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EX-32.1 - EXHIBIT 32.1 - FIRST POTOMAC REALTY TRUSTfpo2015930ex-321.htm
EX-32.2 - EXHIBIT 32.2 - FIRST POTOMAC REALTY TRUSTfpo2015930ex-322.htm
EX-31.1 - EXHIBIT 31.1 - FIRST POTOMAC REALTY TRUSTfpo2015930ex-311.htm
EX-31.2 - EXHIBIT 31.2 - FIRST POTOMAC REALTY TRUSTfpo2015930ex-312.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number 1-31824
 
FIRST POTOMAC REALTY TRUST
(Exact name of registrant as specified in its charter)
 
MARYLAND
 
37-1470730
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
7600 Wisconsin Avenue, 11th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(301) 986-9200
(Registrant’s telephone number, including area code) 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES x    NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filter,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
x
 
Accelerated Filer
¨
Non-Accelerated Filer
¨
 
Smaller Reporting Company
¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of October 28, 2015, there were 57,824,938 common shares, par value $0.001 per share, outstanding.
 



FIRST POTOMAC REALTY TRUST
FORM 10-Q
INDEX
 
 
 
Page
 
 
 
Part I:
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II:
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 


2


SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.

Certain factors that could cause actual results, performance or achievements to differ materially from the Company’s expectations include, among others, the following:

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 dispositions on acceptable terms, or at all;

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; and

other risks detailed under “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014, as such factors may be updated from time to time in the Company’s filings with the SEC, which are accessible on the SEC’s website at www.sec.gov.

The risks set forth above are not exhaustive. Other sections of this report may include additional factors that could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. 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. We do not intend to, and expressly disclaim any duty to, update or revise the forward-looking statements in this discussion to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should not rely upon these forward-looking statements after the date of this report and should keep in mind that any forward-looking statement made in this discussion, or elsewhere, might not occur.




3




FIRST POTOMAC REALTY TRUST
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
 
 
September 30, 2015
 
December 31, 2014
 
(unaudited)
 
 
Assets:
 
 
 
Rental property, net
$
1,276,960

 
$
1,288,873

Assets held-for-sale
12,011

 
59,717

Cash and cash equivalents
12,875

 
13,323

Escrows and reserves
1,699

 
2,986

Accounts and other receivables, net of allowance for doubtful accounts of $1,171 and $1,207, respectively
8,882

 
10,587

Accrued straight-line rents, net of allowance for doubtful accounts of $141 and $104, respectively
40,725

 
34,226

Notes receivable, net
34,000

 
63,679

Investment in affiliates
48,490

 
47,482

Deferred costs, net
45,707

 
43,991

Prepaid expenses and other assets
8,021

 
7,712

Intangible assets, net
37,154

 
45,884

Total assets
$
1,526,524

 
$
1,618,460

Liabilities:
 
 
 
Mortgage and Construction loans
$
313,217

 
$
305,139

Unsecured term loan
300,000

 
300,000

Unsecured revolving credit facility
155,000

 
205,000

Liabilities held-for-sale
227

 
4,562

Accounts payable and other liabilities
39,026

 
41,113

Accrued interest
1,594

 
1,720

Rents received in advance
6,286

 
7,971

Tenant security deposits
5,822

 
5,891

Deferred market rent, net
2,360

 
2,827

Total liabilities
823,532

 
874,223

 
 
 
 
Noncontrolling interests in the Operating Partnership
30,663

 
33,332

Equity:
 
 
 
Preferred Shares, $0.001 par value, 50,000 shares authorized;
 
 
 
Series A Preferred Shares, $25 per share liquidation preference, 6,400 shares issued and outstanding
160,000

 
160,000

Common shares, $0.001 par value, 150,000 shares authorized; 57,835 and 58,815 shares issued and outstanding, respectively
58

 
59

Additional paid-in capital
906,274

 
913,282

Noncontrolling interests in a consolidated partnership
800

 
898

Accumulated other comprehensive loss
(4,283
)
 
(3,268
)
Dividends in excess of accumulated earnings
(390,520
)
 
(360,066
)
Total equity
672,329

 
710,905

Total liabilities, noncontrolling interests and equity
$
1,526,524

 
$
1,618,460

See accompanying notes to condensed consolidated financial statements.

4



FIRST POTOMAC REALTY TRUST
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental
$
34,828

 
$
31,915

 
$
104,051

 
$
93,967

Tenant reimbursements and other
8,026

 
8,140

 
25,690

 
24,758

Total revenues
42,854

 
40,055

 
129,741

 
118,725

Operating expenses:
 
 
 
 
 
 
 
Property operating
10,901

 
10,564

 
34,676

 
32,825

Real estate taxes and insurance
4,815

 
4,059

 
14,668

 
12,431

General and administrative
4,605

 
4,955

 
15,110

 
15,370

Acquisition costs

 
1,488

 

 
2,667

Depreciation and amortization
16,758

 
15,217

 
49,909

 
44,357

Impairment of rental property

 

 

 
3,956

Total operating expenses
37,079

 
36,283

 
114,363

 
111,606

Operating income
5,775

 
3,772

 
15,378

 
7,119

Other expenses (income)
 
 
 
 
 
 
 
Interest expense
6,589

 
6,116

 
20,222

 
17,884

Interest and other income
(995
)
 
(1,684
)
 
(5,797
)
 
(5,112
)
Equity in earnings of affiliates
(432
)
 
(412
)
 
(1,235
)
 
(385
)
Gain on sale of rental property
(3,384
)
 

 
(3,384
)
 
(21,230
)
Total other expenses (income)
1,778

 
4,020

 
9,806

 
(8,843
)
Income from continuing operations
3,997

 
(248
)
 
5,572

 
15,962

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from operations

 
297

 
(975
)
 
(359
)
Loss on debt extinguishment

 

 
(489
)
 

Gain on sale of rental property

 

 
857

 
1,338

Income (loss) from discontinued operations

 
297

 
(607
)
 
979

Net income
3,997

 
49

 
4,965

 
16,941

Less: Net (income) loss attributable to noncontrolling interests
(38
)
 
131

 
189

 
(327
)
Net income attributable to First Potomac Realty Trust
3,959

 
180

 
5,154

 
16,614

Less: Dividends on preferred shares
(3,100
)
 
(3,100
)
 
(9,300
)
 
(9,300
)
Net income (loss) attributable to common shareholders
$
859

 
$
(2,920
)
 
$
(4,146
)
 
$
7,314

Basic and diluted earnings per common share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.01

 
$
(0.05
)
 
$
(0.06
)
 
$
0.10

Income (loss) from discontinued operations

 

 
(0.01
)
 
0.02

Net income (loss)
$
0.01

 
$
(0.05
)
 
$
(0.07
)
 
$
0.12

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
57,961

 
58,167

 
58,155

 
58,137

Diluted
58,045

 
58,167

 
58,155

 
58,209

See accompanying notes to condensed consolidated financial statements.

5


FIRST POTOMAC REALTY TRUST
Consolidated Statements of Comprehensive Income
(unaudited)
(Amounts in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015

2014
 
2015
 
2014
Net income
$
3,997

 
$
49

 
$
4,965

 
$
16,941

Unrealized gain on derivative instruments
171


1,910

 
560

 
1,231

Unrealized loss on derivative instruments
(903
)


 
(1,620
)
 
(125
)
Total comprehensive income
3,265


1,959

 
3,905

 
18,047

Net (income) loss attributable to noncontrolling interests
(38
)
 
131

 
189

 
(327
)
Net loss (gain) from derivative instruments attributable to noncontrolling interests
31


(82
)
 
45

 
(47
)
Comprehensive income attributable to First Potomac Realty Trust
$
3,258


$
2,008

 
$
4,139

 
$
17,673

See accompanying notes to condensed consolidated financial statements.


6


FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
4,965

 
$
16,941

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Discontinued operations:
 
 
 
Gain on sale of rental property
(857
)
 
(1,338
)
Depreciation and amortization
1,222

 
2,853

Depreciation and amortization
50,387

 
45,157

Stock based compensation
2,337

 
2,817

Bad debt expense
525

 
918

Amortization of deferred market rent
132

 
(43
)
Amortization of financing costs and discounts
1,048

 
1,073

Equity in earnings of affiliates
(1,235
)
 
(385
)
Distributions from investments in affiliates
632

 
1,229

Gain on sale of rental property
(3,384
)
 
(21,230
)
Impairment of rental property

 
3,956

Changes in assets and liabilities:
 
 
 
Escrows and reserves
1,111

 
3,809

Accounts and other receivables
1,151

 
583

Accrued straight-line rents
(6,781
)
 
(4,893
)
Prepaid expenses and other assets
(868
)
 
(736
)
Tenant security deposits
(613
)
 
868

Accounts payable and accrued expenses
1,114

 
431

Accrued interest
(125
)
 
79

Rents received in advance
(1,952
)
 
931

Deferred costs
(6,069
)
 
(7,606
)
Total adjustments
37,775

 
28,473

Net cash provided by operating activities
42,740

 
45,414

Cash flows from investing activities:
 
 
 
Investment in note receivable

 
(9,000
)
Proceeds from sale of rental property
71,899

 
85,284

Principal payments from note receivable
29,720

 
129

Change in escrow and reserve accounts
176

 

Additions to rental property and furniture, fixtures and equipment
(36,832
)
 
(25,464
)
Additions to construction in progress
(13,014
)
 
(9,295
)
Acquisition of rental property and associated intangible assets

 
(150,731
)
Contributions to investment in affiliates
(405
)
 
(1,653
)
Distributions from investment in affiliates

 
1,951

Net cash provided by (used in) investing activities
51,544

 
(108,779
)
Cash flows from financing activities:
 
 
 
Financing costs
(2,236
)
 
(496
)
Issuance of debt
180,956

 
209,794

Repayments of debt
(226,155
)
 
(106,127
)
Dividends to common shareholders
(26,425
)
 
(26,391
)
Dividends to preferred shareholders
(9,300
)
 
(9,300
)
Contributions from consolidated joint venture partners

 
161

Distributions to consolidated joint venture partners
(96
)
 

Distributions to noncontrolling interests
(1,181
)
 
(1,183
)
Repurchases of common shares
(10,180
)
 

Operating partnership unit redemptions
(134
)
 

Proceeds from stock option exercises
19

 
160

Net cash (used in) provided by financing activities
(94,732
)
 
66,618

Net (decrease) increase in cash and cash equivalents
(448
)
 
3,253

Cash and cash equivalents, beginning of period
13,323

 
8,740

Cash and cash equivalents, end of period
$
12,875

 
$
11,993

See accompanying notes to condensed consolidated financial statements.

7


FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows – Continued
(unaudited)

Supplemental disclosure of cash flow information for the nine months ended September 30 is as follows (dollars in thousands):
 
2015
 
2014
Cash paid for interest, net
$
19,078

 
$
16,606

Non-cash investing and financing activities:
 
 
 
Debt assumed in connection with the acquisition of rental property

 
37,269

Value of common shares retired to settle employee income tax obligations
454

 
383

Change in fair value of the outstanding common Operating Partnership units
(1,123
)
 
350

Issuance of common Operating Partnership units in connection with the acquisition of rental property

 
40

Changes in accruals:
 
 
 
Additions to rental property and furniture, fixtures and equipment
(2,034
)
 
(290
)
Additions to development and redevelopment
640

 
(782
)

Cash paid for interest on indebtedness is net of capitalized interest of $1.3 million and $2.8 million for the nine months ended September 30, 2015 and 2014, respectively.

Certain of our employees surrendered common shares owned by them valued at $0.5 million and $0.4 million during the nine months ended September 30, 2015 and 2014, respectively, to satisfy their minimum statutory withholding obligations associated with the vesting of restricted common shares of beneficial interest.

Noncontrolling interests in First Potomac Realty Investment Limited Partnership, our operating partnership (the “Operating Partnership”), are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. At September 30, 2015 and 2014, we recorded adjustments of $3.6 million and $3.7 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

No common Operating Partnership units were issued during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, we issued 3,125 common Operating Partnership units at a fair value of $40 thousand to the seller of 840 First Street, NE to satisfy our contingent consideration obligation related to the acquisition of the property.

During the nine months ended September 30, 2015 and 2014, we accrued $7.3 million and $8.2 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. During the nine months ended September 30, 2015 and 2014, we accrued $2.0 million and $0.8 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.


8


FIRST POTOMAC REALTY TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business

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

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

We conduct our business through our Operating Partnership. We are the sole general partner of, and, as of September 30, 2015, owned 100% of the preferred interest and 95.7% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by two of our executive officers and one of our trustees, each of whom contributed certain properties and other assets to us upon our formation, and the remainder of which are owned by other unrelated parties.

At September 30, 2015, we wholly owned or had a controlling interest in properties totaling 7.8 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. We also owned land that can support 1.3 million square feet of additional development. Our consolidated properties were 89.9% occupied by 491 tenants at September 30, 2015. We did not include square footage that was in development or redevelopment, which totaled 0.2 million square feet at September 30, 2015, in our occupancy calculation. We derive substantially all of our revenue from leases of space within our properties. As of September 30, 2015, our largest tenant was the U.S. Government, which accounted for 13.5% of our total annualized cash basis rent, and the U.S. Government combined with government contractors accounted for 25.7% of our total annualized cash basis rent as of September 30, 2015. We operate so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

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

We have condensed or omitted certain information and note disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2014 and as updated from time to time in our other filings with the SEC.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly our financial position as of September 30, 2015, the results of our operations and our comprehensive income for the three and nine months ended September 30, 2015 and 2014 and our cash flows for the nine months ended September 30, 2015 and 2014. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year, as well as the seasonality of certain operating expenses such as utilities expense and snow and ice removal costs.


9



(b) Use of Estimates

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

Rental property is initially recorded at fair value, when acquired in a business combination, or initial cost when constructed or acquired in an asset purchase. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of our assets, by class, are as follows:
Buildings
 
39 years
Building improvements
 
5 to 20 years
Furniture, fixtures and equipment
 
5 to 15 years
Lease related intangible assets
 
The term of the related lease
Tenant improvements
 
Shorter of the useful life of the asset or the term of the related lease

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

We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. We will cease recording depreciation on a building once it has been classified as held-for-sale. In the second quarter of 2014, we prospectively adopted Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which impacts the presentation of operations and gains or losses from disposed properties and properties classified as held-for-sale. ASU 2014-08 states that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations or financial results. The operations of all properties that were sold prior to the adoption of ASU 2014-08, two properties (West Park and Patrick Center) that were classified as held-for-sale in previously issued financial statements prior to our adoption of ASU 2014-08 and were subsequently sold, as well as our Richmond, Virginia portfolio, which included Chesterfield Business Center, Hanover Business Center, Park Central, Virginia Technology Center and a three-acre parcel of undeveloped land (the “Richmond Portfolio”), are reflected within discontinued operations in our consolidated statements of operations for all periods presented.





10


If the building does not qualify as a discontinued operation under ASU 2014-08, we will classify the building's operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.

If the building does qualify as a discontinued operation under ASU 2014-08, we will classify the building's operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the disposed or held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.

