,265,457 | 12,065,591 | ||||||||||||
Total revenues |
$ | 42,499 | $ | 39,837 | $ | 48,312 | $ | 130,648 | ||||||||
Property operating expense |
(11,118 | ) | (9,359 | ) | (11,673 | ) | (32,150 | ) | ||||||||
Real estate taxes and insurance |
(4,120 | ) | (4,284 | ) | (4,262 | ) | (12,666 | ) | ||||||||
Total property operating income |
$ | 27,261 | $ | 26,194 | $ | 32,377 | 85,832 | |||||||||
Depreciation and amortization
expense |
(40,174 | ) | ||||||||||||||
General and administrative |
(13,219 | ) | ||||||||||||||
Acquisition costs |
(1,076 | ) | ||||||||||||||
Other expenses, net |
(25,824 | ) | ||||||||||||||
Loss from discontinued
operations |
(1,483 | ) | ||||||||||||||
Net income |
$ | 4,056 | ||||||||||||||
Total assets(2) |
$ | 411,083 | $ | 305,633 | $ | 317,695 | $ | 1,071,173 | ||||||||
Capital expenditures(3) |
$ | 5,276 | $ | 9,094 | $ | 8,693 | $ | 23,128 | ||||||||
44
2008 | ||||||||||||||||
Maryland | Northern Virginia | Southern Virginia | Consolidated | |||||||||||||
Number of buildings |
75 | 47 | 54 | 176 | ||||||||||||
Square feet |
3,754,980 | 2,814,799 | 5,257,728 | 11,827,507 | ||||||||||||
Total revenues |
$ | 39,048 | $ | 36,542 | $ | 45,308 | $ | 120,898 | ||||||||
Property operating expense |
(8,061 | ) | (7,766 | ) | (10,670 | ) | (26,497 | ) | ||||||||
Real estate taxes and insurance |
(3,608 | ) | (4,086 | ) | (4,165 | ) | (11,859 | ) | ||||||||
Total property operating income |
$ | 27,379 | $ | 24,690 | $ | 30,473 | 82,542 | |||||||||
Depreciation and amortization
expense |
(36,260 | ) | ||||||||||||||
General and administrative |
(11,938 | ) | ||||||||||||||
Other expenses, net |
(30,594 | ) | ||||||||||||||
Income from discontinued
Operations |
16,391 | |||||||||||||||
Net income |
$ | 20,141 | ||||||||||||||
Total assets(2) |
$ | 433,269 | $ | 282,690 | $ | 311,466 | $ | 1,077,951 | ||||||||
Capital expenditures(3) |
$ | 11,983 | $ | 11,565 | $ | 13,009 | $ | 36,830 | ||||||||
(1) | Includes 500 First Street, NW, 1211 Connecticut Ave, NW and 440 First
Street, NW, which were acquired in 2010 and located in Washington, D.C. |
|
(2) | Corporate assets not allocated to any of our reportable segments totaled
$78,205, $36,762 and $50,526 at December 31, 2010, 2009 and 2008, respectively. |
|
(3) | Capital expenditures for corporate assets not allocated to any of our reportable
segments totaled $320, $65 and $273 at December 31, 2010, 2009 and 2008, respectively. |
(19) Quarterly Financial Information
(unaudited)
2010(1) | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
(amounts in thousands, except per share amounts) | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Revenues |
$ | 34,773 | $ | 33,125 | $ | 34,282 | $ | 36,367 | ||||||||
Operating expenses |
27,635 | 25,915 | 25,495 | 35,024 | ||||||||||||
(Loss) income from continuing operations |
(1,650 | ) | (619 | ) | 361 | (6,729 | ) | |||||||||
(Loss) income from discontinued operations |
(558 | ) | 652 | (3,296 | ) | 164 | ||||||||||
Less: Net loss (income) attributable to
noncontrolling interests |
49 | (1 | ) | 55 | 129 | |||||||||||
Net (loss) income attributable to common
shareholders |
$ | (2,159 | ) | $ | 32 | $ | (2,880 | ) | $ | (6,436 | ) | |||||
