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EXCEL - IDEA: XBRL DOCUMENT - FIRST POTOMAC REALTY TRUST | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - FIRST POTOMAC REALTY TRUST | c18745exv31w1.htm |
EX-10.4 - EXHIBIT 10.4 - FIRST POTOMAC REALTY TRUST | c18745exv10w4.htm |
EX-10.3 - EXHIBIT 10.3 - FIRST POTOMAC REALTY TRUST | c18745exv10w3.htm |
EX-31.2 - EXHIBIT 31.2 - FIRST POTOMAC REALTY TRUST | c18745exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - FIRST POTOMAC REALTY TRUST | c18745exv32w2.htm |
EX-10.2 - EXHIBIT 10.2 - FIRST POTOMAC REALTY TRUST | c18745exv10w2.htm |
EX-32.1 - EXHIBIT 32.1 - FIRST POTOMAC REALTY TRUST | c18745exv32w1.htm |
EX-10.1 - EXHIBIT 10.1 - FIRST POTOMAC REALTY TRUST | c18745exv10w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011.
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-31824
FIRST POTOMAC REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND (State or other jurisdiction of incorporation or organization) |
37-1470730 (I.R.S. Employer Identification No.) |
7600 Wisconsin Avenue, 11th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(301) 986-9200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filter, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
o Large Accelerated Filer | þ Accelerated Filer | o Non-Accelerated Filer | o Smaller Reporting Company |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2 of the Exchange Act).
YES o NO þ
As of August 8, 2011, there were 50,057,085 common shares, par value $0.001 per share, outstanding.
FIRST POTOMAC REALTY TRUST
FORM 10-Q
FORM 10-Q
INDEX
2
Table of Contents
FIRST POTOMAC REALTY TRUST
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
June 30, 2011 | December 31, 2010 | |||||||
(unaudited) | ||||||||
Assets: |
||||||||
Rental property, net |
$ | 1,365,846 | $ | 1,217,897 | ||||
Cash and cash equivalents |
12,715 | 33,280 | ||||||
Escrows and reserves |
29,268 | 8,070 | ||||||
Accounts and other receivables, net of allowance
for doubtful accounts of $3,184 and $3,246,
respectively |
7,909 | 7,238 | ||||||
Accrued straight-line rents, net of allowance for
doubtful accounts of $325 and $849, respectively |
14,484 | 12,771 | ||||||
Notes receivable, net |
54,627 | 24,750 | ||||||
Investment in affiliates |
23,974 | 23,721 | ||||||
Deferred costs, net |
26,128 | 20,174 | ||||||
Prepaid expenses and other assets |
17,343 | 14,230 | ||||||
Intangible assets, net |
56,256 | 34,551 | ||||||
Total assets |
$ | 1,608,550 | $ | 1,396,682 | ||||
Liabilities: |
||||||||
Mortgage loans |
$ | 441,966 | $ | 319,096 | ||||
Exchangeable senior notes, net |
30,216 | 29,936 | ||||||
Senior notes |
75,000 | 75,000 | ||||||
Secured term loans |
100,000 | 110,000 | ||||||
Unsecured revolving credit facility |
164,000 | 191,000 | ||||||
Accounts payable and other liabilities |
36,221 | 16,827 | ||||||
Accrued interest |
2,598 | 2,170 | ||||||
Rents received in advance |
6,937 | 7,049 | ||||||
Tenant security deposits |
5,487 | 5,390 | ||||||
Deferred market rent, net |
5,298 | 6,032 | ||||||
Total liabilities |
867,723 | 762,500 | ||||||
Noncontrolling interests in the Operating Partnership |
36,375 | 16,122 | ||||||
Equity: |
||||||||
Series A Preferred Shares, $25 par value, 50,000
shares authorized: 4,600 and 0 shares issued and
outstanding, respectively |
115,000 | | ||||||
Common shares, $0.001 par value, 150,000 common
shares authorized: 50,056 and 49,922 shares issued
and outstanding, respectively |
50 | 50 | ||||||
Additional paid-in capital |
791,641 | 794,051 | ||||||
Noncontrolling interests in consolidated partnerships |
4,079 | 3,077 | ||||||
Accumulated other comprehensive loss |
(808 | ) | (545 | ) | ||||
Dividends in excess of accumulated earnings |
(205,510 | ) | (178,573 | ) | ||||
Total equity |
704,452 | 618,060 | ||||||
Total liabilities, noncontrolling interests and equity |
$ | 1,608,550 | $ | 1,396,682 | ||||
See accompanying notes to condensed consolidated financial statements.
3
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FIRST POTOMAC REALTY TRUST
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rental |
$ | 34,983 | $ | 26,606 | $ | 66,904 | $ | 53,145 | ||||||||
Tenant reimbursements and other |
7,837 | 5,961 | 15,783 | 13,612 | ||||||||||||
Total revenues |
42,820 | 32,567 | 82,687 | 66,757 | ||||||||||||
Operating expenses: |
||||||||||||||||
Property operating |
9,543 | 6,863 | 20,265 | 16,600 | ||||||||||||
Real estate taxes and insurance |
4,091 | 3,131 | 8,032 | 6,392 | ||||||||||||
General and administrative |
4,185 | 3,675 | 8,192 | 7,384 | ||||||||||||
Acquisition costs |
552 | 1,645 | 2,737 | 1,664 | ||||||||||||
Depreciation and amortization |
16,691 | 10,196 | 29,293 | 19,879 | ||||||||||||
Contingent consideration related to acquisition of
property |
| | | 710 | ||||||||||||
Total operating expenses |
35,062 | 25,510 | 68,519 | 52,629 | ||||||||||||
Operating income |
7,758 | 7,057 | 14,168 | 14,128 | ||||||||||||
Other expenses, net: |
||||||||||||||||
Interest expense |
10,473 | 8,052 | 19,100 | 16,903 | ||||||||||||
Interest and other income |
(1,410 | ) | (87 | ) | (2,235 | ) | (197 | ) | ||||||||
Equity in losses of affiliates |
| 20 | 32 | 59 | ||||||||||||
Gain on early retirement of debt |
| (164 | ) | | (164 | ) | ||||||||||
Total other expenses, net |
9,063 | 7,821 | 16,897 | 16,601 | ||||||||||||
Loss from continuing operations before income taxes |
(1,305 | ) | (764 | ) | (2,729 | ) | (2,473 | ) | ||||||||
Benefit from income taxes |
148 | | 461 | | ||||||||||||
Loss from continuing operations |
(1,157 | ) | (764 | ) | (2,268 | ) | (2,473 | ) | ||||||||
Discontinued operations: |
||||||||||||||||
(Loss) income from operations of disposed properties |
(45 | ) | 240 | (2,827 | ) | (258 | ) | |||||||||
Gain on sale of real estate properties |
1,954 | 557 | 1,954 | 557 | ||||||||||||
Income (loss) from discontinued operations |
1,909 | 797 | (873 | ) | 299 | |||||||||||
Net income (loss) |
752 | 33 | (3,141 | ) | (2,174 | ) | ||||||||||
Less: Net loss (income) attributable to noncontrolling
interests |
65 | (1 | ) | 203 | 48 | |||||||||||
Net income (loss) attributable to First Potomac Realty Trust |
817 | 32 | (2,938 | ) | (2,126 | ) | ||||||||||
Less: Dividends on preferred shares |
(2,228 | ) | | (4,010 | ) | | ||||||||||
Net (loss) income available to common shareholders |
$ | (1,411 | ) | $ | 32 | $ | (6,948 | ) | $ | (2,126 | ) | |||||
Basic and diluted earnings per share: |
||||||||||||||||
Loss from continuing operations |
$ | (0.07 | ) | $ | (0.02 | ) | $ | (0.13 | ) | $ | (0.08 | ) | ||||
Income (loss) from discontinued operations |
0.04 | 0.02 | (0.02 | ) | 0.01 | |||||||||||
Net loss |
$ | (0.03 | ) | $ | | $ | (0.15 | ) | $ | (0.07 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic and diluted |
49,283 | 36,511 | 49,259 | 33,552 |
See accompanying notes to condensed consolidated financial statements.
4
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FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,141 | ) | $ | (2,174 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Discontinued operations: |
||||||||
Gain on sale of real estate properties |
(1,954 | ) | (557 | ) | ||||
Depreciation and amortization |
520 | 231 | ||||||
Impairment of real estate assets |
2,711 | 565 | ||||||
Depreciation and amortization |
29,695 | 20,882 | ||||||
Stock based compensation |
1,387 | 2,056 | ||||||
Bad debt expense |
518 | 750 | ||||||
Benefit from income taxes |
(461 | ) | | |||||
Amortization of deferred market rent |
(502 | ) | (677 | ) | ||||
Amortization of financing costs and discounts |
1,076 | 348 | ||||||
Amortization of rent abatement |
1,384 | 1,242 | ||||||
Equity in losses of affiliates |
32 | 59 | ||||||
Distributions from investments in affiliates |
83 | 216 | ||||||
Contingent consideration related to acquisition of property |
| 710 | ||||||
Gain on early retirement of debt |
| (164 | ) | |||||
Changes in assets and liabilities: |
||||||||
Escrows and reserves |
(7,698 | ) | (1,872 | ) | ||||
Accounts and other receivables |
(1,056 | ) | (874 | ) | ||||
Accrued straight-line rents |
(3,208 | ) | (1,128 | ) | ||||
Prepaid expenses and other assets |
1,317 | 2,548 | ||||||
Tenant security deposits |
96 | (176 | ) | |||||
Accounts payable and accrued expenses |
2,809 | (269 | ) | |||||
Accrued interest |
427 | 119 | ||||||
Rents received in advance |
(102 | ) | 259 | |||||
Deferred costs |
(7,387 | ) | (4,146 | ) | ||||
Total adjustments |
19,687 | 20,122 | ||||||
Net cash provided by operating activities |
16,546 | 17,948 | ||||||
Cash flows from investing activities: |
||||||||
Purchase deposit on future acquisitions |
(20,319 | ) | (2,060 | ) | ||||
Change in escrow and reserves |
(2,249 | ) | | |||||
Investment in note receivable |
(29,181 | ) | | |||||
Proceeds from sales of real estate assets |
26,883 | 11,414 | ||||||
Acquisition of rental property and associated intangible assets |
(12,513 | ) | (81,491 | ) | ||||
Additions to rental property |
(16,552 | ) | (5,441 | ) | ||||
Acquisition of land parcel |
(7,500 | ) | | |||||
Additions to construction in progress |
(8,879 | ) | (724 | ) | ||||
Investment in unconsolidated joint ventures |
(260 | ) | | |||||
Deconsolidation of joint venture |
| (896 | ) | |||||
Net cash used in investing activities |
(70,570 | ) | (79,198 | ) | ||||
Cash flows from financing activities: |
||||||||
Financing costs |
(2,224 | ) | (1,220 | ) | ||||
Issuance of debt |
78,000 | 85,000 | ||||||
Issuance of common shares, net |
| 86,977 | ||||||
Issuance of preferred shares, net |
110,997 | | ||||||
Contributions from joint venture partner |
1,000 | | ||||||
Repayments of debt |
(130,826 | ) | (93,543 | ) | ||||
Dividends to common shareholders |
(19,989 | ) | (13,526 | ) | ||||
Dividends to preferred shareholders |
(2,896 | ) | | |||||
Distributions to noncontrolling interests |
(667 | ) | (293 | ) | ||||
Stock option exercises |
64 | 16 | ||||||
Net cash provided by financing activities |
33,459 | 63,411 | ||||||
Net (decrease) increase in cash and cash equivalents |
(20,565 | ) | 2,161 | |||||
Cash and cash equivalents, beginning of period |
33,280 | 9,320 | ||||||
Cash and cash equivalents, end of period |
$ | 12,715 | $ | 11,481 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows Continued
(unaudited)
Consolidated Statements of Cash Flows Continued
(unaudited)
Supplemental disclosures of cash flow information for the six months ended June 30 are as
follows (amounts in thousands):
2011 | 2010 | |||||||
Cash paid for interest, net |
$ | 17,530 | $ | 16,409 | ||||
Non-cash investing and financing activities: |
||||||||
Debt assumed in connection with acquisitions of
real estate |
139,373 | | ||||||
Contingent consideration recorded at acquisition |
9,356 | | ||||||
Conversion of Operating Partnership units into
common shares |
19 | | ||||||
Issuance of Operating Partnership units in
connection with acquisitions of real estate |
21,721 | |
Cash paid for interest on indebtedness is net of capitalized interest of $0.9 million and $0.4
million for the six months ended June 30, 2011 and 2010, respectively.
During the six months ended June 30, 2011, the Company recorded cash payments of $0.2 million
for franchise taxes levied by the city of Washington, D.C. The Company acquired its first property
in Washington, D.C. on June 30, 2010 and, therefore was not subject to any Washington, D.C.
franchise taxes during the six months ended June 30, 2010.
During the six months ended June 30, 2011, 1,300 Operating Partnership units were redeemed for
an equivalent number of the Companys common shares. No Operating Partnership units were redeemed
for an equivalent number of the Companys common shares during the six months ended June 30, 2010.
During the six months ended June 30, 2011 the Company acquired four consolidated properties at
an aggregate purchase price of $189.6 million, including the assumption of $139.4 million of
mortgage debt and the issuance of 1,418,715 Operating Partnership units valued at $21.7 million on
the date of acquisition. The 2011 acquisitions include 840 First Street, NE, which was acquired for
an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration
payable upon the terms of a lease renewal by the buildings sole tenant or the re-tenanting of the
property. At acquisition, the Company was in active negotiations with the existing tenant to renew
its lease through August 2023. As a result, the Company recorded a contingent consideration
obligation of $9.4 million at acquisition. In July 2011, the buildings sole tenant renewed its
lease. Based on the probability of renewal and lease terms used in the original estimate of fair
value, the value of contingent consideration remained unchanged.
6
Table of Contents
FIRST POTOMAC REALTY TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
First Potomac Realty Trust (the Company) is a leader in the ownership, management,
development and redevelopment of office and industrial properties in the greater Washington, D.C.
region. The Company separates its properties into four distinct segments, which it refers to as the
Maryland, Washington, D.C., 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 unaudited condensed consolidated financial statements to we, our or
First Potomac, refer to the Company and its subsidiaries, on a consolidated basis, unless the
context indicates otherwise.
The Company conducts its business through First Potomac Realty Investment Limited Partnership,
the Companys operating partnership (the Operating Partnership). The Company is the sole general
partner of, and, as of June 30, 2011, owned a 95.5% interest in, the Operating Partnership. The
remaining interests in the Operating Partnership, which are presented as noncontrolling interests
in the Operating Partnership in the accompanying unaudited condensed consolidated financial
statements, are limited partnership interests, some of which are owned by several of the Companys
executive officers and trustees who contributed properties and other assets to the Company upon its
formation, and other unrelated parties.
At June 30, 2011, the Company wholly-owned or had a controlling interest in properties
totaling 13.7 million square feet and had a noncontrolling ownership interest in properties
totaling an additional 0.5 million square feet through four unconsolidated joint ventures. The
Company also owned land that can accommodate approximately 1.6 million square feet of additional
development. The Company derives substantially all of its revenue from leases of space within its
properties. As of June 30, 2011, 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 U.S Government also accounted for approximately a third of the Companys outstanding
accounts receivables at June 30, 2011. The majority of the accounts receivable related to the
government was due to the clarification of terms in a specific lease, which has been resolved, and
the Company expects to collect the outstanding balance on the specified lease in the third quarter.
The Company operates so as to qualify as a real estate investment trust (REIT) for federal income
tax purposes.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The unaudited condensed consolidated financial statements of the Company include the accounts
of the Company, the Operating Partnership, 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.
The Company has condensed or omitted certain information and footnote disclosures normally
included in financial statements presented in accordance with U.S. generally accepted accounting
principles (GAAP) in the accompanying unaudited condensed consolidated financial statements. The
Company believes the disclosures made are adequate to prevent the information presented from being
misleading. However, the unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto included in the Companys
annual report on Form 10-K for the year ended December 31, 2010 and as updated from time to time in
other filings with the Securities and Exchange Commission.
In the Companys opinion, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments and accruals
necessary to present fairly the Companys financial position as of June 30, 2011, the results of
its operations for the three and six months ended June 30, 2011 and 2010 and its
cash flows for the six months ended June 30, 2011 and 2010. Interim results are not
necessarily indicative of full-year performance due, in part, to the timing of transactions and the
impact of acquisitions and dispositions throughout the year.
7
Table of Contents
(b) Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP
requires management of the Company to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the 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) 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 Trustees 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. 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.
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Table of Contents
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 and the direct
compensation costs of the Companys construction personnel who manage the development and
redevelopment projects, but only to the extent the employees time can be allocated to a project.
For the three and six months ended June 30, 2011, capitalized compensation costs were immaterial.
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.
(d) Notes Receivable
The Company lends money to the owners of real estate properties, which are collateralized by a
direct or indirect interest in the real estate property. The Company records these investments as
Notes receivable, net in its consolidated balance sheets. The investments are recorded net of any
discount or issuance costs, which are amortized over the life of the respective note receivable
using the effective interest method. The Company records interest received from notes receivable
and amortization of any discount or issuance costs within Interest and other income in its
consolidated statements of operations.
In December 2010, the Company provided a $25.0 million subordinated loan to the owners of 950
F Street, NW, a 287,000 square-foot office building in Washington, D.C., which is secured by a
portion of the owners interest in the property. The loan has a fixed interest rate of 12.5% and
was initially recorded net of $0.3 million of issuance costs. The loan matures on April 1, 2017 and
is repayable in full on or after December 21, 2013. For the three and six months ended June 30,
2011, the Company recorded interest income associated with the loan of $0.8 million and $1.6
million, respectively.
In April 2011, the Company provided a $30.0 million subordinated loan to the owners of
Americas Square, a 461,000 square-foot office complex in Washington, D.C., which is secured by a
portion of the owners interest in the property. The loan has a fixed interest rate of 9.0% and was
initially recorded net of $0.1 million of issuance costs. The loan matures on May 1, 2016 and is
repayable in full on or after October 16, 2012, subject to yield maintenance. For the three and six
months ended June 30, 2011, the Company recorded interest income associated with the loan of $0.6
million.
The Company will establish a provision for anticipated credit losses associated with its notes
receivables and debt investments when it anticipates that it may be unable to collect any
contractually due amounts. This determination is based on upon such factors as delinquencies, loss
experience, collateral quality and current economic or borrower conditions. Estimated losses are
recorded as a charge to earnings to establish an allowance for credit losses that the Company
estimates to be adequate based on these factors. The Company has not recorded any losses
associated with its notes receivable during 2011 and 2010.
(e) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(f) Application of New Accounting Standards
In June 2011, new accounting guidance was issued regarding the presentation of other
comprehensive income that will eliminate the option of reporting other comprehensive income and its
components in the Companys Statement of Equity. The amendment provides companies the option to
present components of net income and comprehensive income as either a single continuous statement
or as two separate but consecutive statements. The amendment does not change what items are
reported in other comprehensive income or the requirement to report reclassification of items from
other comprehensive income to net income. The required disclosures are effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2011. Early
adoption is permitted. The Company does not believe the implementation of these disclosures will
have a material impact on its consolidated financial statements.
(3) Earnings Per Share
Basic earnings or loss per share (EPS) is calculated by dividing net income or loss
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, which include stock options,
non-vested shares, preferred shares and Exchangeable Senior Notes. The Company applies the
two-class method for determining EPS as its outstanding unvested shares with non-forfeitable
dividend rights are considered participating securities. The Companys excess of distributions over
earnings related to participating securities are shown as a reduction in total earnings
attributable to common shareholders in the Companys computation of EPS.