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

We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our investments in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. We will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. We also capitalize direct compensation costs of our construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. We do not capitalize any other general and administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial for the nine months ended September 30, 2015 and 2014. Capitalization of interest ends when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. We place redevelopment and development assets into service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(d) Notes Receivable

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

We will establish a provision for anticipated credit losses associated with our notes receivable when we anticipate that we may be unable to collect any contractually due amounts. This determination is based upon such factors as delinquencies, loss experience, collateral quality and current economic or borrower conditions. Our collectability of our notes receivable may be adversely impacted by the financial stability of the Washington, D.C. region and the ability of the underlying assets to keep current tenants or attract new tenants. Estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that we estimate to be adequate based on these factors. Based on the review of the above criteria, we did not record an allowance for credit losses for our notes receivable during the nine months ended September 30, 2015 and 2014.

(e) Application of New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements or related disclosures.

11



In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”), which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The guidance will become effective for annual periods ending after December 15, 2016. The adoption of ASU 2014-15 is not expected to have an impact on our consolidated financial statements or related disclosures.

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ("ASU 2015-01"), which eliminates the concept of extraordinary items from GAAP and the requirement that an entity separately report extraordinary items in the income statement. ASU 2015-01 also requires that entities continue to evaluate whether items are unusual in nature or infrequent in occurrence for presentation and disclosure purposes. ASU 2015-01 applies to all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted and the guidance may be applied prospectively or retrospectively to all prior periods presented in the consolidated financial statements. The adoption of ASU 2015-01 is not expected to have a material impact on our consolidated financial statements or related disclosures.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting model, including changes to the identification of variable interests (fees paid to a decision maker or service provider), the variable interest entity characteristics for a limited partnership or similar entity and the primary beneficiary determination. ASU 2015-02 is effective January 1, 2016. The adoption of ASU 2015-02 is not expected to have a material impact on our consolidated financial statements or related disclosures.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. ASU 2015-03 is effective for periods beginning after December 15, 2015 with early adoption permitted and will be applied on a retrospective basis. The guidance will be effective on January 1, 2016 and is not expected to have a material impact on our consolidated financial statements or related disclosures.

(f) Reclassifications

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

(3) Earnings Per Common Share

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


12


The following table sets forth the computation of our basic and diluted earnings per common share (amounts in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Numerator for basic and diluted earnings per common share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
3,997

 
$
(248
)
 
$
5,572

 
$
15,962

Income (loss) from discontinued operations

 
297

 
(607
)
 
979

Net income
3,997

 
49

 
4,965

 
16,941

Less: Net (income) loss from continuing operations attributable to noncontrolling interests
(38
)
 
144

 
163

 
(285
)
Less: Net (income) loss from discontinued operations attributable to noncontrolling interests

 
(13
)
 
26

 
(42
)
Net income attributable to First Potomac Realty Trust
3,959

 
180

 
5,154

 
16,614

Less: Dividends on preferred shares
(3,100
)
 
(3,100
)
 
(9,300
)
 
(9,300
)
Net income (loss) attributable to common shareholders
859

 
(2,920
)
 
(4,146
)
 
7,314

Less: Allocation to participating securities
(69
)
 
(80
)
 
(211
)
 
(235
)
Net income (loss) attributable to common shareholders
$
790

 
$
(3,000
)
 
$
(4,357
)
 
$
7,079

Denominator for basic and diluted earnings per common share:
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
57,961

 
58,167

 
58,155

 
58,137

Diluted
58,045

 
58,167

 
58,155

 
58,209

Basic and diluted earnings per common share:
 
 
 
 
 
 
 
     Income (loss) from continuing operations
$
0.01

 
$
(0.05
)
 
$
(0.06
)
 
$
0.10

     (Loss) income from discontinued operations

 

 
(0.01
)
 
0.02

     Net income (loss)
$
0.01

 
$
(0.05
)
 
$
(0.07
)
 
$
0.12


In accordance with GAAP regarding earnings per common share, we did not include the following potential weighted average common shares in our calculation of diluted earnings per common share as they are anti-dilutive for the periods presented (amounts in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Stock option awards
987

 
1,103

 
1,037

 
1,143

Non-vested share awards
307

 
433

 
374

 
401

Series A Preferred Shares(1)
14,627

 
12,356

 
14,190

 
12,438

 
15,921

 
13,892

 
15,601

 
13,982

 
(1) 
Our Series A Preferred Shares are only convertible into our common shares upon certain changes in control of our Company. The dilutive shares are calculated as the daily average of the face value of the Series A Preferred Shares divided by the outstanding common share price.



13


(4) Rental Property

Rental property represents buildings and related improvements, net of accumulated depreciation, and developable land that are wholly owned or owned by an entity in which we have a controlling interest. All of our rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (dollars in thousands):
 
 
September 30, 2015(1)
 
December 31, 2014(2)
Land and land improvements
$
319,569

 
$
325,214

Buildings and building improvements
931,749

 
949,683

Construction in progress
83,778

 
69,181

Tenant improvements
179,728

 
159,867

Furniture, fixtures and equipment
431

 
427

 
1,515,255

 
1,504,372

Less: accumulated depreciation
(238,295
)
 
(215,499
)
 
$
1,276,960

 
$
1,288,873


(1) Excludes rental property totaling $11.5 million at September 30, 2015 related to Newington Business Park Center, which was classified as held-for-sale at September 30, 2015.
(2) Excludes rental property totaling $57.7 million at December 31, 2014 related to the sale of the Richmond Portfolio, which was classified as held-for-sale at December 31, 2014 and was sold on March 19, 2015.

Development and Redevelopment Activity

We will place completed development and redevelopment assets in service upon the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. We own developable land that can accommodate 1.3 million square feet of additional building space, of which, 0.7 million is located in the Washington, D.C. reporting segment, 0.1 million in the Maryland reporting segment, 0.4 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment.

During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building in our Northern Virginia reporting segment on vacant land that we have in our portfolio. We currently expect to complete construction of the new building in early 2016 and expect to complete the construction of the tenant improvements in the second half of 2016. However, we can provide no assurance regarding the timing of the project. At September 30, 2015, our total investment in the development project, excluding tenant improvement and leasing commission costs, was $18.7 million, which included the original cost basis of the applicable portion of the vacant land of $5.2 million. The majority of the costs incurred as of September 30, 2015 in excess of the original cost basis of the land relate to design and permit fees, site preparation costs, foundation work and completion of the superstructure.

On August 4, 2011, we formed a joint venture, in which we have a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound Lines, Inc. (“Greyhound”), which subsequently relocated its operations. Greyhound’s lease expired on August 31, 2013, at which time the property was placed into development with the anticipation of developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. At September 30, 2015, our total investment in the development project was $57.2 million, which included the original cost basis of the property of $43.3 million. The majority of the costs in excess of the original cost basis relate to architectural fees and site preparation costs, as well as capitalized interest and taxes. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date. While we continue pre-development work on Storey Park, we engaged a sales broker to strategically monetize our majority interest in Storey Park, which could result in a sale of all or a portion of our interest in Storey Park; however, we can provide no assurances regarding the timing or pricing of such transaction, or that a sale will occur at all.




14


On December 28, 2010, we acquired 440 First Street, NW, a vacant eight-story office building in our Washington, D.C. reporting segment. In October 2013, we substantially completed the redevelopment of the 139,000 square foot property. During the fourth quarter of 2014, all vacant space at the property was placed in service. At September 30, 2015, the property was 67.4% leased and 51.2% occupied. At September 30, 2015, our total investment in the redevelopment project was $55.5 million, which included the original cost basis of the property of $23.6 million.

During the third quarter of 2015, we did not place in-service any significant completed development or redevelopment space. At September 30, 2015, we had no completed development or redevelopment space that have yet to be placed in service.

(5) Notes Receivable

Below is a summary of our notes receivable for our outstanding mezzanine loans (dollars in thousands):
 
 
Balance at September 30, 2015
 
 
Property
Face Amount
 
Unamortized
Origination Fees
 
Balance
 
Interest Rate
950 F Street, NW
$
34,000

 
$

 
$
34,000

 
9.75
%

 
Balance at December 31, 2014
 
 
Property
Face Amount
 
Unamortized
Origination Fees
 
Balance
 
Interest Rate
950 F Street, NW
$
34,000

 
$

 
$
34,000

 
9.75
%
America’s Square
29,720

 
(41
)
 
29,679

 
9.00
%
 
$
63,720

 
$
(41
)
 
$
63,679

 
 

On February 24, 2015, the owners of America’s Square, a 461,000 square foot office complex located in Washington, D.C., prepaid a mezzanine loan that had an outstanding balance of $29.7 million. We provided the owners of America’s Square a $30.0 million loan in April 2011, which was secured by a portion of the owner’s interest in the property. The loan had a fixed-interest rate of 9.0% and was scheduled to mature on May 1, 2016. We received a yield maintenance payment of $2.4 million with the repayment of the loan. The proceeds from the loan repayment, including the yield maintenance payment, were used to pay down a portion of the outstanding balance of our unsecured revolving credit facility.

In December 2010, we provided a $25.0 million mezzanine loan to the owners of 950 F Street, NW, a ten-story, 287,000 square-foot office/retail building located in Washington, D.C. that is secured by a portion of the owners’ interest in the property. The loan requires monthly interest-only payments with a constant interest rate over the life of the loan. On January 10, 2014, we amended the loan to increase the outstanding balance to $34.0 million and reduce the fixed interest rate from 12.5% to 9.75%. The amended mezzanine loan matures on April 1, 2017 and is repayable in full on or after December 21, 2015. The $9.0 million increase in the loan was provided by a draw under our unsecured revolving credit facility.

We recorded interest income related to our notes receivable of $0.8 million and $2.9 million for the three and nine months ended September 30, 2015, respectively, and $1.5 million and $4.5 million for the three and nine months ended September 30, 2014, respectively, which is included within “Interest and other income” in our consolidated statements of operations.

We recorded no income from the amortization of origination fees for the three months ended September 30, 2015 and $5 thousand for the nine months ended September 30, 2015. We recorded $7 thousand and $25 thousand of income from the amortization of origination fees for the three and nine months ended September 30, 2014, respectively. During the first quarter of 2014, we wrote-off $0.1 million of unamortized fees related to the original 950 F Street, NW mezzanine loan. We recorded income from the yield maintenance payment of $2.4 million during the first quarter of 2015. The yield maintenance payment and the amortization and write-off of unamortized fees are recorded within “Interest and other income” in our consolidated statements of operations.


15


(6) Investment in Affiliates

We own an interest in several joint ventures that own properties. We do not control the activities that are most significant to the joint ventures. As a result, the assets, the liabilities and the operating results of these noncontrolled joint ventures are not consolidated within our unaudited condensed consolidated financial statements. Our investments in these joint ventures are recorded as “Investment in affiliates” in our consolidated balance sheets. Our investment in affiliates consisted of the following (dollars in thousands):
 
Reporting Segment
 
Ownership
Interest
 
September 30, 2015
 
December 31, 2014
Prosperity Metro Plaza
Northern Virginia
 
51
%
 
$
24,980

 
$
24,651

1750 H Street, NW
Washington, D.C.
 
50
%
 
15,444

 
14,834

Aviation Business Park
Maryland
 
50
%
 
5,879

 
5,748

RiversPark I and II(1)
Maryland
 
25
%
 
2,187

 
2,249

 
 
 
 
 
$
48,490

 
$
47,482


(1) RiversPark I and RiversPark II are owned through two separate joint ventures.


On November 12, 2014, our 51% owned unconsolidated joint venture repaid a $48.3 million mortgage loan that encumbered Prosperity Metro Plaza, a two-building, 327,000 square-foot office building located in Merrifield, Virginia. Simultaneously with the repayment, the joint venture entered into a new $50.0 million mortgage loan that has a fixed-interest rate of 3.91%. The new loan requires interest only payments through December 2024, at which time the loan requires principal and interest payments through its maturity date. The loan has a maturity date of December 1, 2029 and is repayable in full without penalty on or after June 1, 2029.

On September 26, 2014, our two 25% owned unconsolidated joint ventures amended a $28.0 million mortgage loan that encumbers RiversPark I and II, a six-building, 308,000 square-foot business park located in Columbia, Maryland. The amended mortgage loan reduced the variable interest rate spread by 60 basis points and reduced the amount of outstanding principal recourse to us from 25% to 10%. The amended loan matures on September 26, 2017 and is repayable in full without penalty at any time during the term of the loan.

On July 10, 2014, an unconsolidated joint venture, in which we have a 50% ownership interest, repaid a $27.9 million mortgage loan that encumbered 1750 H Street, NW, a ten-story, 113,000 square-foot office building located in Washington, D.C. Simultaneously with the repayment, the joint venture entered into a new $32.0 million mortgage loan that has a fixed interest rate of 3.92%, a maturity date of August 1, 2024, and is repayable in full without penalty on or after August 1, 2021. The new loan requires monthly interest-only payments with a constant interest rate over the life of the loan.

The net assets of our unconsolidated joint ventures consisted of the following (dollars in thousands):
 
September 30, 2015
 
December 31, 2014
Assets:
 
 
 
Rental property, net
$
194,442

 
$
193,533

Cash and cash equivalents
5,510

 
4,567

Other assets
15,162

 
16,748

Total assets
215,114

 
214,848

Liabilities:
 
 
 
Mortgage loans(1)
110,000

 
110,000

Other liabilities
5,413

 
7,256

Total liabilities
115,413

 
117,256

Net assets
$
99,701

 
$
97,592

 
(1) 
Of the total mortgage debt that encumbers our unconsolidated properties, $2.8 million is recourse to us. We believe the fair value of the potential liability to us under this guaranty is inconsequential as the likelihood of our need to perform under the debt agreement is remote.


16


Our share of earnings or losses related to our unconsolidated joint ventures is recorded in our consolidated statements of operations as “Equity in (earnings) losses of affiliates.”

The following table summarizes the results of operations of our unconsolidated joint ventures, which, due to our varying ownership interests in the joint ventures and the varying operations of the joint ventures, may not be reflective of the amounts recorded in our consolidated statements of operations (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
5,975

 
$
5,713

 
$
18,205

 
$
17,245

Total operating expenses
(1,866
)
 
(1,818
)
 
(5,778
)
 
(5,738
)
Net operating income
4,109

 
3,895

 
12,427

 
11,507

Depreciation and amortization
(2,254
)
 
(2,256
)
 
(6,790
)
 
(7,323
)
Other expense, net
(980
)
 
(890
)
 
(2,928
)
 
(2,978
)
Net income
$
875

 
$
749

 
$
2,709

 
$
1,206


We earn various fees from several of our joint ventures, which include management fees, leasing commissions and construction management fees. We recognize fees only to the extent of the third party ownership interest in our unconsolidated joint ventures. We recognized fees from our unconsolidated joint ventures of $0.2 million and $0.5 million for the three and nine months ended September 30, 2015, respectively, as well as for the three and nine months ended September 30, 2014, respectively, which are reflected within “Tenant reimbursements and other revenues” in our consolidated statements of operations.


(7) Dispositions

During the second quarter of 2014, we prospectively adopted ASU 2014-08, which states that a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. All other disposed properties will have their operating results reflected within continuing operations on our consolidated statements of operations for all periods presented.

We have had, and will have, no continuing involvement with any of our disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes. Other than the properties discussed below in this Note 7, Dispositions, we did not dispose of or enter into any agreements to sell any other properties during the nine months ended September 30, 2015 and 2014.