Net loss attributable to common
shareholders per share basic and diluted: |
||||||||||||||||
(Loss) income from continuing operations |
$ | (0.06 | ) | $ | (0.02 | ) | $ | 0.01 | $ | (0.15 | ) | |||||
(Loss) income from discontinued operations |
(0.02 | ) | 0.02 | (0.09 | ) | | ||||||||||
Net loss |
$ | (0.08 | ) | $ | | $ | (0.08 | ) | $ | (0.15 | ) | |||||
45
2009(1) | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
(amounts in thousands, except per share amounts) | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Revenues |
$ | 32,785 | $ | 31,720 | $ | 32,086 | $ | 34,057 | ||||||||
Operating expenses |
23,991 | 23,596 | 24,647 | 27,051 | ||||||||||||
Income (loss) from continuing operations |
4,935 | 1,447 | 257 | (1,100 | ) | |||||||||||
Income (loss) from discontinued operations |
203 | 205 | 367 | (2,258 | ) | |||||||||||
Less: Net (income) loss attributable to
noncontrolling interests |
(141 | ) | (45 | ) | (16 | ) | 78 | |||||||||
Net income (loss) attributable to common
shareholders |
$ | 4,997 | $ | 1,607 | $ | 608 | $ | (3,280 | ) | |||||||
Net income (loss) attributable to common
shareholders per share basic and diluted: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.17 | $ | 0.05 | $ | 0.01 | $ | (0.04 | ) | |||||||
Income (loss) from discontinued operations |
0.01 | 0.01 | 0.01 | (0.08 | ) | |||||||||||
Net income (loss) |
$ | 0.18 | $ | 0.06 | $ | 0.02 | $ | (0.12 | ) | |||||||
(1) | These figures are rounded to the nearest thousand, which may impact
crossfooting in reconciling to full year totals. |
The Company sold 18.3 million and 2.8 million common shares in 2010 and 2009,
respectively. The sum of the basic and diluted earnings per share for the four quarters in all
years presented differs from the annual earnings per share calculation due to the required method
of computing the weighted average number of shares in the respective periods.
46
SCHEDULE III
FIRST POTOMAC REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2010
(Amounts in thousands)
FIRST POTOMAC REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2010
(Amounts in thousands)
Encumbrances at | ||||||||||
Property | Location | Date Acquired | Property Type(1) | December 31, 2010 | ||||||
Maryland |
||||||||||
Rumsey Center |
Columbia | Oct-02 | BP | $ | 9,071 | |||||
Snowden Center |
Columbia | Oct-02 | BP | 12,313 | ||||||
6900 English Muffin Way |
Frederick | Jul-04 | I | | ||||||
Gateway Center |
Gaithersburg | Jul-04 | Office | | ||||||
Gateway West |
Westminster | Jul-04 | OP | | ||||||
4451 Georgia Pacific Boulevard |
Frederick | Jul-04 | I | | ||||||
20270 Goldenrod Lane |
Germantown | Jul-04 | Office | | ||||||
Girard Business Center |
Gaithersburg | Jul-04 | BP | | ||||||
Girard Place |
Gaithersburg | Jul-04 | BP | | ||||||
Patrick Center |
Frederick | Jul-04 | Office | | ||||||
Old Courthouse Square |
Martinsburg, WV | Jul-04 | Retail | | ||||||
15 Wormans Mill Court |
Frederick | Jul-04 | OP | | ||||||
West Park |
Frederick | Jul-04 | Office | | ||||||
Woodlands Business Center |
Largo | Jul-04 | Office | | ||||||
Airpark Place |
Gaithersburg | Aug-04 | BP | | ||||||
4612 Navistar Drive |
Frederick | Dec-04 | I | 12,189 | ||||||
