FIRST POTOMAC REALTY TRUST - FORM 8-K - EX-99.2

Attached files

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EX-99.1 - EX-99.1 - FIRST POTOMAC REALTY TRUST	d616870dex991.htm
8-K - FORM 8-K - FIRST POTOMAC REALTY TRUST	d616870d8k.htm

Exhibit 99.2

LOGO


		Index to Supplemental Information


	Page
Company Information		2
Portfolio Maps		3
Earnings Release		4
Consolidated Statements of Operations		12
Consolidated Balance Sheets		15
Net Operating Income (NOI) Same-Property Analysis		16
Highlights		17
Quarterly Financial Results and Measures		18
Capitalization and Selected Ratios		20
Outstanding Debt		21
Debt Maturity Schedule		22
Selected Debt Covenants		23
Net Asset Value Analysis		24
Investment in Joint Ventures		25
Portfolio Summary		26
Leasing and Occupancy Summary		27
Portfolio by Size		28
Top Twenty-Five Tenants		29
Annual Lease Expirations		30
Quarterly Lease Expirations		31
Leasing Analysis		32
Retention Summary		33
Office Properties		34
Business Park / Industrial Properties		35
Management Statements on Non-GAAP Supplemental Measures		36


		Company Information

First Potomac Realty Trust is a leader in the ownership, management, development and redevelopment of office and business park properties in the greater Washington, DC region. The Company’s focus is on acquiring properties that can benefit from its intensive property management, and repositioning properties to increase their profitability and value.


Corporate Headquarters		7600 Wisconsin Avenue
		11th Floor
		Bethesda, MD 20814

New York Stock Exchange


Website		www.first-potomac.com

Investor Relations		Jaime N. Marcus
		Manager, Investor Relations
		(301) 986-9200
		jmarcus@first-potomac.com

The forward-looking statements contained in this supplemental financial information are subject to various risks and uncertainties. Although the Company believes the expectations reflected in any forward-looking statements contained herein are based on reasonable assumptions, there can be no assurance that its expectations will be achieved. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete acquisitions and, if applicable, dispositions on acceptable terms; the Company’s ability to manage its current debt levels and repay or refinance its indebtedness upon maturity or other required payment dates; the Company’s ability to maintain financial covenant compliance under its debt agreements; the Company’s ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; any impact of the informal inquiry initiated by the U.S. Securities and Exchange Commission (the “SEC”); the Company’s ability to obtain debt and/or financing on attractive terms, or at all; changes in the assumptions underlying the Company’s earnings and Core FFO guidance and other risks detailed in the Company’s Annual Report on Form 10-K and described from time to time in the Company’s filings with the SEC. Many of these factors are beyond the Company’s 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.

Note that certain figures are rounded to the nearest thousands or to a tenth of a percent throughout the document, which may impact footing and/or crossfooting of totals and subtotals.

LOGO


		Earnings Release


CONTACT: Jaime N. Marcus				First Potomac Realty Trust 7600 Wisconsin Avenue
Manager, Investor Relations				11^th Floor
(301) 986-9200 jmarcus@first-potomac.com				Bethesda, MD 20814 www.first-potomac.com

FOR IMMEDIATE RELEASE

FIRST POTOMAC REALTY TRUST REPORTS

THIRD QUARTER 2013 RESULTS

Executed 300,000 Square Feet of Leases Bringing the Portfolio to 87.4% Leased

BETHESDA, MD. (October 24, 2013) – First Potomac Realty Trust (NYSE: FPO), a leader in the ownership, management, development and redevelopment of office and business park properties in the greater Washington, D.C. region, reported results for the three and nine months ended September 30, 2013.

Third Quarter 2013 and Subsequent Highlights

•

Reported Core Funds From Operations of $13.5 million, or $0.22 per diluted share.

•

Executed 300,000 square feet of leases, including 213,000 square feet of new leases, bringing total new leasing for the year to 666,000 square feet.

•

Increased leased percentage from 84.9% in the third quarter of 2012 to 87.4% and brought occupancy up from 83.2% to 85.1%.

•

Same-property net operating income increased by 3.7% on an accrual basis and 2.3% on a cash basis.

•

Sold 4200 Tech Court, a 34,000 square foot single-story office building and Triangle Business Center, a 74,000 square foot single-story business park, for net proceeds of $3.2 million and $2.7 million, respectively.

•

On October 1, acquired 540 Gaither Road, the third multi-story office building at Redland Corporate Center, in Rockville, Maryland, for $30 million, which completes the Company’s ownership of the complex.

•

On October 16, amended the unsecured revolving credit facility and unsecured term loans to increase borrowing capacity, extend the maturity, and reduce LIBOR spreads for each.

Douglas J. Donatelli, Chairman and CEO of First Potomac Realty Trust, stated, “Over the last three quarters, we have made significant progress executing on the strategic and capital plan we laid out earlier this year. We continued to improve the operating metrics of our portfolio, increased our sequential occupancy by 110 basis points, and delivered our seventh consecutive quarter of positive net absorption in a very challenging D.C. market. Subsequent to quarter end, we completed our first acquisition since late 2011 with the third building at Redland Corporate Center, and demonstrated our commitment to high-quality, multi-story office assets in strong submarkets where we have an existing presence. We are pleased with the positive steps we have taken, and are working diligently to position First Potomac as the preeminent owner of quality office properties in the greater Washington D.C. region.”

Funds From Operations (“FFO”) decreased for the three months ended September 30, 2013 compared with the same period in 2012 due to a reduction in net operating income as a result of the sale of the majority of the Company’s industrial properties in June 2013, increased personnel separation costs, and a non-recurring non-cash gain of $4.3 million recorded in the third quarter of 2012 as a result of changed tax regulations. The decrease in FFO for the third quarter of 2013 was partially offset by a 3.7% increase in same-property net operating income compared with the third quarter of 2012.


		Earnings Release - Continued

FFO increased for the nine months ended September 30, 2013 compared with the same period in 2012 primarily due to lower debt extinguishment costs and reduced legal and accounting fees, which were partially offset by a reduction in net operating income as a result of the sale of the majority of the Company’s industrial properties, the operations of which are presented in discontinued operations. During the second quarter of 2012, the Company recorded $13.2 million of debt extinguishment charges from the prepayment of its senior notes compared with $4.7 million of debt extinguishment costs incurred in 2013 primarily associated with the repayment of debt in conjunction with property dispositions. FFO also increased for the nine months ended September 30, 2013 due to a 1.7% increase in same property net operating income.

Core FFO decreased for the three and nine months ended September 30, 2013 compared with the same periods in 2012, primarily due to a decline in net operating income as a result of the sale of the majority of the Company’s industrial properties in June 2013, the operations of which are presented in discontinued operations.

A reconciliation between Core FFO and FFO available to common shareholders for the three and nine months ended September 30, 2013 and 2012 is presented below (in thousands, except per share amounts):


	Three Months Ended September 30,												Nine Months Ended September 30,
	2013						2012						2013						2012
	Amount			Per diluted share⁽¹⁾			Amount			Per diluted share⁽¹⁾			Amount			Per diluted share⁽¹⁾			Amount			Per diluted share⁽¹⁾
Core FFO	$	13,524		$	0.22		$	15,297		$	0.29		$	45,257		$	0.80		$	46,779		$	0.88
Loss on debt extinguishment		(123	)		—			—			—			(4,738	)		(0.08	)		(13,325	)		(0.25	)
Internal investigation costs		—			—			(743	)		(0.01	)		—			—			(3,276	)		(0.06	)
Deferred abatement and straight-line amortization⁽²⁾		—			—			1,567			0.03			1,567			0.03			1,567			0.03
Acquisition costs		(173	)		—			(8	)		—			(173	)		—			(49	)		—
Change in tax regulation⁽³⁾		—			—			4,327			0.08			—			—			4,327			0.08
Personnel separation costs		(1,777	)		(0.03	)		(397	)		(0.01	)		(1,777	)		(0.03	)		(397	)		(0.01	)
Contingent consideration related to acquisition of property⁽⁴⁾		—			—			(112	)		—			(75	)		—			(112	)		—
Legal costs associated with informal SEC inquiry		—			—			—			—			(391	)		(0.01	)		—			—

FFO available to common shareholders	$	11,451		$	0.19		$	19,931		$	0.38		$	39,670		$	0.70		$	35,514		$	0.67

Net (loss) income	$	(1,717	)				$	7,435					$	14,722					$	(9,261	)
Net (loss) income attributable to common shareholders per diluted common share⁽⁵⁾	$	(0.08	)				$	0.08					$	0.09					$	(0.35	)

⁽¹⁾	Numbers may not foot due to rounding.

⁽²⁾	Represents the accelerated amortization of the straight-line balance and the deferred abatement for Engineering Solutions at I-66 Commerce Center, which terminated its lease prior to completion. The tenant vacated the property at the end of March 2013. The property was sold in May 2013.

⁽³⁾	Reflects the one-time non-cash impact of changed tax regulations enacted by the District of Columbia that became effective in September 2012.

⁽⁴⁾	Reflects an increase in the Company’s contingent consideration liability related to its acquisition of Ashburn Center in 2009. The Company paid $1.7 million to the seller of the property in the third quarter of 2013 to fulfill the obligation.

⁽⁵⁾	Reflects amounts attributable to noncontrolling interests and the impact of dividends on the Company’s preferred shares to arrive at net (loss) income attributable to common shareholders.

A reconciliation of net (loss) income to FFO available to common shareholders and Core FFO, as well as definitions and statements of purpose, are included below in the financial tables accompanying this press release and under “Non-GAAP Financial Measures,” respectively.


		Earnings Release - Continued

Operating Performance

At September 30, 2013, the Company’s consolidated portfolio consisted of 145 buildings totaling approximately 9 million square feet. The Company’s consolidated portfolio was 87.4% leased and 85.1% occupied at September 30, 2013, compared with 86.5% leased and 84.0% occupied at June 30, 2013 and 84.9% leased and 83.2% occupied at September 30, 2012, a 190 basis point occupancy increase year over year.

During the third quarter of 2013, the Company executed 300,000 square feet of leases, which consisted of 213,000 square feet of new leases and 87,000 square feet of renewal leases. The Company delivered positive net absorption of approximately 19,741 square feet, the Company’s seventh consecutive quarter of positive net absorption, and as anticipated, had a tenant retention rate of 30%, primarily as a result of over 200,000 square feet of known move outs in the third quarter.

Same-property net operating income (“Same-Property NOI”) increased 3.7% on an accrual basis for the three months ended September 30, 2013 and increased 1.7% for the nine months ended September 30, 2013 compared with the same periods in 2012. The increase in Same-Property NOI in the three months ended September 30, 2013 was due to an increase in occupancy at Van Buren Office Park, Reston Business Campus, Sterling Park Business Center and Norfolk Business Center. The increase in Same-Property NOI during the nine months ended September 30, 2013 was primarily a result of occupancy increases at Redland Corporate Center, Atlantic Corporate Park, Van Buren Office Park and Reston Business Campus.

A reconciliation of net (loss) income to Same-Property NOI and a definition and statement of purpose are included below in the financial tables accompanying this press release and under “Non-GAAP Financial Measures,” respectively.

A list of the Company’s properties, as well as additional information regarding the Company’s results of operations can be found in the Company’s Third Quarter 2013 Supplemental Financial Report, which is posted on the Company’s website, www.first-potomac.com.