(a) Disposed or Held-for-Sale Properties within Continuing Operations

The following table is a summary of property dispositions or held-for-sale properties whose operating results are included in continuing operations in our consolidated statements of operations for the periods presented (dollars in thousands):
 Property
Reporting
Segment
Disposition Date
Property Type
Square Feet
Net Sale Proceeds
Newington Business Park Center(1)
Northern Virginia
TBD
Business Park
255,600

$ N/A

Rumsey Center
Maryland
7/28/2015
Business Park
135,015

14,956

Owings Mills Business Park
Maryland
10/16/2014
Business Park
180,475

12,417

Corporate Campus at Ashburn Center
Northern Virginia
6/26/2014
Business Park
194,184

39,910


(1) 
Newington Business Park Center was classified as held-for-sale at September 30, 2015. The sale is expected to be completed in the fourth quarter of 2015 or in early 2016; however, we can provide no assurances regarding the timing or pricing of the sale, or that such sale will occur at all.

17



In October 2015, we entered into a non-binding contract to sell Newington Business Park Center, a seven-building, 255,600 square foot business park, which is located in our Northern Virginia reporting segment. The sale is expected to be completed in the fourth quarter of 2015; however, we can provide no assurances regarding the timing or pricing of the sale, or that such sale will occur at all. As of September 30, 2015, Newington Business Park Center met our held-for-sale criteria and, therefore, the assets of the buildings were classified within “Assets held-for-sale” and the liabilities of the buildings, which totaled $0.2 million, were classified within “Liabilities held-for-sale” on our consolidated balance sheet at September 30, 2015. The majority of the assets classified within assets held-for-sale as of September 30, 2015 consisted of $3.1 million in land and land improvements, $13.7 million in buildings and building improvements, $0.8 million in tenant improvements and $6.1 million of accumulated depreciation. The remaining $0.5 million classified within assets held-for-sale consisted of accrued straight-line rents, net of allowance for doubtful accounts, deferred costs, net of accumulated amortization, and prepaid expenses and other assets.

On July 28, 2015, we sold Rumsey Center, a four-building, single-story business park, which is located in our Maryland reporting segment, totaling 135,000 square feet, for net proceeds of $15.0 million and reported a gain on sale of $3.4 million. We used the net proceeds from the sale of Rumsey Center to fund repurchases of our common shares and to repay a portion of the outstanding balance under our unsecured revolving credit facility.
    
The operating results of Newington Business Park Center and Rumsey Center are reflected in continuing operations in our consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014. The operating results of Corporate Campus at Ashburn Center and Owings Mills Business Park are reflected in continuing operations in our consolidated statements of operations for the three and nine months ended September 30, 2014. The following table summarizes the aggregate results of operations for the four properties that are included in continuing operations for the periods presented (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
890

 
$
1,279

 
$
3,422

 
$
6,356

Property operating expenses
(299
)
 
(529
)
 
(1,222
)
 
(2,289
)
Depreciation and amortization
(98
)
 
(530
)
 
(714
)
 
(2,132
)
Interest expense
(24
)
 
(111
)
 
(244
)
 
(334
)
Impairment of rental property

 

 

 
(3,956
)
Income (loss) from operations of disposed property
469

 
109

 
1,242

 
(2,355
)
Gain on sale of rental property
3,384

 

 
3,384

 
21,230

Net income from continuing operations of disposed property
$
3,853

 
$
109

 
$
4,626

 
$
18,875




(b) Discontinued Operations

The following table is a summary of property dispositions whose operating results are reflected as discontinued operations in our consolidated statements of operations for the periods presented (dollars in thousands):
 
Reporting
Segment
Disposition Date
Property Type
Square Feet
Net Sale Proceeds
Richmond Portfolio
Southern Virginia
3/19/2015
Business Park
827,900

$
53,768

Patrick Center
Maryland
4/16/2014
Office
66,269

10,888

West Park
Maryland
4/2/2014
Office
28,333

2,871

Girard Business Center and Gateway Center
Maryland
1/29/2014
Business Park and Office
341,973

31,616

 

The Richmond Portfolio was sold subsequent to our adoption of ASU 2014-08 and resulted in a strategic shift away from the Richmond, Virginia area. As a result, we reflected the operating results of the Richmond Portfolio as discontinued operations in our consolidated statements of operations for the periods presented. All properties sold prior to our adoption of ASU 2014-08 or classified as held-for-sale in previously issued consolidated financial statements prior to our adoption of ASU 2014-08 are classified within discontinued operations.




18


The following table summarizes the results of operations of properties included in discontinued operations (dollars in thousands):

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$

 
$
1,949

 
$
877

 
$
5,705

Income (loss) from operations, before taxes(1)

 
297

 
(975
)
 
(359
)
Loss on debt extinguishment

 

 
(489
)
 

Gain on sale of rental property

 

 
857

 
1,338

 
(1) 
During the first quarter of 2015, we accelerated $2.0 million of unamortized straight-line rents, deferred rent abatements and leasing commissions related to the sale of the Richmond Portfolio in March 2015. During the first quarter of 2014, we accelerated $1.5 million of unamortized straight-line rents, deferred rent abatements and leasing commissions related to the sale of both Girard Business Center and Gateway Center in January 2014.




(8) Debt

Our borrowings consisted of the following (dollars in thousands):
 

September 30, 
 2015
 
December 31, 2014(1)
Mortgage and construction loans, effective interest rates ranging from 4.22% to 6.01%, maturing at various dates through September 2030(2)
$
313,217


$
308,637

Unsecured term loan, effective interest rates ranging from LIBOR plus 1.65% to LIBOR plus 2.05%, with staggered maturity dates ranging from October 2018 to October 2020(2)
300,000


300,000

Unsecured revolving credit facility, effective interest rate of LIBOR plus 1.70%, maturing October 2017(2)
155,000


205,000


$
768,217


$
813,637


(1) 
The balance at December 31, 2014, includes five mortgage loans that were repaid with the sale of the Richmond Portfolio on March 19, 2015. At December 31, 2014, the mortgage loans had an aggregate principal balance of $3.5 million and were classified within “Liabilities held-for-sale” on our consolidated balance sheet for December 31, 2014.
(2) 
At September 30, 2015, LIBOR was 0.19%. All references to LIBOR in the condensed consolidated financial statements refer to one-month LIBOR.



19


(a) Mortgage and Construction Loans

The following table provides a summary of our mortgage and construction loans at September 30, 2015 and December 31, 2014 (dollars in thousands):
 
Encumbered Property
 
Contractual
Interest Rate

Effective
Interest
Rate
 
Maturity
Date

September 30, 
 2015

December 31, 2014
Jackson National Life Loan(1)
 
5.19%

5.19%

August 2015

$


$
64,943

440 First Street, NW(2)
 
LIBOR + 2.50%

LIBOR + 2.50%

May 2016

32,217


32,216

Storey Park(2)
 
LIBOR + 2.50%

LIBOR + 2.50%

October 2016

22,000


22,000

Gateway Centre Manassas Building I
 
7.35%

5.88%

November 2016

269


432

Hillside I and II
 
5.75%

4.62%

December 2016

12,644


12,949

Redland Corporate Center Buildings II & III
 
4.20%
 
4.64%
 
November 2017
 
64,866

 
65,816

Northern Virginia Development Project(2)
 
LIBOR + 1.85%
 
LIBOR + 1.85%
 
September 2019
 
9,176

 

840 First Street, NE
 
5.72%
 
6.01%
 
July 2020
 
36,054

 
36,539

Battlefield Corporate Center
 
4.26%
 
4.40%
 
November 2020
 
3,568

 
3,692

1211 Connecticut Avenue, NW
 
4.22%

4.47%

July 2022

29,257


29,691

1401 K Street, NW
 
4.80%

4.93%

June 2023

36,386


36,861

11 Dupont Circle, NW(3)
 
4.05%
 
4.22%
 
September 2030
 
66,780

 

 
 
 
 
4.54%
(4) 
 
 
313,217

 
305,139

    Unamortized fair value adjustments
 
 
 
 
 
 
 
(221
)
 
(370
)
    Principal balance
 
 
 
 
 
 
 
312,996

 
304,769

 
 
 
 
 
 
 
 
 
 
 
Debt Classified within “Liabilities-Held-for-Sale”
 
 
 
 
 
 
 
 
 
 
Richmond Portfolio(5)
 
 
 
 
 
 
 
 
 
 
Hanover Business Center Building D
 
8.88%

6.63%

August 2015



104

Chesterfield Business Center Buildings C,D,G and H
 
8.50%

6.63%

September 2015



302

Hanover Business Center Building C
 
7.88%

6.63%

December 2017



505

Chesterfield Business Center Buildings A,B,E and F
 
7.45%

6.63%

June 2021



1,674

Airpark Business Center
 
7.45%

6.63%

June 2021



913

 
 


 
 




3,498

Total unamortized fair value adjustments
 







 
(73
)
    Principal balance
 








3,425

 
 
 
 
 
 
 
 
 
 
 
    Total principal balance
 
 
 

 
 
 
$
312,996

 
$
308,194

 
(1) 
On July 21, 2015, we prepaid, without penalty, the $64.2 million outstanding balance on our Jackson National Life Loan, which was scheduled to mature in August 2015 and was secured by the following properties: Plaza 500, Van Buren Office Park, Greenbrier Technology Center II, Norfolk Business Center, Snowden Center and Rumsey Center, which was subsequently sold on July 28, 2015.
(2) 
At September 30, 2015, LIBOR was 0.19%.
(3) 
On August 7, 2015, we entered into a $66.8 million mortgage loan, which encumbers our 11 Dupont Circle, NW property. The new loan, which is interest only until September 1, 2025, has a fixed interest rate of 4.05%, matures on September 1, 2030 and is prepayable in full, without penalty, on or after August 8, 2025.
(4) 
Weighted average interest rate on total mortgage and construction debt.
(5) 
The mortgage loans and unamortized fair value adjustments that encumbered properties within the Richmond Portfolio were classified within “Liabilities held-for-sale” on our consolidated balance sheet at December 31, 2014. The loans were prepaid upon the sale of the Richmond Portfolio on March 19, 2015.

20


On July 21, 2015, we prepaid, without penalty, the $64.2 million outstanding balance on our Jackson National Life Loan, which was scheduled to mature in August 2015 and was secured by the following properties: Plaza 500, Van Buren Office Park, Greenbrier Technology Center II, Norfolk Business Center, Snowden Center and Rumsey Center, which was sold on July 28, 2015. The loan was initially prepaid with a draw from our unsecured revolving credit facility. The draw from our unsecured revolving credit facility was subsequently paid down when we entered into a $66.8 million mortgage loan, which encumbers our 11 Dupont Circle, NW property, on August 7, 2015. The new loan, which is interest only until September 1, 2025, has a fixed interest rate of 4.05%, matures on September 1, 2030 and is prepayable in full, without penalty, on or after August 8, 2025.

Land Loan

On October 16, 2014, our 97% owned consolidated joint venture that owns Storey Park repaid a $22.0 million loan that encumbered the Storey Park land and was subject to a 5.0% interest rate floor. Simultaneously with the repayment, the joint venture entered into a new $22.0 million land loan with a variable interest rate of LIBOR plus 2.50%. The new loan matures on October 16, 2016, with a one-year extension at our option, and is repayable in full without penalty at any time during the term of the loan. Per the terms of the loan agreement, $6.0 million of the outstanding principal balance and all of the outstanding accrued interest is recourse to us. As of September 30, 2015, we were in compliance with all the financial covenants of the Storey Park land loan.

Construction Loans

On June 5, 2013, we entered into a construction loan (the “440 First Street Construction Loan”) that is collateralized by our 440 First Street, NW property, which underwent a major redevelopment that was substantially completed in October 2013. The loan has a borrowing capacity of up to $43.5 million, of which we initially borrowed $21.7 million in 2013 and borrowed an additional $10.5 million in 2014. The loan has a variable interest rate of LIBOR plus a spread of 2.5% and matures in May 2016, with two one-year extension options at our discretion. We can repay all or a portion of the 440 First Street Construction Loan, without penalty, at any time during the term of the loan. At September 30, 2015, per the terms of the loan agreement, 50% of the outstanding principal balance and all of the outstanding accrued interest were recourse to us. The percentage of outstanding principal balance that is recourse to us can be reduced upon the property achieving certain operating thresholds. As of September 30, 2015, we were in compliance with all of the financial covenants of the 440 First Street Construction Loan.

On September 1, 2015, we entered into a construction loan (the “Northern Virginia Construction Loan”) that is collateralized by a to-be-constructed 167,000 square foot office building that is currently in development in Northern Virginia. We currently expect to complete construction of the new building in early 2016 and expect to complete the construction of the tenant improvements in the second half of 2016. The loan has a borrowing capacity of up to $43.7 million, of which we borrowed $9.2 million as of September 30, 2015. The loan has a variable interest rate of LIBOR plus a spread of 1.85% and matures on September 1, 2019. We can repay all or a portion of the Northern Virginia Construction Loan, without penalty, at any time during the term of the loan. As of September 30, 2015, we were in compliance with all of the financial covenants of the Northern Virginia Construction Loan.

(b) Unsecured Term Loan

The table below shows the outstanding balances and the interest rates of the three tranches of the $300.0 million unsecured term loan at September 30, 2015 (dollars in thousands):
 
 
Maturity Date
 
Amount
 
Interest Rate(1)
Tranche A
October 2018
 
$
100,000

 
LIBOR, plus 165 basis points
Tranche B
October 2019
 
100,000

 
LIBOR, plus 180 basis points
Tranche C
October 2020
 
100,000

 
LIBOR, plus 205 basis points
 
 
 
$
300,000

 
 
 
(1) 
At September 30, 2015, LIBOR was 0.19%. The interest rate spread is subject to change based on our maximum total indebtedness ratio. For more information, see note 8(e) Debt – Financial Covenants.


The term loan agreement contains various restrictive covenants substantially identical to those contained in our unsecured revolving credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the agreement requires that we satisfy certain financial covenants that are also substantially identical to those contained in our unsecured revolving credit facility. The agreement also includes customary events of default, the occurrence of which,

21


following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of our Company under the agreement to be immediately due and payable. As of September 30, 2015, we were in compliance with all the financial covenants of the unsecured term loan.

(c) Unsecured Revolving Credit Facility

During the third quarter of 2015, we borrowed $79.0 million under the unsecured revolving credit facility, $64.2 million of which was used to pay off the Jackson National Life Loan and the remainder was used for general corporate purposes, and repaid $76.0 million of the outstanding balance under the unsecured revolving credit facility with proceeds from a $66.8 million mortgage loan that encumbers 11 Dupont Circle, NW, a portion of the proceeds from the sale of Rumsey Center and available cash. For the three and nine months ended September 30, 2015, our weighted average borrowings under the unsecured revolving credit facility were $164.2 million and $168.9 million, respectively, with a weighted average interest rate of 1.9% for both the three and nine months ended September 30, 2015 compared with weighted average borrowings of $125.9 million and $112.0 million for the three and nine months ended September 30, 2014, respectively, with a weighted average interest rate of 1.7% for both periods in 2014. Our maximum outstanding borrowings were $217.0 million and $218.0 million for the three and nine months ended September 30, 2015, respectively, and $216.0 million for both the three and nine months ended September 30, 2014. At September 30, 2015, outstanding borrowings under the unsecured revolving credit facility were $155.0 million with a weighted average interest rate of 1.9%. At September 30, 2015, LIBOR was 0.19% and the applicable spread on our unsecured revolving credit facility was 170 basis points. The available capacity under the unsecured revolving credit facility was $142.0 million as of the date of this filing. We are required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility. As of September 30, 2015, we were in compliance with all the financial covenants of the unsecured revolving credit facility. For more information, see note 8(e) Debt – Financial Covenants.