9
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The following table sets forth the computation of the Companys basic and diluted earnings per
share (amounts in thousands, except per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator for basic and diluted earnings per share: |
||||||||||||||||
Loss from continuing operations |
$ | (1,157 | ) | $ | (764 | ) | $ | (2,268 | ) | $ | (2,473 | ) | ||||
Income (loss) from discontinued operations |
1,909 | 797 | (873 | ) | 299 | |||||||||||
Net income (loss) |
752 | 33 | (3,141 | ) | (2,174 | ) | ||||||||||
Less: Net loss from continuing operations
attributable to noncontrolling interests |
151 | 14 | 221 | 52 | ||||||||||||
Less: Net income from discontinued operations
attributable to noncontrolling interests |
(86 | ) | (15 | ) | (18 | ) | (4 | ) | ||||||||
Net income (loss) attributable to First
Potomac Realty Trust |
817 | 32 | (2,938 | ) | (2,126 | ) | ||||||||||
Less: Dividends on preferred shares |
(2,228 | ) | | (4,010 | ) | | ||||||||||
Net (loss) income available to common
shareholders |
(1,411 | ) | 32 | (6,948 | ) | (2,126 | ) | |||||||||
Less: Allocation to participating securities |
(155 | ) | (157 | ) | (292 | ) | (304 | ) | ||||||||
Net loss available to common shareholders |
$ | (1,566 | ) | $ | (125 | ) | $ | (7,240 | ) | $ | (2,430 | ) | ||||
Denominator for basic and diluted earnings per share: |
||||||||||||||||
Weighted average shares outstanding basic and
diluted |
49,283 | 36,511 | 49,259 | 33,552 | ||||||||||||
Basic and diluted earnings per share: |
||||||||||||||||
Loss from continuing operations |
$ | (0.07 | ) | $ | (0.02 | ) | $ | (0.13 | ) | $ | (0.08 | ) | ||||
Income (loss) from discontinued operations |
0.04 | 0.02 | (0.02 | ) | 0.01 | |||||||||||
Net loss |
$ | (0.03 | ) | $ | | $ | (0.15 | ) | $ | (0.07 | ) | |||||
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):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Stock option awards |
920 | 847 | 911 | 849 | ||||||||||||
Non-vested share awards |
388 | 310 | 415 | 336 | ||||||||||||
Conversion of Exchangeable Senior Notes(1) |
854 | 1,276 | 854 | 1,346 | ||||||||||||
Series A Preferred Shares(2) |
7,313 | | 7,284 | | ||||||||||||
9,475 | 2,433 | 9,464 | 2,531 | |||||||||||||
(1) | At June 30, 2011 and 2010, each $1,000 principal amount of the Exchangeable
Senior Notes was convertible into 28.039 shares. |
|
(2) | The Companys Series A Preferred Shares are contingently convertible into shares
of the Companys common stock upon certain changes of control of the Company. |
10
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(4) Rental Property
Rental property represents property, net of accumulated depreciation, and developable land
that are wholly owned or owned by an entity in which the Company has a controlling interest. All of
the Companys rental properties are located within the greater Washington, D.C. region. Rental
property consists of the following (amounts in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Land |
$ | 336,854 | $ | 315,229 | ||||
Buildings and improvements |
1,028,414 | 930,077 | ||||||
Construction in process |
64,558 | 41,685 | ||||||
Tenant improvements |
103,435 | 92,002 | ||||||
Furniture, fixtures and equipment |
9,166 | 9,894 | ||||||
1,542,427 | 1,388,887 | |||||||
Less: accumulated depreciation |
(176,581 | ) | (170,990 | ) | ||||
$ | 1,365,846 | $ | 1,217,897 | |||||
(a) 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. Also, the Company owns
developable land that can accommodate 1.6 million square feet of additional building space. Below
is a summary of the approximate building square footage that can be developed on the Companys
developable land and the Companys current development and redevelopment activity (amounts in
thousands):
Square Feet | Cost to Date of | Square Feet | Cost to Date of | |||||||||||||||||
Reporting | Developable | Under | Development | Under | Redevelopment | |||||||||||||||
Segment | Square Feet | Development | Activities | Redevelopment | Activities | |||||||||||||||
Maryland |
150 | | $ | | | $ | | |||||||||||||
Northern Virginia |
568 | | | 227 | 10,219 | |||||||||||||||
Southern Virginia |
841 | 166 | 415 | | | |||||||||||||||
Washington, D.C. |
30 | | | 135 | 726 | |||||||||||||||
1,589 | 166 | $ | 415 | 362 | $ | 10,945 | ||||||||||||||
The majority of the development and redevelopment costs incurred through the Companys
ongoing projects have taken place at Three Flint Hill in the Companys Northern Virginia region.
Three Flint Hill is a 174,000 square foot, eight-story Class A office building. The Company has
incurred approximately $9.9 million in redevelopment costs, which include architectural, and
engineering design fees and permit fees as well as demolition, glass, HVAC, electrical, plumbing,
and lobby finish work.
The Company anticipates the majority of the development and redevelopment efforts on these
projects will continue throughout 2011 and expected to be completed in 2012.
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(b) Acquisitions
During the second quarter of 2011, the Company acquired the One Fair Oaks property, which is
included in its condensed consolidated financial statements from the date of acquisition (dollars
in thousands):
Aggregate | Mortgage | |||||||||||||||||
Acquisition | Property | Square | Purchase | Debt | ||||||||||||||
Location | Date | Type | Feet | Price | Assumed(1) | |||||||||||||
One Fair Oaks |
Northern Virginia | 4/8/2011 | Office | 214,214 | $ | 58,036 | $ | 52,909 | ||||||||||
(1) | Reflects the fair value of the mortgage debt at the time of acquisition. |
The fair values of the acquired assets and liabilities are as follows (amounts in
thousands):
Land |
$ | 5,688 | ||
Acquired tenant improvements |
2,309 | |||
Building and improvements |
43,176 | |||
In-place leases |
5,753 | |||
Acquired leasing commissions |
681 | |||
Above-market leases acquired |
429 | |||
Total assets acquired |
58,036 | |||
Debt assumed |
(52,909 | ) | ||
Net assets acquired |
$ | 5,127 | ||
The fair values for the assets and liabilities acquired in 2011 are preliminary as the Company
continues to finalize their acquisition date fair value determination.
The weighted average amortization period of the Companys consolidated intangible assets,
which consist of in-place leases, acquired leasing commissions and above market leases, acquired in
the second quarter of 2011 is 5.5 years.
(5) Investment in Affiliates
The Company owns an interest in several properties for which it does not control the
activities that are most significant to the operations of the properties. As a result, the assets,
liabilities and operating results of these noncontrolled properties are not consolidated within the
Companys consolidated financial statements. The Companys investment in these properties is
recorded as Investment in affiliates in its consolidated balance sheets.
At January 1, 2010, the Company had a 25% noncontrolling interest in the two separate joint
ventures that owned RiversPark I and II. During the fourth quarter of 2010, the Company entered
into two separate joint ventures, in which it had a 50% noncontrolling interest, to own 1750 H
Street, NW and Aviation Business Park.
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The net assets of the Companys unconsolidated joint ventures consisted of the following
(amounts in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Assets: |
||||||||
Rental property, net |
$ | 103,638 | $ | 104,559 | ||||
Cash and cash equivalents |
3,125 | 1,706 | ||||||
Other assets |
9,895 | 11,442 | ||||||
Total assets |
116,658 | 117,707 | ||||||
Liabilities: |
||||||||
Mortgage loans(1) |
59,383 | 59,914 | ||||||
Other liabilities |
3,273 | 4,316 | ||||||
Total liabilities |
62,656 | 64,230 | ||||||
Net assets |
$ | 54,002 | $ | 53,477 | ||||
(1) | Of the total mortgage debt that encumbers the Companys unconsolidated
properties, $7.0 million is recourse to the Company. |
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):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total revenues |
$ | 2,886 | $ | 1,183 | $ | 5,964 | $ | 2,301 | ||||||||
Total operating expenses |
(786 | ) | (299 | ) | (1,922 | ) | (650 | ) | ||||||||
Net operating income |
2,100 | 884 | 4,042 | 1,651 | ||||||||||||
Depreciation and amortization |
(1,259 | ) | (500 | ) | (2,561 | ) | (954 | ) | ||||||||
Other expenses, net |
(852 | ) | (465 | ) | (1,575 | ) | (932 | ) | ||||||||
Net loss |
$ | (11 | ) | $ | (81 | ) | $ | (94 | ) | $ | (235 | ) | ||||
(6) Discontinued Operations
On May 27, 2011,
the Company sold its Gateway West property for net proceeds of $4.8 million. The property is a four-building, 111,481
square foot office park in Westminster, Maryland, which the Company acquired as part of a portfolio
acquisition in 2004. During the first quarter of 2011, the Company recorded a $2.7 million
impairment charge based on the difference between the contractual sales price less anticipated
selling costs and the carrying value of the property.
On June 22, 2011, the Company sold Aquia Commerce Center I & II, a two building, 64,488 square
foot property in Stafford, Virginia, for net proceeds of $11.3 million. The Company reported a gain
on the sale of $2.0 million.
The following table is a summary of property dispositions whose operating results, along with
Gateway West and Aquia Commerce Center I & IIs operating results, are reflected as discontinued
operations in the Companys condensed consolidated statements of operations:
Reporting | Disposition | Square | ||||||||
Segment | Date | Property Type | Feet | |||||||
Old Courthouse Square |
Maryland | 2/18/2011 | Retail | 201,208 | ||||||
7561 Lindbergh Drive |
Maryland | 6/16/2010 | Industrial Park | 36,000 | ||||||
Deer Park |
Maryland | 4/23/2010 | Business Park | 171,125 | ||||||
408,333 | ||||||||||
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The Company has had, and will have, no continuing involvement with any of its disposed
properties subsequent to their disposal. The disposed properties were not subject to any income
taxes. The Company did not dispose of or enter into any binding agreements to sell any other
properties during the six months ended June 30, 2011 and 2010.
The following table summarizes the components of net income (loss) from discontinued
operations (amounts in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 407 | $ | 1,008 | $ | 1,055 | $ | 2,189 | ||||||||
Net (loss) income, before gains or taxes |
(45 | ) | 240 | (2,827 | ) | (258 | ) | |||||||||
Gain on sale of real estate properties |
1,954 | 557 | 1,954 | 557 |
(7) Debt
The Companys borrowings consisted of the following (amounts in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Mortgage loans, effective interest rates ranging from 4.40% to 7.29%, maturing at various dates through June 2021 |
$ | 441,966 | $ | 319,096 | ||||
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing December 2011(1) |
30,216 | 29,936 | ||||||
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 3.50%, maturing January 2014(2) |
30,000 | 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 August 2011(3) |
50,000 | 50,000 | ||||||
Unsecured revolving credit facility, effective interest rate of LIBOR plus 2.50%, maturing January 2015(3) |
164,000 | 191,000 | ||||||
$ | 811,182 | $ | 725,032 | |||||
(1) | The principal balance of the Exchangeable Senior Notes was $30.4
million at June 30, 2011 and December 31, 2010. |
|
(2) | On January 1, 2011, the loans applicable interest rate increased to LIBOR
plus 3.50% and will continue to increase by 100 basis points every year, to a maximum of 550
basis points. |
|
(3) | On July 18, 2011, the Company repaid its $50.0 million secured term loan
and paid down $117.0 million of the outstanding balance on its unsecured revolving credit
facility with proceeds from the issuance of a three-tranche $175 million unsecured term loan. |
14
Table of Contents
(a) Mortgage Loans
The following table provides a summary of the Companys mortgage debt at June 30, 2011 and
December 31, 2010 (dollars in thousands):
Effective | ||||||||||||||||||||
Contractual | Interest | Maturity | June 30, | December 31, | ||||||||||||||||
Encumbered Property | Interest Rate | Rate | Date | 2011 | 2010 | |||||||||||||||
Indian Creek Court (1) |
7.80 | % | 5.90 | % | January 2011 | $ | | $ | 11,982 | |||||||||||
403/405 Glenn Drive (2) |
7.60 | % | 5.50 | % | July 2011 | 7,807 | 7,960 | |||||||||||||
4612 Navistar Drive (2) |
7.48 | % | 5.20 | % | July 2011 | 11,941 | 12,189 | |||||||||||||
Campus at Metro Park (3) |
7.11 | % | 5.25 | % | February 2012 | 22,134 | 22,556 | |||||||||||||
One Fair Oaks |
6.31 | % | 6.72 | % | June 2012 | 52,807 | | |||||||||||||
1434 Crossways Blvd Building II |
7.05 | % | 5.38 | % | August 2012 | 9,292 | 9,484 | |||||||||||||
Crossways Commerce Center |
6.70 | % | 6.70 | % | October 2012 | 23,951 | 24,179 | |||||||||||||
Newington Business Park Center |
6.70 | % | 6.70 | % | October 2012 | 15,108 | 15,252 | |||||||||||||
Prosperity Business Center |
6.25 | % | 5.75 | % | January 2013 | 3,446 | 3,502 | |||||||||||||
Aquia Commerce Center I(4) |
7.28 | % | 7.28 | % | February 2013 | | 353 | |||||||||||||
Cedar Hill |
6.00 | % | 6.58 | % | February 2013 | 16,046 | | |||||||||||||
Merrill Lynch Building |
6.00 | % | 7.29 | % | February 2013 | 13,704 | | |||||||||||||
1434 Crossways Blvd Building I |
6.25 | % | 5.38 | % | March 2013 | 8,084 | 8,225 | |||||||||||||
Linden Business Center |
6.01 | % | 5.58 | % | October 2013 | 7,000 | 7,080 | |||||||||||||
840 First Street, NE |
5.18 | % | 6.05 | % | October 2013 | 56,242 | | |||||||||||||
Owings Mills Business Center |
5.85 | % | 5.75 | % | March 2014 | 5,394 | 5,448 | |||||||||||||
Annapolis Commerce Park East |
5.74 | % | 6.25 | % | June 2014 | 8,426 | 8,491 | |||||||||||||
Cloverleaf Center |
6.75 | % | 6.75 | % | October 2014 | 17,056 | 17,204 | |||||||||||||
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 | 98,426 | 99,151 | |||||||||||||
Hanover Business Center: |
||||||||||||||||||||
Building D |
8.88 | % | 6.63 | % | August 2015 | 582 | 642 | |||||||||||||
Building C |
7.88 | % | 6.63 | % | December 2017 | 982 | 1,041 | |||||||||||||
Chesterfield Business Center: |
||||||||||||||||||||
Buildings C,D,G and H |
8.50 | % | 6.63 | % | August 2015 | 1,528 | 1,681 | |||||||||||||
Buildings A,B,E and F |
7.45 | % | 6.63 | % | June 2021 | 2,318 | 2,398 | |||||||||||||
7458 Candlewood Road Note 1 |
4.67 | % | 6.04 | % | January 2016 | 4,731 | 4,761 | |||||||||||||
7458 Candlewood Road Note 2 |
6.57 | % | 6.30 | % | January 2016 | 9,835 | 9,938 | |||||||||||||
Gateway Centre, Building I |
7.35 | % | 5.88 | % | November 2016 | 1,104 | 1,189 | |||||||||||||
500 First Street, NW |
5.72 | % | 5.79 | % | July 2020 | 38,539 | 38,793 | |||||||||||||
Battlefield Corporate Center |
4.26 | % | 4.40 | % | November 2020 | 4,219 | 4,289 | |||||||||||||
Airpark Business Center |
7.45 | % | 6.63 | % | June 2021 | 1,264 | 1,308 | |||||||||||||
Total Mortgage Debt |
5.95 | %(5) | $ | 441,966 | $ | 319,096 | ||||||||||||||
(1) | The loan was repaid in January 2011 with available cash. |
|
(2) | The loan was repaid in July 2011 with borrowings from the Companys
unsecured revolving credit facility. |
|
(3) | The maturity date presented for the loan represents the anticipated
repayment date of the loan, after which date the interest rate on the loan 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. |
|
(4) | The loan was repaid in April 2011 with available cash. |
|
(5) | Weighted average interest rate on total mortgage debt. |
On April 8, 2011, the Company acquired One Fair Oaks in Fairfax, Virginia. The acquisition
was funded by the assumption of a $52.4 million mortgage loan and available cash. The mortgage loan
has a fixed contractual interest rate of 6.31% and matures in June 2012.
15
Table of Contents
(b) Unsecured Term Loan
On July 18, 2011, the Company entered into a three-tranche $175.0 million unsecured term loan.
The unsecured term loans three tranches have maturity dates staggered in one-year intervals.
Tranche A has an outstanding balance of $60.0
million at an interest rate of LIBOR plus 215 basis points and matures on July 18, 2016.
Tranche B has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 225 basis
points and matures on July 18, 2017. Tranche C has an outstanding balance of $55.0 million at an
interest rate of LIBOR plus 230 basis points and matures on July 18, 2018. The term loan agreement
contains various restrictive covenants substantially similar to those contained in the Companys
revolving credit facility, including with respect to liens, indebtedness, investments,
distributions, mergers and asset sales. In addition, the agreement requires that the Company
satisfy certain financial covenants that are also substantially similar to those contained in the
Companys revolving credit facility. The agreement also includes customary events of default, the
occurrence of which, following any applicable cure period, would permit the lenders to, among other
things, declare the principal, accrued interest and other obligations of the Company under the
agreement to be immediately due and payable. The Company used the funds to pay down $117.0 million
of the outstanding balance on its unsecured revolving credit facility, to repay its $50.0 million
senior secured term loan and for other general corporate purposes.
(c) Unsecured Revolving Credit Facility
During the second quarter of 2011, the Company amended and restated its unsecured revolving
credit facility. Under the new agreement, the capacity on the Companys unsecured revolving credit
facility was expanded from $225.0 million to $255.0 million and the maturity date was extended to
January 2014 with a one-year extension at the Companys option, which it intends to exercise. The
interest rate on the unsecured revolving credit facility decreased from a range of LIBOR plus 275
to 375 basis points to a range of LIBOR plus 200 to 300 basis points, depending on the Companys
overall leverage. At June 30, 2011, LIBOR was 0.19%. The Companys ability to borrow under the
credit facility will be subject to its satisfaction of certain financial covenants and its ongoing
compliance with various restrictive covenants similar to those included in the prior credit
facility, including with respect to liens, indebtedness, investments, distributions, mergers and
asset sales. The credit facility includes customary events of default, the occurrence of which,
following any applicable cure period, would permit the lenders to, among other things, declare the
principal, accrued interest and other obligations of the Company under the credit facility to be
immediately due and payable.
During the second quarter of 2011, the Company borrowed $48.0 million on its unsecured
revolving credit facility to provide a subordinated loan to the owners of Americas Square and for
general corporate purposes. For the three and six months ended June 30, 2011, the Companys
weighted average borrowings outstanding on its unsecured revolving credit facility was $151.1
million and $132.9 million, respectively, with a weighted average interest rate of 3.1% and 3.2%,
respectively, compared with $84.5 million and $117.9 million with a weighted average interest rate
of 3.6% and 3.8% for the three and six months ended June 30, 2010, respectively. At June 30, 2011,
outstanding borrowings under the unsecured revolving credit facility were $164.0 million. 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, which was $91.0 million at June 30, 2011.
(d) Debt Covenants
At June 30, 2011, the Company was in compliance with all of the financial and non-financial
covenants associated with its debt instruments with the exception of the mortgage loans explained
below.
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
Operating Partnership. As of June 30, 2011, the Company believes that there were eight mortgage
loans with such Prohibited Transfer provisions, representing an aggregate principal amount
outstanding of approximately $77 million. Two of these mortgage loans were entered into prior to
the Companys initial public offering (IPO) in 2003 and six were assumed subsequent to its IPO.
In July 2011, the Company repaid two mortgages totaling $19.7 million with Prohibited Transfer
provisions that were both assumed subsequent to its IPO. 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 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 senior secured term loan, its two Secured Term Loans and
its Exchangeable Senior Notes.