Campus at Metro Park |
Rockville | Dec-04 | OP | 22,556 | ||||||
Glenn Dale Business Center |
Glenn Dale | May-05 | I | | ||||||
Owings Mills Business Center |
Owings Mills | Nov-05 | BP | 5,448 | ||||||
Gateway 270 |
Clarksburg | Jul-06 | BP | | ||||||
Indian Creek Court |
Beltsville | Aug-06 | BP | 11,982 | ||||||
Owings Mills Commerce Center |
Owings Mills | Nov-06 | BP | | ||||||
Ammendale Commerce Center |
Beltsville | Mar-07 | BP | | ||||||
Annapolis Commerce Park East |
Annapolis | Jun-07 | OP | 8,491 | ||||||
Triangle Business Center |
Columbia | Aug-08 | BP | | ||||||
Cloverleaf Center |
Germantown | Oct-09 | OP | 17,204 | ||||||
Redland Corporate Center |
Rockville | Nov-10 | Office | | ||||||
7458 Candlewood Road |
Hanover | Dec-10 | I | 14,699 | ||||||
Total: |
113,953 | |||||||||
Northern Virginia |
||||||||||
13129 Airpark Road |
Culpeper | Dec-97 | I | | ||||||
Plaza 500 |
Alexandria | Dec-97 | I | 33,640 | ||||||
Van Buren Business Park |
Herndon | Dec-97 | OP | 7,544 | ||||||
Tech Court |
Chantilly | Oct-98 | OP | | ||||||
Newington Business Park |
Lorton | Dec-99 | I | 15,252 | ||||||
Interstate Plaza |
Alexandria | Dec-03 | I | | ||||||
Herndon Corporate Center |
Herndon | Apr-04 | OP | | ||||||
Aquia Commerce Center I & II |
Stafford | Jun-04 | OP | 353 | ||||||
15395 John Marshall Highway |
Haymarket | Oct-04 | I | 20,523 | ||||||
Windsor at Battlefield |
Manassas | Dec-04 | OP | | ||||||
Reston Business Campus |
Reston | Mar-05 | OP | | ||||||
Enterprise Center |
Chantilly | Apr-05 | OP | | ||||||
Gateway Centre |
Manassas | Jul-05 | BP | 1,189 | ||||||
403/405 Glenn Drive |
Sterling | Oct-05 | BP | 7,960 | ||||||
Linden Business Center |
Manassas | Oct-05 | BP | 7,080 | ||||||
Prosperity Business Center |
Merrifield | Nov-05 | BP | 3,502 | ||||||
Sterling Park Business Center |
Sterling | Feb-06 | BP | | ||||||
Davis Drive |
Sterling | Aug-06 | BP | | ||||||
Ashburn Center |
Ashburn | Dec-09 | BP | | ||||||
Three Flint Hill |
Oakton | Apr-10 | Office | | ||||||
500 First Street, NW |
Washington, DC | Jun-10 | Office | 38,793 | ||||||
Atlantic Corporate Park |
Sterling | Nov-10 | Office | | ||||||
440 First Street, NW |
Washington, DC | Dec-10 | Office | | ||||||
1211 Connecticut Ave, NW |
Washington, DC | Dec-10 | Office | | ||||||
Total: |
135,836 | |||||||||
Southern Virginia |
||||||||||
Crossways Commerce Center |
Chesapeake | Dec-99 | BP | 24,179 | ||||||
Greenbrier Technology Center II |
Chesapeake | Oct-02 | BP | 4,576 | ||||||
Norfolk Business Center |
Norfolk | Oct-02 | BP | 4,643 | ||||||
Virginia Center |
Glen Allen | Oct-03 | BP | | ||||||
Crossways II |
Chesapeake | Oct-04 | BP | | ||||||
Norfolk Commerce Park II |
Norfolk | Oct-04 | BP | | ||||||
Cavalier Industrial Park |
Chesapeake | Apr-05 | I | | ||||||
1434 Crossways Boulevard |
Chesapeake | Aug-05 | BP | 17,709 | ||||||
Enterprise Parkway |
Hampton | Sep-05 | BP | | ||||||
Diamond Hill Distribution Center |
Chesapeake | Oct-05 | I | | ||||||
1000 Lucas Way |
Hampton | Dec-05 | BP | | ||||||
Rivers Bend Center |
Chester | Jan-06 | I | | ||||||
Northridge I&II |
Ashland | Jan-06 | I | 6,841 | ||||||
Crossways I |
Chesapeake | Feb-06 | BP | | ||||||