(d) Interest Rate Swap Agreements

At September 30, 2015, we had eleven interest rate swap agreements outstanding that collectively fixed LIBOR, at a weighted average interest rate of 1.5%, on $300.0 million of our variable rate debt. See note 9, Derivative Instruments, for more information about our interest rate swap agreements.

(e) Financial Covenants

Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. These covenants relate to our allowable leverage, minimum tangible net worth, fixed charge coverage and other financial metrics. As of September 30, 2015, we were in compliance with the covenants of our unsecured term loan and unsecured revolving credit facility and any such financial covenants of our mortgage debt (including the 440 First Street Construction Loan, the Northern Virginia Construction Loan and the Storey Park land loan).

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

Our unsecured revolving credit facility and unsecured term loan are subject to interest rate spreads that float based on the quarterly measurement of our maximum consolidated total indebtedness to gross asset value ratio. Based on our leverage ratio at September 30, 2015, the applicable interest rate spreads on the unsecured revolving credit facility and the unsecured term loan will be unchanged.






(9) Derivative Instruments

We are exposed to certain risks arising from business operations and economic factors. We use derivative financial instruments to manage exposures that arise from business activities in which our future exposure to interest rate fluctuations is unknown. The

22


objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. We do not use derivatives for trading or speculative purposes and we intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:
available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;
the duration of the hedge may not match the duration of the related liability;
the party owing money in the hedging transaction may default on its obligation to pay; and
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign its side of the hedging transaction.

We enter into interest rate swap agreements to hedge our exposure on our variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instrument’s applicable interest rate.

At September 30, 2015, we had eleven interest rate swap agreements outstanding that collectively fixed LIBOR at a weighted average interest rate of 1.5% on $300.0 million of our variable rate debt. Our interest rate swap agreements are summarized below (dollars in thousands):
Maturity Date
 
Notional
Amount
 
Interest Rate
Contractual
Component
 
Fixed LIBOR
Interest Rate
July 2016
 
$
35,000

 
LIBOR
 
1.754
%
July 2016
 
25,000

 
LIBOR
 
1.763
%
July 2017
 
30,000

 
LIBOR
 
2.093
%
July 2017
 
30,000

 
LIBOR
 
2.093
%
July 2017
 
25,000

 
LIBOR
 
1.129
%
July 2017
 
12,500

 
LIBOR
 
1.129
%
July 2017
 
50,000

 
LIBOR
 
0.955
%
July 2018
 
12,500

 
LIBOR
 
1.383
%
July 2018
 
30,000

 
LIBOR
 
1.660
%
July 2018
 
25,000

 
LIBOR
 
1.394
%
July 2018
 
25,000

 
LIBOR
 
1.135
%
Total/Weighted Average
 
$
300,000

 
 
 
1.505
%

Our interest rate swap agreements are designated as cash flow hedges and we record the effective portion of any unrealized gains associated with the change in fair value of the swap agreements within “Accumulated other comprehensive loss” and “Prepaid expenses and other assets” and the effective portion of any unrealized losses within “Accumulated other comprehensive loss” and “Accounts payable and other liabilities” on our consolidated balance sheets. We record our proportionate share of any unrealized gains or losses on our cash flow hedges associated with our unconsolidated joint ventures within “Accumulated other comprehensive loss” and “Investment in affiliates” on our consolidated balance sheets. We record any gains or losses incurred as a result of each interest rate swap agreement’s fixed rate deviating from our respective loan’s contractual rate within “Interest expense” in our consolidated statements of operations. We did not have any material ineffectiveness associated with our cash flow hedges during the nine months ended September 30, 2015 and 2014.





Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to “Interest expense” on our consolidated statements of operations as interest payments are made on our variable-rate debt. We reclassified accumulated other comprehensive loss as an increase to interest expense of $1.0 million for both the three months ended September 30, 2015 and 2014, and $3.0 million and $3.1 million for the nine months ended September 30, 2015 and 2014, respectively. As of

23


September 30, 2015, we estimated that $4.3 million of our accumulated other comprehensive loss will be reclassified as an increase to interest expense over the following twelve months.

(10) Fair Value Measurements

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

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

The three levels are as follows:

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

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

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

In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of our consolidated assets and liabilities that are measured on a recurring basis as of September 30, 2015 and December 31, 2014 (dollars in thousands):

Balance at  
 September 30, 2015

Level 1

Level 2

Level 3
Recurring Measurements:







Derivative instrument-swap liabilities
$
4,507


$


$
4,507


$

 
Balance at  
 December 31, 2014

Level 1

Level 2

Level 3
Recurring Measurements:







Derivative instrument-swap assets
$
133


$


$
133


$

Derivative instrument-swap liabilities
3,569




3,569




We did not have any assets or liabilities that were measured on a non-recurring basis at September 30, 2015 and December 31, 2014. We did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured at fair value on a recurring basis during the nine months ended September 30, 2015 and 2014. Also, no transfers into or out of fair value measurement levels for assets or liabilities that are measured on a recurring basis occurred during the nine months ended September 30, 2015 and 2014.

Interest Rate Derivatives

At September 30, 2015, we had hedged $300.0 million of our variable rate debt through eleven interest rate swap agreements. See note 9, Derivative Instruments, for more information about our interest rate swap agreements.

The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date and also incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of

24


nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees. We use a third party to assist in valuing our interest rate swap agreements. A daily “snapshot” of the market is taken to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are then compiled through a valuation process that generates daily valuations, which are used to value our interest rate swap agreements. Our interest rate swap derivatives are effective cash flow hedges and the effective portion of the change in fair value is recorded in the equity section of our consolidated balance sheets as “Accumulated other comprehensive loss.”

Financial Instruments

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

The carrying amount and estimated fair value of our notes receivable and debt instruments are as follows (amounts in thousands):
 
September 30, 2015

December 31, 2014
 
Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Financial Assets:







Notes receivable(1)
$
34,000


$
34,000


$
63,679


$
63,720

Financial Liabilities:







Mortgage debt(2)
$
313,217


$
303,465


$
308,637


$
292,882

Unsecured term loan
300,000


303,163


300,000


300,000

Unsecured revolving credit facility
155,000


155,623


205,000


205,000

Total
$
768,217


$
762,251


$
813,637


$
797,882

(1) 
The principal amount of our notes receivable was $34.0 million and $63.7 million at September 30, 2015 and December 31, 2014, respectively. On February 24, 2015, the owners of America’s Square, a 461,000 square foot office complex located in Washington, D.C., prepaid a mezzanine loan, which had an outstanding $29.7 million balance of the $30.0 million mezzanine loan that we provided them in April 2011.
(2) 
The balances at December 31, 2014, include five mortgage loans that were repaid with the sale of the Richmond Portfolio on March 19, 2015. At December 31, 2014, the mortgage loans had an aggregate principal balance of $3.5 million and were classified within “Liabilities held-for-sale” on our consolidated balance sheet for December 31, 2014.


(11) Equity

In July 2015, our Board of Trustees authorized a share repurchase program that allows us to acquire up to five million of our common shares of beneficial interest from time to time through July 2016 in open market transactions at prevailing prices or in negotiated private transactions. We are not obligated to acquire any particular amount of common shares and the share repurchase program may be suspended by the Board of Trustees at any time. During the three months ended September 30, 2015, we repurchased 924,198 shares at a weighted-average share price of $10.99 for a total purchase price of $10.2 million, utilizing a portion of the proceeds from our sale of Rumsey Center. As of the date of this filing, we are authorized to repurchase an additional 4.1 million of our common shares through July 2016.

On October 27, 2015, we 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 16, 2015 to common shareholders of record as of November 9, 2015. We also declared a dividend of $0.484375 per share on our Series A Preferred Shares. The dividend will be paid on November 16, 2015 to preferred shareholders of record as of November 9, 2015. Dividends on all non-vested share awards are

25


recorded as a reduction of shareholders’ equity. For each dividend paid by us on our common and preferred shares, the Operating Partnership distributes an equivalent distribution on our common and preferred Operating Partnership units, respectively.

On July 28, 2015, we declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend was paid on August 17, 2015 to common shareholders of record as of August 10, 2015. We also declared a dividend of $0.484375 per share on our Series A Preferred Shares. The dividend was paid on August 17, 2015 to preferred shareholders of record as of August 10, 2015.

Our unsecured revolving credit facility, unsecured term loan, the 440 First Street Construction Loan, the Northern Virginia Construction Loan and the Storey Park land loan contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit our ability to make distributions to our common and preferred shareholders, except for distributions required to maintain our qualification as a REIT. Further, distributions with respect to our common shares are subject to our ability to first satisfy our obligations to pay distributions to the holders of our Series A Preferred Shares.

26


As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests associated with the Operating Partnership are recorded outside of permanent equity. Our equity and redeemable noncontrolling interests are as follows (dollars in thousands):
 
 
First
Potomac
Realty Trust
 
Non-redeemable
noncontrolling
interests
 
Total Equity
 
Redeemable
noncontrolling
interests
Balance at December 31, 2014
$
710,007

 
$
898

 
$
710,905

 
$
33,332

Net income (loss)
5,154

 
(3
)
 
5,151

 
(186
)
Changes in ownership, net
3,289

 

 
3,289

 
(1,257
)
Distributions to owners
(35,725
)
 
(96
)
 
(35,821
)
 
(1,181
)
Other comprehensive loss
(1,015
)
 

 
(1,015
)
 
(45
)
Repurchase of common shares
$
(10,180
)
 
$

 
$
(10,180
)
 
$

Balance at September 30, 2015
$
671,530

 
$
799

 
$
672,329

 
$
30,663

 
 
First
Potomac
Realty Trust
 
Non-redeemable
noncontrolling
interests
 
Total Equity
 
Redeemable
noncontrolling
interests
Balance at December 31, 2013
$
738,510

 
$
781

 
$
739,291

 
$
33,221

Net income
16,614

 

 
16,614

 
327

Changes in ownership, net
2,018

 
161

 
2,179

 
390

Distributions to owners
(35,691
)
 

 
(35,691
)
 
(1,183
)
Other comprehensive income
1,059

 

 
1,059

 
47

Balance at September 30, 2014
$
722,510

 
$
942

 
$
723,452

 
$
32,802


A summary of our accumulated other comprehensive loss is as follows (dollars in thousands):
 
 
2015
 
2014
Beginning balance at January 1,
$
(3,268
)
 
$
(3,836
)
Net unrealized (loss) gain on derivative instruments
(1,060
)
 
1,106

Net loss (gain) attributable to noncontrolling interests
45

 
(47
)
Ending balance at September 30,
$
(4,283
)
 
$
(2,777
)

(12) Noncontrolling Interests

(a) Noncontrolling Interests in the Operating Partnership

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








27


Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing price of our common shares at September 30, 2015, the cost to acquire, through cash purchase or issuance of our common shares, all of the outstanding common Operating Partnership units not owned by us would be approximately $28.8 million. At September 30, 2015 and December 31, 2014, we recorded adjustments of $3.6 million and $4.7 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At September 30, 2015, 2,619,069 of the total common Operating Partnership units, or 4.3%, were not owned by us. During the nine months ended September 30, 2015, 11,508 common Operating Partnership units were redeemed with available cash. There were no common Operating Partnership units redeemed for common shares during the nine months ended September 30, 2015. During the first quarter of 2014, we issued 3,125 common Operating Partnership units to the seller of 840 First Street, NE to satisfy a contingent consideration obligation related to the acquisition of the property.
 
(b) Noncontrolling Interests in a Consolidated Partnership

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

On August 4, 2011, we formed a joint venture, in which we have a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound, which subsequently relocated its operations. Greyhound’s lease expired on August 31, 2013, at which time the property was placed into development with the anticipation of developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. At September 30, 2015, our total investment in the development project was $57.2 million, which included the original cost basis of the property of $43.3 million. The majority of the costs in excess of the original cost basis relate to architectural fees and site preparation costs as well as capitalized interest and taxes. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date. While we continue pre-development work on Storey Park, we engaged a sales broker to strategically monetize our majority interest in Storey Park, which could result in a sale of all or a portion of our interest in Storey Park; however, we can provide no assurances regarding the timing or pricing of such transaction, or that a sale will occur at all.

(13) Segment Information

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


28


The results of continuing operations of our four reporting segments for the three and nine months ended September 30, 2015 and 2014 are as follows (dollars in thousands):
 
Three Months Ended September 30, 2015
 
Washington, D.C.
 
Maryland
 
Northern Virginia
 
Southern Virginia
 
Consolidated
Number of buildings(1)
6

 
34

 
49

 
19

 
108

Square feet(1)
915,692

 
1,884,741

 
3,020,293

 
2,021,667

 
7,842,393

Total revenues
$
11,337

 
$
10,575

 
$
13,715

 
$
7,227

 
$
42,854

Property operating expense
(2,962
)
 
(2,467
)
 
(3,347
)
 
(2,125
)
 
(10,901
)
Real estate taxes and insurance
(2,015
)
 
(893
)
 
(1,285
)
 
(622
)
 
(4,815
)
Total property operating income
$
6,360

 
$
7,215

 
$
9,083

 
$
4,480

 
27,138

Depreciation and amortization expense
 
 
 
 
 
 
 
 
(16,758
)
General and administrative
 
 
 
 
 
 
 
 
(4,605
)
Other expenses
 
 
 
 
 
 
 
 
(1,778
)
Net income
 
 
 
 
 
 
 
 
$
3,997

Capital expenditures(2)
$
2,440

 
$
2,649

 
$
11,309

 
$
2,019

 
$
18,521

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
Washington, D.C.
 
Maryland
 
Northern Virginia
 
Southern Virginia
 
Consolidated
Number of buildings(1)(3)
6

 
42

 
49

 
38

 
135

Square feet(1)(3)
815,093

 
2,179,366

 
3,020,975

 
2,852,212

 
8,867,646

Total revenues
$
8,489

 
$
11,154

 
$
13,309

 
$
7,103

 
$
40,055

Property operating expense
(2,496
)
 
(2,540
)
 
(3,121
)
 
(2,407
)
 
(10,564
)
Real estate taxes and insurance
(1,278
)
 
(956
)
 
(1,228
)
 
(597
)
 
(4,059
)
Total property operating income
$
4,715

 
$
7,658

 
$
8,960

 
$
4,099

 
25,432

Depreciation and amortization expense
 
 
 
 
 
 
 
 
(15,217
)
General and administrative
 
 
 
 
 
 
 
 
(4,955
)
Acquisition costs
 
 
 
 
 
 
 
 
(1,488
)
Other expenses
 
 
 
 
 
 
 
 
(4,020
)
Discontinued operations(4)
 
 
 
 
 
 
 
 
297

Net income
 
 
 
 
 
 
 
 
$
49

Capital expenditures(2)
$
5,320

 
$
1,875

 
$
1,516

 
$
2,001

 
$
10,767




29


 
Nine Months Ended September 30, 2015
 
Washington, D.C.
 