16
Table of Contents
(8) Income Taxes
Beginning in the fourth quarter of 2010, the Company acquired properties located in Washington
D.C., which are subject to local franchise taxes. During the three and six months ended June 30,
2011, the Company recognized a benefit for income taxes of $0.1 million and $0.5 million,
respectively, related to franchise taxes levied by the city of Washington D.C. at an effective rate
of 9.975%. The Company acquired its first property in Washington, D.C. that was subject to
franchise tax in the fourth quarter of 2010 and was not subject to any franchise taxes during the
three and six months ended June 30, 2010.
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 the 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. As of June
30, 2011 and December 31, 2010, 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.
The Company has not recorded a valuation allowance against its deferred tax assets as it
determined that is more likely than not that future operations will generate sufficient taxable
income to realize the deferred tax assets. The Company has not recognized any deferred tax assets
or liabilities as a result of uncertain tax positions and has no material net operating loss,
capital loss or alternative minimum tax carryovers. There was no (benefit) 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) Derivative Instruments and Comprehensive Income (Loss)
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. |
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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. The table below
summarizes the Companys interest rate swap agreements as of June 30, 2011 (dollars in thousands):
Interest Rate | ||||||||||||||
Contractual | Fixed LIBOR | |||||||||||||
Transaction Date | Maturity Date | Amount | Component | Interest Rate | ||||||||||
Consolidated: |
July 2010(1) | January 2014 | $ | 50,000 | LIBOR | 1.474 | % | |||||||
Unconsolidated: |
September 2008 | September 2011 | 28,000 | (2) | LIBOR | 3.47 | % |
(1) | The interest rate swap agreement became effective on January 18, 2011. |
|
(2) | 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
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 income (loss) is summarized as follows (amounts in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 752 | $ | 33 | $ | (3,141 | ) | $ | (2,174 | ) | ||||||
Unrealized (loss) gain on derivative instruments |
(540 | ) | 595 | (283 | ) | 1,123 | ||||||||||
Total comprehensive income (loss) |
212 | 628 | (3,424 | ) | (1,051 | ) | ||||||||||
Comprehensive loss (income) attributable to
noncontrolling interests |
92 | (12 | ) | 222 | 24 | |||||||||||
Comprehensive income (loss) attributable to First
Potomac Realty Trust |
$ | 304 | $ | 616 | $ | (3,202 | ) | $ | (1,027 | ) | ||||||
During July 2011, the Company entered into four interest rate swap agreements that fixed
LIBOR on $120 million of its variable rate debt. The table below summarizes the Companys four new
interest rate swap agreements, which were all effective on July 18, 2011 (dollars in thousands):
Interest Rate | Fixed LIBOR | |||||||||
Maturity Date | Amount | Contractual Component | Interest Rate | |||||||
July 2016 |
$ | 35,000 | LIBOR | 1.754 | % | |||||
July 2016 |
25,000 | LIBOR | 1.7625 | % | ||||||
July 2017 |
30,000 | LIBOR | 2.093 | % | ||||||
July 2017 |
30,000 | LIBOR | 2.093 | % |
(10) 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.
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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 June 30, 2011 and December 31, 2010
(amounts in thousands):
Balance at | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | Level 1 | Level 2 | Level 3 | |||||||||||||
Recurring Measurements: |
||||||||||||||||
Derivative instrument-swap agreement |
$ | 788 | $ | | $ | 788 | $ | | ||||||||
Contingent consideration related to acquisition of: |
||||||||||||||||
Ashburn Center |
1,398 | | | 1,398 | ||||||||||||
840 First Street, NE |
9,356 | | | 9,356 | ||||||||||||
Balance at | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
Non-recurring Measurement: |
||||||||||||||||
Impaired real estate asset |
$ | 10,950 | $ | | $ | 10,950 | $ | | ||||||||
Recurring Measurements: |
||||||||||||||||
Derivative instrument-swap agreement |
396 | | 396 | | ||||||||||||
Contingent consideration related to acquisition of: |
||||||||||||||||
Ashburn Center |
1,398 | | | 1,398 |
There were no assets or liabilities measured on a non-recurring basis at June 30, 2011.
Interest Rate Derivatives
On January 18, 2011, the Company fixed LIBOR at 1.474% on $50.0 million of its variable rate
debt through an interest rate swap agreement that matures on January 15, 2014. The derivative is
fair valued based on 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 as Accumulated Other
Comprehensive Loss.
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Table of Contents
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.
A summary of the Companys interest rate derivatives liability is as follows (amounts in
thousands):
Six months ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Balance at December 31, |
$ | 396 | $ | 1,741 | ||||
Deconsolidation (1) |
| (396 | ) | |||||
Unrealized loss (gain) |
392 | (1,089 | ) | |||||
Balance at June 30, |
$ | 788 | $ | 256 | ||||
(1) | On January 1, 2010, the Company deconsolidated RiversPark I and all its
assets and liabilities, including its interest rate derivative liability, were removed
from the Companys consolidated balance sheets. |
The Company recorded an unrealized loss of $0.4 million for the six months ended June 30, 2011
and a unrealized gain of $1.1 million for the six months ended June 30, 2010, related to its
derivative liability, which is included in Accounts payable and other liabilities in the
Companys consolidated balance sheets.
Contingent Consideration
On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an
aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration
payable upon the terms of a lease renewal by the buildings sole tenant or the re-tenanting of the
property. At acquisition, the Company was in active negotiations with the existing tenant to renew
its lease through August 2023. As a result, the Company recorded a contingent consideration
obligation of $9.4 million at acquisition. In July 2011, the buildings sole tenant renewed its
lease. Based on the probability of renewal and lease terms used in the original estimate of fair
value, the value of contingent consideration remained unchanged. The fair value of the contingent
consideration obligation was determined based on several probability weighted discounted cash flow
scenarios that projected stabilization being achieved at certain timeframes. The fair value was
based, in part, on significant inputs, which are not observable in the market, thus representing a
Level 3 measurement in accordance with the fair value hierarchy.
The Company has a contingent consideration obligation associated with the 2009 acquisition of
Ashburn Center. 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.
The Company did not recognize any gain or loss associated with its contingent consideration
for the three and six months ended June 30, 2011. During the first quarter of 2010, the Company
fully leased the Ashburn Center, 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. The Company has classified
its contingent consideration liabilities within Accounts payable and other liabilities and any
changes in its fair value subsequent to their acquisition date valuation are charged to earnings.
There was no significant change in the fair value of the contingent consideration during the
quarter ended June 30, 2010.
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A summary of the Companys consolidated contingent consideration obligations is as follows
(amounts in thousands):
Six months ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Balance at December 31, |
$ | 1,398 | $ | 688 | ||||
Increase in fair value |
| 710 | ||||||
Additions to contingent consideration obligation |
9,356 | | ||||||
Balance at June 30, |
$ | 10,754 | $ | 1,398 | ||||
Impairment of Real Estate 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 a
property, an impairment analysis is performed.
For the three months ended June 30, 2011 and 2010, the Company did not record any impairment
on its real estate assets. During the first quarter of 2011 and 2010, the Company incurred
impairment charges of $2.7 million and $0.6 million, respectively, for properties that were
disposed of in the three months ended June 30, 2011 and 2010, respectively.
On December 29, 2010, the Company acquired 7458 Candlewood Road, which is located in the
Companys Maryland reporting segment. Due to the bankruptcy of an acquired tenant, the Company
realized 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 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 realized 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.
With the exception 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 six months ended June 30, 2011. Also, no transfers into
and out of fair value measurements levels occurred during the six months ended June 30, 2011 or
2010.
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Table of Contents
Financial Instruments
The carrying amounts of cash equivalents, accounts and other receivables and accounts
payable, with the exception of any items listed above, approximate their fair values due to their
short-term maturities. The Company uses third parties with mezzanine lending expertise to value its
notes receivable based on comparable deals, market analysis and underlying asset operating results.
The Company calculates the 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 note receivables and debt instruments at June 30, 2011 and December 31, 2010 are as
follows (amounts in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Notes receivable(1) |
$ | 54,627 | $ | 55,000 | $ | 24,750 | $ | 24,750 | ||||||||
Financial Liabilities: |
||||||||||||||||
Mortgage debt |
$ | 441,966 | $ | 440,519 | $ | 319,096 | $ | 316,169 | ||||||||
Exchangeable senior notes(2) |
30,216 | 30,564 | 29,936 | 30,412 | ||||||||||||
Series A senior notes |
37,500 | 38,416 | 37,500 | 37,850 | ||||||||||||
Series B senior notes |
37,500 | 38,581 | 37,500 | 37,251 | ||||||||||||
Secured term loans |
100,000 | 100,031 | 110,000 | 109,976 | ||||||||||||
Unsecured revolving credit facility |
164,000 | 166,382 | 191,000 | 191,073 | ||||||||||||
Total |
$ | 811,182 | $ | 814,493 | $ | 725,032 | $ | 722,731 | ||||||||
(1) | The face value of the note receivable for 950 F Street, NW was $25.0 million
at June 30, 2011 and December 31, 2010. The face value of the note receivable for
Americas Square was $30.0 million at June 30, 2011. |
|
(2) | The face value of the notes was $30.4 million at June 30, 2011 and December 31,
2010. |
(11) Equity
On May 13, 2011, the Company paid a dividend of $0.20 per share to common shareholders of
record as of May 6, 2011 and paid a dividend of $0.484375 per share to preferred shareholders of
record as of May 6, 2011. On July 25, 2011, the Company declared a dividend of $0.20 per common
share, which is payable on August 12, 2011 to common shareholders of record as of August 5, 2011.
On July 25, 2011, the Company also declared a dividend of $0.484375 per share on its Series A
Preferred Shares, which is payable on August 15, 2011 to preferred shareholders of record as of
August 5, 2011. Dividends on all non-vested share awards are recorded as a reduction of
shareholders equity.
As a result of the redemption feature of the Operating Partnership units, the noncontrolling
interests are recorded outside of permanent equity. The Companys allocation between noncontrolling
interests is as follows (amounts in thousands):
Non- | ||||||||||||||||
First | redeemable | Redeemable | ||||||||||||||
Potomac | noncontrolling | noncontrolling | ||||||||||||||
Realty Trust | interests | Total Equity | interests | |||||||||||||
Balance, December 31, 2010 |
$ | 614,983 | $ | 3,077 | $ | 618,060 | $ | 16,122 | ||||||||
Net loss |
(2,938 | ) | | (2,938 | ) | (203 | ) | |||||||||
Changes in ownership, net |
111,477 | 1,002 | 112,479 | 21,142 | ||||||||||||
Distributions to owners |
(22,885 | ) | | (22,885 | ) | (667 | ) | |||||||||
Other comprehensive loss |
(264 | ) | | (264 | ) | (19 | ) | |||||||||
Balance, June 30, 2011 |
$ | 700,373 | $ | 4,079 | $ | 704,452 | $ | 36,375 | ||||||||
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Non- | ||||||||||||||||
First | redeemable | Redeemable | ||||||||||||||
Potomac | noncontrolling | noncontrolling | ||||||||||||||
Realty Trust | interests | Total Equity | interests | |||||||||||||
Balance, December 31, 2009 |
$ | 377,759 | $ | | $ | 377,759 | $ | 9,585 | ||||||||
Net loss |
(2,126 | ) | | (2,126 | ) | (48 | ) | |||||||||
Changes in ownership, net |
99,630 | | 99,630 | 1,257 | ||||||||||||
Distributions to owners |
(13,526 | ) | | (13,526 | ) | (293 | ) | |||||||||
Other comprehensive income |
1,099 | | 1,099 | 24 | ||||||||||||
Balance, June 30, 2010 |
$ | 462,836 | $ | | $ | 462,836 | $ | 10,525 | ||||||||
(12) Noncontrolling Interests in Partnerships
(a) 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, preferred dividends paid or
additional contributions. Based on the closing share price of the Companys common stock at June
30, 2011, 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
$36.4 million, which exceeded the noncontrolling interests historical cost by $3.2 million.
At December 31, 2010, 958,473 Operating Partnership units, or 1.9%, were not owned by the
Company. During the six months ended June 30, 2011, the Company issued 1,418,715 Operating
Partnership units valued at $21.7 million to partially fund the acquisition of 840 First Street,
NE. There were also 1,300 Operating Partnership units redeemed for 1,300 common shares fair valued
at $19 thousand. As a result, 2,375,888 of the total outstanding Operating Partnership units, or
4.5%, were not owned by the Company at June 30, 2011. There were no Operating Partnership units
redeemed with available cash during the six months ended June 30, 2011.
(b) Noncontrolling Interests in Consolidated Partnerships
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
noncontrolling interests.
On November 10, 2010, the Company acquired Redland Corporate Center II and III through a joint
venture with Perseus Realty, LLC (Perseus). As a result of the partnership structure, the Company
has a 97% economic interest in the joint venture and Perseus has the remaining 3% interest. As of
June 30, 2011, the Company recorded noncontrolling interests of $3.1 million, which reflects the
third partys common equity interest in Redland Corporate Center II & III.
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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 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. As of June
30, 2011, the Company recorded noncontrolling interests of $1.0 million, which reflects the third
partys common equity interest in 1200 17th Street, NW.
(13) 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. 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.
Option Exercises
The Company received approximately $46 thousand and $7 thousand from the exercise of stock
options during the three months ended June 30, 2011 and 2010, respectively, and $64 thousand and
$16 thousand for the six months ended June 30, 2011 and 2010, respectively. Shares issued as a
result of stock option exercises are funded through the issuance of new shares. The total intrinsic
value of options exercised during the three months ended June 30, 2011 and 2010 were $25 thousand
and $5 thousand, respectively, and $34 thousand and $9 thousand for the six months ended June 30,
2011 and 2010, respectively.
Non-vested share awards
On May 19, 2011, the Company issued a total of 20,310 restricted share awards to its
non-employee trustees, all of which will vest on the first anniversary of the award date. The
trustee shares were fair valued based on the share price of the underlying common shares on the
date of issuance.
The Company recognized compensation expense associated with its restricted share awards of
$0.6 million and $0.9 million for the three months ended June 30, 2011 and 2010, respectively, and
$1.2 million and $1.9 million for the six months ended June 30, 2011 and 2010, 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 net income available to
common shareholders in the Companys computation of EPS.
A summary of the Companys non-vested share awards as of June 30, 2011 is as follows:
Weighted | ||||||||
Non-vested | Average Grant | |||||||
Shares | Date Fair Value | |||||||
Non-vested at March 31, 2011 |
782,433 | $ | 12.70 | |||||
Granted |
20,310 | 16.25 | ||||||
Vested |
(53,775 | ) | 14.58 | |||||
Non-vested at June 30, 2011 |
748,968 | 12.66 | ||||||
A summary of non-vested share awards and activity for the period ended March 31, 2011 is
discussed in the Companys first quarter 2011 Form 10-Q.
As of June 30, 2011, the Company had $4.7 million of unrecognized compensation cost related to
non-vested shares. The Company anticipates this cost will be recognized over a weighted-average
period of 3.3 years.
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Table of Contents
(14) Segment Information
The Companys reportable segments consist of four distinct reporting and operational segments
within the greater Washington D.C, region in which it operates: Maryland, Washington, D.C.,
Northern Virginia and Southern Virginia. Prior to 2011, the Company had reported its properties
located in Washington, D.C. within its Northern Virginia reporting segment. However, due to the
Companys growth within the Washington, D.C. region, it has altered its internal structure, which
includes changing the Companys internal decision making process regarding its Washington, D.C.
properties. Therefore, the Company feels it is appropriate to separate the properties owned in
Washington, D.C. into its own reporting segment.
The Company evaluates the performance of its segments based on the operating results of the
properties located within each segment, which excludes large non-recurring gains and losses, gains
from sale of real estate assets, interest expense, general and administrative costs, acquisition
costs or any other indirect corporate expense to the segments. In addition, the segments do not
have significant non-cash items other than straight-line and deferred market rent amortization
reported in their operating results. There are no inter-segment sales or transfers recorded between
segments.
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Table of Contents
The results of operations for the Companys four reportable segments are as follows (dollars
in thousands):
Three months ended June 30, 2011 | ||||||||||||||||||||
Maryland | Washington, D.C. | Northern Virginia | Southern Virginia | Consolidated | ||||||||||||||||
Number of buildings |
67 | 4 | 57 | 55 | 183 | |||||||||||||||
Square feet |
3,875,172 | 633,452 | 3,662,616 | 5,478,909 | 13,650,149 | |||||||||||||||
Total revenues |
$ | 12,403 | $ | 5,938 | $ | 12,272 | $ | 12,207 | $ | 42,820 | ||||||||||
Property operating expense |
(2,916 | ) | (1,147 | ) | (2,615 | ) | (2,865 | ) | (9,543 | ) | ||||||||||
Real estate taxes and insurance |
(1,232 | ) | (667 | ) | (1,212 | ) | (980 | ) | (4,091 | ) | ||||||||||
Total property operating income |
$ | 8,255 | $ | 4,124 | $ | 8,445 | $ | 8,362 | 29,186 | |||||||||||
Depreciation and amortization expense |
(16,691 | ) | ||||||||||||||||||
General and administrative |
(4,185 | ) | ||||||||||||||||||
Acquisition costs |
(552 | ) | ||||||||||||||||||
Other expenses, net |
(8,915 | ) | ||||||||||||||||||
Income from discontinued operations |
1,909 | |||||||||||||||||||
Net income |
$ | 752 | ||||||||||||||||||
Capital expenditures(1) |
$ | 6,002 | $ | 418 | $ | 7,604 | $ | 1,784 | $ | 16,321 | ||||||||||
Three Months Ended June 30, 2010 | ||||||||||||||||||||
Maryland | Washington, D.C.(2) | Northern Virginia | Southern Virginia | Consolidated | ||||||||||||||||
Number of buildings |
68 | 1 | 51 | 54 | 174 | |||||||||||||||
Square feet |
3,608,755 | 129,035 | 2,689,641 | 5,258,232 | 11,685,663 | |||||||||||||||
Total revenues |
$ | 10,736 | $ | 13 | $ | 9,880 | $ | 11,938 | $ | 32,567 | ||||||||||
Property operating expense |
(2,223 | ) | (1 | ) | (1,928 | ) | (2,711 | ) | (6,863 | ) | ||||||||||
Real estate taxes and insurance |
(1,008 | ) | (2 | ) | (1,086 | ) | (1,035 | ) | (3,131 | ) | ||||||||||
Total property operating income |
$ | 7,505 | $ | 10 | $ | 6,866 | $ | 8,192 | 22,573 | |||||||||||
Depreciation and amortization expense |
(10,196 | ) | ||||||||||||||||||
General and administrative |
(3,675 | ) | ||||||||||||||||||
Acquisition costs |
(1,645 | ) | ||||||||||||||||||
Other expenses, net |
(7,821 | ) | ||||||||||||||||||
Income from discontinued operations |
797 | |||||||||||||||||||
Net income |
$ | 33 | ||||||||||||||||||
Capital expenditures(1) |
$ | 598 | $ | | $ | 768 | $ | 1,848 | $ | 3,312 | ||||||||||
26
Table of Contents
Six months ended June 30, 2011 | ||||||||||||||||||||
Maryland | Washington, D.C. | Northern Virginia | Southern Virginia | Consolidated | ||||||||||||||||
Total revenues |
$ | 25,603 | $ | 9,508 | $ | 22,800 | $ | 24,776 | $ | 82,687 | ||||||||||
Property operating expense |
(6,839 | ) | (1,867 | ) | (5,593 | ) | (5,966 | ) | (20,265 | ) | ||||||||||
Real estate taxes and insurance |
(2,394 | ) | (1,240 | ) | (2,400 | ) | (1,998 | ) | (8,032 | ) | ||||||||||
Total property operating income |
$ | 16,370 | $ | 6,401 | $ | 14,807 | $ | 16,812 | 54,390 | |||||||||||
Depreciation and amortization expense |
(29,293 | ) | ||||||||||||||||||
General and administrative |
(8,192 | ) | ||||||||||||||||||
Acquisition costs |
(2,737 | ) | ||||||||||||||||||
Other expenses, net |
(16,436 | ) | ||||||||||||||||||
Loss from discontinued operations |
(873 | ) | ||||||||||||||||||
Net loss |
$ | (3,141 | ) | |||||||||||||||||
Total assets(3) |
$ | 476,878 | $ | 269,393 | $ | 420,927 | $ | 344,694 | $ | 1,608,550 | ||||||||||
Capital expenditures(1) |
$ | 8,801 | $ | 678 | $ | 11,212 | $ | 3,539 | $ | 25,431 | ||||||||||
Six Months Ended June 30, 2010 | ||||||||||||||||||||
Maryland | Washington, D.C.(2) | Northern Virginia | Southern Virginia | Consolidated | ||||||||||||||||
Total revenues |
$ | 21,771 | $ | 13 | $ | 20,590 | $ | 24,383 | $ | 66,757 | ||||||||||
Property operating expense |
(5,577 | ) | (1 | ) | (5,029 | ) | (5,993 | ) | (16,600 | ) | ||||||||||
Real estate taxes and insurance |
(2,068 | ) | (2 | ) | (2,228 | ) | (2,094 | ) | (6,392 | ) | ||||||||||
Total property operating income |
$ | 14,126 | $ | 10 | $ | 13,333 | $ | 16,296 | 43,765 | |||||||||||
Depreciation and amortization expense |
(19,879 | ) | ||||||||||||||||||
General and administrative |
(7,384 | ) | ||||||||||||||||||
Acquisition costs |
(1,664 | ) | ||||||||||||||||||
Other expenses, net |
(17,311 | ) | ||||||||||||||||||
Income from discontinued operations |
299 | |||||||||||||||||||
Net loss |
$ | (2,174 | ) | |||||||||||||||||
Total assets(3) |
$ | 380,317 | $ | 68,450 | $ | 328,493 | $ | 325,936 | $ | 1,125,626 | ||||||||||
Capital expenditures(1) |
$ | 923 | $ | | $ | 1,695 | $ | 3,396 | $ | 6,165 | ||||||||||
(1) | Capital expenditures for corporate assets not allocated to any of our reportable
segments totaled $513 and $98 for the three months ended June 30, 2011 and 2010, respectively,
and $1,201 and $151 for the six months ended June 30, 2011 and 2010, respectively. |
|
(2) | The acquired its first property located in Washington, D.C. on June 30, 2010. |
|
(3) | Corporate assets not allocated to any of our reportable segments totaled $96,658 and
$22,430 at June 30, 2011 and 2010, respectively. |
(15) Subsequent Events
On July 19, 2011, the Company acquired Greenbrier Towers I & II in Chesapeake, Virginia for a
contractual price of $16.7 million. The property consists of two office buildings totaling 172,000
square feet and is 86% leased to over 40 tenants. The acquisition was funded with proceeds from the
sale of Aquia Commerce Center I & II and a draw on the Companys line of credit.