Acquisition

On October 1, 2013, the Company acquired 540 Gaither Road (Redland I), a six-story, 134,000 square foot office building in Rockville, Maryland, for $30.0 million. The property is located within Redland Corporate Center, which is comprised of three multi-story, Class-A office buildings totaling 483,000 square feet. The Company acquired Redland II and III in a joint venture with Perseus Realty, LLC in late 2010. The newly acquired property is 100% leased to the Department of Health and Human Services (HHS) through early 2018. The acquisition was funded with $28.2 million of proceeds from the sale of its industrial portfolio in June 2013 that was previously placed with a qualified intermediary to facilitate a tax-free exchange, as well as available cash.

Dispositions

Consistent with the Company’s previously disclosed strategy of focusing on high-quality, multi-story office properties, the Company continued to dispose of certain non-core properties. Specifically, the Company sold 4200 Tech Court, a 34,000 square foot single-story office building located in Chantilly, Virginia, for net proceeds of approximately $3.2 million, and Triangle Business Center, a four-building, 74,000 square foot single-story business park property located in Baltimore, Maryland, for net proceeds of approximately $2.7 million. The Company reported a gain on the sale of 4200 Tech Court of $0.4 million in its third quarter results. As previously disclosed, the Company recorded an impairment charge of $1.4 million on Triangle Business Center in the second quarter of 2013.


		Earnings Release - Continued

On September 24, 2013, the Company entered into a contract to sell Worman’s Mill Court, a 40,000 square foot office building located in Frederick, Maryland. Based on the anticipated sales price, the Company recorded an impairment charge of $0.5 million in the third quarter of 2013. The sale is expected to be completed in the fourth quarter of 2013. At September 30, 2013, the Company classified the property as “held-for-sale” on its consolidated balance sheet.

The operating results and any gains on sale of 4200 Tech Court, Triangle Business Center and Worman’s Mill Court are reflected as discontinued operations in the Company’s consolidated statements of operations for each of the periods presented in this press release.

Financing Activity

On September 3, 2013, the Company repaid a $6.6 million mortgage loan that encumbered Linden Business Center with available cash.

On September 30, 2013, the Company repaid a $53.9 million mortgage loan that encumbered 840 First Street, NE, which was scheduled to mature on October 1, 2013. 840 First Street, NE is subject to a tax protection agreement, which requires that the Company maintain a specified minimum amount of debt on the property through March 2018. As a result of this requirement, simultaneously with the repayment of the mortgage debt, the Company encumbered 840 First Street, NE with a $37.3 million mortgage loan that had previously encumbered 500 First Street, NW. The transfer of the mortgage loan did not impact any material terms of the agreement. The Company incurred $0.1 million in debt extinguishment charges related to the transfer.

On October 16, 2013, the Company amended its unsecured revolving credit facility and unsecured term loan. The Company increased the size of the unsecured revolving credit facility from $255 million to $300 million and extended the maturity date of the facility to October 2017, with a one-year extension at the Company’s option. The Company divided its unsecured term loan into three $100 million tranches that mature in October 2018, 2019 and 2020, which added over two years of term from the previous maturity dates. As part of the amendments, the Company reduced its LIBOR spreads to current market rates, eliminated the prepayment lock-outs for the unsecured term loan, eliminated prepayment penalties associated with two tranches of the unsecured term loan, decreased the capitalization rates used to calculate gross asset value in the covenant calculations, and moved to a covenant package more closely aligned with the Company’s strategic plan. The Company believes the amendments to the unsecured revolving credit facility and unsecured term loan will reduce its borrowing costs and put the Company in a stronger position to deploy capital in the future.

Balance Sheet

The Company had $659.0 million of debt outstanding at September 30, 2013 compared with $688.0 million of debt outstanding at June 30, 2013. Of the Company’s outstanding debt at September 30, 2013, $232.3 million was fixed-rate debt, $350.0 million was hedged variable-rate debt, and $76.7 million was unhedged variable-rate debt.

Dividends

On October 22, 2013, the Company declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend will be paid on November 15, 2013 to common shareholders of record as of November 6, 2013. The Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The dividend will be paid on November 15, 2013 to preferred shareholders of record as of November 6, 2013.


		Earnings Release - Continued

Core FFO Guidance

The Company improved its full-year 2013 Core FFO guidance to $1.02 to $1.04 per diluted share. The Company’s updated guidance reflects all prior dispositions and financing activities completed during the year, as well as the acquisition of 540 Gaither Road, which was completed in the fourth quarter of 2013, and Worman’s Mill Court, which is expected to be sold in the fourth quarter of 2013. Among other things, guidance does not include the impact of any potential acquisition opportunities. The following is a summary of the assumptions that the Company used in arriving at its guidance, which were updated based on the Company’s first, second, and third quarter activity (unaudited, amounts in thousands except percentages and per share amounts):


	Expected Ranges⁽¹⁾
Portfolio NOI⁽²⁾	$	114,000		—	$	116,000
Interest and Other Income		6,000		—		6,500
FFO from Unconsolidated Joint Ventures		5,000		—		5,500
Interest Expense	$	34,000		—	$	35,000
G&A(³)		19,000		—		20,000
Preferred Dividends				12,400
Weighted Average Shares		57,500		—		58,000
Year-End Occupancy		85.0	%	—		86.0	%
Same-Property NOI – Accrual Basis		1.5	%	—		2.5	%

⁽¹⁾

Company’s guidance reflects the disposition of the 24 industrial properties, 4200 Tech Court, 4212 Tech Court, and Triangle Business Center, the potential sale of Worman’s Mill Court, the acquisition of 540 Gaither Road, as well as the issuance of 7,475,000 common shares during the second quarter of 2013, but does not take into consideration any additional dispositions, acquisitions or capital raising activities in 2013. The Company’s guidance also excludes any potential gains or asset impairments associated with potential future property dispositions.

⁽²⁾	Does not include the $1.5 million straight-line amortization rent impact associated with Engineering Solutions at I-66 Commerce Center. The tenant terminated its lease at the end of March 2013 and the property was sold in May 2013.

⁽³⁾	Excludes $1.8 million of personnel separation costs related to the departure of the Company’s former Chief Operating Officer and $0.4 million of legal costs associated with the informal SEC inquiry.

The Company’s guidance is also based on a number of other assumptions, many of which are outside the Company’s control and all of which are subject to change. The Company may change its guidance as actual and anticipated results vary from these assumptions.


Guidance Range for 2013	Low Range			High Range
Net income attributable to common shareholders per diluted share	$	0.04		$	0.06
Real estate depreciation⁽¹⁾		1.17			1.17
I-66 Commerce Center accelerated amortization		(0.03	)		(0.03	)
Net loss attributable to noncontrolling interests and items excluded from Core FFO per diluted share⁽²⁾		(0.16	)		(0.16	)

Core FFO per diluted share	$	1.02		$	1.04

⁽¹⁾	Includes the Company’s pro-rata share of depreciation from its unconsolidated joint ventures and depreciation related to the Company’s disposed properties.

⁽²⁾	Items excluded from Core FFO consist of the gains associated with disposed properties, the costs associated with the informal SEC inquiry, contingent consideration, impairment charges, acquisition costs, personnel separation costs, and debt modification and extinguishment charges.


		Earnings Release - Continued

Investor Conference Call and Webcast

First Potomac will host a conference call on October 25, 2013 at 9:00 AM ET to discuss third quarter results. The conference call can be accessed by dialing (877) 705-6003 or (201) 493-6725 for international participants. A replay of the call will be available from 12:00 Noon ET on October 25, 2013, until midnight ET on November 1, 2013. The replay can be accessed by dialing (877) 870-5176 or (858) 384-5517 for international callers, and entering pin number 10000324.

A live broadcast of the conference call will also be available online at the Company’s website, www.first-potomac.com, on October 25, 2013, beginning at 9:00 AM ET. An online replay will follow shortly after the call and will continue for 90 days.

About First Potomac Realty Trust

First Potomac Realty Trust is a self-administered, self-managed real estate investment trust that focuses on owning, operating, developing and redeveloping office and business park properties in the greater Washington, D.C. region. As of September 30, 2013, the Company’s consolidated portfolio totaled approximately 9 million square feet. Based on annualized cash basis rent, the Company’s portfolio consists of 51% office properties and 49% business park and industrial properties. A key element of First Potomac’s overarching strategy is its dedication to sustainability. Nearly one million square feet of First Potomac property is LEED Certified, with the potential for another one million square feet in future development projects. Approximately half of the portfolio’s multi-story office square footage is LEED or Energy Star Certified. FPO common shares (NYSE:FPO) and preferred shares (NYSE:FPO-PA) are publicly traded on the New York Stock Exchange.

Non-GAAP Financial Measures

Funds from Operations – Funds from operations (“FFO”) represents net income (computed in accordance with U.S. generally accepted accounting principles (“GAAP”)), excluding gains (losses) on sales of real estate and impairments of real estate assets, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company also excludes, from its FFO calculation, any depreciation and amortization related to third parties from its consolidated joint ventures.

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. The Company also considers FFO an appropriate performance measure given its wide use by investors and analysts. The Company computes FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999, April 2002 and January 2012), which may differ from the methodology for calculating FFO utilized by other equity real estate investment trusts (“REITs”) and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s 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 Company’s cash needs, including its ability to make distributions. The Company presents FFO per diluted share calculations that are based on the outstanding dilutive common shares plus the outstanding Operating Partnership units for the periods presented.

Core FFO – Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by the Company’s operating portfolio and affect the comparability of the Company’s period-over-period performance. These items include, but are not limited to, gains and losses on the retirement of debt, legal and accounting costs related to the Company’s prior internal investigation and the informal SEC inquiry, personnel separations costs, contingent consideration charges and acquisition costs.


		Earnings Release - Continued

The Company’s presentation of FFO in accordance with the NAREIT white paper, or presentation of Core FFO, should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of the Company’s financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of its liquidity. The Company’s FFO and Core FFO calculations are reconciled to net income in the Company’s Consolidated Statements of Operations included in this release.

NOI – The Company defines net operating income (“NOI”) as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and insurance). Management believes that NOI is a useful measure of the Company’s property operating performance as it provides a performance measure of the revenues and expenses directly associated with owning, operating, developing and redeveloping office and business park properties, and provides a perspective not immediately apparent from net income or FFO. Other REITs may use different methodologies for calculating NOI, and accordingly, the Company’s NOI may not be comparable to other REITs. The Company’s NOI calculations are reconciled to total revenues and total operating expenses at the end of this release.

Same-Property NOI – 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 owned by the Company for the entirety of the periods compared, is a primary performance measure the Company uses to assess the results of operations at its properties. As an indication of the Company’s operating performance, Same-Property NOI should not be considered an alternative to net income calculated in accordance with GAAP. A reconciliation of the Company’s 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 thus impacting trends and comparability. Also, the Company eliminates depreciation and amortization expense, which are property level expenses, in computing Same-Property NOI as these are non-cash expenses that are based on historical cost accounting assumptions and 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.

Forward Looking Statements

The forward-looking statements contained in this press release, including statements regarding the Company’s 2013 Core FFO guidance and related assumptions, the potential sale of Worman’s Mill Court and the timing of such sale, and future acquisition and growth opportunities, are subject to various risks and uncertainties. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that its expectations will be achieved. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete acquisitions on acceptable terms; the Company’s ability to manage its current debt levels and repay or refinance its indebtedness upon maturity or other required payment dates; the Company’s ability to maintain financial covenant compliance under its debt agreements; the Company’s ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; any impact of the informal inquiry initiated by the U.S. Securities and Exchange Commission (the “SEC”); the Company’s ability to obtain debt and/or financing on attractive terms, or at all; changes in the assumptions underlying the Company’s earnings and Core FFO guidance and other risks detailed in the Company’s Annual Report on Form 10-K and described from time to time in the Company’s filings


		Earnings Release - Continued

with the SEC. Many of these factors are beyond the Company’s 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.