Maryland
 
Northern Virginia
 
Southern Virginia
 
Consolidated
Total revenues
$
33,522

 
$
33,315

 
$
41,529

 
$
21,375

 
$
129,741

Property operating expense
(9,088
)
 
(9,129
)
 
(10,603
)
 
(5,856
)
 
(34,676
)
Real estate taxes and insurance
(5,994
)
 
(2,681
)
 
(4,178
)
 
(1,815
)
 
(14,668
)
Total property operating income
$
18,440

 
$
21,505

 
$
26,748

 
$
13,704

 
80,397

Depreciation and amortization expense
 
 
 
 
 
 
 
 
(49,909
)
General and administrative
 
 
 
 
 
 
 
 
(15,110
)
Other expenses
 
 
 
 
 
 
 
 
(9,806
)
Discontinued operations(4)
 
 
 
 
 
 
 
 
(607
)
Net income
 
 
 
 
 
 
 
 
$
4,965

Total assets(5)(6)
$
515,625

 
$
344,676

 
$
452,962

 
$
167,903

 
$
1,526,524

Capital expenditures(2)
$
9,859

 
$
6,965

 
$
27,190

 
$
5,419

 
$
49,846

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Washington, D.C.
 
Maryland
 
Northern Virginia
 
Southern Virginia
 
Consolidated
Total revenues
$
23,256

 
$
34,025

 
$
40,122

 
$
21,322

 
$
118,725

Property operating expense
(6,889
)
 
(8,913
)
 
(10,203
)
 
(6,820
)
 
(32,825
)
Real estate taxes and insurance
(3,579
)
 
(2,934
)
 
(4,217
)
 
(1,701
)
 
(12,431
)
Total property operating income
$
12,788

 
$
22,178

 
$
25,702

 
$
12,801

 
73,469

Depreciation and amortization expense
 
 
 
 
 
 
 
 
(44,357
)
General and administrative
 
 
 
 
 
 
 
 
(15,370
)
Acquisition costs
 
 
 
 
 
 
 
 
(2,667
)
Impairment of rental property
 
 
 
 
 
 
 
 
(3,956
)
Other income
 
 
 
 
 
 
 
 
8,843

Discontinued operations(4)
 
 
 
 
 
 
 
 
979

Net income
 
 
 
 
 
 
 
 
$
16,941

Total assets(5)(6)
$
501,536

 
$
375,399

 
$
437,909

 
$
228,655

 
$
1,628,737

Capital expenditures(2)
$
16,702

 
$
6,966

 
$
3,876

 
$
6,173

 
$
34,410


(1) 
Excludes Storey Park from our Washington, D.C. reporting segment, which was placed in development in the third quarter of 2013.
(2) 
Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $104 and $55 for the three months ended September 30, 2015 and 2014, respectively, and $413 and $693 for the nine months ended September 30, 2015 and 2014, respectively.
(3) 
Includes occupied space at 440 First Street, NW in our Washington, D.C. reporting segment, which was substantially completed in the third quarter of 2013. In October 2014, the property was placed in service.
(4) 
Includes the operating results from the Richmond Portfolio, Patrick Center, West Park, Girard Business Center and Gateway Center. For information, see note 7(b), Dispositions - Discontinued Operations.
(5) 
Total assets include our investment in properties that are owned through joint ventures that are not consolidated within our condensed consolidated financial statements. For more information on our unconsolidated investments, including location within our reportable segments, see note 6, Investment in Affiliates.
(6) 
Corporate assets not allocated to any of our reportable segments totaled $45,358 and $85,238 at September 30, 2015 and 2014, respectively.




30


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

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and included elsewhere in this Quarterly Report on Form 10-Q. See “Special Note About Forward-Looking Statements” above.

References in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” or “First Potomac,” refer to First Potomac Realty Trust and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

Overview

We are a leader in the ownership, management, development and redevelopment of office and business park properties in the greater Washington, D.C. region. We strategically focus on acquiring and redeveloping properties that we believe can benefit from our intensive property management, leasing expertise, market knowledge and established relationships, and seek to reposition these properties to increase their profitability and value. Our portfolio primarily contains a mix of single-tenant and multi-tenant office properties and business parks. Office properties are single-story and multi-story buildings that are primarily for office use; and business parks contain buildings with office features combined with some industrial property space. We separate our properties into four distinct reporting segments, which we refer to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments.

We conduct our business through First Potomac Realty Investment Limited Partnership, our operating partnership (the “Operating Partnership”). We are the sole general partner of, and, as of September 30, 2015, owned 100% of the preferred interest and 95.7% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by two of our executive officers and one of our trustees, each of whom contributed certain properties and other assets to us upon our formation, and the remainder of which are owned by other unrelated parties.

At September 30, 2015, we wholly owned or had a controlling interest in properties totaling 7.8 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. We also owned land that can support approximately 1.3 million square feet of additional development. Our consolidated properties were 89.9% occupied by 491 tenants at September 30, 2015. We did not include square footage that was in development or redevelopment, which totaled 0.2 million square feet at September 30, 2015, in our occupancy calculation. We derive substantially all of our revenue from leases of space within our properties. As of September 30, 2015, our largest tenant was the U.S. Government, which accounted for 13.5% of our total annualized cash basis rent, and the U.S. Government combined with government contractors, accounted for 25.7% of our total annualized cash basis rent as of September 30, 2015. We operate so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

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

Our long-term growth will principally be driven by our ability to:
 
maintain and increase occupancy rates and/or increase rental rates at our properties;
sell assets to third parties, or contribute properties to joint ventures, at favorable prices;
continue to grow our portfolio through acquisitions of new properties, potentially through joint ventures, or reinvest in our company through share repurchases and/or redemption of our preferred shares when they become redeemable;
develop and redevelop existing assets; and
execute initiatives designed to increase balance sheet capacity and expand the potential sources of capital.

31



Executive Summary

For the three months ended September 30, 2015, we had net income of $4.0 million compared with net income of $49 thousand for the same period in 2014. The increase in net income for the three months ended September 30, 2015 was primarily due to a $3.4 million gain on the sale of Rumsey Center in the third quarter of 2015. For the nine months ended September 30, 2015, we had net income of $5.0 million compared with net income of $16.9 million for the same period in 2014. The decrease in net income for the nine months ended September 30, 2015 compared with the same period in 2014 was primarily due to a $21.2 million gain on the sale of Corporate Campus at Ashburn Center in the second quarter of 2014. The decrease in net income for the nine months ended September 30, 2015 was partially offset by the gain on sale of Rumsey Center and an increase in net operating income, primarily as a result of higher occupancy in our portfolio.

Funds From Operations (“FFO”) increased for the three and nine months ended September 30, 2015 compared with the same periods in 2014 due to an increase in same property net operating income, as a result of higher occupancy in our portfolio, as well as a decrease in acquisition costs.

FFO is a non-GAAP financial measure. For a description of FFO, including why we believe our presentation is useful and a reconciliation of FFO to net income attributable to First Potomac Realty Trust, see “Funds From Operations.”

Significant Activity
 
Increased occupied percentage to 89.9% from 87.0% at September 30, 2014, which is the highest level of occupancy we have achieved since the first quarter of 2006.
As part of our plan to accelerate the sale of at least $200 million of assets, we retained sales brokers to market nine properties in Northern Virginia, as well as Storey Park, a development site in the NoMa sub-market in Washington, D.C., and identified Cedar Hill in Northern Virginia as a disposition candidate.
In July, sold Rumsey Center, a four-building, 135,000 square foot, single-story business park, for net proceeds of $15.0 million, bringing aggregate net proceeds from dispositions in 2015 to $68.7 million, which is in addition to the anticipated sale of at least another $200 million of assets.
Repurchased 924,198 common shares, at a weighted-average share price of $10.99, utilizing a portion of the proceeds from the sale of Rumsey Center.

Informal SEC Inquiry

As previously disclosed in our Annual Reports on Form 10-K for the years ended December 31, 2014, 2013 and 2012, we were informed that the SEC initiated an informal inquiry relating to the matters that were the subject of the Audit Committee’s internal investigation regarding the material weakness previously identified in our Annual Report on Form 10-K for the year ended December 31, 2011. The SEC staff has informed us that this inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, nor considered a reflection upon any person, entity or security. We have been, and intend to continue, voluntarily cooperating fully with the SEC. The scope and outcome of this matter cannot be determined at this time.


32


Properties:

The following sets forth certain information about our properties by segment as of September 30, 2015 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON, D.C. REGION
 
Property
Buildings
 
Sub-Market(1)
 
Square Feet
 
Annualized
Cash Basis
Rent(2)
 
Leased at
September 30,
2015
 
Occupied at
September 30,
2015
Office
 
 
 
 
 
 
 
 
 
 
 
11 Dupont Circle, NW
1

 
CBD
 
150,805

 
$
5,389

 
97.7
%
 
97.7
%
440 First Street, NW(3)
1

 
Capitol Hill
 
138,603

 
2,923

 
67.4
%
 
51.2
%
500 First Street, NW
1

 
Capitol Hill
 
129,035

 
4,638

 
100.0
%
 
100.0
%
840 First Street, NE
1

 
NoMA
 
248,535

 
7,414

 
98.9
%
 
97.7
%
1211 Connecticut Avenue, NW
1

 
CBD
 
130,085

 
3,603

 
97.5
%
 
97.5
%
1401 K Street, NW
1

 
East End
 
118,629

 
2,819

 
70.3
%
 
68.1
%
Total/Weighted Average
6

 
 
 
915,692

 
26,786

 
90.2
%
 
87.1
%
Development
 
 
 
 
 
 
 
 
 
 
 
Storey Park(4)

 
NoMA
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated Joint Venture
 
 
 
 
 
 
 
 
 
 
 
1750 H Street, NW
1

 
CBD
 
113,131

 
3,728

 
91.1
%
 
91.1
%
Region Total/Weighted Average
7

 
 
 
1,028,823

 
$
30,514

 
90.3
%
 
87.6
%

(1) 
CBD refers to Central Business District; NoMA refers to North of Massachusetts Avenue.
(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 estimated operating expense reimbursements that are included, along with base rent, in the contractual payments of our full service leases. This amount differs from Cash NOI due to items such as rent abatement, unreimbursed expenses, non-recurring revenues and expenses, differences in leased vs. occupied space, and timing differences related to tenant activity.
(3) 
In October 2013, we substantially completed the redevelopment of the property. During the fourth quarter of 2014, we placed all the vacant space into service.
(4) 
The property was acquired through a consolidated joint venture in which we have a 97% controlling economic interest. The property was placed into development on September 1, 2013 with the anticipation of developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date. While we continue pre-development work on Storey Park, we engaged a sales broker to strategically monetize our majority interest in Storey Park, which could result in a sale of all or a portion of our interest in Storey Park; however, we can provide no assurances regarding the timing or pricing of such transaction, or that a sale will occur at all.

















33


MARYLAND REGION
 
Property
Buildings
 
Location
 
Square Feet
 
Annualized
Cash Basis
Rent(1)
 
Leased at
September 30,
2015
 
Occupied at
September 30,
2015
Business Park
 
 
 
 
 
 
 
 
 
 
 
Ammendale Business Park(2)
7

 
Beltsville
 
312,846

 
$
4,015

 
89.8
%
 
89.8
%
Gateway 270 West
6

 
Clarksburg
 
252,295

 
3,080

 
90.4
%
 
87.4
%
Snowden Center
5

 
Columbia
 
145,267

 
2,308

 
100.0
%
 
100.0
%
Total Business Park
18

 
 
 
710,408

 
9,403

 
92.1
%
 
91.0
%
Office
 
 
 
 
 
 
 
 
 
 
 
Annapolis Business Center
2

 
Annapolis
 
101,113

 
1,643

 
100.0
%
 
100.0
%
Metro Park North
4

 
Rockville
 
191,211

 
2,855

 
87.3
%
 
87.3
%
Cloverleaf Center
4

 
Germantown
 
173,766

 
2,063

 
75.5
%
 
73.0
%
Hillside I and II
2

 
Columbia
 
86,227

 
1,051

 
91.4
%
 
91.4
%
TenThreeTwenty
1

 
Columbia
 
138,854

 
2,046

 
95.6
%
 
92.6
%
Redland Corporate Center
3

 
Rockville
 
483,162

 
12,141

 
100.0
%
 
100.0
%
Total Office
16

 
 
 
1,174,333

 
21,799

 
93.2
%
 
92.4
%
Total Consolidated
34

 
 
 
1,884,741

 
31,202

 
92.8
%
 
91.9
%
Unconsolidated Joint Ventures
 
 
 
 
 
 
 
 
 
 
 
Aviation Business Park
3

 
Glen Burnie
 
120,285

 
1,239

 
69.8
%
 
69.8
%
RiversPark I and II
6

 
Columbia
 
307,984

 
3,125

 
70.0
%
 
70.0
%
Total Joint Ventures
9

 
 
 
428,269

 
4,364

 
69.9
%
 
69.9
%
Region Total/Weighted Average
43

 
 
 
2,313,010

 
$
35,566

 
88.5
%
 
87.8
%

(1) 
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 estimated operating expense reimbursements that are included, along with base rent, in the contractual payments of our full service leases. This amount differs from Cash NOI due to items such as rent abatement, unreimbursed expenses, non-recurring revenues and expenses, differences in leased vs. occupied space, and timing differences related to tenant activity.
(2) 
Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court.




34


NORTHERN VIRGINIA REGION
  
Property
Buildings
 
Location
 
Square Feet
 
Annualized
Cash Basis
Rent(1)
 
Leased at
September 30,
2015
 
Occupied at
September 30,
2015
Business Park
 
 
 
 
 
 
 
 
 
 
 
Gateway Centre Manassas(2)
3

 
Manassas
 
102,446

 
$
855

 
85.5
%
 
79.0
%
Linden Business Center(2)
3

 
Manassas
 
109,809

 
846

 
81.2
%
 
81.2
%
Prosperity Business Center(2)
1

 
Merrifield
 
71,373

 
778

 
100.0
%
 
92.5
%
Sterling Park Business Center(3)
7

 
Sterling
 
471,487

 
4,557

 
97.1
%
 
97.1
%
Total Business Park
14

 
 
 
755,115

 
7,036

 
93.5
%
 
91.9
%
Office
 
 
 
 
 
 
 
 
 
 
 
Atlantic Corporate Park
2

 
Sterling
 
218,793

 
3,310

 
82.9
%
 
82.9
%
Cedar Hill(4)
2

 
Tysons Corner
 
102,632

 
2,198

 
100.0
%
 
100.0
%
Enterprise Center(2)
4

 
Chantilly
 
188,933

 
1,756

 
55.0
%
 
55.0
%
Herndon Corporate Center(2)
4

 
Herndon
 
128,359

 
1,376

 
68.7
%
 
68.7
%
One Fair Oaks
1

 
Fairfax
 
214,214

 
5,563

 
100.0
%
 
100.0
%
Reston Business Campus(2)
4

 
Reston
 
82,378

 
932

 
78.9
%
 
78.9
%
Three Flint Hill
1

 
Oakton
 
180,819

 
3,528

 
96.3
%
 
96.3
%
Van Buren Office Park(2)
5

 
Herndon
 
106,683

 
1,032

 
78.2
%
 
78.2
%
1775 Wiehle Avenue
1

 
Reston
 
130,048

 
2,936

 
100.0
%
 
100.0
%
Windsor at Battlefield(2)
2

 
Manassas
 
155,764

 
2,034

 
95.2
%
 
95.2
%
Total Office
26

 
 
 
1,508,623

 
24,665

 
85.6
%
 
85.6
%
Industrial
 
 
 
 
 
 
 
 
 
 
 
Newington Business Park Center(2)
7

 
Lorton
 
255,600

 
2,364

 
83.3
%
 
83.3
%
Plaza 500
2

 
Alexandria
 
500,955

 
4,776

 
87.7
%
 
87.7
%
Total Industrial
9

 
 
 
756,555

 
7,140

 
86.2
%
 
86.2
%
Total Consolidated
49

 
 
 
3,020,293

 
38,841

 
87.7
%
 
87.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
 
 
 
 
 
 
 
 
Northern Virginia land(5)

 
 
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated Joint Venture
 
 
 
 
 
 
 
 
 
 
 
Prosperity Metro Plaza
2

 
Merrifield
 
326,475

 
7,416

 
98.6
%
 
97.9
%
Region Total/Weighted Average
51

 
 
 
3,346,768

 
$
46,257

 
88.8
%
 
88.4
%

(1) 
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 estimated operating expense reimbursements that are included, along with base rent, in the contractual payments of our full service leases. This amount differs from Cash NOI due to items such as rent abatement, unreimbursed expenses, non-recurring revenues and expenses, differences in leased vs. occupied space, and timing differences related to tenant activity.
(2) 
Consistent with our previously announced plan to accelerate the sale of at least $200 million of assets, we have engaged a sales broker to market these assets. In October 2015, we entered into a non-binding contract to sell Newington Business Park, which sale is expected to occur in the fourth quarter of 2015 or in early 2016. However, we can provide no assurances regarding the timing or pricing of these sales, or that such sales will occur at all. At September 30, 2015, we classified Newington Business Park Center as held-for-sale on our consolidated balance sheet.
(3) 
Sterling Park Business Center consists of the following properties: 403/405 Glenn Drive, Davis Drive and Sterling Park Business Center.
(4) 
We identified Cedar Hill as a disposition candidate. We are working with JLL to market the asset, and we have begun the process of identifying potential buyers for the property. We anticipate completing the sale in the first quarter of 2016. However, we can provide no assurances regarding the timing or pricing of the sale, or that such sale will occur at all.
(5) 
During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building in Northern Virginia on vacant land that we have in our portfolio. We currently expect to complete construction of the new building in early 2016 and expect to complete the construction of the tenant improvements in the second half of 2016. However, we can provide no assurance regarding the timing, costs or results of the project.