On August 4, 2011, the Company formed a joint venture with Perseus Realty, LLC to acquire the
Greyhound Bus Terminal site at 1005 First Street, NE for $46.8 million, of which, $38.4 million was
paid at closing and the remaining $8.4 million will be paid in August 2013. The joint venture
intends on developing the 1.6 acre site that can accommodate development of up to approximately
712,000 square feet of office space. The site is currently occupied by the Greyhound Bus Terminal,
which will lease back the site under a ten-year lease agreement with a termination option after the
second lease year. Greyhound has already announced that it intends to relocate to nearby Union
Station. The Company estimates a 6.5% return from the lease-back while development is being planned. When the joint venture is fully capitalized, the
Company anticipates owning 97% of the joint venture.
27
Table of Contents
ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the condensed consolidated financial statements and
notes thereto appearing elsewhere in this Form 10-Q. The discussion and analysis is derived from
the consolidated operating results and activities of First Potomac Realty Trust.
First Potomac Realty Trust (the Company) is a leader in the ownership, management,
development and redevelopment of office and industrial properties in the greater Washington, D.C.
region. The Company separates its properties into four distinct segments, which it refers to as the
Maryland, Washington, D.C., 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 unaudited condensed consolidated financial statements to we, our or
First Potomac, refer to the Company and its subsidiaries, on a consolidated basis, unless the
context indicates otherwise.
The Company conducts its business through First Potomac Realty Investment Limited Partnership;
the Companys operating partnership (the Operating Partnership). The Company is the sole general
partner of, and, as of June 30, 2011, owned a 95.5% interest in, the Operating Partnership. The
remaining interests in the Operating Partnership, which are presented as noncontrolling interests
in the Operating Partnership in the accompanying unaudited condensed consolidated financial
statements, are limited partnership interests, some of which are owned by several of the Companys
executive officers and trustees who contributed properties and other assets to the Company upon its
formation, and other unrelated parties.
At June 30, 2011, the Company wholly-owned or had a controlling interest in properties
totaling 13.7 million square feet and had a noncontrolling ownership interest in properties
totaling an additional 0.5 million square feet through four unconsolidated joint ventures. The
Company also owned land that can accommodate approximately 1.6 million square feet of additional
development. The Company derives substantially all of its revenue from leases of space within its
properties. As of June 30, 2011, 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 U.S Government also accounted for approximately a third of the Companys outstanding
accounts receivables at June 30, 2011. The majority of the accounts receivable related to the
government was due to the clarification of terms in a specific lease, which has been resolved, and
the Company expects to collect the outstanding balance of the specified lease in the third quarter.
The Company operates so as to qualify as a real estate investment trust (REIT) for federal income
tax purposes.
The primary source of the Companys revenue and earnings is rent received from customers under
long-term (generally three to ten years) operating leases at its properties, including
reimbursements from customers for certain operating costs. Additionally, the Company may generate
earnings from the sale of assets either outright or contributed into joint ventures.
The Companys long-term growth will principally be driven by its ability to:
| maintain and increase occupancy rates and/or increase rental rates at its
properties; |
||
| sell assets to third parties at favorable prices or contribute properties to joint
ventures; and |
||
| continue to grow its portfolio through acquisition of new properties, potentially
through joint ventures. |
Executive Summary
The Company had net income of $0.8 million during the second quarter of 2011 compared with net
income of $33 thousand during the second quarter of 2010. The increase in the Companys net income
for the quarter ended June 30, 2011 compared with 2010 is primarily due to an increase in gain on
sale of real estate properties. The Company sold a property in
the second quarter of 2011 for a gain of $2.0 million compared with a gain of $0.6 million
from a property sold in the second quarter of 2010. The increase in net income for the three months
ended June 30, 2011 was partially offset by an increase in interest expense as the Company issued
additional debt and assumed several mortgages in its acquisition of properties in the fourth
quarter of 2010 and the first half of 2011.
28
Table of Contents
For the six months ended June 30, 2011, the Company incurred a net loss of $3.1 million
compared with a net loss of $2.2 million during the six months ended June 30, 2010. The increase in
the Companys net loss for the six months ended June 30, 2011 compared with the same period in 2010
is primarily due to an increase in acquisition costs and impairment charges. The Company acquired
four properties during the six months ended June 30, 2011, incurring $2.7 million in acquisition
costs, compared with two property acquisitions during the six months ended June 30, 2010, incurring
$1.7 million in acquisition costs. During the first quarter of 2011, the Company incurred a $2.7
million impairment charge on a property in its Maryland region that was sold in the second quarter
of 2011. During the first quarter of 2010, the Company incurred a $0.6 impairment charge on a
property in its Maryland region that was sold in the second quarter of 2010.
The Companys funds from operations (FFO) were $14.0 million, or $0.27 per diluted share,
and $21.7 million, or $0.42 per diluted share, for the three and six months ended June 30, 2011,
respectively, compared with FFO of $10.2 million, or $0.27 per diluted share, and $18.2 million, or
$0.53 per diluted share, for the three and six months ended June 30, 2010, respectively. The
increase in FFO for the periods presented is primarily due to an increase in the Companys net
operating income. FFO is a non-GAAP financial measure. For a description of FFO, including why
management believes its presentation is useful and a reconciliation of FFO to net income (loss)
attributable to First Potomac Realty Trust, see Funds From Operations.
Significant
Second Quarter Transactions
| Executed 740,000 square feet of leases; 232,000 square feet of which were new leases. |
| Expanded borrowing capacity of unsecured revolving credit facility from $225 to $255
million; |
| Acquired a property in the
Companys Northern Virginia reporting segment for an aggregate purchase price
of $58 million, which had an anticipated capitalization rate of 8.8%;
|
| Sold Aquia Commerce Center I & II for net proceeds of $11.3 million, which equated to
an 8.7% capitalization rate, and sold Gateway West for net proceeds of $4.8 million,
which equated to a 3.8% capitalization rate as the property was largely vacant at the
time of sale. The Company calculates the capitalization rates associated with its
disposed properties as the propertys annualized net operating income divided by the
selling cost of the property. |
29
Table of Contents
Properties:
The following sets forth certain information for the Companys consolidated properties by
segment as of June 30, 2011 (including properties in development and redevelopment, dollars in
thousands):
WASHINGTON, DC
Number | Annualized | Leased at | Occupied at | |||||||||||||||||||
of | Sub- | Square | Cash Basis | June 30, | June 30, | |||||||||||||||||
Property | Buildings | Market(1) | Feet | Rent(2) | 2011(3) | 2011(3) | ||||||||||||||||
Downtown DC-Office |
||||||||||||||||||||||
500 First Street, NW |
1 | Capitol Hill | 129,035 | $ | 4,387 | 100.0 | % | 100.0 | % | |||||||||||||
840 First Street, NE |
1 | NoMA | 244,298 | 7,717 | 100.0 | % | 100.0 | % | ||||||||||||||
1211 Connecticut Avenue, NW |
1 | CBD | 125,119 | 3,346 | 100.0 | % | 100.0 | % | ||||||||||||||
Total Consolidated |
3 | 498,452 | 15,450 | 100.0 | % | 100.0 | % | |||||||||||||||
Total Joint Ventures |
1 | 111,373 | 4,051 | 100.0 | % | 100.0 | % | |||||||||||||||
Total Redevelopment |
1 | 135,000 | | |||||||||||||||||||
Grand Total |
5 | 744,825 | $ | 19,501 | 100.0 | % | 100.0 | % | ||||||||||||||
(1) | CBD = Central Business District; NoMa = North of Massachusetts Avenue |
|
(2) | Annualized cash basis rent is reflected at a triple-net equivalent basis, which
removes operating expense reimbursements that are included, along with base rent, in the
contractual payments of the Companys full service leases. The operating expense
reimbursements primarily relate to real estate taxes and insurance expenses. |
|
(3) | Does not include space in development or redevelopment. |
30
Table of Contents
MARYLAND REGION
Number | Leased at | Occupied at | ||||||||||||||||||||
of | Annualized Cash | June 30, | June 30, | |||||||||||||||||||
Property | Buildings | Location | Square Feet | Basis Rent(1) | 2011(2) | 2011(2) | ||||||||||||||||
SUBURBAN MD |
||||||||||||||||||||||
Business Park |
||||||||||||||||||||||
Airpark Place |
3 | Gaithersburg | 82,414 | $ | 603 | 55.20 | % | 55.20 | % | |||||||||||||
Ammendale Business Park(3) |
7 | Beltsville | 312,736 | 2,670 | 91.80 | % | 62.10 | % | ||||||||||||||
Gateway 270 West |
6 | Clarksburg | 255,491 | 2,966 | 85.50 | % | 85.50 | % | ||||||||||||||
Girard Business Park(4) |
7 | Gaithersburg | 298,195 | 2,870 | 87.30 | % | 65.80 | % | ||||||||||||||
Rumsey Center |
4 | Columbia | 134,431 | 1,245 | 75.20 | % | 71.60 | % | ||||||||||||||
Snowden Center |
5 | Columbia | 144,847 | 2,024 | 92.10 | % | 90.60 | % | ||||||||||||||
Total Business Park |
32 | 1,228,114 | 12,378 | 85.20 | % | 71.80 | % | |||||||||||||||
Office Park |
||||||||||||||||||||||
15 Wormans Mill Court |
1 | Frederick | 40,051 | 356 | 87.70 | % | 87.70 | % | ||||||||||||||
Annapolis Commerce Park |
2 | Annapolis | 101,898 | 2,268 | 98.80 | % | 98.80 | % | ||||||||||||||
Campus at Metro Park North |
4 | Rockville | 190,912 | 3,378 | 85.10 | % | 85.10 | % | ||||||||||||||
Cloverleaf |
4 | Germantown | 173,655 | 3,067 | 98.60 | % | 98.60 | % | ||||||||||||||
Total Office Park |
11 | 506,516 | 9,069 | 92.70 | % | 92.70 | % | |||||||||||||||
Office |
||||||||||||||||||||||
20270 Goldenrod Lane |
1 | Germantown | 23,518 | 75 | 25.90 | % | 25.90 | % | ||||||||||||||
Gateway Center |
2 | Gaithersburg | 44,150 | 674 | 96.00 | % | 96.00 | % | ||||||||||||||
Merrill Lynch Building |
1 | Columbia | 136,381 | 1,462 | 68.30 | % | 68.30 | % | ||||||||||||||
Patrick Center |
1 | Frederick | 66,420 | 1,014 | 75.40 | % | 75.40 | % | ||||||||||||||
Redland Corporate Center-Bldg 3 |
1 | Rockville | 139,120 | 3,364 | 100.00 | % | 100.00 | % | ||||||||||||||
West Park |
1 | Frederick | 28,620 | 293 | 75.20 | % | 75.20 | % | ||||||||||||||
Woodlands Business Center |
1 | Largo | 37,886 | 313 | 68.30 | % | 68.30 | % | ||||||||||||||
Total Office |
8 | 476,095 | 7,195 | 79.40 | % | 79.40 | % | |||||||||||||||
Industrial |
||||||||||||||||||||||
Frederick Industrial Park(5) |
3 | Frederick | 550,418 | 3,964 | 89.00 | % | 88.80 | % | ||||||||||||||
Glenn Dale Business Center |
1 | Glenn Dale | 315,962 | 1,657 | 92.10 | % | 92.10 | % | ||||||||||||||
Total Industrial |
4 | 866,380 | 5,621 | 90.10 | % | 90.00 | % | |||||||||||||||
Total Suburban Maryland |
55 | 3,077,105 | 34,263 | 86.90 | % | 81.50 | % | |||||||||||||||
BALTIMORE |
||||||||||||||||||||||
Business Park |
||||||||||||||||||||||
Owings Mills Business Park(6) |
6 | Owings Mills | 219,284 | 2,009 | 76.80 | % | 74.40 | % | ||||||||||||||
Triangle Business Center |
4 | Baltimore | 74,182 | 510 | 63.20 | % | 63.20 | % | ||||||||||||||
Total Industrial |
10 | 293,466 | 2,519 | 73.40 | % | 71.60 | % | |||||||||||||||
Industrial |
||||||||||||||||||||||
7458 Candlewood Road |
1 | Hanover | 295,673 | 762 | 39.40 | % | 39.40 | % | ||||||||||||||
Total Baltimore |
11 | 589,139 | 3,281 | 56.30 | % | 55.40 | % | |||||||||||||||
Stabilized Portfolio |
66 | 3,666,244 | 37,544 | 82.00 | % | 77.30 | % | |||||||||||||||
Lease Up Property |
||||||||||||||||||||||
Redland Corporate Center-Bldg 2 |
1 | Rockville | 208,928 | 2,540 | 53.20 | % | 0.60 | % | ||||||||||||||
Total Consolidated |
67 | 3,875,172 | 40,084 | 80.40 | % | 73.20 | % | |||||||||||||||
Total Joint Ventures |
2 | 428,427 | 4,047 | 71.40 | % | 68.70 | % | |||||||||||||||
Grand Total |
69 | 4,303,599 | $ | 44,131 | 79.50 | % | 72.80 | % | ||||||||||||||
(1) | Annualized cash basis rent is reflected at Triple-net equivalent, which removes items that are included, along with base rent, in the contractual payments of the lease. These items primarily relate to real estate taxes and insurance expenses |
|
(2) | Does not include space in development or redevelopment. |
|
(3) | Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court. |
|
(4) | Girard Business Park consists of the following properties: Girard Business Center and Girard Place. |
|
(5) | Frederick Industrial Park consists of the following properties: 4451 Georgia Pacific Boulevard, 4612 Navistar Drive, and 6900 English Muffin Way. |
|
(6) | Owings Mills Business Park consists of the following properties: Owings Mills Business Center and Owings Mills Commerce Center. |
31
Table of Contents
NORTHERN VIRGINIA REGION
Number | Leased at | Occupied at | ||||||||||||||||||||
of | Annualized Cash | June 30, | June 30, | |||||||||||||||||||
Property | Buildings | Location | Square Feet | Basis Rent(1) | 2011(2) | 2011(2) | ||||||||||||||||
Business Park |
||||||||||||||||||||||
Ashburn Center |
3 | Ashburn | 194,184 | $ | 1,727 | 100.0 | % | 100.0 | % | |||||||||||||
Gateway Centre |
3 | Manassas | 101,534 | 900 | 76.0 | % | 76.0 | % | ||||||||||||||
Linden Business Center |
3 | Manassas | 109,838 | 793 | 58.4 | % | 58.4 | % | ||||||||||||||
Prosperity Business Center |
1 | Merrifield | 71,312 | 756 | 84.9 | % | 84.9 | % | ||||||||||||||
Sterling Park Business Center(3) |
6 | Sterling | 406,763 | 3,611 | 82.6 | % | 76.0 | % | ||||||||||||||
Total Business Park |
16 | 883,631 | 7,787 | 82.8 | % | 79.8 | % | |||||||||||||||
Office Park |
||||||||||||||||||||||
Herndon Corporate Center |
4 | Herndon | 127,918 | 1,548 | 79.7 | % | 79.6 | % | ||||||||||||||
Lafayette Business Park(4) |
6 | Chantilly | 254,296 | 3,175 | 80.2 | % | 80.2 | % | ||||||||||||||
Reston Business Campus |
4 | Reston | 82,988 | 1,034 | 86.0 | % | 86.0 | % | ||||||||||||||
Van Buren Business Park |
5 | Herndon | 107,853 | 704 | 48.1 | % | 46.7 | % | ||||||||||||||
Windsor at Battlefield |
2 | Manassas | 154,989 | 1,983 | 100.0 | % | 100.0 | % | ||||||||||||||
Total Office Park |
21 | 728,044 | 8,444 | 80.2 | % | 80.0 | % | |||||||||||||||
Office |
||||||||||||||||||||||
Cedar Hill |
2 | Tysons Corner | 102,632 | 2,301 | 100.0 | % | 100.0 | % | ||||||||||||||
One Fair Oaks |
2 | Fairfax | 214,214 | 5,020 | 100.0 | % | 100.0 | % | ||||||||||||||
Total Office |
4 | 316,846 | 7,321 | 100.0 | % | 100.0 | % | |||||||||||||||
Industrial |
||||||||||||||||||||||
13129 Airpark Road |
1 | Culpeper | 149,888 | 622 | 75.9 | % | 75.9 | % | ||||||||||||||
15395 John Marshall Highway |
1 | Haymarket | 236,082 | 3,369 | 100.0 | % | 100.0 | % | ||||||||||||||
Interstate Plaza |
1 | Alexandria | 109,029 | 1,067 | 87.4 | % | 87.4 | % | ||||||||||||||
Newington Business Park Center |
7 | Lorton | 254,272 | 2,435 | 87.6 | % | 86.4 | % | ||||||||||||||
Plaza 500 |
2 | Alexandria | 504,089 | 5,826 | 91.7 | % | 91.7 | % | ||||||||||||||
Total Industrial |
12 | 1,253,360 | 13,319 | 90.2 | % | 89.9 | % | |||||||||||||||
Stabilized Portfolio |
53 | 3,181,881 | 36,871 | 86.8 | % | 85.9 | % | |||||||||||||||
Lease Up Property |
||||||||||||||||||||||
Atlantic Corporate Park |
2 | Sterling | 220,610 | 637 | 17.5 | % | 15.0 | % | ||||||||||||||
Total Consolidated |
55 | 3,402,491 | 37,508 | 82.3 | % | 81.3 | % | |||||||||||||||
Total Redevelopment |
3 | 260,125 | | |||||||||||||||||||
Grand Total |
58 | 3,662,616 | $ | 37,508 | 82.3 | % | 81.3 | % | ||||||||||||||
(1) | Annualized cash basis rent is reflected at a triple-net equivalent basis, which
removes operating expense reimbursements that are included, along with base rent, in the
contractual payments of the Companys full service leases. The operating expense reimbursements
primarily relate to real estate taxes and insurance expenses. |
|
(2) | Does not include space in development or redevelopment. |
|
(3) | Sterling Park Business Center consists of the following properties: 403/405 Glenn
Drive, Davis Drive, and Sterling Park Business Center. |
|
(4) | Lafayette Business Park consists of the following properties: Enterprise Center and Tech
Court. |
32
Table of Contents
SOUTHERN VIRGINIA REGION |
Number | Leased at | Occupied at | ||||||||||||||||||||
of | Annualized Cash | June 30, | June 30, | |||||||||||||||||||
Property | Buildings | Location | Square Feet | Basis Rent(1) | 2011(2) | 2011(2) | ||||||||||||||||
RICHMOND |
||||||||||||||||||||||
Business Park |
||||||||||||||||||||||
Hanover Business Center |
11 | Richmond | 320,362 | $ | 1,667 | 80.2 | % | 80.2 | % | |||||||||||||
Virginia Center |
4 | Ashland | 182,944 | 712 | 66.1 | % | 66.1 | % | ||||||||||||||
Chesterfield Business
Center(3) |
3 | Richmond | 204,280 | 2,167 | 89.1 | % | 89.1 | % | ||||||||||||||
Park Central |
1 | Glen Allen | 118,145 | 1,942 | 85.2 | % | 85.2 | % | ||||||||||||||
Total Business Park |
19 | 825,731 | 6,488 | 80.0 | % | 80.0 | % | |||||||||||||||
Industrial |
||||||||||||||||||||||
Northridge I, II |
2 | Ashland | 140,185 | 876 | 100.0 | % | 100.0 | % | ||||||||||||||
Rivers Bend Center(4) |
6 | Chester | 795,037 | 4,424 | 94.2 | % | 94.2 | % | ||||||||||||||
Total Industrial |
8 | 935,222 | 5,300 | 95.1 | % | 95.1 | % | |||||||||||||||
Total Richmond |
27 | 1,760,953 | 11,788 | 88.0 | % | 88.0 | % | |||||||||||||||
NORFOLK |
||||||||||||||||||||||
Business Park |
||||||||||||||||||||||
Crossways Commerce
Center(5) |
9 | Chesapeake | 1,089,786 | 9,859 | 82.0 | % | 82.0 | % | ||||||||||||||
Greenbrier Business
Center(6) |
4 | Chesapeake | 411,657 | 4,155 | 80.2 | % | 80.2 | % | ||||||||||||||
1000 Lucas Way |
2 | Hampton | 182,323 | 1,383 | 96.3 | % | 96.3 | % | ||||||||||||||
Enterprise Parkway |
1 | Hampton | 363,892 | 1,804 | 60.1 | % | 60.1 | % | ||||||||||||||
Norfolk Commerce Park(7) |
3 | Norfolk | 261,989 | 2,600 | 81.2 | % | 75.3 | % | ||||||||||||||
Total Business Park |
19 | 2,309,647 | 19,801 | 79.3 | % | 78.6 | % | |||||||||||||||
Office Park |
||||||||||||||||||||||
Battlefield Corporate Center |
1 | Chesapeake | 96,720 | 750 | 100.0 | % | 100.0 | % | ||||||||||||||
Industrial |
||||||||||||||||||||||
1400 Cavalier Boulevard |
4 | Chesapeake | 394,308 | 1,557 | 88.6 | % | 88.6 | % | ||||||||||||||
Diamond Hill Distribution Center |
4 | Chesapeake | 712,683 | 2,830 | 82.0 | % | 82.0 | % | ||||||||||||||
Total Industrial |
8 | 1,106,991 | 4,387 | 84.4 | % | 84.4 | % | |||||||||||||||
Total Norfolk |
28 | 3,513,358 | 24,938 | 81.4 | % | 81.0 | % | |||||||||||||||
Total Consolidated |
55 | 5,274,311 | 36,726 | 83.6 | % | 83.3 | % | |||||||||||||||
Total Redevelopment |
1 | 38,988 | | |||||||||||||||||||
Grand Total |
56 | 5,313,299 | $ | 36,726 | 82.3 | % | 81.3 | % | ||||||||||||||
(1) | Annualized cash basis rent is reflected at a triple-net equivalent basis, which removes operating expense reimbursements that are included, along with base rent, in the contractual payments of the Companys full service leases.