		Earnings Release - Continued

Consolidated Statements of Operations

(unaudited, amounts in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues:
Rental	$	32,424		$	31,516		$	96,742		$	93,689
Tenant reimbursements and other		8,413			7,270			25,229			23,585

Total revenues		40,837			38,786			121,971			117,274

Operating expenses:
Property operating		10,878			10,035			31,529			27,697
Real estate taxes and insurance		4,240			3,741			13,104			12,253
General and administrative		6,346			5,645			16,598			17,787
Acquisition costs		173			8			173			49
Depreciation and amortization		14,812			14,144			43,891			41,247
Impairment of real estate assets		—			496			—			2,444
Contingent consideration related to acquisition of property		—			112			75			112

Total operating expenses		36,449			34,181			105,370			101,589

Operating income		4,388			4,605			16,601			15,685

Other expenses, net:
Interest expense		7,726			9,974			27,036			30,909
Interest and other income		(1,696	)		(1,521	)		(4,801	)		(4,528	)
Equity in (earnings) losses of affiliates		(19	)		30			(54	)		52
Gain on sale of investment		—			(2,951	)		—			(2,951	)
Loss on debt extinguishment		123			—			324			13,221

Total other expenses, net		6,134			5,532			22,505			36,703

Loss from continuing operations before income taxes		(1,746	)		(927	)		(5,904	)		(21,018	)

Benefit from income taxes		—			4,304			—			4,142

(Loss) income from continuing operations		(1,746	)		3,377			(5,904	)		(16,876	)

Discontinued operations:
(Loss) income from operations		(387	)		4,058			5,677			7,454
Loss on debt extinguishment		—			—			(4,414	)		—
Gain on sale of real estate property		416			—			19,363			161

Income from discontinued operations		29			4,058			20,626			7,615

Net (loss) income		(1,717	)		7,435			14,722			(9,261	)

Less: Net loss (income) attributable to noncontrolling interests		211			(232	)		(196	)		876

Net (loss) income attributable to First Potomac Realty Trust		(1,506	)		7,203			14,526			(8,385	)

Less: Dividends on preferred shares		(3,100	)		(3,100	)		(9,300	)		(8,864	)

Net (loss) income attributable to common shareholders	$	(4,606	)	$	4,103		$	5,226		$	(17,249	)


		Earnings Release - Continued


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net (loss) income attributable to common shareholders	$	(4,606	)	$	4,103		$	5,226		$	(17,249	)
Depreciation and amortization:
Real estate assets		14,812			14,144			43,891			41,247
Discontinued operations		104			2,489			3,928			7,728
Unconsolidated joint ventures		1,332			1,487			4,001			4,456
Consolidated joint ventures		(46	)		(46	)		(150	)		(129	)
Impairment of real estate assets		474			496			1,921			3,517
Gain on sale of real estate property		(416	)		(2,951	)		(19,363	)		(3,112	)
Net (loss) income attributable to noncontrolling interests in the Operating Partnership		(203	)		209			216			(944	)

Funds from operations available to common shareholders	$	11,451		$	19,931		$	39,670		$	35,514


		Earnings Release - Continued

Consolidated Statements of Operations

(unaudited, amounts in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Funds from operations (FFO)	$	14,551		$	23,031		$	48,970		$	44,378
Less: Dividends on preferred shares		(3,100	)		(3,100	)		(9,300	)		(8,864	)

FFO available to common shareholders		11,451			19,931			39,670			35,514
Personnel separation costs		1,777			397			1,777			397
Loss on debt extinguishment		123			—			4,738			13,325
Internal investigation costs		—			743			—			3,276
Deferred abatement and straight-line amortization		—			(1,567	)		(1,567	)		(1,567	)
Change in tax regulation		—			(4,327	)		—			(4,327	)
Acquisition costs		173			8			173			49
Contingent consideration related to acquisition of property		—			112			75			112
Legal costs associated with informal SEC inquiry		—			—			391			—

Core FFO	$	13,524		$	15,297		$	45,257		$	46,779

Basic and diluted earnings per common share:
Loss from continuing operations available to common shareholders	$	(0.08	)	$	—		$	(0.28	)	$	(0.49	)
Income from discontinued operations available to common shareholders		—			0.08			0.37			0.14

Net (loss) income available to common shareholders	$	(0.08	)	$	0.08		$	0.09		$	(0.35	)

Weighted average common shares outstanding:
Basic		57,969			50,267			54,014			50,049
Diluted		57,969			50,346			54,014			50,049
FFO available to common shareholders per share – basic and diluted	$	0.19		$	0.38		$	0.70		$	0.67
Core FFO per share – diluted	$	0.22		$	0.29		$	0.80		$	0.88
Weighted average common shares and units outstanding:
Basic		60,561			52,869			56,610			52,802
Diluted		60,628			52,947			56,701			52,884


		Earnings Release - Continued

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)


	September 30, 2013			December 31, 2012
	(unaudited)
Assets:
Rental property, net	$	1,218,364		$	1,450,679
Assets held-for-sale		3,447			—
Cash and cash equivalents		16,971			9,374
Escrows and reserves		38,089			13,421
Accounts and other receivables, net of allowance for doubtful accounts of $1,698 and $1,799, respectively		12,309			15,271
Accrued straight-line rents, net of allowance for doubtful accounts of $168 and $530, respectively		29,838			28,133
Notes receivable, net		54,722			54,730
Investment in affiliates		49,229			50,596
Deferred costs, net		39,706			40,370
Prepaid expenses and other assets		11,064			8,597
Intangible assets, net		37,544			46,577

Total assets	$	1,511,283		$	1,717,748

Liabilities:
Mortgage loans	$	275,974		$	418,864
Secured term loan		—			10,000
Unsecured term loan		300,000			300,000
Unsecured revolving credit facility		83,000			205,000
Accounts payable and other liabilities		44,704			64,920
Accrued interest		1,697			2,653
Rents received in advance		6,969			9,948
Tenant security deposits		5,799			5,968
Deferred market rent, net		1,746			3,535

Total liabilities		719,889			1,020,888

Noncontrolling interests in the Operating Partnership		33,972			34,367
Equity:
Preferred Shares, $0.001 par value, 50,000 shares authorized; Series A Preferred Shares, $25 liquidation preference, 6,400 shares issued and outstanding	$	160,000		$	160,000
Common shares, $0.001 par value, 150,000 shares authorized; 58,772 and 51,047 shares issued and outstanding, respectively		59			51
Additional paid-in capital		912,444			804,584
Noncontrolling interests in consolidated partnerships		3,957			3,728
Accumulated other comprehensive loss		(5,150	)		(10,917	)
Dividends in excess of accumulated earnings		(313,888	)		(294,953	)

Total equity		757,422			662,493

Total liabilities, noncontrolling interests and equity	$	1,511,283		$	1,717,748


		Earnings Release - Continued

Same-Property Analysis

(unaudited, dollars in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Same-Property NOI⁽¹⁾
Total base rent	$	30,863		$	30,389		$	92,073		$	90,676
Tenant reimbursements and other		7,833			6,961			23,059			21,157
Property operating expenses		(9,825	)		(9,553	)		(28,571	)		(27,159	)
Real estate taxes and insurance		(3,857	)		(3,679	)		(11,931	)		(11,377	)

Same-Property NOI—accrual basis		25,014			24,118			74,630			73,388
Straight-line revenue, net		(432	)		(298	)		(1,148	)		(1,229	)
Deferred market rental revenue, net		50			258			74			366

Same-Property NOI—cash basis	$	24,632		$	24,078		$	73,556		$	72,525

Change in same-property NOI—accrual basis		3.7	%					1.7	%
Change in same-property NOI—cash basis		2.3	%					1.4	%
Same-property percentage of total portfolio (sf)		97.0	%					97.0	%

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Reconciliation of Consolidated NOI to Same-Property NOI
Total revenues	$	40,837		$	38,786		$	121,971		$	117,274
Property operating expenses		(10,878	)		(10,035	)		(31,529	)		(27,697	)
Real estate taxes and insurance		(4,240	)		(3,741	)		(13,104	)		(12,253	)

NOI		25,719			25,010			77,338			77,324
Less: Non-same property NOI⁽²⁾		(705	)		(892	)		(2,708	)		(3,936	)

Same-Property NOI—accrual basis	$	25,014		$	24,118		$	74,630		$	73,388


	Three Months						Nine Months
	Ended						Ended
	September 30,			Percentage of			September 30,			Percentage of
	2013			Base Rent			2013			Base Rent
Change in Same-Property NOI by Region (accrual basis)
Washington, D.C.		2.5	%		13	%		3.1	%		13	%
Maryland		(1.7	)%		32	%		(0.8	)%		31	%
Northern Virginia		12.5	%		31	%		4.2	%		32	%
Southern Virginia		0.3	%		24	%		0.7	%		24	%
Change in Same-Property NOI by Type (accrual basis)
Business Park / Industrial		4.7	%		47	%		(0.1	)%		46	%
Office		2.8	%		53	%		3.4	%		54	%

⁽¹⁾

Same-property comparisons are based upon those consolidated properties owned for the entirety of the periods presented. Same-property results exclude the operating results of the following non same-properties that were owned as of September 30, 2013: Three Flint Hill, 440 First Street, NW, Davis Drive, 1005 First Street, NE and Worman’s Mill Court.

⁽²⁾	Non-same property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Highlights

(unaudited, dollars in thousands, except per share data)


	Q3-2013			Q2-2013			Q1-2013			Q4-2012			Q3-2012
Performance Metrics	$	11,451		$	11,141		$	17,077		$	16,601		$	19,931
FFO available to common shareholders⁽¹⁾
Core FFO⁽¹⁾	$	13,524		$	15,886		$	15,846		$	16,805		$	15,297
FFO available to common shareholders per share	$	0.19		$	0.20		$	0.32		$	0.31		$	0.38
Core FFO per share	$	0.22		$	0.28		$	0.30		$	0.32		$	0.29
Operating Metrics
Change in Same-Property NOI
Cash Basis		2.3	%		(0.1	)%		1.3	%		5.3	%		1.6	%
Accrual Basis		3.7	%		0.0	%		1.4	%		6.3	%		3.2	%
Assets
Total Assets	$	1,511,283		$	1,557,666		$	1,718,364		$	1,717,748		$	1,714,237
Debt Balances
Unhedged Variable Rate Debt	$	76,699		$	43,657		$	249,500		$	165,000		$	129,000
Hedged Variable Rate Debt⁽²⁾		350,000			350,000			350,000			350,000			350,000
Fixed Rate Debt		232,275			294,389			355,387			418,864			442,267

Total	$	658,974		$	688,046		$	954,887		$	933,864		$	921,267

Leasing Metrics
Net Absorption (Square Feet)⁽³⁾		19,741			69,107	⁽⁴⁾		177,460			48,946			54,841
Tenant Retention Rate		30	%⁽⁵⁾		79	%⁽⁴⁾		89	%		58	%		75	%
Leased %		87.4	%		86.5	%		86.3	%		84.9	%		84.9	%
Occupancy %		85.1	%		84.0	%		83.9	%		83.0	%		83.2	%
Total New Leases (Square Feet)		213,000			234,000			218,000			291,000			143,000
Total Renewal Leases (Square Feet)		87,000			306,000			345,000			318,000			332,000

⁽¹⁾	See page 19 for a reconciliation of the Company’s FFO available to common shareholders and Core FFO to net (loss) income attributable to common shareholders.