35


SOUTHERN VIRGINIA REGION

Property
Buildings
 
Location
 
Square Feet
 
Annualized
Cash Basis
Rent(1)
 
Leased at
September 30,
2015
 
Occupied at
September 30,
2015
Business Park
 
 
 
 
 
 
 
 
 
 
 
Battlefield Corporate Center
1

 
Chesapeake
 
96,720

 
$
828

 
100.0
%
 
100.0
%
Crossways Commerce Center(2)
9

 
Chesapeake
 
1,080,487

 
11,659

 
96.3
%
 
96.3
%
Greenbrier Business Park(3)
4

 
Chesapeake
 
411,180

 
4,269

 
91.8
%
 
87.3
%
Norfolk Commerce Park(4)
3

 
Norfolk
 
261,558

 
2,668

 
96.1
%
 
93.7
%
Total Business Park
17

 
 
 
1,849,945

 
19,424

 
95.5
%
 
94.1
%
Office
 
 
 
 
 
 
 
 
 
 
 
Greenbrier Towers
2

 
Chesapeake
 
171,721

 
1,795

 
85.8
%
 
80.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Region Total/Weighted Average
19

 
 
 
2,021,666

 
$
21,219

 
94.6
%
 
93.0
%
 
(1) 
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 estimated operating expense reimbursements that are included, along with base rent, in the contractual payments of our full service leases. This amount differs from Cash NOI due to items such as rent abatement, unreimbursed expenses, non-recurring revenues and expenses, differences in leased vs. occupied space, and timing differences related to tenant activity.
(2) 
Crossways Commerce Center consists of the following properties: Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, Crossways Commerce Center IV and 1434 Crossways Boulevard.
(3) 
Greenbrier Business Park consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II and Greenbrier Circle Corporate Center.
(4) 
Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II and Gateway II.



36


Development and Redevelopment Activity

We will place completed development and redevelopment assets in service upon the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. We own developable land that can accommodate 1.3 million square feet of additional building space, of which, 0.7 million is located in the Washington, D.C. reporting segment, 0.1 million in the Maryland reporting segment, 0.4 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment.

During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building in our Northern Virginia reporting segment on vacant land that we have in our portfolio. We currently anticipate investing approximately $36 million to construct the new building, which excludes tenant improvements, leasing commissions and capitalized interest costs. At the inception of the lease, we anticipated spending approximately $11 million in tenant improvements and approximately $2 million in combined leasing commissions and capitalized interest costs. Subsequently, we entered into an amendment to the original lease, pursuant to which the tenant can exchange, at its option, up to $11.5 million of rent abatement (depending on the amount of additional tenant improvement costs incurred), as stipulated in the original lease, for up to $10.3 million of additional tenant improvement costs. Currently, we anticipate spending between approximately $11 million and $21 million in tenant improvement costs related to the new tenant; however, the specific amount of such costs will depend upon the needs and request of the tenant. We currently expect to complete construction of the new building in early 2016 and expect to complete the construction of the tenant improvements the second half of 2016. However, we can provide no assurance regarding the timing, cost or results of the project. At September 30, 2015, our total investment in the development project, excluding tenant improvement and leasing commission costs, was $18.7 million, which included the original cost basis of the applicable portion of the vacant land of $5.2 million. The majority of the costs incurred as of September 30, 2015 in excess of the original cost basis of the land relate to design and permit fees, site preparation costs, foundation work and completion of the superstructure.

On August 4, 2011, we formed a joint venture, in which we have a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound Lines, Inc. (“Greyhound”), which subsequently relocated its operations. Greyhound’s lease expired on August 31, 2013, at which time the property was placed into development with the anticipation of developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. At September 30, 2015, our total investment in the development project was $57.2 million, which included the original cost basis of the property of $43.3 million. The majority of the costs in excess of the original cost basis relate to architectural fees and site preparation costs, as well as capitalized interest and taxes. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date. While we continue pre-development work on Storey Park, we engaged a sales broker to strategically monetize our majority interest in Storey Park, which could result in a sale of all or a portion of our interest in Storey Park; however, we can provide no assurances regarding the timing or pricing of such transaction, or that a sale will occur at all.

On December 28, 2010, we acquired 440 First Street, NW, a vacant eight-story office building in our Washington, D.C. reporting segment. In October 2013, we substantially completed the redevelopment of the 139,000 square foot property. During the fourth quarter of 2014, all vacant space at the property was placed in service. At September 30, 2015, the property was 67.4% leased and 51.2% occupied. At September 30, 2015, our total investment in the redevelopment project was $55.5 million, which included the original cost basis of the property of $23.6 million.

During the third quarter of 2015, we did not place in-service any completed significant development or redevelopment space. At September 30, 2015, we had no completed development or redevelopment space that have yet to be placed in service.

Lease Expirations

Approximately 9.4% of our annualized cash basis rent is scheduled to expire during the next twelve months, which includes 1.1% of our annualized cash basis rent expiring during the remainder of 2015. We expect replacement rents on leases expiring during the remainder of 2015 to decrease on a cash basis relative to the current rental rates being paid by tenants. Current tenants are not obligated to renew their leases upon the expiration of their terms. If non-renewals or terminations occur, we may not be able to locate qualified replacement tenants and, as a result, could lose a significant source of revenue while remaining responsible for the payment of our financial obligations. Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to us than the current lease terms, or we may be forced to provide tenant improvements at our expense or provide other concessions or additional services to maintain or attract tenants. We continually strive to increase our portfolio occupancy, and the amount of vacant space in our portfolio at any given time may impact our willingness to reduce rental rates or provide greater concessions to retain existing tenants and attract new tenants. We continually monitor our portfolio

37


on a regional and per property basis to assess market trends, including vacancy, comparable deals and transactions, and other business and economic factors that may influence our leasing decisions. Prior to signing a lease with a tenant, we generally assess the prospective tenant’s credit quality through review of its financial statements and tax returns, and the result of that review is a factor in establishing the rent to be charged and/or level of security deposit required. Over the course of our leases, we monitor our tenants to stay aware of any material changes in credit quality. The metrics we use to evaluate a significant tenant’s liquidity and creditworthiness depend on facts and circumstances specific to that tenant and to the industry in which it operates and include the tenant’s credit history and economic conditions related to the tenant, its operations and the markets in which it operates.  These factors may change over time. In addition, our property management personnel have regular contact with tenants and tenant employees and, where the terms of the lease permit and we deem it prudent, we may request tenant financial information for periodic review, review publicly-available financial statements in the case of public company tenants and monitor news and rating agency reports regarding our tenants (or their parent companies) and their underlying businesses. In addition, we regularly analyze account receivable balances as part of the ongoing monitoring of the timeliness of rent collections from tenants.

During the third quarter of 2015, we had a tenant retention rate of 54%. After reflecting all the renewal leases on a triple-net basis to allow for comparability, the weighted average rental rate of our renewed leases increased 15.2% for the three months ended September 30, 2015 and decreased 0.6% for the nine months ended September 30, 2015, compared with the expiring leases on a U.S. generally accepted accounting principles (“GAAP”) basis. During the third quarter of 2015, we executed new leases for approximately 71,000 square feet, with the majority of the new leases (based on square footage) containing rent escalations.

The following table sets forth tenant improvement and leasing commission costs on a rentable square foot basis for all new and renewal leases signed during the nine months ended September 30, 2015:

 
New
 
Renewal
Tenant improvements (per rentable square foot)
$
25.59

 
$
4.75

Leasing commissions (per rentable square foot)
8.27

 
1.95


The following table sets forth a summary schedule of the lease expirations at our consolidated properties for leases in place as of September 30, 2015 (dollars in thousands, except per square foot data):
Year of Lease Expiration(1)(2)
Number of
Leases
Expiring
 
Leased
Square Feet
 
% of Leased
Square Feet
 
Annualized
Cash Basis
Rent(2)
 
% of
Annualized
Cash Basis
Rent
 
Average Base
Rent per
Square
Foot(3)(4)
2015
8

 
78,312

 
1.1
%
 
$
1,263

 
1.1
%
 
$
16.13

2016
65

 
547,619

 
7.7
%
 
11,160

 
9.5
%
 
20.38

2017
88

 
1,164,110

 
16.3
%
 
20,444

 
17.3
%
 
17.56

2018
86

 
791,187

 
11.1
%
 
10,992

 
9.3
%
 
13.89

2019
62

 
887,714

 
12.4
%
 
12,487

 
10.6
%
 
14.07

2020
68

 
1,154,237

 
16.2
%
 
16,591

 
14.0
%
 
14.37

2021
37

 
338,314

 
4.7
%
 
4,564

 
3.9
%
 
13.49

2022
35

 
403,147

 
5.7
%
 
6,040

 
5.1
%
 
14.98

2023
19

 
555,347

 
7.8
%
 
12,411

 
10.5
%
 
22.35

2024
22

 
573,795

 
8.0
%
 
10,147

 
8.6
%
 
17.68

Thereafter
48

 
643,402

 
9.0
%
 
11,949

 
10.1
%
 
18.57

Total / Weighted Average
538

 
7,137,184

 
100.0
%
 
$
118,048

 
100.0
%
 
16.54

 
(1) 
We classify 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. Assumes no exercise of tenant renewal options or early terminations.
(2) 
At September 30, 2015, we had no month-to-month leases.
(3) 
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 estimated operating expense reimbursements that are included, along with base rent, in the contractual payments of our full service leases. This amount differs from Cash NOI due to items such as rent abatement, unreimbursed expenses, non-recurring revenues and expenses, differences in leased vs. occupied space, and timing differences related to tenant activity.
(4) 
Represents annualized cash basis rent at September 30, 2015, divided by the square footage of the expiring leases.

38


We own three single-tenant buildings that have leases expiring in 2016 and 2017 (540 Gaither Road - Department of Health and Human Services, One Fair Oaks - CACI International, and 500 First Street, NW - Bureau of Prisons). In October 2015, we received notice from the Department of Health and Human Services, which fully leases the building at 540 Gaither Road within our Redland Corporate Center property in our Maryland reporting segment, that it will be exercising its early termination right and vacating the building in March of 2017. We underwrote the Department of Health and Human Services exercising its termination right when we acquired the building in 2013. The Bureau of Prisons, which fully leases 500 First Street, NW in our Washington, D.C. reporting segment, and CACI International, which fully leases One Fair Oaks in our Northern Virginia reporting segment, have leases that are scheduled to expire on July 31, 2016 and December 31, 2016, respectively; however, these tenants have not yet indicated whether they intend to renew or terminate their respective leases. We are currently evaluating various strategies, including renewal discussions with the respective tenants at 500 First Street and One Fair Oaks, with the ultimate goal of achieving the best possible outcome upon the expiration of these leases. However, we can provide no assurances regarding the outcome of these renewal discussions or the alternative strategies for such properties.
Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP that require us to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that we deem most important to the portrayal of our financial condition, results of operations and cash flows. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our consolidated financial statements. Our critical accounting policies and estimates relate to revenue recognition, including evaluation of the collectability of accounts and notes receivable, impairment of long-lived assets, purchase accounting for acquisitions of rental property, derivative instruments and share-based compensation.

The following is a summary of certain aspects of these critical accounting policies and estimates.

Revenue Recognition

We generate substantially all of our revenue from leases on our properties. We recognize rental revenue on a straight-line basis over the terms of our leases, which includes fixed-rate renewal periods leased at below market rates at acquisition or inception. Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. We consider current information, credit quality, historical trends, economic conditions and other events regarding the tenants’ ability to pay their obligations in determining if amounts due from tenants, including accrued straight-line rents, are ultimately collectible. The uncollectible portion of the amounts due from tenants, including accrued straight-line rents, is charged to property operating expense in the period in which the determination is made.

Tenant leases generally contain provisions under which the tenants reimburse us for a portion of property operating expenses and real estate taxes incurred by us. Such reimbursements are recognized in the period in which the expenses are incurred. We record a provision for losses on estimated uncollectible accounts receivable based on our analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably assured and we have possession of the terminated space.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements or related disclosures.

Accounts and Notes Receivable

We must make estimates of the collectability of our accounts and notes receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and interest and other income. We specifically analyze accounts receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of our allowance for doubtful accounts receivable. These estimates have a direct impact on our net income as a higher

39


required allowance for doubtful accounts receivable will result in lower net income. The uncollectible portion of the amounts due from tenants, including straight-line rents, is charged to property operating expense in the period in which the determination is made. We consider similar criteria in assessing impairment associated with outstanding loans or notes receivable and whether any allowance for anticipated credit loss is appropriate.

Investments in Rental Property and Rental Property Entities

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

Buildings
 
39 years
Building improvements
 
5 to 20 years
Furniture, fixtures and equipment
 
5 to 15 years
Lease related intangible assets
 
The term of the related lease
Tenant improvements
 
Shorter of the useful life of the asset or the term of the related lease

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

We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. We will cease recording depreciation on a building once it has been classified as held-for-sale. In the second quarter of 2014, we prospectively adopted ASU 2014-08, which impacts the presentation of operations and gains or losses from disposed properties and properties classified as held-for-sale.

If the building does not qualify as a discontinued operation under ASU 2014-08 we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.

If the building does qualify as a discontinued operation under ASU 2014-08, we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the disposed or held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.