The operating expense reimbursements primarily relate to real estate taxes and insurance expenses. |
|
(2) | Does not include space in development or redevelopment. |
|
(3) | Chesterfield Business Center consists of the following properties: Airpark Business Center, Chesterfield Business Center, and Pine Glen. |
|
(4) | Rivers Bend Center consists of the following properties: Rivers Bend Center and Rivers Bend Center II. |
|
(5) | Crossways Commerce Center consists of the following properties: Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, 1434 Crossways Boulevard, and 1408 Stephanie Way |
|
(6) | Greenbrier Business Center consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II, and Greenbrier Circle Corporate Center. |
|
(7) | Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II, and Gateway II. |
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Table of Contents
Development and Redevelopment Activity
As of June 30, 2011, the Company continued development of several parcels of land, including
land adjacent to previously acquired properties and land acquired with the intent to develop. 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. Also, the Company expects to continue
redevelopment efforts on unfinished vacant spaces in its portfolio through the investment of
capital in electrical, plumbing and other capital improvements in order to expedite the leasing of
the spaces.
Below is a summary of the approximate building square footage that can be developed on the
Companys developable land and the Companys current development and redevelopment activity
(amounts in thousands):
Square Feet | Cost to Date of | Square Feet | Cost to Date of | |||||||||||||||||
Reporting | Developable | Under | Development | Under | Redevelopment | |||||||||||||||
Segment | Square Feet | Development | Activities | Redevelopment | Activities | |||||||||||||||
Maryland |
150 | | $ | | | $ | | |||||||||||||
Northern Virginia |
568 | | | 227 | 10,219 | |||||||||||||||
Southern Virginia |
841 | 166 | 415 | | | |||||||||||||||
Washington, D.C. |
30 | | | 135 | 726 | |||||||||||||||
1,589 | 166 | $ | 415 | 362 | $ | 10,945 | ||||||||||||||
The majority of the development and redevelopment costs incurred through the Companys
ongoing projects have taken place at Three Flint Hill in the Companys Northern Virginia region.
Three Flint Hill is a 174,000 square foot, eight-story Class A office building. The Company has
incurred approximately $9.9 million in redevelopment costs, which include architectural, and
engineering design fees and permit fees as well as demolition, glass, HVAC, electrical, plumbing,
and lobby finish work.
Lease Expirations
Approximately 15% of the Companys annualized base rent is scheduled to expire in the
remainder of 2011 and 2012, excluding month-to-month leases. Current tenants may not renew their
leases upon the expiration of their terms. If non-renewals or terminations occur, the Company may
not be able to locate qualified replacement tenants and, as a result, could lose a significant
source of revenue while remaining responsible for the payment of its financial obligations.
Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable
to the Company than the current lease terms, or the Company may be forced to provide tenant
improvements at its expense or provide other concessions or additional services to maintain or
attract tenants. We continually strive to increase our portfolio occupancy, and the amount of
vacant space in our portfolio at any given time may impact our willingness to reduce rental rates
or provide greater concessions to retain existing tenants and attract new tenants. The Companys
management continually monitors its portfolio on a regional and per property basis to assess market
trends, including vacancy, comparable deals and transactions, and other business and economic
factors that may influence our leasing decisions. During the three months ended June 30, 2011, the
Company had a 71% retention rate, based on square footage. The weighted average rental rate on the
Companys renewed leases decreased 0.1% compared with the expiring leases.
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Table of Contents
The following table sets forth a summary schedule of the lease expirations at the Companys
properties for leases in place as of June 30, 2011 for each of the ten full calendar years
beginning January 1, 2011 (dollars in thousands):
Percent of | ||||||||||||||||||||||||
Percent of | Total | |||||||||||||||||||||||
Number of | Total | Annualized | Annualized | |||||||||||||||||||||
Year of Lease | Leases | Square | Annualized Cash Basis | Cash Basis | Base Rent per | |||||||||||||||||||
Expiration | Expiring | Square Feet | Feet | Rent | Rent | Sq. Ft.(1) | ||||||||||||||||||
MTM(2) |
15 | 99,894 | 0.9 | % | $ | 1,077 | 0.7 | % | $ | 10.78 | ||||||||||||||
2011 |
90 | 783,479 | 7.2 | % | 9,438 | 6.5 | % | 12.05 | ||||||||||||||||
2012 |
119 | 913,819 | 8.4 | % | 12,213 | 8.4 | % | 13.36 | ||||||||||||||||
2013 |
134 | 1,881,865 | 17.4 | % | 26,373 | 18.1 | % | 14.01 | ||||||||||||||||
2014 |
126 | 1,432,883 | 13.2 | % | 17,088 | 11.7 | % | 11.93 | ||||||||||||||||
2015 |
76 | 864,156 | 8.0 | % | 10,901 | 7.5 | % | 12.61 | ||||||||||||||||
2016 |
66 | 1,616,698 | 14.9 | % | 25,754 | 17.6 | % | 15.93 | ||||||||||||||||
Thereafter |
142 | 3,235,989 | 29.9 | % | 43,149 | 29.6 | % | 13.33 | ||||||||||||||||
Total |
768 | 10,828,783 | 100.0 | % | $ | 145,993 | 100.0 | % | $ | 13.48 | ||||||||||||||
(1) | Annualized Cash Basis Rent is calculated as the contractual rent due under the
terms of the lease, without taking into consideration rent abatements, divided by the
square footage of the space. |
|
(2) | Reflects leases that are renewed on a month to month basis at June 30, 2011. |
Critical Accounting Policies and Estimates
The Companys condensed consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP) that require the Company to make certain
estimates and assumptions. Critical accounting policies and estimates are those that require
subjective or complex judgments and are the policies and estimates that the Company deems most
important to the portrayal of its financial condition and results of operations. It is possible
that the use of different reasonable estimates or assumptions in making these judgments could
result in materially different amounts being reported in its condensed consolidated financial
statements. The Companys critical accounting policies relate to revenue recognition, including
evaluation of the collectability of accounts receivable, impairment of long-lived assets, purchase
accounting for acquisitions of real estate, derivative instruments and share-based compensation.
The following is a summary of certain aspects of these critical accounting policies and
estimates.
Revenue Recognition
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 includes 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.
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Table of Contents
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.
Accounts and Notes Receivable
The Company must make estimates of the collectability of its accounts and notes receivable
related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and interest
and other income. The Company specifically analyzes accounts and notes receivable and historical
bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends
when evaluating the adequacy of its allowance for doubtful accounts receivable. These estimates
have a direct impact on the Companys net income as a higher required allowance for doubtful
accounts receivable will result in lower net income. The uncollectible portion of the amounts due
from tenants, including straight-line rents, is charged to property operating expense in the period
in which the determination is made.
Investments in Real Estate and Real Estate Entities
Investments in real estate are initially recorded at fair value and carried at initial cost,
less accumulated depreciation and, when appropriate, impairment losses. Improvements and
replacements are capitalized at fair value when they extend the useful life, increase capacity, or
improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred.
Depreciation and amortization are recorded on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives of the 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 | |
Lease related intangible assets
|
Term of related lease |
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, 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. 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 transferred to another property owned by the
Company after the disposition.
The Company recognizes the fair value, if sufficient information exists to reasonably estimate
the fair value, of any liability for conditional asset retirement obligations when incurred, which
is generally upon acquisition, construction, development or redevelopment and/or through the normal
operation of the asset.
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The Company capitalizes interest costs incurred on qualifying expenditures for real estate
assets under development or redevelopment while being readied for their intended use in accordance
with accounting requirements regarding capitalization of interest. The Company will capitalize
interest when qualifying expenditures for the asset have been made, activities necessary to get the
asset ready for its intended use are in progress and interest costs are being incurred. Capitalized
interest also includes interest associated with expenditures incurred to acquire developable land
while development activities are in progress and interest on the direct compensation costs of the
Companys construction personnel who manage the development and redevelopment projects, but only to
the extent the employees time can be allocated to a project. For the three and six months ended
June 30, 2011, capitalized compensation costs were immaterial. 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.
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.
Derivative Instruments
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. 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.
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Table of Contents
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. 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.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2011 with the Three and Six Months Ended June
30, 2010
During the first half of 2011, the Company acquired a building at One Fair Oaks; two buildings
at Cedar Hill; a building at Merrill Lynch; and a building at 840 First Street, NE for an aggregate
purchase cost of $189.6 million.
During 2010, the Company acquired the following consolidated properties: a building at Three
Flint Hill; a building at 500 First Street, NW; a building at Battlefield Corporate Center; two
buildings at Redland Corporate Center; two buildings at Atlantic Corporate Park; a building at 1211
Connecticut Ave, NW; a building at 440 First Street, NW and a building at 7458 Candlewood Road for
an aggregate purchase cost of $286.2 million.
Collectively, the properties are referred to as the Non-comparable Properties.
The term Comparable Portfolio refers to all consolidated properties owned by the Company for
the entirety of the periods presented.
Total Revenues
Total revenues are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Rental |
$ | 34,983 | $ | 26,606 | $ | 66,904 | $ | 53,145 | $ | 8,377 | 31 | % | $ | 13,759 | 26 | % | ||||||||||||||||
Tenant reimbursements & other |
$ | 7,837 | $ | 5,961 | $ | 15,783 | $ | 13,612 | $ | 1,876 | 31 | % | $ | 2,171 | 16 | % |
Rental Revenue
Rental revenue is comprised of contractual rent, the impact of straight-line revenue and the
amortization of deferred market rent assets and liabilities representing above and below market
rate leases at acquisition. Rental revenue increased $8.4 million and $13.8 million for the three
and six months ended June 30, 2011, respectively, compared with the same periods in 2010, which was
primarily due to increased revenues from the Companys recent acquisitions. The Non-comparable
Properties contributed $8.8 million and $14.1 million of additional rental revenue for the three
and six months ended June 30, 2011, respectively. Rental revenue for the Comparable Portfolio
decreased $0.4 million and $0.3 million for the three and six months ended June 30, 2011,
respectively, compared with the same periods in 2010, due to an increase in vacancy. The weighted
average occupancy of the Comparable Portfolio was 83.0% for the quarter ended June 30, 2011
compared with 84.1% for the same period in 2010. During the three months ended June 30, 2011, the
Company signed 53 new and renewal leases, of which, 33 leases, or 62%, contained fixed rate rental
increases ranging from 2.5% to 3.26%. The Company expects aggregate rental revenues will increase
throughout 2011 due to a full-year of revenues from the properties acquired in 2010 and additional
properties acquired in 2011.
The increase in rental revenue for the three and six months ended June 30, 2011 compared with
2010 includes $2.0 million and $4.2 million, respectively, for the Maryland reporting segment, $4.5
million and $7.3 million, respectively, for the Washington, D.C. reporting segment, $1.8 million
and $2.0 million, respectively, for the Northern Virginia reporting segment and $0.1 million and
$0.3 million, respectively, for the Southern Virginia reporting segment.
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Table of Contents
Tenant Reimbursements and Other Revenues
Tenant reimbursements and other revenues include operating and common area maintenance costs
reimbursed by the Companys tenants as well as other incidental revenues such as lease termination
payments, construction management fees and late fees. Tenant reimbursements and other revenues
increased $1.9 million and $2.2 million during the three and six months ended June 30, 2011,
respectively, compared with the same periods in 2010. The increase is due to the Non-comparable
Properties, which contributed $2.3 million and $3.4 million of additional tenant reimbursements and
other revenues for the three and six months ended June 30, 2011, respectively, compared with the
same periods in 2010. For the Comparable Portfolio, tenant reimbursements and other revenues
decreased $0.4 million and $1.2 million for the three and six months ended June 30, 2011,
respectively, compared with the same periods in 2010 primarily due to a reduction in termination
fee income. The Company expects tenant reimbursements and other revenues to increase throughout
2011 due to a full-year of recoverable operating expenses from properties acquired in 2010 and
additional properties acquired in 2011.
The increase in tenant reimbursements and other revenues for the three and six months ended
June 30, 2011 compared with 2010 include $1.4 million and $2.2 million, respectively, for the
Washington, D.C. reporting segment, $0.6 million and $0.2 million, respectively, for the Northern
Virginia reporting segment and $0.2 million and $0.1 million, respectively, for the Southern
Virginia reporting segment. For the Maryland reporting segment, tenant reimbursements and other
revenues decreased $0.3 million for both the three and six months ended June 30, 2011 compared with
the same periods in 2010.
Total Expenses
Property Operating Expenses
Property operating expenses are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Property operating |
$ | 9,543 | $ | 6,863 | $ | 20,265 | $ | 16,600 | $ | 2,680 | 39 | % | $ | 3,665 | 22 | % | ||||||||||||||||
Real estate taxes and insurance |
$ | 4,091 | $ | 3,131 | $ | 8,032 | $ | 6,392 | $ | 960 | 31 | % | $ | 1,640 | 26 | % |
Property operating expenses increased $2.7 million and $3.7 million for the three and six
months ended June 30, 2011, respectively, compared with the same periods in 2010. The increase is
due to the Non-comparable Properties, which contributed $2.8 million and $4.7 million of additional
property operating expenses for the three and six months ended June 30, 2011, respectively. For the
Comparable Portfolio, property operating expenses decreased $0.1 million for the three months ended
June 30, 2011, which was primarily due to a decline in reserves for bad debt expense, and decreased
$1.0 million for the six months ended June 30, 2011 due to a decline in snow and ice removal costs.
The Company expects property operating expenses to increase for the remainder of the year compared
with prior year results due primarily to the Companys new acquisitions. The increase in property
operating expenses for the three and six months ended June 30, 2011 compared with 2010 includes
$0.7 million and $1.2 million, respectively, for the Maryland reporting segment, $1.1 million and
$1.9 million, respectively, for the Washington, D.C. reporting segment and $0.7 million and $0.6
million, respectively, for the Northern Virginia reporting segment. For the Southern Virginia
reporting segment, property operating expenses increased $0.2 million for the three months ended
June 30, 2011 compared with the same period in 2010 and remained flat for the six months ended June
30, 2011 compared to 2010.