1408 Stephanie Way |
Chesapeake | May-06 | BP | | ||||||
Airpark Business Center |
Richmond | Jun-06 | BP | 1,308 | ||||||
Chesterfield Business Center |
Richmond | Jun-06 | BP | 4,079 | ||||||
Hanover Business Center |
Ashland | Jun-06 | BP | 1,683 | ||||||
Gateway II |
Norfolk | Nov-06 | BP | | ||||||
Park Central |
Richmond | Nov-06 | BP | |||||||
Greenbrier Circle Corporate Center |
Chesapeake | Jan-07 | BP | | ||||||
Greenbrier Technology Center I |
Chesapeake | Jan-07 | BP | | ||||||
Pine Glen |
Richmond | Feb-07 | BP | | ||||||
Rivers Bend Center II |
Chester | May-07 | I | | ||||||
Battlefield Corporate Center |
Chesapeake | Oct-10 | OP | 4,289 | ||||||
Total: |
69,307 | |||||||||
Land held for future development |
| |||||||||
Other |
| |||||||||
Total |
$ | 319,096 | ||||||||
47
Initial Costs | Gross Amount at End of Year | |||||||||||||||||||||||||||
Building and | Building and | Accumulated | ||||||||||||||||||||||||||
Land | Improvements | Since Acquisition | Land | Improvements | Total | Depreciation | ||||||||||||||||||||||
$ | 2,675 | $ | 10,196 | $ | 2,372 | $ | 2,675 | $ | 12,568 | $ | 15,243 | $ | 4,110 | |||||||||||||||
3,404 | 12,824 | 3,382 | 3,404 | 16,206 | 19,610 | 4,841 | ||||||||||||||||||||||
3,136 | 8,642 | 25 | 3,136 | 8,667 | 11,803 | 1,497 | ||||||||||||||||||||||
1,715 | 3,943 | 166 | 1,715 | 4,109 | 5,824 | 750 | ||||||||||||||||||||||
890 | 6,925 | 1,533 | 890 | 8,458 | 9,348 | 1,681 | ||||||||||||||||||||||
3,445 | 8,923 | 5 | 3,445 | 8,928 | 12,373 | 1,546 | ||||||||||||||||||||||
1,415 | 2,060 | 183 | 1,415 | 2,243 | 3,658 | 419 | ||||||||||||||||||||||
4,671 | 7,151 | 1,506 | 4,671 | 8,657 | 13,328 | 1,780 | ||||||||||||||||||||||
5,134 | 9,507 | 784 | 5,134 | 10,291 | 15,425 | 1,745 | ||||||||||||||||||||||
1,777 | 8,721 | 1,183 | 1,777 | 9,904 | 11,681 | 1,690 | ||||||||||||||||||||||
3,485 | 12,862 | (3,079 | ) | 2,649 | 10,619 | 13,268 | 2,462 | |||||||||||||||||||||
545 | 3,329 | 41 | 545 | 3,370 | 3,915 | 625 | ||||||||||||||||||||||
520 | 5,177 | 643 | 520 | 5,820 | 6,340 | 1,082 | ||||||||||||||||||||||
1,322 | 2,920 | 640 | 1,322 | 3,560 | 4,882 | 616 | ||||||||||||||||||||||
2,697 | 7,141 | 284 | 2,697 | 7,425 | 10,122 | 1,280 | ||||||||||||||||||||||
3,808 | 18,658 | | 3,808 | 18,658 | 22,466 | 2,919 | ||||||||||||||||||||||
9,220 | 32,056 | 43 | 9,220 | 32,099 | 41,319 | 5,749 | ||||||||||||||||||||||
3,369 | 14,504 | 1,612 | 3,369 | 16,116 | 19,485 | 2,551 | ||||||||||||||||||||||
1,382 | 7,416 | 1,318 | 1,382 | 8,734 | 10,116 | 1,497 | ||||||||||||||||||||||
18,302 | 20,562 | 4,264 | 18,302 | 24,826 | 43,128 | 3,540 | ||||||||||||||||||||||
5,673 | 17,168 | 1,305 | 5,673 | 18,473 | 24,146 | 2,314 | ||||||||||||||||||||||
3,304 | 12,295 | 766 | 3,304 | 13,061 | 16,365 | 2,044 | ||||||||||||||||||||||
2,398 | 7,659 | 5,527 | 2,398 | 13,186 | 15,584 | 2,136 | ||||||||||||||||||||||
6,101 | 12,602 | 271 | 6,101 | 12,873 | 18,974 | 1,405 | ||||||||||||||||||||||
1,279 | 2,480 | 1,058 | 1,237 | 3,580 | 4,817 | 347 | ||||||||||||||||||||||
7,097 | 14,211 | 230 | 7,097 | 14,441 | 21,538 | 860 | ||||||||||||||||||||||
17,272 | 63,480 | 750 | 17,272 | 64,230 | 81,502 | 345 | ||||||||||||||||||||||