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



40


We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our investments in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. We will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. We also capitalize direct compensation costs of our construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. We do not capitalize any other general and administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial during the three months ended September 30, 2015 and 2014. Capitalization of interest ends when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. We place redevelopment and development assets into service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

Purchase Accounting

Acquisitions of rental property, including any associated intangible assets, are measured at fair value at the date of acquisition. Any liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The fair value of the acquired property is allocated between land and building (on an as-if vacant basis) based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the depreciated replacement cost of the tenant improvements, which approximates their fair value. The fair value of the in-place leases is recorded as follows:


the fair value of leases in-place on the date of acquisition is based on absorption costs for the estimated lease-up period in which vacancy and foregone revenue are avoided due to the presence of the acquired leases;

the fair value of above and below-market in-place leases based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the assumed lease and the estimated market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to fourteen years; and

the fair value of intangible tenant or customer relationships.

Our determination of these fair values requires us to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, and depreciation and amortization expense recognized for these leases and associated intangible assets and liabilities.

Derivative Instruments

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

available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;

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

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

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


41


We may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair value. For effective hedging relationships, the effective portion of the change in the fair value of the assets or liabilities is recorded within equity (cash flow hedge) or through earnings (fair value hedge). Ineffective portions of derivative transactions will result in changes in fair value recognized in earnings. For a cash flow hedge, we record our proportionate share of unrealized gains or losses on our derivative instruments associated with our unconsolidated joint ventures within equity and “Investment in affiliates.” We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees.

Share-Based Payments

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. For options awards, we use a Black-Scholes option-pricing model. Expected volatility is based on an assessment of our realized volatility over the preceding period that is equivalent to the award’s expected life. The expected term represents the period of time the options are anticipated to remain outstanding as well as our historical experience for groupings of employees that have similar behavior and considered separately for valuation purposes. For non-vested share awards that vest over a predetermined time period, we use the outstanding share price at the date of issuance to fair value the awards. For non-vested shares awards that vest based on performance conditions, we use a Monte Carlo simulation (risk-neutral approach) to determine the value and derived service period of each tranche. The expense associated with the share-based awards will be recognized over the period during which an employee is required to provide services in exchange for the award - the requisite service period (usually the vesting period). The fair value for all share-based payment transactions are recognized as a component of income or loss from continuing operations.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2015 with the Three and Nine Months Ended September 30, 2014

The term “Comparable Portfolio” refers to all consolidated properties owned by us and in-service, with operating results reflected in our continuing operations, for the entirety of the periods presented. The Comparable Portfolio includes Newington Business Park Center, which was classified as held-for-sale at September 30, 2015. The operating results of Newington Business Park Center are reflected in continuing operations in our consolidated statements of operations for the entirety of the periods presented.

The term “Non-Comparable Properties” refers to properties that we have acquired, sold, placed in-service, or placed in development or redevelopment during the periods presented. The Non-Comparable Properties are comprised of the following properties:

11 Dupont Circle, NW, 1775 Wiehle Avenue and 1401 K Street, NW, which were all acquired subsequent to the first quarter of 2014 for an aggregate purchase price of $188.0 million. We did not acquire any properties during the nine months ended September 30, 2015. For the Results of Operations discussion below, these three properties will collectively be referred to as the “Acquired Properties”;

Rumsey Center, which was sold on July 28, 2015, and Corporate Campus at Ashburn Center and Owings Mills Business Park, which were both sold in 2014 subsequent to our adoption of ASU 2014-08 in the second quarter of 2014. In accordance with ASU 2014-08, the operating results of Rumsey Center, Corporate Campus at Ashburn Center and Owings Mills Business Park are reflected in continuing operations in our consolidated statements of operations for the three and nine months ended September 30, 2014. For the Results of Operations discussion below, these three properties will collectively be referred to as the “Disposed Properties”;

440 First Street, NW, which was fully placed in service in October 2014. The redevelopment of 440 First Street, NW was substantially completed in October 2013; and

Storey Park, which has remained in development for the entirety of the periods presented.
 


42


The operating results for our Richmond, Virginia portfolio, which included Chesterfield Business Center, Hanover Business Center, Park Central, Virginia Technology Center and a three-acre parcel of undeveloped land (the “Richmond Portfolio”), which was sold during the first quarter of 2015, as well as the properties disposed of in 2014 (excluding Corporate Campus at Ashburn Center and Owings Mills Business Park, which have operating results reflected within continuing operations) are reflected as discontinued operations for the periods presented.

For discussion of the operating results of our reporting segments, the terms “Washington, D.C.”, “Maryland”, “Northern Virginia” and “Southern Virginia” will be used to describe the respective reporting segments.

Due to the additional property operating revenues and expenses contributed by the Acquired Properties, we expect that property operating revenues and expenses will both increase for 2015 compared with 2014.

In the tables below, the designation “NM” is used to refer to a percentage that is not meaningful.

Total Revenues

Total revenues are summarized as follows:
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
Change
 
Change
Rental
$
34,828

 
$
31,915

 
$
104,051

 
$
93,967

 
$
2,913

 
9
 %
 
$
10,084

 
11
%
Tenant reimbursements and other
$
8,026

 
$
8,140

 
$
25,690

 
$
24,758

 
$
(114
)
 
(1
)%
 
$
932

 
4
%

Rental Revenue

Rental revenue is comprised of contractual rent, the impact of straight-line revenue and the amortization of deferred market rent assets and liabilities representing above and below market rate leases at acquisition. Rental revenue increased $2.9 million and $10.1 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014, as the Non-Comparable Properties contributed additional revenue of $1.9 million and $7.9 million, respectively, and the Comparable Portfolio contributed additional revenue of $1.0 million and $2.2 million, respectively. The increase in rental revenue from the Non-Comparable Properties for the three and nine months ended September 30, 2015 was comprised of an increase of $1.6 million and $8.6 million, respectively, from the Acquired Properties and an increase of $0.6 million and $1.6 million, respectively, from 440 First Street, NW, which was partially offset by a decrease in rental revenue from the Disposed Properties of $0.3 million and $2.3 million for the three and nine months ended September 30, 2015, respectively. The increase in rental revenue from the Comparable Portfolio was due to an increase in occupancy in the Comparable Portfolio. The weighted average occupancy of the Comparable Portfolio was 90.0% and 89.2% for the three and nine months ended September 30, 2015, respectively, compared with 87.8% and 87.5%, respectively, for the same periods in 2014.

The increase in rental revenue for the three and nine months ended September 30, 2015 compared with the same periods in 2014 includes $2.8 million and $9.4 million, respectively, for Washington, D.C. and $0.3 million and $0.4 million, respectively, for Southern Virginia. Rental revenue for Northern Virginia decreased $0.1 million and increased $0.8 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014. Rental revenue for Maryland decreased $0.1 million and $0.5 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014.

Tenant Reimbursements and Other Revenues

Tenant reimbursements and other revenues include operating and common area maintenance costs reimbursed by our tenants, as well as other incidental revenues such as lease termination payments, parking revenue and joint venture and construction related management fees. Tenant reimbursements and other revenues decreased $0.1 million and increased $0.9 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014. For the three months ended September 30, 2015, the Comparable Portfolio had a $0.4 million decrease in tenant reimbursements and other revenues, compared with the same period in 2014, due to a decline in termination fees, which was partially offset by a $0.3 million increase in tenant reimbursements and other revenues from the Non-Comparable Properties. For the nine months ended September 30, 2015, tenant reimbursements and other revenues increased $0.4 million for the Comparable Portfolio, compared with the same period in 2014, due to an increase in recoverable property operating expenses, and increased

43


$0.5 million for the Non-Comparable Properties. The increases in tenant reimbursements and other revenues of $0.3 million and $0.5 million for the Non-Comparable Properties for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 consisted of an increase of $0.4 million and $1.2 million, respectively, from the Acquired Properties, which was partially offset by a decrease in tenant and other reimbursements of $0.1 million and $0.8 million, respectively, from the Disposed Properties. Tenant reimbursements and other revenues for 440 First Street, NW, a Non-Comparable Property, slightly increased for the three months ended September 30, 2015 and increased $0.1 million for the nine months ended September 30, 2015 compared with the same periods in 2014.

The decrease in tenant reimbursements and other revenues for the three months ended September 30, 2015 compared with the same period in 2014 includes a $0.5 million decrease for Maryland and a $0.1 million decrease for Southern Virginia, which were partially offset by a $0.1 million increase for Washington, D.C. and a $0.4 million increase for Northern Virginia. The increase in tenant reimbursements and other revenues for the nine months ended September 30, 2015 compared with the same period in 2014 includes a $0.8 million increase for Washington D.C. and a $0.6 million increase for Northern Virginia, which were partially offset by a $0.2 million decrease for Maryland and a $0.3 million decrease for Southern Virginia.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows: 

 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
Change
 
Change
Property operating
$
10,901

 
$
10,564

 
$
34,676

 
$
32,825

 
$
337

 
3
%
 
$
1,851

 
6
%
Real estate taxes and insurance
$
4,815

 
$
4,059

 
$
14,668

 
$
12,431

 
$
756

 
19
%
 
$
2,237

 
18
%

Property operating expenses increased $0.3 million and $1.9 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 due to the Non-Comparable Properties, which contributed additional property operating expenses of $0.4 million and $2.3 million for the three and nine months ended September 30, 2015, respectively. The increase in property operating expenses from the Non-Comparable Properties for the three and nine months ended September 30, 2015 was comprised of an increase of $0.5 million and $2.7 million, respectively, from the Acquired Properties and an increase of $0.1 million and $0.3 million, respectively, from 440 First Street, NW and Storey Park, which increases were partially offset by a decrease of $0.2 million and $0.7 million from the Disposed Properties for the three and nine months ended September 30, 2015, respectively. The increases in property operating expenses from the Non-Comparable Properties for the three and nine months ended September 30, 2015 were also partially offset by a decrease in property operating expenses for the Comparable Portfolio of $0.1 million and $0.4 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014.

The increase in property operating expenses for the three and nine months ended September 30, 2015 compared with the same periods in 2014 includes $0.5 million and $2.3 million, respectively, for Washington, D.C. and $0.2 million and $0.4 million, respectively, for Northern Virginia. Property operating expenses for Maryland decreased $0.1 million and increased $0.2 million for the three and nine months ended September 30, 2015, respectively, and property operating expenses for Southern Virginia decreased $0.3 million and $1.0 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014.

Real estate taxes and insurance expense increased $0.8 million and $2.2 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 due to the Non-Comparable Properties, which contributed additional real estate taxes and insurance expense of $0.6 million and $2.1 million for the three and nine months ended September 30, 2015, respectively. The increase in real estate taxes and insurance from the Non-Comparable Properties was comprised of an increase of $0.4 million and $1.6 million for the three and nine months ended September 30, 2015, respectively, from the Acquired Properties and an increase of $0.3 million and $0.9 million for the three and nine months ended September 30, 2015, respectively, from 440 First Street, NW. These increases were partially offset by a decrease of $0.1 million and $0.4 million, respectively, from the Disposed Properties. Real estate taxes and insurance expense for the Comparable Portfolio increased $0.2 million and $0.1 million for the three and nine months ended September 30, 2015 compared with the same period in 2014.

44



The increase in real estate taxes and insurance expense for the three and nine months ended September 30, 2015 compared with the same periods in 2014 includes increases of $0.7 million and $2.4 million, respectively, for Washington, D.C. and an increase of $0.1 million for both periods for Southern Virginia. Real estate taxes and insurance for Maryland decreased $0.1 million and $0.2 million for the three and nine months ended September 30, 2015, respectively, and increased $0.1 million and decreased $0.1 million for the three and nine months ended September 30, 2015, respectively, for Northern Virginia, compared with the same periods in 2014.

Other Operating Expenses

General and administrative expenses are summarized as follows:

 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
2014
 
Change
 
Change
 
Change
 
Change
 
$
4,605

 
$
4,955

 
$
15,110

$
15,370

 
$
(350
)
 
(7
)%
 
$
(260
)
 
(2
)%

General and administrative expenses decreased $0.4 million and $0.3 million for the three and nine months ended September 30, 2015 compared with the same periods in 2014. The decrease in general and administrative expenses for the three and nine months ended September 30, 2015 was primarily due to a reduction in employee compensation costs, including non-cash, share-based compensation expense and placement fees. The decrease in general and administrative fees for the nine months ended September 30, 2015 compared with the same period in 2014 was partially offset by $0.4 million of personnel separation costs incurred during the first quarter of 2015 as a result of moving to a more vertically integrated management structure. We currently anticipate that general and administrative expenses for the remainder of 2015 will be flat. However, as discussed in “Item 1A—Risk Factors” in our Annual Report on Form 10-K, the informal inquiry initiated by the SEC could result in increased legal and/or accounting fees in 2015.

Acquisition costs are summarized as follows:
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
2014
 
Change
 
Change
 
Change
 
Change
 
$

 
$
1,488

 
$

$
2,667

 
$
(1,488
)
 
(100
)%
 
$
(2,667
)
 
(100
)%

We did not acquire any properties during the nine months ended September 30, 2015. During the third quarter of 2014, we acquired 11 Dupont Circle, NW, an eight-story office building in our Washington, D.C. reporting segment for a contractual purchase price of $89.0 million. During the second quarter of 2014, we acquired 1401 K Street, NW, a twelve-story, 117,000 square foot office building located in Washington D.C., for a contractual purchase price of $58.0 million and 1775 Wiehle Avenue, a five-story, 130,000 square foot office building located in Reston, Virginia for a contractual purchase price of $41.0 million.

Depreciation and amortization expense is summarized as follows:
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
2014
 
Change
 
Change
 
Change
 
Change
 
$
16,758

 
$
15,217

 
$
49,909

$
44,357

 
$
1,541

 
10
%
 
$
5,552

 
13
%

Depreciation and amortization expense includes depreciation of rental property and the amortization of intangible assets and leasing commissions. Depreciation and amortization expense increased $1.5 million and $5.6 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014, primarily due to the Non-Comparable Properties, which contributed additional depreciation and amortization expense of $1.1 million and $5.4 million for the three and nine months ended September 30, 2015, respectively. The increase in depreciation and amortization expense from the Non-Comparable Properties was comprised of an increase of $0.8 million and $4.7 million for the three and nine months ended September 30, 2015, respectively, from the Acquired Properties and an increase of $0.7 million and $2.0 million, respectively,

45


from 440 First Street, NW. The increases with respect to the Non-Comparable Properties were partially offset by a decrease of $0.4 million and $1.3 million for the three and nine months ended September 30, 2015, respectively, from the Disposed Properties. For the Comparable Portfolio, depreciation and amortization expense increased $0.4 million and $0.2 million for the three and nine months ended September 30, 2015, respectively, compared with the same period in 2014. Due to the additional depreciation and amortization expense contributed by the Acquired Properties, we expect that depreciation and amortization expense will increase during 2015 compared with 2014.

Impairment of rental property is summarized as follows:

 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
Change
 
Change
 
$

 
$

 
$

 
$
3,956

 
$

 

 
$
(3,956
)
 
(100
)%

In October 2014, we sold Owings Mills Business Park, a four-building business park located in our Maryland reporting segment. We recorded an impairment charge of $4.0 million on the four buildings at Owings Mills Business Park in the second quarter of 2014 based on the fair value of the property, less selling costs. We did not record any other impairment charges within continuing operations for the three and nine months ended September 30, 2015 and 2014.