Real estate taxes and insurance expense increased $1.0 million and $1.6 million for the three
and six months ended June 30, 2011, respectively, compared with the same periods in 2010. The
Non-comparable Properties contributed an increase in real estate taxes and insurance expense of
$1.2 million and $2.1 million for the three and six months ended June 30, 2011, respectively. For
the Comparable Portfolio, real estate taxes and insurance expense decreased $0.2 million and $0.5
million for the three and six months ended June 30, 2011, respectively, compared with the same
periods in 2010 primarily due to lower real estate assessments and real estate tax rates. Real
estate taxes and insurance expense for the three and six months ended June 30, 2011 compared with
2010, increased $0.2 million and $0.3 million, respectively, for the Maryland reporting segment,
$0.8 million and $1.2 million, respectively, for the Washington, D.C. reporting segment and $0.1
million and $0.2 million, respectively, for the Northern Virginia reporting segment. For the
Southern Virginia reporting segment, real estate taxes and insurance expense decreased $0.1 million
for both the three and six months ended June 30, 2011 compared to 2010.
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Table of Contents
Other Operating Expenses |
General and administrative expenses are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
$ | 4,185 | $ | 3,675 | $ | 8,192 | $ | 7,384 | $ | 510 | 14 | % | $ | 808 | 11 | % |
General and administrative expenses increased $0.5 million and $0.8 million for the three
and six months ended June 30, 2011, respectively, compared with the same periods in 2010, primarily
due to an increase in marketing and advertising expenses and consulting and accounting fees for the
three and six months ended June 30, 2011.
Acquisition costs are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Decrease | Change | Increase | Change | ||||||||||||||||||||||||
$ | 552 | $ | 1,645 | $ | 2,737 | $ | 1,664 | $ | 1,093 | 66 | % | $ | 1,073 | 64 | % |
Acquisition costs decreased $1.1 million for the three months ended June 30, 2011 compared
with the same period in 2010 and increased $1.1 million for the six months ended June 30, 2011
compared with the same period in 2010. During 2011, the Company acquired three properties in the
first quarter and one property in the second quarter compared with 2010 when the Company acquired
two properties in the second quarter.
Depreciation and amortization expenses are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
$ | 16,691 | $ | 10,196 | $ | 29,293 | $ | 19,879 | $ | 6,495 | 64 | % | $ | 9,414 | 47 | % |
Depreciation and amortization expense includes depreciation of real estate assets and
amortization of intangible assets and leasing commissions. Depreciation and amortization expense
increased $6.5 million and $9.4 million for the three and six months ended June 30, 2011,
respectively, compared with the same periods in 2010 primarily due to the Companys recent
acquisitions. The Non-comparable Properties contributed additional depreciation and amortization
expense of $6.2 million and $8.6 million for the three and six months ended June 30, 2011,
respectively. The additional increase in depreciation and amortization expense was attributed to
the Comparable Portfolio, which contributed additional depreciation and amortization expense of
$0.3 million and $0.8 million for the three and six months ended June 30, 2011, respectively,
compared with the same periods in 2010, primarily due to the disposal of assets from tenants that
vacated during the year prior to reaching the full term of their lease. The Company anticipates
depreciation and amortization expense to increase the remainder of 2011 due to recognizing a
full-year of depreciation and amortization expense for properties acquired in 2010 and additional
properties acquired in 2011.
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Contingent consideration related to acquisition of property is summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Change | Change | Decrease | Change | ||||||||||||||||||||||||
$ | | $ | | $ | | $ | 710 | $ | | | $ | 710 | 100 | % |
As part of the consideration for the Companys 2009 acquisition of Ashburn Center, the
Company is obligated to record 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. The Company initially recorded $0.7 million at the time of
acquisition in December 2009, which represented the fair value of the Companys potential
obligation at acquisition. During the first quarter of 2010, the Company was able to lease vacant
space at Ashburn Center faster than it had anticipated and, therefore, recorded additional
contingent consideration of $0.7 million that reflected an increase in the potential consideration
that may be owed to the seller. There was no significant change in the fair value of the contingent
consideration during the three and six months ended June 30, 2011.
Other Expenses (Income)
Interest expense is summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
$ | 10,473 | $ | 8,052 | $ | 19,100 | $ | 16,903 | $ | 2,421 | 30 | % | $ | 2,197 | 13 | % |
The Company seeks to employ cost-effective financing methods to fund its acquisitions,
development and redevelopment projects and to refinance its existing debt to provide greater
balance sheet flexibility or to take advantage of lower interest rates. The methods used to fund
the Companys activities impact the period-over-period comparisons of interest expense.
Interest expense increased $2.4 million and $2.2 million for the three and six months ended
June 30, 2011, respectively, compared with the same periods in 2010. At June 30, 2011, the Company
had $811.2 million of debt outstanding with a weighted average interest rate of 5.0% compared with
$613.5 million of debt outstanding with a weighted average interest rate of 5.4% at June 30, 2010.
The increase in the Companys interest expense is primarily attributable to an increase in
mortgage interest expense, which increased $2.2 million and $2.7 million for the three and six
months ended June 30, 2011, respectively, compared with the same periods in 2010, due to the
assumption of additional mortgages associated with the Companys 2011 and 2010 acquisitions. During
the fourth quarter of 2010, the Company entered into a $50.0 million secured term loan, which
contributed additional interest expense of $0.4 million and $1.0 million for the three and six
months ended June 30, 2011, respectively. The Company has incurred additional deferred financing
costs with the assumption and issuance of new debt and the refinancing of its unsecured credit
facility, which increased interest expense $0.2 million and $0.5 million for the three and six
months ended June 30, 2011, respectively, compared with the same periods in 2010.
For the three months ended June 30, 2011, the Company experienced an increase in interest
expense associated with its unsecured revolving credit facility of $0.4 million, due to a higher
outstanding balance on the facility, and a decrease in interest expense of $0.1 million for the six
months ended June 30, 2011 as a higher outstanding balance on the facility was offset by a lower
applicable interest rate. For the three and six months ended June 30, 2011, the average balance on
the Companys unsecured revolving credit facility was $151.1 million and $132.9 million,
respectively, with a weighted average interest rate of 3.1% and 3.2%, respectively, compared with
$84.5 million and $117.9 million with a weighted average interest rate of 3.6% and 3.8% for the
three and six months ended June 30, 2010, respectively.
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The increase in interest expense for the three and six months ended June 30, 2011 compared
with 2010 was partially offset by a decrease of $0.2 million and $0.5 million, respectively, in
interest expense associated with the Companys Exchangeable Senior Notes as $20.1 million of the
notes were repurchased in the second quarter of 2010. Also, the Company recorded an increase in
capitalized interest of $0.2 million and $0.5 million for the three and six months ended June 30,
2011, respectively, compared with the same periods in 2010.
The Company uses derivative financial instruments to manage exposure to interest rate
fluctuations on its variable rate debt. On January 18, 2011, the Company fixed LIBOR at 1.474% on
$50.0 million of its variable rate debt though an interest rate swap agreement that matures on
January 15, 2014. During the first six months of 2010, the Company had fixed LIBOR on $85.0 million
of variable rate debt through two interest rate swap agreements, which both expired in August 2010.
As a result, interest expense related to the interest rate swap agreements decreased $0.4 million
and $0.9 million for the three and six months ended March 31, 2011, respectively, compared with the
same periods in 2010.
Interest and other income are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
$ | 1,410 | $ | 87 | $ | 2,235 | $ | 197 | $ | 1,323 | 1521 | % | $ | 2,038 | 1035 | % |
In December 2010, the Company provided a $25.0 million subordinated loan to the owners of
950 F Street, NW, a 287,000 square-foot office building in Washington, D.C. The loan has a fixed
interest rate of 12.5%. In April 2011, the Company provided a $30.0 million subordinated loan to
the owners of Americas Square a 461,000 square foot, Class A office complex in Washington, D.C.
The loan has a fixed interest rate of 9.0%. The Company recorded interest income related to these
loans of $1.4 million and $2.2 million for the three and six months ended June 30, 2011,
respectively. The increase in interest and other income was partially offset by a $0.1 million
decline in other income for both the three and six months ended June 30, 2011 compared to 2010,
related to income received from the Company subleasing its former corporate office space.
Equity in losses of affiliates is summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Decrease | Change | Decrease | Change | ||||||||||||||||||||||||
$ | | $ | 20 | $ | 32 | $ | 59 | $ | 20 | 100 | % | $ | 27 | 46 | % |
Equity in losses of affiliates reflects the Companys ownership interest in the
operating results of the properties, in which, it does not have a controlling interest. The
decrease in equity in losses of affiliates reflects a smaller aggregate loss generated by the
properties owned by these ventures during the three and six months ended June 30, 2011 compared
with the same periods in 2010.
Gain on early retirement of debt is summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Decrease | Change | Decrease | Change | ||||||||||||||||||||||||
$ | | $ | 164 | $ | | $ | 164 | $ | 164 | 100 | % | $ | 164 | 100 | % |
During the second quarter of 2010, the Company issued 0.9 million common shares in
exchange for retiring $13.03 million of Exchangeable Senior Notes and used available cash to retire
$7.02 million of its Exchangeable Senior Notes, which resulted in a gain of $0.2 million, net of
deferred financing costs and discounts. The Company did not retire any Exchangeable Senior
Notes or other debt resulting in a gain during the three and six months ended June 30, 2011.
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Table of Contents
Benefit from Income Taxes
Benefit from income taxes is summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
$ | 148 | $ | | $ | 461 | $ | | $ | 148 | | $ | 461 | |
The Company owns three consolidated properties in Washington, D.C., 840 First Street, NE,
1211 Connecticut Avenue, NW and 440 First Street, NW, which are subject to income-based franchise
taxes as a result of conducting business in Washington, D.C. The Company recorded a benefit from
income taxes of $0.1 million and $0.5 million for the three and six months ended June 30, 2011,
respectively. The Company did not own any properties located in Washington D.C. that were subject
to any Washington D.C. income-based franchise taxes during the three and six months ended June 30,
2010.
Discontinued Operations
Discontinued operations are summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Increase | Change | Decrease | Change | ||||||||||||||||||||||||
$ | 1,909 | $ | 797 | $ | (873 | ) | $ | 299 | $ | 1,112 | 140 | % | $ | 1,172 | 392 | % |
Represents the operating results of Aquia Commerce Center I & II, Gateway West, Old
Courthouse Square, Deer Park and 7561 Lindbergh Drive. Aquia Commerce Center I & II and Gateway
West were both sold in the second quarter of 2011, Old Courthouse Square was sold in the first
quarter of 2011 and Deer Park and 7561 Lindbergh Drive were sold in the second quarter of 2010.
Gateway West, Old Courthouse Square, Deer Park and 7561 Lindbergh Drive were located in the
Companys Maryland reporting segment and Aquia Commerce Center I & II was located in the Companys
Northern Virginia reporting segment. The Company has had, and will have, no continuing involvement
with these properties subsequent to their disposal.
Net loss (income) attributable to noncontrolling interests |
Net loss (income) attributable to noncontrolling interests is summarized as follows:
Three Months Ended | Six Months Ended | Three Months | Six Months | |||||||||||||||||||||||||||||
June 30, | June 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2011 | 2010 | 2011 | 2010 | Decrease | Change | Increase | Change | ||||||||||||||||||||||||
$ | 65 | $ | (1 | ) | $ | 203 | $ | 48 | $ | 66 | 6600 | % | $ | 155 | 323 | % |
Net loss (income) attributable to noncontrolling interests reflects the ownership
interests in the Companys net income or loss attributable to parties other than the Company. The
change in net loss (income) attributable to noncontrolling interests can be attributed to an
increase in net income during the three months ended June 30, 2011 and an increase in net loss
during the six months ended June 30, 2011 compared with the same periods in 2010.
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Table of Contents
The percentage of the Operating Partnership owned by noncontrolling interests increased to
4.5% as of June 30, 2011 compared with 1.9% as of June 30, 2010, primarily due to the issuance of
1,418,715 Operating Partnership units to partially fund the acquisition of 840 First Street, NE
during the second quarter of 2011. During the fourth quarter of 2010, the Company acquired Redland
Corporate Center through a joint venture, in which, it has a 97% economic interest. The Company
consolidates the operating results of the property and recognizes its joint venture partners
percentage of gains or losses from Redland Corporate Center in net loss (income) attributable to
noncontrolling interests. For the quarter ended June 30, 2011, the joint venture partners share of
the income in the operations of Redland Corporate Center was $2 thousand.
Same Property Net Operating Income
Same Property Net Operating Income (Same Property NOI), defined as operating revenues
(rental, tenant reimbursements and other revenues) less operating expenses (property operating
expenses, real estate taxes and insurance) from the properties whose period-over-period operations
can be viewed on a comparative basis , is a primary performance measure the Company uses to assess
the results of operations at its properties. Same Property NOI is a non-GAAP measure. As an
indication of the Companys operating performance, Same Property NOI should not be considered an
alternative to net income calculated in accordance with GAAP. A reconciliation of the Companys
Same Property NOI to net income from its consolidated statements of operations is presented below.
The Same Property NOI results exclude corporate-level expenses, as well as certain transactions,
such as the collection of termination fees, as these items vary significantly period-over-period
and thus impact trends and comparability. Also, the Company eliminates depreciation and
amortization expense, which are property level expenses, in computing Same Property NOI because
these are non-cash expenses that are based on historical cost accounting assumptions and management
believes these expenses do not offer the investor significant insight into the operations of the
property. This presentation allows management and investors to distinguish whether growth or
declines in net operating income are a result of increases or decreases in property operations or
the acquisition of additional properties. While this presentation provides useful information to
management and investors, the results below should be read in conjunction with the results from the
consolidated statements of operations to provide a complete depiction of total Company performance.
The Company also presents Same Property NOI results for each of its reporting segments, with the
exception of its Washington, D.C. reporting segment, which did not have any properties owned for
the entirety of the periods presented.
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Table of Contents
Comparison of the Three and Six Months Ended June 30, 2011 with the Three and Six Months Ended June
30, 2010
The following table of selected operating data provides the basis for our discussion of Same
Property NOI for the periods presented:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | $ | % | June 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | Change | 2011 | 2010 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
166 | 166 | | | 166 | 166 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 26,118 | $ | 26,499 | $ | (381 | ) | (1.4 | ) | $ | 52,647 | $ | 52,892 | $ | (245 | ) | (0.5 | ) | ||||||||||||||
Tenant reimbursements |
5,400 | 5,342 | 58 | 1.1 | 11,843 | 12,538 | (695 | ) | (5.5 | ) | ||||||||||||||||||||||
Total same property revenue |
31,518 | 31,841 | (323 | ) | (1.0 | ) | 64,490 | 65,430 | (940 | ) | (1.4 | ) | ||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
6,258 | 6,404 | (146 | ) | (2.3 | ) | 14,627 | 15,825 | (1,198 | ) | (7.6 | ) | ||||||||||||||||||||
Real estate taxes and insurance |
2,881 | 3,113 | (232 | ) | (7.5 | ) | 5,867 | 6,350 | (483 | ) | (7.6 | ) | ||||||||||||||||||||
Total same property operating expenses |
9,139 | 9,517 | (378 | ) | (4.0 | ) | 20,494 | 22,175 | (1,681 | ) | (7.6 | ) | ||||||||||||||||||||
Same property net operating income |
$ | 22,379 | $ | 22,324 | $ | 55 | 0.2 | $ | 43,996 | $ | 43,255 | $ | 741 | 1.7 | ||||||||||||||||||
Reconciliation to net income |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 22,379 | $ | 22,323 | $ | 43,996 | $ | 43,255 | ||||||||||||||||||||||||
Non-comparable net operating income (2) (3) |
6,955 | 250 | 10,855 | 510 | ||||||||||||||||||||||||||||
General and administrative expenses |
(4,185 | ) | (3,675 | ) | (8,192 | ) | (7,384 | ) | ||||||||||||||||||||||||
Acquisition costs |
(552 | ) | (1,645 | ) | (2,737 | ) | (1,664 | ) | ||||||||||||||||||||||||
Depreciation and amortization |
(16,691 | ) | (10,196 | ) | (29,293 | ) | (19,879 | ) | ||||||||||||||||||||||||
Contingent consideration related to acquisition of
property |
| | | (710 | ) | |||||||||||||||||||||||||||
Other expenses, net |
(9,063 | ) | (7,821 | ) | (16,897 | ) | (16,601 | ) | ||||||||||||||||||||||||
Discontinued operations (4) |
1,909 | 797 | (873 | ) | 299 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 752 | $ | 33 | $ | (3,141 | ) | $ | (2,174 | ) | ||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Same Properties |
82.9 | % | 84.1 | % | 83.4 | % | 84.6 | % |
(1) | Same property results reflect properties whose results can be viewed on a comparative basis for the periods
presented. Same property results exclude the results of the following non same-properties: RiversPark I and II, Three Flint Hill, 500 First
Street, NW, Battlefield Corporate Center, Redland Corporate Center, Atlantic Corporate Park, 1211 Connecticut Ave, NW, 440 First Street,
NW, 7458 Candlewood Road, 1750 H Street, NW, Aviation Business Park, Cedar Hill I & III, Merrill Lynch, 840 First Street, NE, One Fair
Oaks, Davis Drive and Sterling Park Building 7. |
|
(2) | Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an
administrative overhead allocation for comparative purposes.
|
|
(3) | Discontinued operations represent the results of operations and subsequent dispositions of Aquia Commerce Center
I&II, Gateway West, Old Courthouse Square, Deer Park and 7561 Lindbergh Drive. |
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Table of Contents
Same Property NOI increased $0.1 million, or 0.2%, and $0.7 million, or 1.7%, for the
three and six months ended June 30, 2011, respectively, compared with the same periods in
2010. Total same property revenues decreased $0.3 million and $0.9 million for the three and six
months ended June 30, 2011, respectively, primarily due to an increase in vacancy. Total same
property revenues for the six months ended June 30, 2011 were also impacted by a reduction in
recoverable expenses due to lower snow and ice removal costs. Total same property expenses
decreased $0.4 million for the three ended June 30, 2011, due to a reduction in real estate taxes,
and decreased $1.7 million for the six months ended June 30, 2011 due to a reduction in real estate
taxes and snow and ice removal costs.
Maryland
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | $ | % | June 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | Change | 2011 | 2010 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
63 | 63 | | | 63 | 63 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 8,325 | $ | 8,618 | $ | (293 | ) | (3.4 | ) | $ | 17,068 | 17,247 | $ | (179 | ) | (1.0 | ) | |||||||||||||||
Tenant reimbursements |
1,575 | 1,573 | 2 | 0.1 | 3,655 | 3,929 | (274 | ) | (7.0 | ) | ||||||||||||||||||||||
Total same property revenue |
9,900 | 10,191 | (291 | ) | (2.9 | ) | 20,723 | 21,176 | (453 | ) | (2.1 | ) | ||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
1,832 | 2,112 | (280 | ) | (13.3 | ) | 4,749 | 5,385 | (636 | ) | (11.8 | ) | ||||||||||||||||||||
Real estate taxes and insurance |
990 | 1,007 | (17 | ) | (1.7 | ) | 1,950 | 2,066 | (116 | ) | (5.6 | ) | ||||||||||||||||||||
Total same property operating expenses |
2,822 | 3,119 | (297 | ) | (9.5 | ) | 6,699 | 7,451 | (752 | ) | (10.1 | ) | ||||||||||||||||||||
Same property net operating income |
$ | 7,078 | $ | 7,072 | $ | 6 | 0.1 | $ | 14,024 | $ | 13,725 | $ | 299 | 2.2 | ||||||||||||||||||
Reconciliation to total property operating income: |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 7,078 | $ | 7,072 | $ | 14,024 | $ | 13,725 | ||||||||||||||||||||||||
Non-comparable net operating income(2) |
1,177 | 433 | 2,346 | 401 | ||||||||||||||||||||||||||||
Total property operating income |
$ | 8,255 | $ | 7,505 | $ | 16,370 | $ | 14,126 | ||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Same Properties |
80.6 | % | 82.8 | % | 80.8 | % | 82.5 | % | ||||||||||||||||||||||||
(1) | Same property results reflect properties whose results can be viewed
on a comparative basis for the periods presented. Same property results exclude
Redland Corporate Center, 7458 Candlewood Road and Merrill Lynch. |
|
(3) | Non-comparable net operating income has been adjusted to reflect a
normalized management fee percentage in lieu of an administrative
overhead allocation for comparative purposes. |
Same Property NOI for the Maryland properties slightly increased for the three months
ended June 30, 2011 and increased $0.3 million, or 2.2%, for the six months ended June 30, 2011
compared with the same periods in 2010. Total same property revenues decreased $0.3 million and
$0.5 million for the three and six months ended June 30, 2011, respectively, due to an increase in
vacancy. Total same property operating expenses for the Maryland properties decreased $0.3 million
for the three ended June 30, 2011, due to lower reserves for bad debt expense, and decreased $0.8
million due to lower real estate taxes, snow and ice removal costs and reserves for bad debt
expense.