5,924 | 13,832 | | 5,924 | 13,832 | 19,756 | | ||||||||||||||||||||||
121,960 | 347,244 | 26,812 | 121,082 | 374,934 | 496,016 | 51,831 | ||||||||||||||||||||||
442 | 3,103 | 1,205 | 442 | 4,308 | 4,750 | 1,674 | ||||||||||||||||||||||
6,265 | 35,433 | 3,442 | 6,265 | 38,875 | 45,140 | 13,052 | ||||||||||||||||||||||
3,592 | 7,652 | 2,319 | 3,592 | 9,971 | 13,563 | 3,579 | ||||||||||||||||||||||
1,056 | 4,844 | 808 | 1,056 | 5,652 | 6,708 | 1,817 | ||||||||||||||||||||||
3,135 | 10,354 | 5,316 | 3,135 | 15,670 | 18,805 | 5,223 | ||||||||||||||||||||||
2,185 | 8,972 | 3,015 | 2,185 | 11,987 | 14,172 | 2,304 | ||||||||||||||||||||||
4,082 | 14,651 | 1,267 | 4,082 | 15,918 | 20,000 | 3,169 | ||||||||||||||||||||||
1,795 | 8,689 | 518 | 1,795 | 9,207 | 11,002 | 1,636 | ||||||||||||||||||||||
2,736 | 7,301 | 8,270 | 2,736 | 15,571 | 18,307 | 2,700 | ||||||||||||||||||||||
3,228 | 11,696 | 3,275 | 3,228 | 14,971 | 18,199 | 3,220 | ||||||||||||||||||||||
1,996 | 8,778 | 630 | 1,996 | 9,408 | 11,404 | 1,775 | ||||||||||||||||||||||
3,727 | 27,274 | 3,174 | 3,727 | 30,448 | 34,175 | 4,805 | ||||||||||||||||||||||
3,015 | 6,734 | 936 | 3,015 | 7,670 | 10,685 | 1,943 | ||||||||||||||||||||||
3,940 | 12,547 | 2,966 | 3,940 | 15,513 | 19,453 | 2,347 | ||||||||||||||||||||||
4,829 | 10,978 | 512 | 4,829 | 11,490 | 16,319 | 1,682 | ||||||||||||||||||||||
5,881 | 3,495 | 290 | 5,881 | 3,785 | 9,666 | 574 | ||||||||||||||||||||||
19,897 | 10,750 | 15,310 | 18,011 | 27,946 | 45,957 | 2,902 | ||||||||||||||||||||||
1,614 | 3,611 | (33 | ) | 1,614 | 3,578 | 5,192 | 496 | |||||||||||||||||||||
2,682 | 9,456 | 2,786 | 2,675 | 12,249 | 14,924 | 378 | ||||||||||||||||||||||
| 13653 | 1,361 | | 15,014 | 15,014 | | ||||||||||||||||||||||
25,806 | 33,883 | 83 | 25,806 | 33,966 | 59,772 | 516 | ||||||||||||||||||||||
5,895 | 11,655 | 5,000 | 5,895 | 16,655 | 22,550 | 36 | ||||||||||||||||||||||
| 15,300 | 11 | | 15,311 | 15,311 | | ||||||||||||||||||||||
27,077 | 17,520 | | 27,077 | 17,520 | 44,597 | 58 | ||||||||||||||||||||||
134,875 | 298329 | 62,461 | 132,982 | 362,683 | 495,665 | 55,886 | ||||||||||||||||||||||
5,160 | 23,660 | 11,629 | 5,160 | 35,289 | 40,449 | 11,030 | ||||||||||||||||||||||
1,365 | 5,119 | 1,748 | 1,365 | 6,867 | 8,232 | 2,602 | ||||||||||||||||||||||
1,323 | 4,967 | 572 | 1,323 | 5,539 | 6,862 | 2,391 | ||||||||||||||||||||||
1,922 | 7,026 | 2,165 | 1,922 | 9,191 | 11,113 | 3,357 | ||||||||||||||||||||||
1,036 | 6,254 | 810 | 1,036 | 7,064 | 8,100 | 1,098 | ||||||||||||||||||||||
1,221 | 8,693 | 1,857 | 1,221 | 10,550 | 11,771 | 2,164 | ||||||||||||||||||||||
1,387 | 11,362 | 7,509 | 1,387 | 18,871 | 20,258 | 2,697 | ||||||||||||||||||||||
4,447 | 24,739 | 253 | 4,815 | 24,624 | 29,439 | 5,098 | ||||||||||||||||||||||
4,132 | 10,674 | 4,748 | 4,132 | 15,422 | 19,554 | 2,393 | ||||||||||||||||||||||
3,290 | 24,949 | 3,043 | 3,290 | 27,992 | 31,282 | 4,086 | ||||||||||||||||||||||
2,592 | 8,563 | 1,782 | 2,592 | 10,345 | 12,937 | 2,173 | ||||||||||||||||||||||
3,153 | 26,294 | 3,013 | 3,482 | 28,978 | 32,460 | 4,870 | ||||||||||||||||||||||
1,172 | 7,417 | 1,178 | 1,172 | 8,595 | 9,767 | 1,737 | ||||||||||||||||||||||