⁽²⁾	As of September 30, 2013, the Company had fixed LIBOR at a weighted averaged interest rate of 1.5% on $350.0 million of its variable rate debt through twelve interest rate swap agreements.

⁽³⁾	Net absorption includes adjustments made for pre-leasing, deals signed in advance of existing lease expirations and unforeseen terminations.

⁽⁴⁾	Both the Net Absorption and Tenant Retention Rate exclude all properties that were sold in the second quarter of 2013.

⁽⁵⁾	The Company had an expected tenant retention rate of 30% in the third quarter of 2013, primarily as a result of over 200,000 square feet of known move outs in the quarter.

Quarterly Financial Results

(unaudited, dollars in thousand)


	Three Months Ended
	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012
OPERATING REVENUES
Rental	$	32,424		$	32,359		$	31,959		$	31,943		$	31,516
Tenant reimbursements and other		8,413			8,026			8,789			8,259			7,270

		40,837			40,385			40,748			40,202			38,786
PROPERTY EXPENSES
Property operating		10,878			9,840			10,810			10,134			10,035
Real estate taxes and insurance		4,240			4,168			4,695			3,834			3,741

NET OPERATING INCOME		25,719			26,377			25,243			26,234			25,010
OTHER (EXPENSES) INCOME
General and administrative		(6,346	)		(4,985	)		(5,267	)		(5,781	)		(5,645	)
Acquisition costs		(173	)		—			—			—			(8	)
Interest and other income		1,696			1,574			1,530			1,522			1,521
Equity in earnings (losses) of affiliates		19			7			28			92			(30	)

EBITDA		20,915			22,973			21,534			22,067			20,848
Depreciation and amortization		(14,812	)		(14,657	)		(14,421	)		(14,954	)		(14,144	)
Interest expense		(7,726	)		(9,353	)		(9,958	)		(10,090	)		(9,974	)
Loss on debt extinguishment		(123	)		(201	)		—			(466	)		—
Contingent consideration related to acquisition of property		—			(75	)		—			(39	)		(112	)
Impairment of real estate assets		—			—			—			—			(496	)
Gain on sale of investment⁽¹⁾		—			—			—			—			2,951

Loss from continuing operations before income taxes		(1,746	)		(1,313	)		(2,845	)		(3,482	)		(927	)

Benefit from income taxes		—			—			—			—			4,304

(Loss) income from continuing operations		(1,746	)		(1,313	)		(2,845	)		(3,482	)		3,377

DISCONTINUED OPERATIONS
(Loss) income from operations		(387	)		1,256			4,808			4,362			4,058
Loss on debt extinguishment		—			(4,414	)		—			—			—
Gain on sale of real estate property⁽²⁾		416			18,947			—			—			—

Income from discontinued operations		29			15,789			4,808			4,362			4,058

NET (LOSS) INCOME		(1,717	)		14,476			1,963			880			7,435

Less: Net loss (income) attributable to noncontrolling interests		211			(466	)		59			110			(232	)

NET (LOSS) INCOME ATTRIBUTABLE TO FIRST POTOMAC REALTY TRUST		(1,506	)		14,010			2,022			990			7,203

Less: Dividends on preferred shares		(3,100	)		(3,100	)		(3,100	)		(3,100	)		(3,100	)

NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(4,606	)	$	10,910		$	(1,078	)	$	(2,110	)	$	4,103


Supplemental Financial Results Items:
The following items were included in the determination of net (loss) income:

	Three Months Ended
	September 30, 2013			June 30, 2013			March 31, 2013			December 31,2012			September 30, 2012
Termination fees	$	61		$	49		$	121		$	606		$	63
Capitalized interest		836			360			344			334			603
Change in tax regulations⁽³⁾		—			—			—			—			4,327
Snow and ice removal costs (excluding reimbursements)⁽⁴⁾		(27	)		(68	)		(817	)		66			—
Reserves for bad debt expense		(167	)		(229	)		(174	)		(55	)		(149	)
Internal investigation costs		—			—			—			(27	)		(743	)
Legal costs associated with informal SEC inquiry		—			(55	)		(336	)		(110	)		—
Personnel separation costs		(1,777	)		—			—			(732	)		(397	)
Discontinued Operations⁽⁵⁾
Revenues	$	319		$	6,323		$	10,709		$	9,939		$	9,965
Operating expenses		(128	)		(1,922	)		(2,842	)		(2,519	)		(2,759	)
Depreciation and amortization expense		(104	)		(1,337	)		(2,487	)		(2,486	)		(2,489	)
Interest expense, net of interest income		—			(362	)		(572	)		(572	)		(659	)
Impairment of real estate assets		(474	)		(1,446	)		—			—			—
Loss on debt extinguishment		—			(4,414	)		—			—			—
Gain on sale of real estate property⁽²⁾	$	416		$	18,947			—			—			—

	$	29		$	15,789		$	4,808		$	4,362		$	4,058

⁽¹⁾	During the third quarter of 2012, the Company recorded a $3.0 million gain on the sale of its 95% interest in 1200 17th street, NW, an office building in Washington, U.C.

⁽²⁾

For the three months ended September 30, 2013, the gain on sale of real estate property includes $0.4 million related to the sale of 4200 Tech Court. For the three months ended June 30, 2013, the gain on sale of real estate property includes $18.7 million related to the sale of the industrial portfolio and $0.2 million related to the sale of 4212 Tech Court.

⁽³⁾	Reflects the one-time non-cash impact of new tax regulations enacted by the District of Columbia that became effective in September 2012, which is included in Benefit from income taxes in the above Quarterly Financial Results.

⁽⁴⁾	The Company recovered approximately 65% of these costs.

⁽⁵⁾

Represents the operating results of (i) Worman’s Mill Court, which is expected to be sold in the fourth quarter of 2013, (ii) Triangle Business Center and 4200 Tech Court, which were both sold in the third quarter of 2013, (iii) 4212 Tech Court, I-66 Commerce Center, Frederick Industrial Park, Mercedes Center, Glen Dale Business Center, Interstate Plaza, 13129 Airpark Road, Northridge, River’s Bend Center, Cavalier Industrial Park, Diamond Hill Distribution Center and Hampton Roads Center, which were all sold in the second quarter of 2013, and (iv) two buildings at Owings Mills Business Park, which were sold in the fourth quarter of 2012.

Quarterly Financial Measures

(unaudited, amounts in thousands, except per share data)


	Three Months Ended
	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012
FUNDS FROM OPERATIONS (“FFO”)
Net (loss) income attributable to common shareholders	$	(4,606	)	$	10,910		$	(1,078)		$	(2,110)		$	4,103
Depreciation and amortization:
Real estate assets		14,812			14,657			14,421			14,954			14,144
Discontinued operations		104			1,337			2,487			2,486			2,489
Unconsolidated joint ventures		1,332			1,317			1,352			1,428			1,487
Consolidated joint ventures		(46	)		(53	)		(51	)		(49	)		(46	)
Impairment of real estate assets		474			1,446			—			—			496
Gain on sale of real estate property		(416	)		(18,947	)		—			—			(2,951	)
Net (loss) income attributable to noncontrolling interests in the Operating Partnership		(203	)		474			(54	)		(108	)		209

FFO available to common shareholders		11,451			11,141			17,077			16,601			19,931
Dividends on preferred shares		3,100			3,100			3,100			3,100			3,100

FFO	$	14,551		$	14,241		$	20,177		$	19,701		$	23,031

FFO available to common shareholders		11,451			11,141			17,077			16,601			19,931
Personnel separation costs		1,777			—			—			732			397
Loss on debt extinguishment⁽¹⁾		123			4,615			—			466			—
Internal investigation costs⁽²⁾		—			—			—			27			743
Deferred abatement and straight-line amortization⁽³⁾		—			—			(1,567	)		(1,567	)		(1,567	)
Change in tax regulation⁽⁴⁾		—			—			—			—			(4,327	)
Acquisition costs		173			—			—			—			8
Contingent consideration related to acquisition of property		—			75			—			39			112
Development costs⁽⁵⁾		—			—			—			397			—
Legal costs associated with informal SEC inquiry		—			55			336			110			—

Core FFO	$	13,524		$	15,886		$	15,846		$	16,805		$	15,297

ADJUSTED FUNDS FROM OPERATIONS (“AFFO”)
Core FFO	$	13,524		$	15,886		$	15,846		$	16,805		$	15,297
Non-cash share-based compensation expense		838			891			771			1,271			856
Straight-line rent, net⁽⁶⁾		(446	)		(459	)		(292	)		(226	)		(361	)
Deferred market rent, net		50			(3	)		(18	)		(74	)		228
Non-real estate depreciation and amortization⁽⁷⁾		332			256			242			245			251
Debt fair value amortization		(58	)		(76	)		(8	)		(24	)		(35	)
Provision for income taxes		—			—			—			—			23
Amortization of finance costs		672			816			756			777			683
Tenant improvements⁽⁸⁾		(3,190	)		(6,413	)		(3,544	)		(4,898	)		(3,108	)
Leasing commissions⁽⁸⁾		(1,690	)		(1,629	)		(1,352	)		(941	)		(830	)
Capital expenditures⁽⁸⁾		(2,728	)		(1,627	)		(2,010	)		(4,034	)		(1,634	)

AFFO	$	7,304		$	7,642		$	10,391		$	8,901		$	11,370

Total weighted average common shares and OP units:
Basic		60,561			56,184			53,002			52,927			52,869

Diluted		60,628			56,289			53,106			53,026			52,947

FFO available to common shareholders and units per share:
FFO—basic and diluted	$	0.19		$	0.20		$	0.32		$	0.31		$	0.38

Core FFO—diluted	$	0.22		$	0.28		$	0.30		$	0.32		$	0.29

AFFO per share:
AFFO—basic	$	0.12		$	0.14		$	0.20		$	0.17		$	0.22

AFFO—diluted	$	0.12		$	0.14		$	0.20		$	0.17		$	0.21

⁽¹⁾

During the third quarter of 2013, the Company incurred $0.1 million in charges related to the transfer of a mortgage loan to 840 First Street, NE. During the second quarter of 2013, the Company incurred $4.6 million in charges related to the prepayment of certain mortgage debt associated with the previously disclosed sales of the 24 industrial properties and the paydown of a mortgage loan encumbering Cloverleaf Center, the Bridge Loan and the Secured Term Loan. During the fourth quarter of 2012, the Company incurred a $0.5 million charge related to the defeasement of a mortgage loan that encumbered four buildings at Owings Mills Business Park, of which two buildings were sold on November 7, 2012.

⁽²⁾	Represents legal and accounting fees incurred in connection with the Company’s completed internal investigation.

⁽³⁾

Represents the accelerated amortization of the straight line balance and the deferred abatement for Engineering Solutions at I-66 Commerce Center, which terminated its lease prior to completion. The tenant vacated the property on March 31, 2013 and I-66 Commerce Center was sold in the second quarter of 2013.

⁽⁴⁾	Reflects the one-time non-cash impact of new tax regulations enacted by the District of Columbia that became effective in September 2012.