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Table of Contents
Northern Virginia
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | $ | % | June 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | Change | 2011 | 2010 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
49 | 49 | | | 49 | 49 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 8,159 | $ | 8,094 | $ | 65 | 0.8 | $ | 16,228 | $ | 16,137 | $ | 91 | 0.6 | ||||||||||||||||||
Tenant reimbursements |
1,600 | 1,673 | (73 | ) | (4.4 | ) | 3,641 | 4,107 | (466 | ) | (11.3 | ) | ||||||||||||||||||||
Total same property revenue |
9,759 | 9,767 | (8 | ) | (0.1 | ) | 19,869 | 20,244 | (375 | ) | (1.9 | ) | ||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
1,795 | 1,757 | 38 | 2.2 | 4,385 | 4,753 | (368 | ) | (7.7 | ) | ||||||||||||||||||||||
Real estate taxes and insurance |
943 | 1,075 | (132 | ) | (12.3 | ) | 1,988 | 2,197 | (209 | ) | (9.5 | ) | ||||||||||||||||||||
Total same property operating expenses |
2,738 | 2,832 | (94 | ) | (3.3 | ) | 6,373 | 6,950 | (577 | ) | (8.3 | ) | ||||||||||||||||||||
Same property net operating income |
$ | 7,021 | $ | 6,935 | $ | 86 | 1.2 | $ | 13,496 | $ | 13,294 | $ | 202 | 1.5 | ||||||||||||||||||
Reconciliation to total property operating income |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 7,021 | $ | 6,935 | $ | 13,496 | $ | 13,294 | ||||||||||||||||||||||||
Non-comparable net operating income
(loss)(2) (3) |
1,424 | (69 | ) | 1,311 | 39 | |||||||||||||||||||||||||||
Total property operating income |
$ | 8,445 | $ | 6,866 | $ | 14,807 | $ | 13,333 | ||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Same Properties |
83.6 | % | 84.3 | % | 84.1 | % | 84.0 | % |
(1) | Same property results reflect properties whose results can be viewed on a
comparative basis for the periods presented. Same property results exclude the results of
Three Flint Hill, Atlantic Corporate Park, Cedar Hill, Davis Drive and Sterling Park-Building
7. |
|
(3) | Non-comparable net operating income has been adjusted to reflect a
normalized management fee percentage in lieu of an administrative
overhead allocation for comparative purposes. |
Same Property NOI for the Northern Virginia properties increased $0.1 million, or 1.2%,
and $0.2 million, or 1.5%, for the three and six months ended June 30, 2011, respectively, compared
with the same periods in 2010. Total same property revenues remained relatively flat for the three
months ended June 30, 2011 and decreased $0.4 million for the six months ended June 30, 2011
compared with 2010 due to a decline in recoverable property operating expenses. Total same
property operating expenses decreased $0.1 million and $0.6 million for the three and six months
ended June 30, 2011, respectively, primarily due to lower real estate taxes and, in the first
quarter of 2011 snow and ice removal costs.
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Table of Contents
Southern Virginia
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | $ | % | June 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | Change | 2011 | 2010 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
54 | 54 | | | 54 | 54 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 9,634 | $ | 9,787 | $ | 153 | (1.6 | ) | $ | 19,351 | $ | 19,508 | $ | (157 | ) | (0.8 | ) | |||||||||||||||
Tenant reimbursements |
2,225 | 2,096 | 129 | 6.2 | 4,547 | 4,502 | 45 | 1.0 | ||||||||||||||||||||||||
Total same property revenue |
11,859 | 11,883 | (24 | ) | (0.2 | ) | 23,898 | 24,010 | (112 | ) | (0.5 | ) | ||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
2,631 | 2,535 | 96 | 3.8 | 5,493 | 5,687 | (194 | ) | (3.4 | ) | ||||||||||||||||||||||
Real estate taxes and insurance |
948 | 1,031 | (83 | ) | (8.1 | ) | 1,929 | 2,087 | (158 | ) | (7.6 | ) | ||||||||||||||||||||
Total same property operating expenses |
3,579 | 3,566 | 13 | 0.4 | 7,422 | 7,774 | (352 | ) | (4.5 | ) | ||||||||||||||||||||||
Same property net operating income |
$ | 8,280 | $ | 8,317 | $ | (37 | ) | (0.4 | ) | $ | 16,476 | $ | 16,236 | $ | 240 | 1.5 | ||||||||||||||||
Reconciliation to total property operating income |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 8,280 | $ | 8,317 | $ | 16,476 | $ | 16,236 | ||||||||||||||||||||||||
Non-comparable net operating income
(loss) (2) |
82 | (125 | ) | 336 | 60 | |||||||||||||||||||||||||||
Total property operating income |
$ | 8,362 | $ | 8,192 | $ | 16,812 | $ | 16,296 | ||||||||||||||||||||||||
(1) Same property
results reflect properties whose results can be viewed on a
comparative basis for the periods presented. Same property results exclude the results of
Battlefield Corporate Center. |
||||||||||||||||||||||||||||||||
(3) Non-comparable
net operating income has been adjusted to reflect a
normalized management fee percentage in lieu of an administrative
overhead allocation for comparative purposes. |
||||||||||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Same Properties |
84.0 | % | 84.4 | % | 84.6 | % | 85.8 | % |
Same Property NOI for the Southern Virginia properties slightly decreased for the three
months ended June 30, 2011 and increased $0.2 million, or 1.5%, for the six months ended June 30,
2011 compared with the same periods in 2010. Total same property revenues slightly decreased for
both the three and six months ended June 30, 2011 compared with 2010 as a result of an increase in
vacancy. Total same property operating expense slightly increased for the three months ended June
30, 2011 and decreased $0.4 million primarily due to a decline in real estate taxes, snow and ice
removal costs and reserves for anticipated bad debt expense.
Liquidity and Capital Resources
Overview
The Company seeks to maintain a flexible balance sheet, with an appropriate balance of cash,
debt, equity and available funds under its unsecured revolving credit facility, to readily provide
access to capital given the volatility of the market and to position itself to take advantage of
potential growth opportunities. The Company expects to meet short-term liquidity requirements
generally through working capital, net cash provided by operations, and, if necessary, borrowings
on its unsecured revolving credit facility. The Companys short-term obligations consist primarily
of the lease for its corporate headquarters, normal recurring operating expenses, regular debt
payments, recurring expenditures for corporate and
administrative needs, non-recurring expenditures such as capital improvements, tenant
improvements and redevelopments, leasing commissions and dividends to preferred and common
shareholders.
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Over the next twelve months, the Company believes that it will generate sufficient cash flow
from operations and have access to the capital resources, through debt and equity markets,
necessary to expand and develop its business, to fund its operating and administrative expenses, to
continue to meet its debt service obligations and to pay distributions in accordance with REIT
requirements. However, the Companys cash flow from operations could be adversely affected due to
uncertain economic factors and volatility in the financial and credit markets. In particular, the
Company cannot assure that its tenants will not default on their leases or fail to make full rental
payments if their businesses are challenged due to, among other things, the economic conditions
(particularly if the tenants are unable to secure financing to operate their businesses). This may
be particularly true for the Companys tenants that are smaller companies. Further, approximately
15% of the Companys annualized base rent is scheduled to expire during the next eighteen months
and, if it is unable to renew these leases or re-let the space, its cash flow could be negatively
impacted.
The Company also believes that it will have sufficient cash flow or access to capital to meet
its obligations over the next five years. The Company intends to meet long-term funding
requirements for property acquisitions, development, redevelopment and other non-recurring capital
improvements through net cash provided from operations, long-term secured and unsecured
indebtedness, including borrowings under its unsecured revolving credit facility, unsecured term
loan, secured term loans and unsecured senior notes, proceeds from disposal of strategically
identified assets (outright and through joint ventures) and the issuance of equity and debt
securities.
For example:
| In January 2011, the Company raised net proceeds of approximately $111 million
through the issuance of 4.6 million 7.75% Series A Preferred Shares. The Company used
$105.0 million of the proceeds to pay down a portion of its unsecured revolving credit
facility; |
| On June 16, 2011, the Company amended and restated its unsecured revolving credit
facility. Under the new agreement, the capacity on the Companys unsecured revolving
credit facility was expanded from $225 million to $255 million and the maturity date
was extended to January 2014 with a one-year extension at the Companys option, which
it intends to exercise. The interest rate on the unsecured revolving credit facility
decreased from a range of LIBOR plus 275 to 375 basis points to a range of LIBOR plus
200 to 300 basis points, depending on the Companys overall leverage; and |
| On July 18, 2011, the Company entered into a three-tranche $175.0 million unsecured
term loan. The unsecured term loans three tranches have maturity dates staggered in
one-year intervals. Tranche A has an outstanding balance of $60.0 million at an
interest rate of LIBOR plus 215 basis points and matures on July 18, 2016. Tranche B
has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 225 basis
points and matures on July 18, 2017. Tranche C has an outstanding balance of $55.0
million at an interest rate of LIBOR plus 230 basis points and matures on July 18,
2018. The Company used the funds to pay down $117.0 million of the outstanding balance
on its unsecured revolving credit facility, to repay its $50.0 million senior secured
term loan and for other general corporate purposes. |
The Companys ability to raise funds through sales of debt and equity securities and access
other third party sources of capital in the future will be dependent on, among other things,
general economic conditions, general market conditions for REITs, rental rates, occupancy levels,
market perceptions and the trading price of the Companys shares. The Company will continue to
analyze which sources of capital are most advantageous to it at any particular point in time, but
the capital markets may not be consistently available on terms the Company deems attractive, or at
all.
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Financial Covenants
The Companys outstanding corporate debt agreements contain specific financial covenants that
may impact future financing decisions made by the Company or may be impacted by a decline in
operations. These covenants differ by debt instrument and relate to the Companys allowable
leverage, minimum tangible net worth, fixed debt coverage and other financial metrics. As of June
30, 2011, the Company was in compliance with all of the financial covenants of its outstanding debt
instruments. Below is a summary of certain financial covenants associated with the Companys
outstanding debt at June 30, 2011 (dollars in thousands):
Unsecured Revolving Credit Facility and Secured Term Loans
Unsecured | 2007 | 2008 | ||||||||||||||||||||||
Revolving | Secured | Secured | ||||||||||||||||||||||
Credit Facility | Covenant | Term Loan | Covenant | Term Loan | Covenant | |||||||||||||||||||
Unencumbered Pool Leverage(1) |
40.3 | % | ≤ 62.5 | % | | | | | ||||||||||||||||
Unencumbered Pool Debt Service Coverage Ratio(1), |
4.01x | ≥ 1.75x | | | | | ||||||||||||||||||
Maximum Consolidated Total Indebtedness |
50.2 | % | ≤ 62.5 | % | 53.7 | % | ≤ 62.5 | % | 51.3 | % | ≤ 60 | % | ||||||||||||
Minimum Tangible Net Worth |
$ | 849,365 | ≥ $690,290 | $ | 754,509 | ≥ $690,290 | $ | 833,310 | ≥ $690,290 | |||||||||||||||
Fixed Charge Coverage Ratio |
1.98x | ≥ 1.50x | 1.81x | ≥ 1.50x | 1.81x | ≥ 1.50x | ||||||||||||||||||
Maximum Secured Debt |
33.1 | % | ≤ 40 | % | 34.6 | % | ≤ 40 | % | 33.0 | % | ≤ 40 | % |
(1) | Covenant applies only to the Companys unsecured revolving credit facility. |
Senior Notes
Senior Notes | Covenant | |||||||
Unencumbered Pool Leverage |
2.45x | ≥ 1.50x | ||||||
Unencumbered Pool Debt Service Coverage Ratio |
4.07x | ≥ 1.75x | ||||||
Maximum Consolidated Total Indebtedness |
52.5 | % | ≤ 65 | % | ||||
Minimum Tangible Net Worth |
$ | 792,716 | ≥ $690,290 | |||||
Fixed Charge Coverage Ratio |
1.81x | ≥ 1.50x | ||||||
Maximum Secured Debt |
33.8 | % | ≤ 40 | % |
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
Operating Partnership. As of June 30, 2011, the Company believes that there were eight mortgage
loans with such Prohibited Transfer provisions, representing an aggregate principal amount
outstanding of approximately $77 million. Two of these mortgage loans were entered into prior to
the Companys initial public offering (IPO) in 2003 and six were assumed subsequent to its IPO.
In July 2011, the Company repaid two mortgages totaling $19.7 million with Prohibited Transfer
provisions that were both assumed subsequent to its IPO. 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 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 unsecured term loan, its two Secured Term Loans and its Exchangeable Senior Notes.
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Cash Flows
Due to the nature of the Companys business, it relies on net cash provided by operations to
fund its short-term liquidity needs. Net cash provided by operations is substantially dependent on
the continued receipt of rental payments and other expenses reimbursed by the Companys tenants.
The ability of tenants to meet their obligations, including the payment of rent contractually owed
to the Company, and the Companys ability to lease space to new or replacement tenants on favorable
terms, could affect the Companys cash available for short-term liquidity needs. The Company
intends to meet short and long term funding requirements for debt maturities, interest payments,
dividend distributions and capital expenditures through cash flow provided by operations, long-term
secured and unsecured indebtedness, including borrowings under its unsecured revolving credit
facility, proceeds from asset disposals and the issuance of equity and debt securities.
The Company could also fund building acquisitions, development, redevelopment and other
non-recurring capital improvements through additional borrowings, issuance of Operating Partnership
units or sales of assets, outright or through joint ventures.
Consolidated cash flow information is summarized as follows:
Six Months Ended | ||||||||||||
June 30, | ||||||||||||
(amounts in thousands) | 2011 | 2010 | Change | |||||||||
Cash provided by operating activities |
$ | 16,546 | $ | 17,948 | $ | (1,402 | ) | |||||
Cash used in investing activities |
(70,570 | ) | (79,198 | ) | 8,628 | |||||||
Cash provided by financing activities |
33,459 | 63,411 | (29,952 | ) |
Net cash provided by operating activities decreased $1.4 million for the six months ended June
30, 2011 compared with the same period in 2010 primarily due to a $5.8 million increase in the
amount of cash the Company contributed to its escrow and reserve accounts. During the six months
ended June 30, 2011, the Company assumed three mortgages in financing its property acquisitions and
under the provisions of the mortgages the Company was required to contribute funds to various
escrow and reserve accounts. The decrease in cash provided by operating activities during the six
months ended June 30, 2011 compared with the same period in 2010 was also the result of an increase
in the Companys deferred costs. The decrease in cash provided by operating activities was
partially offset by an increase in the Companys accounts payable and other liabilities for the six
months ended June 30, 2011 compared with the same period in 2010.
Net cash used in investing activities decreased $8.6 million for the six months ended June 30,
2011 compared with the same period in 2010. The decrease in cash used in investing activities is
primarily due to a reduction in cash used for property acquisitions. During the first six months of
2011, the Company used $20.0 million of cash to acquire four properties and a land parcel compared
with the use of $81.5 million of cash to acquire two office buildings during the first six months
of 2010. The 2011 acquisitions were partially funded by the assumption of mortgage debt totaling
$139.4 million and the issuance of Operating Partnership units valued at $21.7 million, while the
2010 acquisitions were funded with cash. Also, the Company received proceeds of $26.9 million from
the sale of three properties during the six months ended June 30, 2011 compared with proceeds of
$11.4 million received from the sale of two properties during the same period in 2010. The
decrease in cash used in investing activities was partially offset by the Company providing a $30.0
million subordinated loan to the owners of an office building located in Washington, D.C. During
the six months ended June 30, 2011, the Company used $25.4 million of cash on additions to rental
property and construction in progress compared with $6.2 million used during the six months ended
June 30, 2010. Also, as of June 30, 2011, the Company had paid $20.3 million in deposits on
potential acquisitions compared with $2.1 million in deposits paid as of June 30, 2010. Of the
$20.3 million in deposits, $11.3 million related to proceeds received on the sale of a property in
the second quarter of 2011, which was part of a like-kind exchange for a property acquired in July
2011. As part of a property acquisition in 2011, the Company was required to escrow $2.2 million
for future tenant improvements.
Net cash provided by financing activities decreased $30.0 million for the six months ended
June 30, 2011 compared with the same period in 2010. The Company repaid outstanding debt on its
unsecured revolving credit facility and mortgage loans totaling $130.8 million for the six months
ended June 30, 2011 compared with repayments of $93.5 million during the same period in 2010. The
Company borrowed $78.0 million on its unsecured revolving credit facility during the six months
ended June 30, 2011 compared with borrowings of $46.0 million on its facility and the issuance of a
$39.0 million mortgage loan during the same period in 2010. During the six months ended June 30,
2011, the Company issued 4.6 million of Series A Preferred Shares for net proceeds of $111.0
million compared with the issuance of 6.3 million common shares for net proceeds of $87.0 million
during the six months ended June 30, 2010. The proceeds from both the preferred and common share
issuances
during the first six months of 2011 and 2010 were used to pay down a portion of the
outstanding balance on the Companys unsecured revolving credit facility. As a result of the
Companys equity issuances during 2011 and 2010, its cash paid for dividends increased $9.8 million
for the six months ended June 30, 2011 compared with the same period in 2010. During the six months
ended June 30, 2011, the Company received $1.0 million from a consolidated joint venture partner,
which was applied toward a deposit on a potential acquisition.
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Contractual Obligations
As of June 30, 2011, the Company had development and redevelopment contractual obligations of
$3.0 million outstanding, primarily related to redevelopment activities at Three Flint Hill, which
is undergoing a complete redevelopment, and capital improvement obligations of $4.1 million
outstanding. Capital improvement obligations represent commitments for roof, asphalt, HVAC and
common area replacements contractually obligated as of June 30, 2011. Also, as of June 30, 2011,
the Company had $4.8 million of tenant improvement obligations, primarily related to a tenant at
Indian Creek Court. The Company anticipates meeting its contractual obligations related to its
construction activities with cash from its operating activities. In the event cash from the
Companys operating activities is not sufficient to meet its contractual obligations, the Company
can access additional capital through its unsecured revolving credit facility. At June 30, 2011,
the Company had $91.0 million available under its unsecured revolving credit facility.
In connection with the Companys 2009 acquisition of Ashburn Center, the Company entered into
a contingent consideration 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. 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 reflected an
increase in the anticipated fee to the seller. As of June 30, 2011, the Companys total contingent
consideration obligation to the former owner of Ashburn Center was approximately $1.4 million.
On December 29, 2010, the Company entered into an unconsolidated joint venture with AEW
Capital Management, L.P. and acquired Aviation Business Park, a three-building, single-story,
office park totaling 121,000 square feet in Glen Burnie, Maryland. The property was acquired by the
joint venture through a deed-in-lieu of foreclosure in return for additional consideration to the
owner if certain future leasing hurdles are met. As of June 30, 2011, the Companys total
contingent consideration obligation to the former owner of Aviation Business Park was approximately
$0.1 million, which is not reflected on the Companys condensed consolidated financial statements.