2,657 | 11,597 | 1,714 | 2,657 | 13,311 | 15,968 | 2,314 | ||||||||||||||||||||||
1,292 | 3,899 | 518 | 1,292 | 4,417 | 5,709 | 621 | ||||||||||||||||||||||
250 | 2,814 | 497 | 250 | 3,311 | 3,561 | 573 | ||||||||||||||||||||||
900 | 13,335 | 2,186 | 900 | 15,521 | 16,421 | 2,300 | ||||||||||||||||||||||
1,794 | 11,561 | 705 | 1,794 | 12,266 | 14,060 | 1,693 | ||||||||||||||||||||||
1,320 | 2,293 | 374 | 1,320 | 2,667 | 3,987 | 398 | ||||||||||||||||||||||
1,789 | 19,712 | 2,236 | 1,789 | 21,948 | 23,737 | 3,616 | ||||||||||||||||||||||
4,164 | 18,984 | 2,262 | 4,164 | 21,246 | 25,410 | 2,784 | ||||||||||||||||||||||
2,024 | 7,960 | 918 | 2,024 | 8,878 | 10,902 | 1,366 | ||||||||||||||||||||||
618 | 4,517 | 383 | 618 | 4,900 | 5,518 | 578 | ||||||||||||||||||||||
5,634 | 11,533 | 606 | 5,634 | 12,139 | 17,773 | 1,296 | ||||||||||||||||||||||
1,860 | 6,071 | | 1,860 | 6,071 | 7,931 | 36 | ||||||||||||||||||||||
56,502 | 283,993 | 52,706 | 57,199 | 336,002 | 393,201 | 63,271 | ||||||||||||||||||||||
3,642 | | 253 | 3,895 | | 3,895 | | ||||||||||||||||||||||
71 | 39 | | 71 | 39 | 110 | 2 | ||||||||||||||||||||||
$ | 317,050 | $ | 929,605 | $ | 142,232 | $ | 315,229 | $ | 1,073,658 | $ | 1,388,887 | $ | 170,990 | |||||||||||||||
(1) | I =Industrial; BP=Business Park; OP=Office Park |
48
Depreciation of rental property is computed on a straight-line basis over the estimated
useful lives of the assets.
The estimated lives of the Companys assets range from 5 to 39 years or to the term of the
underlying lease. The tax basis of the Companys real estate assets was $1,422 million and $1,135
million at December 31, 2010 and 2009, respectively.
(a) Reconciliation of Real Estate
The following table reconciles the real estate investments for the years ended December 31
(amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | 1,128,956 | $ | 1,106,571 | $ | 1,065,181 | ||||||
Acquisitions of rental property(1) |
267,312 | 33,446 | 43,528 | |||||||||
Capital expenditures |
24,952 | 18,961 | 39,922 | |||||||||
Impairments |
(3,448 | ) | (2,541 | ) | | |||||||
Cost of real estate sold(2) |
(26,065 | ) | (25,060 | ) | (38,131 | ) | ||||||
Dispositions |
(2,820 | ) | (2,421 | ) | (3,929 | ) | ||||||
Ending balance |
$ | 1,388,887 | $ | 1,128,956 | $ | 1,106,571 | ||||||
(b) Reconciliation of Accumulated Depreciation
The following table reconciles the accumulated depreciation on the real estate investments for
the years ended December 31 (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | 141,481 | $ | 111,658 | $ | 88,075 | ||||||
Depreciation of acquisitions of
rental property |
991 | 168 | 347 | |||||||||
Depreciation of all other rental
property and capital expenditures |
32,822 | 31,862 | 27,539 | |||||||||
Dispositions |
(1,988 | ) | (200 | ) | (3,508 | ) | ||||||
Dispositions write-off |
(2,316 | ) | (2,007 | ) | (795 | ) | ||||||
Ending balance |
$ | 170,990 | $ | 141,481 | $ | 111,658 | ||||||
(1) | Includes a $2.4 million impairment for the year ended December 31, 2010
related to a property that was acquired in the fourth quarter of 2010. |
|
(2) | Includes a $0.6 million impairment for the year ended December 31, 2010
related to a property that was sold in the second quarter of 2010. |
49