⁽⁵⁾	During the fourth quarter of 2012, the Company expensed development costs related to a project that was deferred at Greenbrier Business Park.

⁽⁶⁾	Includes the Company’s amortization of the following: straight-line rents and associated uncollectable amounts, rent abatements and lease incentives.

⁽⁷⁾	Most non-real estate depreciation is classified in general and administrative expense.

⁽⁸⁾	Does not include first-generation costs, which the Company defines as tenant improvements, leasing commissions and capital expenditure costs that were taken into consideration when underwriting the purchase of a property or incurred to bring the property to operating standard for its intended use.


First-generation costs
Tenant improvements	$	1,420	$	3,265	$	2,588	$	3,881	$	3,289
Leasing commissions		1,738		536		461		516		1,021
Capital expenditures		1,145		2,215		2,049		4,513		1,633

Total first-generation costs		4,303		6,016		5,098		8,910		5,943
Development and redevelopment		1,850		5,692		4,813		4,939		2,653

	$	6,153	$	11,708	$	9,911	$	13,849	$	8,596

Capitalization and Selected Ratios

(unaudited, dollars in thousands, except per share data, percentages and ratios)

Total Market Capitalization


			Percent of Total Market Capitalization
Common Shares and Units
Total common shares outstanding		58,772
Operating Partnership (“OP”) units held by third parties		2,592

Total common shares and OP units outstanding		61,364
Market price per share at September 30, 2013	$	12.57

Market Value of Common Equity	$	771,345		48.4	%

Preferred Shares
Total Series A Preferred Shares outstanding		6,400
Market price per share at September 30, 2013	$	25.40

Market Value of Preferred Equity	$	162,560		10.2	%

Debt
Fixed-rate debt	$	232,275		14.6	%
Hedged variable-rate debt⁽¹⁾		350,000		22.0	%
Unhedged variable-rate debt		76,699		4.8	%

Total debt	$	658,974		41.4	%

Total Market Capitalization	$	1,592,879		100.0	%

Selected Ratios


	Three Months Ended
	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012
COVERAGE RATIOS
Interest Coverage Ratio
EBITDA, excluding acquisition costs⁽²⁾	$	21,088		$	22,973		$	21,534		$	22,067		$	20,856
Interest expense		7,726			9,353			9,958			10,090			9,974

		2.73x			2.46x			2.16x			2.19x			2.09x
Fixed Charge Coverage Ratio
EBITDA, excluding acquisition costs⁽²⁾	$	21,088		$	22,973		$	21,534		$	22,067		$	20,856
Fixed charges⁽³⁾		12,458			14,294			15,051			15,230			15,060

		1.69x			1.61x			1.43x			1.45x			1.38x
OVERHEAD RATIO
G&A to Real Estate Revenues
General and administrative expense⁽⁴⁾	$	4,569		$	4,924		$	4,931		$	4,912		$	4,505
Total revenues		40,837			40,385			40,748			40,202			38,786

		11.2	%		12.2	%		12.1	%		12.2	%		11.6	%
LEVERAGE RATIOS
Debt/Total Market Capitalization Total debt	$	658,974		$	688,046		$	954,887		$	933,864		$	921,267
Total market capitalization		1,592,879			1,658,187			1,919,706			1,761,716			1,776,780

		41.4	%		41.5	%		49.7	%		53.0	%		51.9	%
Debt/Undepreciated Book Value Total debt	$	658,974		$	688,046		$	954,887		$	933,864		$	921,267
Undepreciated book value		1,423,717			1,422,287			1,687,645			1,681,763			1,660,704

		46.3	%		48.4	%		56.6	%		55.5	%		55.5	%

⁽¹⁾	At September 30, 2013, the Company had fixed LIBOR at a weighted average interest rate of 1.5% on $350.0 million of its variable rate debt through twelve interest rate swap agreements.

⁽²⁾	Acquisition costs were omitted due to their variability, which impacted the comparability of period-over-period results.

⁽³⁾	Fixed charges include interest expense, debt principal amortization and quarterly accumulated dividends on the Company’s preferred shares.

⁽⁴⁾	Excludes personnel separation costs, legal costs associated with informal SEC inquiry and internal investigation costs. For detail of these costs, see the reconcilation of FFO available to common shareholders to Core FFO on the Quarterly Financial Measures table.

Outstanding Debt

(unaudited, dollars in thousands)


Fixed-Rate Debt	Effective Interest Rate			Balance at September 30, 2013			Annualized Debt Service			Maturity Date		Balance at Maturity
Encumbered Properties
Annapolis Business Center⁽¹⁾		6.25	%	$	8,114		$	665			6/1/2014	$	8,010
Jackson National Life Loan⁽²⁾		5.19	%		66,400			6,582			8/1/2015		64,230
Hanover Business Center Building D⁽¹⁾		6.63	%		288			161			8/1/2015		13
Chesterfield Business Center Buildings C, D, G and H⁽¹⁾		6.63	%		772			414			8/1/2015		34
Gateway Centre Manassas Building I⁽¹⁾		5.88	%		688			239			11/1/2016		—
Hillside Center⁽¹⁾		4.62	%		13,448			945			12/6/2016		12,160
Redland Corporate Center		4.64	%		67,336			4,014			11/1/2017		62,064
Hanover Business Center Building C⁽¹⁾		6.63	%		688			186			12/1/2017		13
840 First Street, NE⁽³⁾		6.01	%		37,298			2,722			7/1/2020		32,000
Battlefield Corporate Center		4.40	%		3,889			320			11/1/2020		2,618
Chesterfield Business Center Buildings A, B, E and F⁽¹⁾		6.63	%		1,921			318			6/1/2021		26
Airpark Business Center⁽¹⁾		6.63	%		1,048			173			6/1/2021		14
1211 Connecticut Avenue, NW		4.47	%		30,385			1,823			7/1/2022		24,668

Total Fixed-Rate Debt		5.09	%⁽⁴⁾	$	232,275		$	18,562				$	205,850

Unamortized fair value adjustments					(714	)

Total Principal Balance				$	231,561

Variable-Rate Debt⁽⁵⁾
1005 First Street, NE⁽⁶⁾		5.80	%		22,000			1,100			10/16/2014		22,000
Construction Loan⁽⁷⁾		LIBOR + 2.50%			21,699			582			5/30/2016		21,699
Unsecured Revolving Credit Facility⁽⁸⁾		LIBOR + 2.25%			83,000			2,017			1/15/2015		83,000
Unsecured Term Loan⁽⁸⁾
Tranche A		LIBOR + 2.15%			60,000			1,398			7/18/2016		60,000
Tranche B		LIBOR + 2.25%			147,500			3,584			7/18/2017		147,500
Tranche C		LIBOR + 2.30%			92,500			2,294			7/18/2018		92,500

		2.43	%⁽⁴⁾		300,000			7,276					300,000

Total Variable-Rate Debt		4.19	%⁽⁴⁾⁽⁹⁾	$	426,699		$	10,975				$	426,699

Total Debt at September 30, 2013		4.51	%⁽⁴⁾⁽⁹⁾	$	658,974		$	29,537	⁽¹⁰⁾			$	632,549

⁽¹⁾	The balance includes the fair value impacts recorded at acquisition upon assumption of the mortgages encumbering these properties.

⁽²⁾

At September 30, 2013, the loan was secured by the following properties: Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, and Norfolk Business Center. The terms of the loan allow the Company to substitute collateral, as long as certain debt-service coverage and loan-to-value ratios are maintained, or to prepay a portion of the loan, with a prepayment penalty, subject to a debt service yield.

⁽³⁾

On September 30, 2013, the Company repaid the $53.9 million mortgage loan that encumbered 840 First Street, NE, which was scheduled to mature on October 1, 2013. 840 First Street, NE is subject to a tax protection agreement, which requires that the Company maintain a specified minimum amount of debt on the property through March 2018. As a result of this agreement, simultaneously with the repayment of the mortgage loan, the Company encumbered 840 First Street, NE with a $37.3 million mortgage loan that had previously encumbered 500 First Street, NW.

⁽⁴⁾	Represents the weighted average interest rate.

⁽⁵⁾	All of the Company’s variable rate debt is based on one-month LIBOR. For the purposes of calculating the annualized debt service and the effective interest rate, the Company used the one-month LIBOR rate at September 30, 2013, which was 0.18%.

⁽⁶⁾	The loan has a contractual interest rate of LIBOR plus a spread of 2.75% (with a floor of 5.0%) and matures in October 2014, with a one-year extension at the Company’s option.

⁽⁷⁾	The loan matures in May 2016, with two one-year extension options at the Company’s discretion and has a borrowing capacity of up to $43.5 million. The Company can repay all or a portion of the Construction Loan, without penalty, at any time during the term of the loan.

⁽⁸⁾

On October 16, 2013, the Company amended its unsecured revolving credit facility and unsecured term loans. The Company increased the size of the unsecured revolving credit facility from $255 million to $300 million, and extended the maturity date to October 2017, with a one-year extension at the Company’s option. The Company’s unsecured term loan was divided into three $100 million tranches that mature in October 2018, 2019 and 2020. As part of the amendment, the Company reduced its LIBOR spreads to current market rates, which, depending on the Company’s leverage ratios could reduce the applicable LIBOR spreads on its unsecured revolving credit facility and unsecured term loan by 50 to 90 basis points.

⁽⁹⁾	At September 30, 2013, the Company had fixed LIBOR on $350.0 million of its variable rate debt through twelve interest rate swap agreements. The effective interest rate reflects the impact of the Company’s interest rate swap agreements.

⁽¹⁰⁾	During the third quarter of 2013, the Company paid approximately $1.6 million in principal payments on its consolidated mortgage debt, which excludes $60.5 million related to mortgage debt that was repaid during the third quarter of 2013.

Debt Maturity Schedule

(unaudited, dollars in thousands)

LOGO

NOI of Pledged Properties and Supported Indebtedness


Year of Maturity	Type	Annualized NOI⁽²⁾⁽³⁾		Total Maturing Indebtedness		Total Supported Indebtedness		Debt Yield
2014	Secured Property Debt	$	3,252	$	30,010	$	30,010		10.8	%
2015	Secured Property Debt		11,696		64,277		64,277		18.2	%
2016	Secured Property Debt		857		12,160		12,160		7.0	%
2016	Construction Loan		—		21,699		21,699		NM
2017	Secured Property Debt		7,241		62,077		62,077		11.7	%
2017⁽²⁾	Unsecured Revolving Credit Facility		69,372		83,000		383,000		18.1	%
2018⁽²⁾	Unsecured Term Loan		69,372		100,000		383,000		18.1	%
2019⁽²⁾	Unsecured Term Loan		69,372		100,000		383,000		18.1	%
2020⁽²⁾	Unsecured Term Loan		69,372		100,000		383,000		18.1	%
2020	Secured Property Debt		7,518		34,618		34,618		21.7	%
2021	Secured Property Debt		719		40		40		NM
2022	Secured Property Debt		3,464		24,668		24,668		14.0	%

NM = Not meaningful.

⁽¹⁾	At September 30, 2013, the Company had fixed LIBOR on $350.0 million of its variable rate debt through twelve interest rate swap agreements.

⁽²⁾

On October 16, 2013, the Company amended its unsecured revolving credit facility and unsecured term loans. The Company increased the size of the unsecured revolving credit facility from $255 million to $300 million and increased the term of the facility by approximately four years. The unsecured revolving credit facility will mature in October 2017, with a one-year extension at the Company’s option. The Company also extended the maturity dates of each of the three loans that comprise the $300 million unsecured term loan by approximately two years. The amended terms are reflected in the table.