On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an
aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration
payable upon the lease renewal by the buildings sole tenant or the re-tenanting of the property.
At acquisition, the Company was in negotiations with the existing tenant to renew its lease through
August 2023. As a result, the Company recorded a contingent consideration obligation of $9.4
million at acquisition. In July 2011, the buildings sole tenant renewed its lease. Based on the
probability of renewal and lease terms used in the original estimate of fair value, the value of
contingent consideration remained unchanged
As of June 30, 2011, the Company had $5.1 million in deposits outstanding for potential
acquisitions. The Company had no other material contractual obligations as of June 30, 2011.
Distributions
The Company is required to distribute to its shareholders at least 90% of its REIT taxable
income in order to qualify as a REIT, including some types of taxable income it recognizes for tax
purposes but with regard to which it does not receive corresponding cash. In addition, the Company
must distribute to its shareholders 100% of its taxable income to eliminate its U.S. federal income
tax liability. Funds used by the Company to pay dividends on its common shares are provided through
distributions from the Operating Partnership. For every common share of the Company, the Operating
Partnership has issued to the Company a corresponding common unit. The Company is the sole general
partner of and, as of June 30, 2011, owned 95.5% interest in, the Operating Partnerships units.
The remaining interests in the Operating Partnership 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. The
Operating Partnership is required to make cash distributions to the Company in an amount sufficient
to meet its distribution requirements. The cash distributions by the Operating Partnership reduce
the amount of cash that is available for general corporate purposes, which includes repayment of
debt, funding acquisitions or construction activities, and for other corporate operating
activities. On a quarterly basis, the Companys management team recommends a distribution amount
that is approved by the Companys Board
of Trustees. The amount of future distributions will be based on taxable income, cash from
operating activities and available cash and at the discretion of the Companys Board of Trustees.
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Dividends
On July 25, 2011, the Company declared a dividend of $0.20 per common share, equating to an
annualized dividend of $0.80 per common share. The dividend is payable on August 12, 2011 to common
shareholders of record as of August 5, 2011. The Company also declared a dividend of $0.484375 per
share on its Series A Preferred Shares. The dividend is payable on August 15, 2011 to preferred
shareholders of record as of August 5, 2011.
Funds From Operations
Funds from operations (FFO) is a non-GAAP measure used by many investors and analysts that
follow the real estate industry. The Company considers FFO a useful measure of performance for an
equity REIT because it facilitates an understanding of the operating performance of its properties
without giving effect to real estate depreciation and amortization, which assume that the value of
real estate assets diminishes predictably over time. Since real estate values have historically
risen or fallen with market conditions, the Company believes that FFO provides a meaningful
indication of its performance. Management also considers FFO an appropriate supplemental
performance measure given its wide use by and relevance to investors and analysts. FFO, reflecting
the assumption that real estate asset values rise or fall with market conditions, principally
adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume
that the value of real estate diminishes predictably over time.
As defined by the National Association of Real Estate Investment Trusts (NAREIT) in its
March 1995 White Paper (as amended in November 1999 and April 2002), FFO represents net income
(computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real
estate-related depreciation and amortization and after adjustments for unconsolidated partnerships
and joint ventures. The Company computes FFO in accordance with NAREITs definition, which may
differ from the methodology for calculating FFO, or similarly titled measures, used by other
companies and this may not be comparable to those presentations. The Companys methodology for
computing FFO adds back noncontrolling interests in the income from its Operating Partnership in
determining FFO. The Company believes this is appropriate as Operating Partnership units are
presented on an as-converted, one-for-one basis for shares of stock in determining FFO per diluted
share.
Further, FFO does not represent amounts available for managements discretionary use because
of needed capital replacement or expansion, debt service obligations or other commitments and
uncertainties, nor is it indicative of funds available to fund the Companys cash needs, including
its ability to make distributions. The Companys presentation of FFO should not be considered as an
alternative to net income (computed in accordance with GAAP) as an indicator of the Companys
financial performance or to cash flow from operating activities (computed in accordance with GAAP)
as an indicator of its liquidity.
The following table presents a reconciliation of net (loss) income available to common
shareholders to FFO available to common shareholders and unitholders (amounts in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income available to common shareholders |
$ | (1,411 | ) | $ | 32 | $ | (6,948 | ) | $ | (2,126 | ) | |||||
Add: Depreciation and amortization: |
||||||||||||||||
Real estate assets |
16,691 | 10,196 | 29,293 | 19,879 | ||||||||||||
Discontinued operations |
222 | 361 | 520 | 815 | ||||||||||||
Unconsolidated joint ventures |
513 | 125 | 1,036 | 238 | ||||||||||||
Consolidated joint venture |
(21 | ) | | (40 | ) | | ||||||||||
Gain on sale of real estate properties |
(1,954 | ) | (557 | ) | (1,954 | ) | (557 | ) | ||||||||
Net (loss) income attributable to
noncontrolling interests in the Operating
Partnership |
(67 | ) | 1 | (203 | ) | (48 | ) | |||||||||
FFO available to common shareholders and unitholders |
$ | 13,973 | $ | 10,158 | $ | 21,704 | $ | 18,201 | ||||||||
Weighted average common shares and Operating
Partnership units outstanding diluted |
51,829 | 37,430 | 51,169 | 34,473 |
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Off-Balance Sheet Arrangements
On January 1, 2010 and March 17, 2009, the Company deconsolidated the joint ventures that own
RiversPark I and II, respectively, and removed all their related assets and liabilities from its
consolidated balance sheets as of the date of deconsolidation. The Company remains liable for $7.0
million of mortgage debt, which represents its proportionate share. During the fourth quarter
2010, the Company entered into separate unconsolidated joint ventures with a third party to
acquire 1750 H Street, NW and Aviation Business Park. For more information, see footnote 5 -
Investment in Affiliates.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the federal securities
laws. Forward-looking statements, which are based on certain assumptions and describe future
plans, strategies and expectations of the Company, are generally identifiable by use of the words
believe, expect, intend, anticipate, estimate, project or similar expressions. The
Companys ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Certain factors that could cause actual results to differ materially from
the Companys expectations include changes in general or regional economic conditions; the
Companys ability to timely lease or re-lease space at current or anticipated rents; changes in
interest rates; changes in operating costs; the Companys ability to complete current and future
acquisitions; the Companys ability to obtain additional financing; the Companys ability to
manage its current debt levels and repay or refinance its indebtedness upon maturity or other
required payment dates; the Companys ability to obtain debt and/or financing on attractive terms,
or at all; and other risks detailed under Risk Factors in Part I, Item 1A in our Annual Report
on Form 10-K for the year ended December 31, 2010 and in the other documents the Company files
with the SEC. Many of these factors are beyond the Companys ability to control or predict.
Forward-looking statements are not guarantees of performance. For forward-looking statements
herein, the Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no
obligation to update or supplement forward-looking statements that become untrue because of
subsequent events. We have no duty to, and do not intend to, update or revise the forward-looking
statements in this discussion after the date hereof, except as may be required by law. In light of
these risks and uncertainties, you should keep in mind that any forward-looking statement made in
this discussion, or elsewhere, might not occur.
ITEM 3: | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK |
The Companys future income, cash flows and fair values relevant to financial instruments are
dependent upon prevailing market interest rates. In the normal course of business, the Company is
exposed to the effect of interest rate changes. The Company has historically entered into
derivative agreements to mitigate exposure to unexpected changes in interest. Market risk refers to
the risk of loss from adverse changes in market interest rates. The Company periodically uses
derivative financial instruments to seek to manage, or hedge, interest rate risks related to its
borrowings. The Company does not use derivatives for trading or speculative purposes and only
enters into contracts with major financial institutions based on their credit rating and other
factors. The Company 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.
At June 30, 2011, the Companys exposure to variable interest rates consisted of $164.0
million of borrowings on its unsecured revolving credit facility and $100.0 million on three
secured term loans. A change in interest rates of 1% would result in an increase or decrease of
$2.6 million in interest expense on an annualized basis. As of June 30, 2011, the Company has
hedged $50.0 million of its variable rate debt through an interest rate swap agreement that matures
on January 15, 2014. During July 2011, the Company entered into four interest rate swap agreements
that fixed LIBOR on $120 million of its variable rate debt. The table below summarizes the
Companys four new interest rate swap agreements, which were all effective on July 18, 2011
(dollars in thousands):
Interest Rate | Fixed LIBOR | |||||||||
Maturity Date | Amount | Contractual Component | Interest Rate | |||||||
July 2016 |
$ | 35,000 | LIBOR | 1.754 | % | |||||
July 2016 |
25,000 | LIBOR | 1.7625 | % | ||||||
July 2017 |
30,000 | LIBOR | 2.093 | % | ||||||
July 2017 |
30,000 | LIBOR | 2.093 | % |
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For fixed rate debt, changes in interest rates generally affect the fair value of debt but not
the earnings or cash flow of the Company. See footnote 10, Fair Value Measurements for more
information on the fair value of the Companys debt.
ITEM 4: | CONTROLS AND PROCEDURES |
The Company carried out an evaluation with the participation of the Companys management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this
report. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports that the Company files, or
submits under the Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Companys internal control over financial reporting during the
quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
55
Table of Contents
PART II: OTHER INFORMATION
Item 1. | Legal Proceedings |
As of June 30, 2011, the Company was not subject to any material pending legal proceedings.
Item 1A. | Risk Factors |
In addition to the risk factors previously disclosed in Item 1A, Risk Factors in the Companys
Annual Report on Form 10-K for the year ended December 31, 2010, the Company is subject to the
following additional risk:
The recent downgrade of the U.S. Governments credit rating could cause a worsening of general economic conditions and
an increase in interest rates, which could materially adversely affect our business, financial condition, results of
operations and ability to make distributions to our shareholders.
On August 2, 2011, legislation was enacted to increase the federal debt ceiling and to reduce future U.S. Government
spending levels by as much as $2.4 trillion over the next decade. Notwithstanding the passage of this legislation,
there remains uncertainty about whether and when the U.S. Government will implement the budget cuts, which has resulted
in continued concerns that the U.S. Government could default on its obligations in the future. On August 5, 2011,
Standard & Poors downgraded the U.S. Governments credit rating for the first time in history due to its belief that
the legislation was inadequate to address the countrys growing debt burden. The decision of Standard & Poors to
downgrade the U.S. Governments credit rating could create broader financial and global banking turmoil and uncertainty
and could lead to a significant rise in interest rates. These events could cause the interest rates on our borrowings
and our cost of capital to increase significantly, and could extend to our tenants. As a result, these events could
materially and adversely affect our interest expense and other costs of borrowing and make it more difficult to
refinance our indebtedness when it becomes due and payable, lease vacant space and re-let space as leases expire and to
acquire properties on attractive terms, and could adversely affect the ability of our tenants to meet their lease
obligations or alter their intent, need or ability to renew expiring leases. Furthermore, the downgrade of the U.S.
Governments credit rating could result in significant volatility in global stock markets, which could cause the market
price of our common and preferred stock to decrease significantly. Any of these outcomes could have a material adverse
effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our
shareholders.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Removed and Reserved |
Item 5. | Other Information |
Not applicable.
Item 6. | Exhibits |
No. | Description | |||
3.1 | Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on
October 1, 2003). |
|||
3.2 | Articles Supplementary designating First Potomac Realty Trusts 7.750% Series A Cumulative Redeemable Perpetual
Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by
reference to Exhibit 3.2 to the Companys Form 8-A filed on January 18, 2011) |
|||
3.3 | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrants
Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
|||
4.1 | Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September
15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-11
(Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
|||
4.2 | Amendment No. 13 to Amended and Restated Limited Partnership Agreement of First Potomac Realty Investment
Limited Partnership (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on January 19, 2011). |
56
Table of Contents
No. | Description | |||
4.3 | Amendment No. 14 to Amended and Restated Limited Partnership Agreement of First Potomac Realty Investment
Limited Partnership (incorporated by reference to Exhibit 4.3 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended March 31, 2011). |
|||
4.4 | Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed with the SEC
on June 23, 2006). |
|||
4.5 | Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed with the SEC
on June 23, 2006). |
|||
4.6 | Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and
the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006 (incorporated by
reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.7 | First Amendment, Consent and Waiver dated as of November 5, 2010 to the Note Purchase Agreement dated as of
June 22, 2006, by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several
Purchasers listed on the signature pages thereto (incorporated by reference to Exhibit 4.6 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2010). |
|||
4.8 | Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference to Exhibit
4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.9 | Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the Registrants
Current Report on Form 8-K filed on June 23, 2006). |
|||
4.10 | Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the
Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on December 12, 2006). |
|||
4.11 | Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011
(incorporated by
reference to
Exhibit 4.2 to
the Registrants
Current Report
on Form 8-K
filed on
December 12,
2006). |
|||
10.1 | * | Amendment No. 2, dated October 27, 2010, to the Companys Second Amended and Restated Revolving Credit
Agreement, dated December 29, 2009, between the Operating Partnership, certain of the Operating
Partnerships subsidiaries and KeyBank N.A., Wells Fargo N.A., Wachovia Bank, N.A., Bank of Montreal, PNC
Bank, N.A. Chevy Chase Bank (a division of Capital One, N.A.), U.S. Bank, N.A. and TD Bank, N.A. |
||
10.2 | * | Amendment No. 3, dated October 27, 2010, by and among the Operating Partnership, certain of its
subsidiaries (as guarantors), KeyBank and Wells Fargo, to the Secured Term Loan Agreement, dated August
11, 2008, as amended to date, by and among the Operating Partnership, certain of its subsidiaries (as
guarantors) and the lending institutions which are parties thereto. |
||
10.3 | * | Amendment No. 4, dated October 27, 2010, by and among the Operating Partnership, certain of its
subsidiaries (as guarantors) and KeyBank, to the Secured Term Loan Agreement, dated August 7, 2007, as
amended to date, by and among the Operating Partnership, certain of its subsidiaries (as guarantors) and
the lending institutions which are parties thereto. |
||
10.4 | * | Secured term loan agreement, dated November 10, 2010, between the Operating Partnership and KeyBank N.A. |
||
10.5 | Amendment No. 1 to Secured Term Loan Agreement dated as of May 10, 2011 by and among First Potomac Realty
Investment Limited Partnership, KeyBank National Association (as a lender and as administrative agent) and
the other lenders that may become party thereto (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the SEC on May 13, 2011). |
|||
10.6 | Term Loan Agreement, dated as of July 18, 2011, by and among First Potomac Realty Investment Limited
Partnership and its subsidiaries listed on Schedule 1 thereto, KeyBank National Association, as a lender
and administrative agent, and the other lenders and agents party thereto (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed with the SEC on July 22, 2011). |
|||
31.1 | * | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | * | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
||
32.2 | * | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
57
Table of Contents
101 | XBRL |
XBRL (Extensible Business Reporting Language). The following materials from the First Potomac
Realty Trusts Quarterly Report on Form 10-Q for the period ended June 30, 2011, formatted in XBRL:
(i) Consolidated balance sheets as of June 30, 2011 (unaudited) and December 31, 2010; (ii)
Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2011
and 2010; (iii) Consolidated statements of cash flows (unaudited) for the six months ended June 30,
2011 and 2010; and (iv) Notes to condensed consolidated financial statements (unaudited). As
provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purpose of
Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act.
* | Filed herewith. |
58
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST POTOMAC REALTY TRUST | ||||
Date: August 9, 2011
|
/s/ Douglas J. Donatelli
|
|||
Chairman of the Board and Chief Executive Officer | ||||
Date: August 9, 2011
|
/s/ Barry H. Bass
|
|||
Executive Vice President and Chief Financial Officer |
59
Table of Contents
EXHIBIT INDEX
No. | Description | |||
3.1 | Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on
October 1, 2003). |
|||
3.2 | Articles Supplementary designating First Potomac Realty Trusts 7.750% Series A Cumulative Redeemable Perpetual
Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by
reference to Exhibit 3.2 to the Companys Form 8-A filed on January 18, 2011) |
|||
3.3 | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrants
Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
|||
4.1 | Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September
15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-11
(Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
|||
4.2 | Amendment No. 13 to Amended and Restated Limited Partnership Agreement of First Potomac Realty Investment
Limited Partnership (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on January 19, 2011). |
|||
4.3 | Amendment No. 14 to Amended and Restated Limited Partnership Agreement of First Potomac Realty Investment
Limited Partnership (incorporated by reference to Exhibit 4.3 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended March 31, 2011). |
|||
4.4 | Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed with the SEC
on June 23, 2006). |
|||
4.5 | Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed with the SEC
on June 23, 2006). |
|||
4.6 | Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and
the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006 (incorporated by
reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.7 | First Amendment, Consent and Waiver dated as of November 5, 2010 to the Note Purchase Agreement dated as of
June 22, 2006, by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several
Purchasers listed on the signature pages thereto (incorporated by reference to Exhibit 4.6 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2010). |
|||
4.8 | Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference to Exhibit
4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.9 | Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the Registrants
Current Report on Form 8-K filed on June 23, 2006). |
|||
4.10 | Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the
Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on December 12, 2006). |
|||
4.11 | Form of First
Potomac Realty
Investment
Limited
Partnership 4.0%
Exchangeable
Senior Note due
2011
(incorporated by
reference to
Exhibit 4.2 to
the Registrants
Current Report
on Form 8-K
filed on
December 12,
2006). |
|||
10.1 | * | Amendment No. 2, dated October 27, 2010, to the Companys Second Amended and Restated Revolving Credit
Agreement, dated December 29, 2009, between the Operating Partnership, certain of the Operating
Partnerships subsidiaries and KeyBank N.A., Wells Fargo N.A., Wachovia Bank, N.A., Bank of Montreal, PNC
Bank, N.A. Chevy Chase Bank (a division of Capital One, N.A.), U.S. Bank, N.A. and TD Bank, N.A. |
Table of Contents
No. | Description | |||
10.2 | * | Amendment No. 3, dated October 27, 2010, by and among the Operating Partnership, certain of its
subsidiaries (as guarantors), KeyBank and Wells Fargo, to the Secured Term Loan Agreement, dated August
11, 2008, as amended to date, by and among the Operating Partnership, certain of its subsidiaries (as
guarantors) and the lending institutions which are parties thereto. |
||
10.3 | * | Amendment No. 4, dated October 27, 2010, by and among the Operating Partnership, certain of its
subsidiaries (as guarantors) and KeyBank, to the Secured Term Loan Agreement, dated August 7, 2007, as
amended to date, by and among the Operating Partnership, certain of its subsidiaries (as guarantors) and
the lending institutions which are parties thereto. |
||
10.4 | * | Secured term loan agreement, dated November 10, 2010, between the Operating Partnership and KeyBank N.A. |
||
10.5 | Amendment No. 1 to Secured Term Loan Agreement dated as of May 10, 2011 by and among First Potomac Realty
Investment Limited Partnership, KeyBank National Association (as a lender and as administrative agent) and
the other lenders that may become party thereto (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the SEC on May 13, 2011). |
|||
10.6 | Term Loan Agreement, dated as of July 18, 2011, by and among First Potomac Realty Investment Limited
Partnership and its subsidiaries listed on Schedule 1 thereto, KeyBank National Association, as a lender
and administrative agent, and the other lenders and agents party thereto (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed with the SEC on July 22, 2011). |
|||
31.1 | * | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | * | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
||
32.2 | * | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
101 | XBRL |
XBRL (Extensible Business Reporting Language). The following materials from the First Potomac
Realty Trusts Quarterly Report on Form 10-Q for the period ended June 30, 2011, formatted in XBRL:
(i) Consolidated balance sheets as of June 30, 2011 (unaudited) and December 31, 2010; (ii)
Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2011
and 2010; (iii) Consolidated statements of cash flows (unaudited) for the six months ended June 30,
2011 and 2010; and (iv) Notes to condensed consolidated financial statements (unaudited). As
provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purpose of
Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act.
* | Filed herewith. |