⁽³⁾	NOI calculated using the defintions in the unsecured debt covenants that were amended on October 16, 2013.

Selected Debt Covenants

(unaudited, dollars in thousands)


	Credit Facility / Unsecured
	Term Loan / Construction Loan
	Quarter Ended September 30, 2013			Covenant
Covenants⁽¹⁾
Consolidated Total Leverage Ratio⁽²⁾		43.1	%		< 60	%
Net Worth⁽²⁾	$	944,046			> 601,202
Fixed Charge Coverage Ratio⁽²⁾		1.89x			> 1.50x
Maximum Dividend Payout Ratio		63.0	%		< 95	%
Restricted Investments:
Joint Ventures		5.8	%		< 15	%
Real Estate Assets Under Development		3.2	%		< 15	%
Undeveloped Land		1.4	%		< 5	%
Structured Finance Investments		3.3	%		< 5	%
Total Restricted Investments		7.8	%		< 25	%
Restricted Indebtedness:
Maximum Secured Debt		19.5	%		< 40	%
Unencumbered Pool Leverage⁽²⁾		42.6	%		< 60	%
Unencumbered Pool Interest Coverage Ratio⁽²⁾		4.75x			> 1.75x

⁽¹⁾

On October 16, 2013, the Company amended its unsecured revolving credit facility and unsecured term loans. As part of these amendments, the Company, among other things, reduced its LIBOR spreads to current market rates, eliminated the prepayment lock-outs associated with the unsecured term loan, decreased the capitalization rates used to calculate gross asset value in the covenant calculations, and moved to a covenant package more closely aligned with the Company’s strategic plan. The covenants listed above reflect the amended covenants, which, pursuant to the terms of the amendments, are applicable to the Company with respect to the quarter ended September 30, 2013.

⁽²⁾	These are the only covenants that apply to the Construction Loan, which are calculated in accordance with the amended unsecured revolving credit facility.

Net Asset Value Analysis

(unaudited, dollars in thousands, except percentages)


Income Statement Items⁽¹⁾	Three Months Ended September 30, 2013
Total Portfolio In-Place Cash NOI
Total GAAP Revenue	$	40,837
Straight-line and Deferred Market Rents		(392	)
Management Fee Adjustment⁽²⁾		521
Property Operating Costs		(15,118	)

Total Portfolio In-Place Cash NOI	$	25,848

Occupancy as of September 30, 2013		85.1	%
Balance Sheet Items
Development & Redevelopment Assets
Original Cost Basis of Land held for Future Development	$	22,664
Original Cost Basis of Land in Current Development/Redevelopment		66,870
Construction Costs to Date for Current Development/Redevelopment		31,843

Total Development & Redevelopment Assets	$	121,377

Other Assets
Investments in Affiliates	$	49,229
Notes Receivable, net		54,722

Total Other Assets	$	103,951

Net Liabilities at 9/30/2013
Mortgage and Senior Debt, cash principal balances	$	(658,260	)
Accrued interest		(1,697	)
Rents received in advance		(6,969	)
Tenant security deposits		(5,799	)
Accounts payable and other liabilities		(44,704	)
Cash and cash equivalents, escrows and reserves		55,060
Accounts and other receivables, net of allowance for doubtful accounts		12,309
Prepaid expenses and other assets		11,064

Total Net Liabilities	$	(638,996	)

Preferred Shares Outstanding at 9/30/2013		6,400
Par Value of Preferred Shares Outstanding at 93/30/2013	$	160,000
Weighted Average Diluted Shares and OP Units Outstanding at 9/30/2013		60,628

⁽¹⁾	Does not include figures from discontinued operations.

⁽²⁾	Management fee adjustment, which equates to 4% of cash basis revenue, is used in lieu of an administrative overhead allocation for comparative purposes.

Investment in Joint Ventures

(unaudited, dollars in thousands)

Unconsolidated Joint Ventures


	FPO Ownership			FPO Initial Investment		FPO Investment at September 30, 2013		Property Type	Location	Square Feet		Leased at September 30, 2013			Occupied at September 30, 2013
RiversPark I and II		25	%	$	3,857	$	2,720	Business Park	Columbia, MD		307,984		94.7	%		90.9	%
Aviation Business Park		50	%		4,190		5,028	Office	Glen Burnie, MD		120,285		45.9	%		45.9	%
1750 H Street, NW		50	%		16,795		16,449	Office	Washington, DC		112,269		100.0	%		100.0	%
Prosperity Metro Plaza		51	%		28,124		25,032	Office	Fairfax, VA		327,470		89.5	%		85.7	%

Total / Weighted Average				$	52,966	$	49,229				868,008		86.7	%		83.9	%


Outstanding Debt	FPO Ownership			Effective Interest Rate			Principal Balance at September 30, 2013⁽¹⁾		Annualized Debt Service		Maturity Date	Balance at Maturity⁽¹⁾
RiversPark I and II		25	%		2.75	%	$	28,000	$	770	3/26/2014⁽²⁾	$	28,000
1750 H Street, NW		50	%		5.17	%		28,809		2,634	6/11/2014		27,975
Prosperity Metro Plaza		51	%		3.86	%		50,346		3,628	1/11/2015		48,140

Total / Weighted Average					3.92	%	$	107,155	$	7,032		$	104,115

Income Statement—Unconsolidated Joint Ventures


	Three Months Ended⁽³⁾
	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012
Total revenues	$	6,035		$	5,959		$	6,052		$	6,370		$	6,254
Total operating expenses		(1,879	)		(1,905	)		(1,865	)		(1,918	)		(1,883	)

Net operating income		4,156			4,054			4,187			4,452			4,371
Depreciation and amortization		(2,887	)		(2,854	)		(2,939	)		(3,054	)		(3,174	)
Interest expense, net of interest income		(1,063	)		(1,062	)		(1,060	)		(1,080	)		(1,085	)
Other (expenses) income		(28	)		(28	)		(14	)		(32	)		15

Net income	$	178		$	110		$	174		$	286		$	127

⁽¹⁾	Reflects the balance of the debt secured by the properties, not First Potomac’s portion of the debt.

⁽²⁾	During the third quarter of 2013, the loan was extended by six months to March 26, 2014.

⁽³⁾	Reflects the operating results of the property, not First Potomac’s economic interest in the properties.

Portfolio Summary

(unaudited)

Consolidated Portfolio


	Number of Buildings		Square Feet⁽¹⁾		% Leased⁽¹⁾			% Occupied⁽¹⁾			Annualized Cash Basis Rent⁽²⁾⁽³⁾		% of Annualized Cash Basis Rent
Washington DC		3		502,690		93.1	%		90.5	%	$	14,675,878		13.1	%
Maryland		53		2,544,481		86.6	%		81.6	%		34,095,413		30.3	%
Northern VA		51		3,085,740		87.7	%		86.7	%		37,590,264		33.4	%
Southern VA		38		2,852,240		86.8	%		85.6	%		26,077,968		23.2	%
Richmond		19		827,623		78.5	%		78.5	%		5,844,090		5.2	%
Norfolk		19		2,024,617		90.1	%		88.5	%		20,233,878		18.0	%

Total / Weighted Average		145		8,985,151		87.4	%		85.1	%	$	112,439,523		100.0	%

Projected

Estimated

Total

Investment

Date

Expected

Significant Development/Redevelopment⁽⁴⁾

Region

Square Feet

Investment⁽⁵⁾

To Date⁽⁵⁾

In Service⁽⁶⁾

Return

(dollars in thousands)

Redevelopment

440 First Street, NW

Washington DC

139,273

59,000

51,801

Q4-2014

Total Consolidated Portfolio

9,124,424


	Number of Buildings		Square Feet⁽¹⁾		% Leased⁽¹⁾			% Occupied⁽¹⁾			Annualized Cash Basis Rent⁽²⁾⁽³⁾
Unconsolidated Joint Ventures⁽⁷⁾		12		868,008		86.7	%		83.9	%	$	15,059,429

⁽¹⁾	Does not include space in development or redevelopment.

⁽²⁾

Annualized cash basis rent at the end of the quarter, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases.

⁽³⁾	Includes leased spaces that are not yet occupied.

⁽⁴⁾	841,145 square feet of additional land is available for development, not including 1005 First Street, NE.

⁽⁵⁾	Total Investment includes original cost basis of property, projected base building costs and projected tenant improvements.

⁽⁶⁾	Development/redevelopment is estimated to be placed in service one year from substantial completion.

⁽⁷⁾	Represents operating results of the unconsolidated joint ventures, not First Potomac’s economic interest in the properties.

Leasing and Occupancy Summary

(unaudited)

Total Portfolio by Property Type⁽¹⁾


								Occupied Portfolio by Property Type										Leased Portfolio by Property Type
	Square Feet		% of Total Portfolio			Number of Buildings		Occupied Square Feet		% Occupied			Annualized Cash Basis Rent⁽²⁾		% of Annualized Cash Basis Rent			Leased Square Feet⁽³⁾		% Leased			Annualized Cash Basis Rent⁽²⁾⁽³⁾		% of Annualized Cash Basis Rent
Office		3,270,407		36.4	%		50		2,713,233		83.0	%	$	54,680,571		50.0	%		2,839,018		86.8	%	$	56,850,099		50.6	%
Business Park / Industrial		5,714,744		63.6	%		95		4,933,219		86.3	%		54,663,452		50.0	%		5,013,583		87.7	%		55,589,424		49.4	%

Total / Weighted Average		8,985,151		100	%		145		7,646,452		85.1	%	$	109,344,023		100.0	%		7,852,601		87.4	%	$	112,439,523		100.0	%

Market Concentration by Annualized Cash Basis Rent⁽²⁾⁽³⁾


	Washington DC			Maryland			Northern VA			Southern VA
										Richmond			Norfolk			Subtotal			Total
Office		13.1	%		17.6	%		18.4	%		0.0	%		1.5	%		1.5	%		50.6	%
Business Park / Industrial		0.0	%		12.8	%		15.0	%		5.2	%		16.5	%		21.7	%		49.4	%

		13.1	%		30.3	%		33.4	%		5.2	%		18.0	%		23.2	%		100.0	%

⁽¹⁾	Does not include space in development or redevelopment.

⁽²⁾

⁽³⁾	Includes leased spaces that are not yet occupied.

Portfolio by Size

(unaudited)


Square Feet Under Lease	Number of Leases		Leased Square Feet		% of Total Square Feet			Annualized Cash Basis Rent⁽¹⁾		% of Annualized Cash Basis Rent			Average Base Rent per Square Foot⁽¹⁾
0-2,500		171		261,290		3.3	%	$	3,828,180		3.4	%	$	14.65
2,501-10,000		362		1,910,484		24.3	%		23,960,402		21.3	%		12.54
10,001-20,000		111		1,514,743		19.3	%		19,955,706		17.7	%		13.17
20,001-40,000		57		1,517,848		19.3	%		20,577,258		18.3	%		13.56
40,001-100,000		25		1,529,521		19.5	%		21,227,262		18.9	%		13.88
100,000 +		8		1,118,715		14.2	%		22,890,715		20.4	%		20.46

Total / Weighted Average		734		7,852,601		100.0	%	$	112,439,523		100.0	%	$	14.32

LOGO

⁽¹⁾

Top Twenty-Five Tenants

(unaudited)


Ranking	Tenant	Number of Leases		Total Leased Square Feet		Annualized Cash Basis Rent⁽¹⁾		% of Annualized Cash Basis Rent			Weighted Average Remaining Lease Years
1	U.S. Government		22		541,360	$	11,827,659		10.5	%		4.1
2	BlueCross BlueShield		1		204,314		5,946,076		5.3	%		9.9
3	CACI International		1		214,214		5,284,315		4.7	%		3.3
4	BAE Systems Technology Solutions & Services		3		167,881		3,376,714		3.0	%		6.5
5	ICF Consulting Group Inc.		2		127,946		3,059,138		2.7	%		10.9
6	Sentara Healthcare		6		276,974		2,463,523		2.2	%		7.0
7	Stock Building Supply, Inc.		2		171,996		2,106,951		1.9	%		3.4
8	State of Maryland—AOC		14		101,113		1,688,813		1.5	%		6.3
9	Vocus, Inc.		1		93,000		1,633,604		1.5	%		9.5
10	First Data Corporation		1		117,336		1,452,620		1.3	%		6.2
11	Latisys-Ashburn, LLC		2		123,097		1,386,188		1.2	%		8.2
12	Montgomery County, Maryland		2		57,825		1,383,641		1.2	%		8.2
13	Siemens Corporation		3		100,745		1,352,642		1.2	%		2.9
14	Affiliated Computer Services, Inc		1		107,422		1,265,431		1.1	%		3.3
15	Lyttle Corp		1		54,530		1,080,785		1.0	%		9.3
16	Harris Corporation		3		47,404		983,501		0.9	%		1.4
17	International Resources Group		5		36,016		979,813		0.9	%		0.6
18	Verizon		5		70,627		970,095		0.9	%		1.9
19	American Public University System, Inc.		3		63,455		904,825		0.8	%		1.5
20	GG Ashburn, LLC (Gold’s Gym)		1		54,560		878,416		0.8	%		13.5
21	Harris Connect		1		64,486		862,176		0.8	%		3.0
22	DRS Defense Solutions, LLC		2		45,675		825,410		0.7	%		3.1
23	McLean Bible Church		1		53,559		816,775		0.7	%		10.8
24	Telogy Networks, Inc.		1		52,145		779,568		0.7	%		4.7
25	ServiceSource, Inc.		3		64,683		740,756		0.7	%		1.0

	Subtotal Top 25 Tenants		87		3,012,363	$	54,049,434		48.1	%		5.8
	All Remaining Tenants		647		4,840,238		58,390,089		51.9	%		4.5

	Total / Weighted Average		734		7,852,601	$	112,439,523		100.0	%		5.2

Tenant Diversification by Industry

LOGO

⁽¹⁾

Annual Lease Expirations

(unaudited)


	Total Portfolio											Property Type
												Office				Business Park /Industrial
Year of Lease Expiration⁽¹⁾	Number of Leases Expiring		Leased Square Feet		% of Leased Square Feet			Annualized Cash Basis Rent⁽²⁾		Average Base Rent per Square Foot⁽²⁾		Leased Square Feet		Average Base Rent per Square Foot⁽²⁾		Leased Square Feet		Average Base Rent per Square Foot⁽²⁾
MTM		2		13,005		0.2	%	$	291,432	$	22.41		13,005	$	22.41		—	$	—
2013		20		94,138		1.2	%		1,086,126		11.54		9,808		16.19		84,330		11.00
2014		121		722,101		9.2	%		9,782,874		13.55		288,864		17.39		433,237		10.99
2015		113		728,942		9.3	%		9,493,573		13.02		234,873		16.74		494,069		11.26
2016		104		770,712		9.8	%		12,656,696		16.42		255,528		26.61		515,184		11.37
2017		94		1,214,468		15.5	%		18,339,653		15.10		409,719		21.66		804,749		11.76
2018		87		900,945		11.5	%		10,028,305		11.13		240,918		14.17		660,027		10.02
2019		71		932,600		11.9	%		12,300,310		13.19		210,455		17.53		722,145		11.92
2020		46		845,964		10.8	%		11,849,721		14.01		416,042		18.83		429,922		9.34
2021		21		325,060		4.1	%		3,952,724		12.16		45,608		16.22		279,452		11.50
2022		20		243,310		3.1	%		3,276,124		13.46		87,092		22.30		156,218		8.54
Thereafter		35		1,061,356		13.5	%		19,381,987		18.26		627,106		22.57		434,250		12.04

Total / Weighted Average		734		7,852,601		100.0	%	$	112,439,523	$	14.32		2,839,018	$	20.02		5,013,583	$	11.09

⁽¹⁾	The company classifies leases that expired or were terminated on the last day of the year as leased square footage since the tenant is contractually entitled to the space.

⁽²⁾

Annualized cash basis rent at the end of the quarter, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple- net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases.

Quarterly Lease Expirations

(unaudited)


Quarter of Lease Expiration⁽¹⁾	Number of Leases Expiring		Leased Square Feet		% of Leased Square Feet			Annualized Cash Basis Rent⁽²⁾		Average Base Rent per Square Foot⁽²⁾
MTM		2		13,005		0.2	%	$	291,432	$	22.41
2013—Q4		20		94,138		1.2	%		1,086,126		11.54
2014—Q1		29		185,242		2.4	%		2,791,667		15.07
2014—Q2		34		183,493		2.3	%		2,774,625		15.12
2014—Q3		32		176,526		2.2	%		2,522,219		14.29

Total / Weighted Average		117		652,404		8.3	%	$	9,466,068	$	11.21

⁽¹⁾	The company classifies leases that expired or were terminated on the last day of the quarter as leased square footage since the tenant is contractually entitled to the space.

⁽²⁾

Leasing Analysis

(unaudited)

Total Lease Summary

All Comparable and Non-comparable Leases

Three Months Ending
September 30, 2013

Average

Capital Cost

Square

Number of

Cash Basis

GAAP Basis

Average

Capital Cost

per Sq. Ft.

Footage

Leases Signed

Base Rent

Lease Term

Per Sq. Ft.⁽¹⁾

per Year⁽¹⁾

New Leases

213,262

7.11

7.53

6.6

12.16

1.63

First Generation New Leases

35,636

17.62

19.12

9.8

37.82

3.88

Second Generation New Leases ⁽²⁾

177,626

5.01

5.21

6.0

7.01

1.17

Renewal Leases⁽³⁾

86,315

10.19

10.56

4.0

5.66

1.41

Total / Weighted Average

299,577

8.00

8.40

5.9

10.29

1.56

Nine Months Ending
September 30, 2013

Average

Capital Cost

Square

Number of

Cash Basis

GAAP Basis

Average

Capital Cost

per Sq. Ft.

Footage

Leases Signed

Base Rent

Lease Term

Per Sq. Ft.⁽¹⁾

per Year⁽¹⁾

New Leases

665,887

10.69

11.32

7.6

26.15

3.31

First Generation New Leases

145,921

18.49

20.14

9.0

53.10

5.87

Second Generation New Leases⁽²⁾

519,966

8.51

8.85

7.2

18.59

2.60

Renewal Leases⁽³⁾⁽⁴⁾

737,411

10.46

10.96

4.9

3.70

0.75

Total / Weighted Average

1,403,298

139

10.57

11.13

6.2

14.35

1.97

Lease Comparison

Comparable Leases Only⁽⁵⁾


	Three Months Ending September 30, 2013
					*Cash Basis*							*GAAP Basis*
	Square		Number of				Previous		Percentage					Previous		Percentage			Average
	Footage		Leases Signed		Base Rent		Base Rent		Change			Base Rent		Base Rent		Change			Lease Term
New Leases		28,206		6	$	11.78	$	14.28		-17.5	%	$	12.77	$	13.71		-6.9	%		7.1
Renewal Leases⁽³⁾		86,315		24		10.19		11.33		-10.0	%		10.56		10.51		0.5	%		4.0

Total / Weighted Average		114,521		30	$	10.58	$	12.06		-12.2	%	$	11.10	$	11.30		-1.7	%		4.8

	Nine Months Ending September 30, 2013
					*Cash Basis*							*GAAP Basis*
	Square		Number of				Previous		Percentage					Previous		Percentage			Average
	Footage		Leases Signed		Base Rent		Base Rent		Change			Base Rent		Base Rent		Change			Lease Term
New Leases		127,174		19	$	13.44	$	17.44		-22.9	%	$	13.95	$	16.19		-13.9	%		7.9
Renewal Leases⁽³⁾		737,411		64		10.46		11.39		-8.2	%		10.96		10.85		1.0	%		4.9

Total / Weighted Average		864,585		83		10.89		12.28		-11.3	%		11.40		11.64		-2.1	%		5.4

⁽¹⁾	The average capital cost does not include base building improvements needed to (1) bring a space up to code, (2) create building-standard operating efficiency, or (3) add demising walls and define the separate operations of a suite.

⁽²⁾	Includes the 1,889 square foot new lease at Triangle Business Center, which was sold during the third quarter of 2013.

⁽³⁾	Includes the 1,923 square foot renewal at Triangle Business Center, which was sold during the third quarter of 2013.

⁽⁴⁾	Includes the 51,279 square foot renewal at Interstate Plaza, which was part of the industrial portfolio disposition.

⁽⁵⁾	Comparable lease comparisons do not include comparable data for first generation spaces, suites that have been vacant for over twelve months, or leases with terms of less than one year.

Retention Summary

(unaudited)

Retention Analysis Excluding Industrial Portfolio Disposition


	*Three Months Ending September 30, 2013*							*Nine Months Ending September 30, 2013⁽¹⁾*
	Square Footage Expiring⁽²⁾		Square Footage Renewed		Retention Rate			Square Footage Expiring⁽²⁾		Square Footage Renewed		Retention Rate
Total Portfolio		290,242		86,315		30	%		999,396		686,132		69	%
Washington DC⁽³⁾		42,832		0		0	%		63,797		20,965		33	%
Maryland		114,189		19,930		17	%		174,801		62,129		36	%
Northern Virginia		68,425		34,932		51	%		263,472		197,703		75	%
Southern Virginia		64,796		31,453		49	%		497,326		405,335		82	%

⁽¹⁾	Excludes second quarter leasing activity for properties included in the industrial portfolio disposition: 236,082 square foot expiration at I-66 Commerce Center and a 51,279 square foot renewal at Interstate Plaza.

⁽²⁾	Leases that expire or are terminated on the last day of the quarter are classified as leased square footage and are not reported as expired until the following quarter.

⁽³⁾	Excludes the 30,414 square foot expiration at 1005 First Street, NE, which was placed into development during the third quarter of 2013.

Office Properties

(unaudited)


						Annualized
						Cash Basis		%
Property⁽¹⁾	Buildings		Location	Square Feet		Rent⁽²⁾		Leased			% Occupied
*Washington DC*
500 First Street, NW		1	Capitol Hill		129,035	$	4,822,302		100.0	%		100.0	%
840 First Street, NE		1	NoMA⁽³)		248,536		6,316,895		87.5	%		82.2	%
1211 Connecticut Avenue, NW		1	CBD⁽³⁾		125,119		3,536,681		97.1	%		97.1	%

*Total / Weighted Average*		3			502,690	$	14,675,878		93.1	%		90.5	%
*Maryland*
Annapolis Business Center		2	Annapolis		102,374		1,688,813		98.8	%		98.8	%
Cloverleaf Center		4	Germantown		173,766		2,074,064		74.1	%		74.1	%
Gateway Center		2	Gaithersburg		44,551		511,930		74.5	%		74.5	%
Hillside I and II		2	Columbia		85,631		907,218		74.4	%		74.4	%
Metro Park North		4	Rockville		191,469		3,291,256		100.0	%		73.1	%
Patrick Center		1	Frederick		66,269		980,913		77.1	%		77.1	%
Redland Corporate Center		2	Rockville		349,267		7,914,026		100.0	%		91.4	%
TenThreeTwenty		1	Columbia		136,193		1,714,140		79.9	%		79.9	%
West Park		1	Frederick		28,333		280,092		85.1	%		83.3	%
Worman’s Mill Court		1	Frederick		40,099		381,225		87.6	%		87.6	%

*Total / Weighted Average*		20			1,217,952	$	19,743,678		89.2	%		82.5	%
*Northern Virginia*
Atlantic Corporate Park		2	Sterling		219,526	$	1,505,661		41.3	%		35.8	%
Cedar Hill		2	Tyson’s Corner		102,632		2,196,617		100.0	%		100.0	%
Enterprise Center		4	Chantilly		187,710		3,012,074		86.6	%		86.0	%
Herndon Corporate Center		4	Herndon		128,084		1,535,945		82.7	%		81.7	%
One Fair Oaks		1	Fairfax		214,214		5,284,315		100.0	%		100.0	%
Reston Business Campus		4	Reston		82,372		1,074,901		83.2	%		76.8	%
Three Flint Hill		1	Oakton		180,741		2,976,204		92.2	%		86.2	%
Van Buren Office Park		5	Herndon		107,409		1,154,879		83.2	%		83.2	%
Windsor at Battlefield		2	Manassas		155,511		1,995,606		90.3	%		90.3	%

*Total / Weighted Average*		25			1,378,199	$	20,736,202		82.8	%		80.6	%
*Southern Virginia*
Greenbrier Towers		2	Chesapeake		171,566	$	1,694,341		83.6	%		83.6	%
Total / Weighted Average		50			3,270,407	$	56,850,099		86.8	%		83.0	%

*Unconsolidated Joint Ventures*
1750 H Street, NW		1	CBD—DC⁽³)		112,269	$	3,992,851		100.0	%		100.0	%
Aviation Business Park		3	Glen Burnie—MD		120,285		804,946		45.9	%		45.9	%
Prosperity Metro Plaza		2	Merrifield—NOVA		327,470		6,209,576		89.5	%		85.7	%

*Total / Weighted Average*		6			560,024	$	11,007,373		82.2	%		80.0	%

⁽¹⁾	Does not include space in development or redevelopment.

⁽²⁾

⁽³⁾	CBD refers to the Central Business District and NoMa refers to North of Massachusetts Avenue.

Business Park / Industrial Properties

(unaudited)


						Annualized		%
Property⁽¹⁾	Buildings		Location	Square Feet		Cash Basis Rent⁽²⁾		Leased			% Occupied
*Maryland*
Ammendale Business Park⁽³⁾		7	Beltsville		312,846	$	4,084,902		100.0	%		100.0	%
Gateway 270 West		6	Clarksburg		255,917		2,606,413		73.5	%		67.6	%
Girard Business Center⁽⁴⁾		7	Gaithersburg		297,422		2,924,093		83.7	%		79.9	%
Owings Mills Business Park⁽⁵⁾		4	Owings Mills		180,475		1,195,302		53.4	%		42.4	%
Rumsey Center		4	Columbia		134,689		1,383,578		94.9	%		94.9	%
Snowden Center		5	Columbia		145,180	$	2,157,448		98.9	%		98.9	%

*Total / Weighted Average*		33			1,326,529	$	14,351,736		84.3	%		80.8	%
*Northern Virginia*
Corporate Campus at Ashburn Center		3	Ashburn		194,184	$	2,562,219		100.0	%		100.0	%
Gateway Centre Manassas		3	Manassas		102,332		638,848		60.5	%		60.5	%
Linden Business Center		3	Manassas		109,787		1,042,336		97.4	%		97.4	%
Newington Business Park Center⁽⁶⁾		7	Lorton		254,148		2,211,537		79.1	%		79.1	%
Plaza 500⁽⁶⁾		2	Alexandria		500,938		5,129,453		96.6	%		96.6	%
Prosperity Business Center		1	Merrifield		71,343		851,187		92.5	%		92.5	%
Sterling Park Business Center⁽⁷⁾		7	Sterling		474,809	$	4,418,482		94.9	%		94.9	%

*Total / Weighted Average*		26			1,707,541	$	16,854,061		91.6	%		91.6	%
*Southern Virginia*
Battlefield Corporate Center		1	Chesapeake		96,720		795,456		100.0	%		100.0	%
Chesterfield Business Center⁽⁸⁾		11	Richmond		320,111	$	1,704,889		76.8	%		76.8	%
Crossways Commerce Center⁽⁹⁾		9	Chesapeake		1,083,785		11,433,563		95.8	%		94.5	%
Greenbrier Business Park⁽¹⁰⁾		4	Chesapeake		410,723		3,815,891		75.8	%		71.2	%
Hanover Business Center		4	Ashland		183,868		844,550		70.4	%		70.4	%
Norfolk Commerce Park⁽¹¹⁾		3	Norfolk		261,823		2,494,627		89.8	%		89.6	%
Park Central		3	Richmond		204,789		2,008,045		86.3	%		86.3	%
Virginia Technology Center		1	Glen Allen		118,855		1,286,607		82.3	%		82.3	%

*Total / Weighted Average*		36			2,680,674	$	24,383,627		87.0	%		85.7	%
Total / Weighted Average		95			5,714,744	$	55,589,424		87.7	%		86.3	%

*Unconsolidated Joint Ventures*
RiversPark I and II		6	Columbia—MD		307,984	$	4,052,056		94.7	%		90.9	%

⁽¹⁾	Does not include space in development or redevelopment.

⁽²⁾

⁽³⁾	Ammendale Business Park consists of Ammendale Commerce Center and Indian Creek Court.

⁽⁴⁾	Girard Business Center consists of Girard Business Center and Girard Place.

⁽⁵⁾	Owings Mills Business Park consists of Owings Mills Business Center and Owings Mills Commerce Center.

⁽⁶⁾	Newington Business Park Center and Plaza 500 are classified as Industrial properties.

⁽⁷⁾	Sterling Park Business Center consists of 22370/22400/22446/22455 Davis Drive and 403/405/22560 Glenn Drive.

⁽⁸⁾	Chesterfield Business Center consists of Airpark Business Center, Chesterfield Business Center and Pine Glen.

⁽⁹⁾	Crossways Commerce Center consists of the Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, Crossways I, Crossways II, 1434 Crossways Boulevard and 1408 Stephanie Way.

⁽¹⁰⁾	Greenbrier Business Park consists of Greenbrier Technology Center I, Greenbrier Technology Center II and Greenbrier Circle Corporate Center.

⁽¹¹⁾	Norfolk Commerce Park consists of Norfolk Business Center, Norfolk Commerce Park II and Gateway II.

Management Statements on

Non-GAAP Supplemental Measures

Investors and analysts following the real estate industry utilize funds from operations (“FFO”), net operating income (“NOI”), earnings before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted funds from operations (“AFFO”), variously defined, as supplemental performance measures.

The Company believes NOI, Same-Property NOI, EBITDA, FFO, Core FFO and AFFO are appropriate measures given their 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/amortization of real estate assets. NOI provides a measure of rental operations and does not factor in depreciation/amortization and non-property specific expenses such as general and administrative expenses. EBITDA provides a further tool to evaluate the ability to incur and service debt and to fund dividends and other cash needs. AFFO provides a further tool to evaluate the ability to fund dividends. In addition, FFO, NOI, EBITDA and AFFO are commonly used in various ratios, pricing multiples/yields and returns and valuation calculations used to measure financial position, performance and value.

NOI

Management believes that NOI is a useful measure of the Company’s property operating performance. The Company defines NOI as operating revenues (rental, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and insurance). Other real estate investment trust (“REITs”) may use different methodologies for calculating NOI, and accordingly, the Company’s NOI may not be comparable to other REITs.

Because NOI excludes general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property dispositions, discontinued operations and extraordinary items, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective not immediately apparent from net income. The Company uses NOI to evaluate its operating performance since NOI allows the Company to evaluate the impact that factors such as occupancy levels, lease structure, lease rates and tenant base have on the Company’s results, margins and returns. In addition, management believes that NOI provides useful information to the investment community about the Company’s property and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of property performance in the real estate industry.

However, NOI should not be viewed as a measure of the Company’s overall financial performance since it does not reflect general and administrative expenses, interest expense, depreciation and amortization costs, the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties.

SAME-PROPERTY NOI

The Company defines same-property NOI as NOI for the Company’s properties wholly owned during the entirety of the periods reported. Other REITs may use different methodologies for calculating same-property NOI and, accordingly, the Company’s same-property NOI may not be comparable to other REITs.

EBITDA

Management believes that EBITDA is a useful measure of the Company’s operating performance. EBITDA is defined as earnings before interest, taxes, depreciation and amortization.

Management considers EBITDA to be an appropriate supplemental performance measure since it represents earnings prior to the impact of depreciation, amortization, gain (loss) from property dispositions and loss on early retirement of debt. This calculation facilitates the review of income from operations without considering the effect of non-cash depreciation and amortization or the cost of debt.

FFO

Management believes that FFO is a useful measure of the Company’s operating performance. The Company computes FFO as defined by the National Association of Real Estate Investment Trusts, or NAREIT, which states FFO should represent net income (loss) before minority interest (computed in accordance with GAAP) plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures, gains or losses on the sale of property and impairments to real estate assets. The Company also excludes, from its FFO calculation, any depreciation and amortization related to third parties from its consolidated joint ventures. Further, other REITs may use different methodologies for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other REITs. The Company presents FFO per diluted share calculations that are based on the outstanding dilutive common shares plus the outstanding Operating Partnership units for the periods presented.

Management considers FFO a useful additional 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 assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a more meaningful and accurate indication of our performance. In addition, management believes that FFO provides useful information to the investment community about the Company’s financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

Core FFO

Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by the Company’s operating portfolio and affect the comparability of the Company’s period-over-period performance. These items include, but are not limited to, gains and losses on the retirement of debt, legal and accounting costs related to the Company’s prior internal investigation and the informal SEC inquiry, personnel separation costs, contingent consideration charges and acquisition costs.

AFFO

Management believes that AFFO is a useful measure of the Company’s liquidity. The Company computes AFFO by adding to FFO equity based compensation expense and the non-cash amortization of deferred financing costs and non-real estate depreciation, and then subtracting cash paid for any recurring tenant improvements, leasing commissions, and recurring capital expenditures, and eliminating the net effect of straight-line rents, deferred market rent and debt fair value amortization.

First generation costs include tenant improvements, leasing commissions and capital expenditures that were taken into consideration when underwriting the purchase of a property or incurred to bring the property to operating standard for its intended use. The Company also excludes development and redevelopment related expenditures. AFFO provides an additional perspective on the Company’s ability to fund cash needs and make distributions to shareholders by adjusting for the effect of these non-cash items included in FFO, as well as recurring capital expenditures and leasing costs. However, other REITs may use different methodologies for calculating AFFO and, accordingly, the Company’s AFFO may not be comparable to other REITs.

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