Other Expenses (Income)

Interest expense is summarized as follows:

 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
Change
 
Change
 
$
6,589

 
$
6,116

 
$
20,222

 
$
17,884

 
$
473

 
8
%
 
$
2,338

 
13
%

Interest expense increased $0.5 million and $2.3 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 due to an aggregate higher average outstanding balance and higher weighted average interest rates on our unsecured revolving credit facility and unsecured term loan. For the three and nine months ended September 30, 2015, our weighted average borrowings under both the unsecured revolving credit facility and the unsecured term loan totaled $464.2 million and $468.9 million, respectively, with a weighted average interest rate of 2.0% for both periods, compared with weighted average borrowings of $425.9 million and $412.0 million for the three and nine months ended September 30, 2014, respectively, with a weighted average interest rate of 1.8% for both periods. The increase in interest expense for the three and nine months ended September 30, 2015 compared with the same periods in 2014 was also attributable to a decrease of $0.5 million and $1.4 million, respectively, in capitalized interest expense, which was due to placing 440 First Street, NW in service in the fourth quarter of 2014. We anticipate interest expense will be higher in 2015 compared with 2014 as a result of higher overall outstanding debt balances and lower capitalized interest expense.

Interest and other income are summarized as follows:

 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
2014
 
Change
 
Change
 
Change
 
Change
 
$
995

 
$
1,684

 
$
5,797

$
5,112

 
$
(689
)
 
(41
)%
 
$
685

 
13
%

On February 24, 2015, the owners of America’s Square, a 461,000 square foot office complex located in Washington, D.C., prepaid a mezzanine loan that had an outstanding balance of $29.7 million. We provided the owners of America’s Square a $30.0 million mezzanine loan in April 2011. We received a yield maintenance payment of $2.4 million with the prepayment of the loan, which is reflected within “Interest and other income” for the nine months ended September 30, 2015 in our consolidated statements of operations.

46


We anticipate that interest and other income will remain relatively flat for the remainder of 2015 compared with 2014, as the yield maintenance payment of $2.4 million associated with the prepayment of the America's Square mezzanine loan in February 2015 will primarily offset the reduction in interest income as a result of the loan’s prepayment.

Equity in earnings of affiliates is summarized as follows:

 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
Change
 
Change
 
$
432

 
$
412

 
$
1,235

 
$
385

 
$
20

 
5
%
 
$
850

 
NM

Equity in earnings of affiliates reflects our aggregate ownership interest in the operating results of the properties in which we do not have a controlling interest.

The increase in income from our unconsolidated joint ventures for the three and nine months ended September 30, 2015 compared with the same periods in 2014 was primarily due to an increase in income from Prosperity Metro Plaza and 1750 H Street, NW, which was due to an increase in occupancy at the properties.

Gain on sale of rental property is summarized as follows:

 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
Change
 
Change
 
$
3,384

 
$

 
$
3,384

 
$
21,230

 
$
3,384

 
NM
 
$
(17,846
)
 
(84
)%

On July 28, 2015, we sold Rumsey Center, a four-building, single-story business park, which is located in our Maryland reporting segment, totaling 135,000 square feet, for net proceeds of $15.0 million and reported a gain on sale of $3.4 million. We used a portion of the net proceeds from the sale of Rumsey Center to fund repurchases of our common shares and the remainder to repay a portion of the outstanding balance of our unsecured revolving credit facility.

On June 26, 2014, we sold Corporate Campus at Ashburn Center, a three-building business park located in Ashburn, Virginia, for net proceeds of $39.9 million and reported a gain on the sale of the property of $21.2 million in the second quarter of 2014. We used the net proceeds from the sale, together with available cash, to acquire 1775 Wiehle Avenue. The operating results and gain on the sale of the Corporate Campus at Ashburn Center are reflected in continuing operations in our consolidated statements of operations for the three and nine months ended September 30, 2014.

We did not record any other gain on sale of rental property within continuing operations during the three and nine months ended September 30, 2015 and 2014.

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations is summarized as follows:
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended  September 30,
 
Nine Months Ended  September 30,
 
 
Percent
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
2014
 
Change
 
Change
 
Change
 
Change
 
$

 
$
297

 
$
(607
)
$
979

 
$
(297
)
 
(100
)%
 
$
(1,586
)
 
NM

Discontinued operations for the periods presented reflect the Richmond Portfolio, which was classified within discontinued operations after our adoption of ASU 2014-08, due to our strategic shift away from the Richmond, Virginia market, as well as disposed properties that were classified as discontinued operations in previously filed consolidated financial statements prior to our adoption of ASU 2014-08. During the first quarter of 2015, we sold our Richmond Portfolio, which included Chesterfield Business Center, Hanover Business Center, Park Central, Virginia Technology Center and a three-acre parcel of

47


undeveloped land for net proceeds of $53.8 million. We recorded a gain on the sale of the portfolio of $0.9 million during the first quarter of 2015. During the first quarter of 2015, we accelerated the amortization of deferred rent abatements, straight-line rents and leasing commissions, which were recorded on the balance sheet of the Richmond Portfolio. The accelerated amortization resulted in an additional $2.0 million of expense during the nine months ended September 30, 2015. As part of the sale of the Richmond Portfolio, we incurred $0.5 million of debt extinguishment charges related to debt that was encumbered by the sold properties.
During the first quarter of 2014, we sold a portfolio of properties that consisted of Girard Business Center and Gateway Center, which were both located in our Maryland reporting segment. We recorded a gain on the sale of the portfolio of $0.1 million during the first quarter of 2014. During the second quarter of 2014, we sold our Patrick Center and West Park properties, which were both located in our Maryland reporting segment, and recorded a net gain of $1.3 million in the second quarter of 2014. We have had, and will have, no continuing involvement with these properties subsequent to their disposal. For more information about our discontinued operations, see note 7 – Dispositions, in the notes to our condensed consolidated financial statements.

Net (income) loss attributable to noncontrolling interests

Net (income) loss attributable to noncontrolling interests is summarized as follows: 

 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Percent
 
 
Percent
(dollars in thousands)
2015
 
2014
 
2015
2014
 
Change
 
Change
 
Change
Change
 
$
(38
)
 
$
131

 
$
189

$
(327
)
 
$
(169
)
 
NM
 
$
516

NM

Net (income) loss attributable to noncontrolling interests reflects the ownership interests in our net income or loss, less amounts owed to our preferred shareholders, attributable to parties other than us. We had net income attributable to common shareholders of $0.9 million and net loss attributable to common shareholders of $4.1 million for the three and nine months ended September 30, 2015, respectively, and we had net loss attributable to common shareholders of $2.9 million and net income attributable to common shareholders of $7.3 million for the three and nine months ended September 30, 2014, respectively. The weighted average percentage of the common Operating Partnership units held by third parties was 4.3% for both the three and nine months ended September 30, 2015 and 2014.

At September 30, 2015, we consolidated the operating results of one joint venture and recognized our joint venture partner’s percentage of gains or losses within “Net (income) loss attributable to noncontrolling interests” in our consolidated statements of operations. The joint venture partners’ aggregate share of earnings in the operating results of our consolidated joint ventures was immaterial during both the three and nine months ended September 30, 2015 and 2014.

Same Property Net Operating Income

Same Property Net Operating Income (“Same Property NOI”), defined as property revenues (rental and tenant reimbursements and other revenues) less property operating expenses (property operating, and real estate taxes and insurance expenses) from the consolidated properties owned by us and in-service for the entirety of the periods presented, is a primary performance measure we use to assess the results of operations at our properties. Same Property NOI is a non-GAAP measure. As an indication of our operating performance, Same Property NOI should not be considered an alternative to net income calculated in accordance with GAAP. A reconciliation of our Same Property NOI to net income from our 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, we eliminate 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 management believes these expenses do not offer the investor significant insight into the operations of the property. This presentation allows management and investors to determine whether growth or declines in net operating income are a result of increases or decreases in property operations or the acquisition or disposition 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 our total performance.




48


Comparison of the Three and Nine Months Ended September 30, 2015 with the Three and Nine Months Ended September 30, 2014

The following table of selected operating data provides the basis for our discussion of Same Property NOI for the periods presented:

CONSOLIDATED
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
(dollars in thousands)
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Number of buildings(1)
106

 
106

 

 

 
104

 
104

 

 

Same property revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
31,946

 
$
31,019

 
$
927

 
3.0

 
$
88,307

 
$
86,132

 
$
2,175

 
2.5

Tenant reimbursements and other
7,421

 
7,306

 
115

 
1.6

 
23,189

 
22,250

 
939

 
4.2

Total same property revenues
39,367

 
38,325

 
1,042

 
2.7

 
111,496

 
108,382

 
3,114

 
2.9

Same property operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property(2)
9,548

 
9,521

 
27

 
0.3

 
28,200

 
27,969

 
231

 
0.8

Real estate taxes and insurance
4,135

 
3,888

 
247

 
6.4

 
11,459

 
11,328

 
131

 
1.2

Total same property operating expenses
13,683

 
13,409

 
274

 
2.0

 
39,659

 
39,297

 
362

 
0.9

Same property net operating income
$
25,684

 
$
24,916

 
$
768

 
3.1

 
$
71,837

 
$
69,085

 
$
2,752

 
4.0

Reconciliation to net income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same property net operating income
$
25,684

 
$
24,916

 
 
 
 
 
$
71,837

 
$
69,085

 
 
 
 
Non-comparable net operating income
1,454

 
516

 
 
 
 
 
8,560

 
4,384

 
 
 
 
General and administrative expenses
(4,605
)
 
(4,955
)
 
 
 
 
 
(15,110
)
 
(15,370
)
 
 
 
 
Depreciation and amortization
(16,758
)
 
(15,217
)
 
 
 
 
 
(49,909
)
 
(44,357
)
 
 
 
 
Other(3)
(1,778
)
 
(5,508
)
 
 
 
 
 
(9,806
)
 
2,220

 
 
 
 
Discontinued operations

 
297

 
 
 
 
 
(607
)
 
979

 
 
 
 
Net income
$
3,997

 
$
49

 
 
 
 
 
$
4,965

 
$
16,941

 
 
 
 

 
Weighted Average Occupancy
For the Three Months Ended September 30,
 
Weighted Average Occupancy
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Same Properties
90.0
%
 
87.8
%
 
89.2
%
 
87.5
%

(1) 
Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same property results for the three and nine months ended September 30, 2015 and 2014 exclude the operating results of the following non-comparable properties that were owned as of September 30, 2015: 440 First Street, NW, Storey Park, and 11 Dupont Circle, NW. Same property results for the nine months ended September 30, 2015 and 2014 also exclude 1401 K Street, NW and 1775 Wiehle Avenue.
(2) 
Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.
(3) 
Combines acquisition costs, impairment of rental property and total other expenses (income) from our consolidated statements of operations.

Same Property NOI increased $0.8 million and $2.8 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014. Total same property revenues increased $1.0 million and $3.1 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014, primarily due to an increase in occupancy. Total same property operating expenses increased $0.3 million and $0.4 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 due to an increase in operating expenses related to higher occupancy.


49


Washington, D.C.
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
(dollars in thousands)
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Number of buildings(1)
4

 
4

 

 

 
3

 
3

 

 

Same property revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
6,015

 
$
5,521

 
$
494

 
8.9

 
$
14,451

 
$
13,136

 
$
1,315

 
10.0

Tenant reimbursements and other
2,090

 
2,085

 
5

 
0.2

 
5,934

 
5,879

 
55

 
0.9

Total same property revenues
8,105

 
7,606

 
499

 
6.6

 
20,385

 
19,015

 
1,370

 
7.2

Same property operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property(2)
1,920

 
2,073

 
(153
)
 
(7.4
)
 
4,790

 
4,552

 
238

 
5.2

Real estate taxes and insurance
1,351

 
1,217

 
134

 
11.0

 
3,253

 
3,071

 
182

 
5.9

Total same property operating expenses
3,271

 
3,290

 
(19
)
 
(0.6
)
 
8,043

 
7,623

 
420

 
5.5

Same property net operating income:
$
4,834

 
$
4,316

 
$
518

 
12.0

 
$
12,342

 
$
11,392

 
$
950

 
8.3

Reconciliation to total property operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same property net operating income
$
4,834

 
$
4,316

 
 
 
 
 
$
12,342

 
$
11,392

 
 
 
 
Non-comparable net operating income
1,526

 
399

 
 
 
 
 
6,098

 
1,396

 
 
 
 
Total property operating income
$
6,360

 
$
4,715

 
 
 
 
 
$
18,440

 
$
12,788

 
 
 
 
 
Weighted Average Occupancy
For the Three Months Ended September 30,
 
Weighted Average Occupancy
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Same Properties
93.9
%
 
88.2
%
 
96.0
%
 
90.8
%

(1) 
Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same property results for the three and nine months ended September 30, 2015 and 2014 exclude the operating results of the following non-comparable properties that were owned as of September 30, 2015: 440 First Street, NW, Storey Park, and 11 Dupont Circle, NW. Same property results for the nine months ended September 30, 2015 and 2014 also exclude 1401 K Street, NW.
(2) 
Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.


Same Property NOI for the Washington, D.C. properties increased $0.5 million and $1.0 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014. For the three and nine months ended September 30, 2015, total same property revenues increased $0.5 million and $1.4 million, respectively, compared with the same periods in 2014 as a result of an increase in occupancy at both 1211 Connecticut Avenue, NW and 840 First Street, NE. Total same property operating expenses slightly decreased for the three months ended September 30, 2015 compared with the same period in 2014 due to a decrease in anticipated bad debt reserves, which was partially offset by an increase in real estate taxes, due to higher property assessments. Total same property operating expenses increased $0.4 million for the nine months ended September 30, 2015 compared with the same period in 2014 due to an increase in real estate taxes due to higher property assessments.

 

50


Maryland
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
(dollars in thousands)
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Number of buildings(1)
34

 
34

 

 

 
34

 
34

 

 

Same property revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
8,961

 
$
8,786

 
$
175

 
2.0

 
$
26,510

 
$
26,113

 
$
397

 
1.5

Tenant reimbursements and other
1,362

 
1,530

 
(168
)
 
(11.0
)
 
5,290

 
5,032

 
258

 
5.1

Total same property revenues
10,323

 
10,316

 
7

 
0.1

 
31,800

 
31,145

 
655

 
2.1

Same property operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property(2)
2,318

 
2,175

 
143

 
6.6

 
8,379

 
7,726

 
653

 
8.5

Real estate taxes and insurance
882

 
850

 
32

 
3.8

 
2,592

 
2,642

 
(50
)
 
(1.9
)
Total same property operating expenses
3,200

 
3,025

 
175

 
5.8

 
10,971

 
10,368

 
603

 
5.8

Same property net operating income
$
7,123

 
$
7,291

 
$
(168
)
 
(2.3
)
 
$
20,829

 
$
20,777

 
$
52

 
0.3

Reconciliation to total property operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same property net operating income
$
7,123

 
$
7,291

 
 
 
 
 
$
20,829

 
$
20,777

 
 
 
 
Non-comparable net operating income (loss)
92

 
367

 
 
 
 
 
676

 
1,401

 
 
 
 
Total property operating income
$
7,215

 
$
7,658

 
 
 
 
 
$
21,505

 
$
22,178

 
 
 
 
 
Weighted Average Occupancy
For the Three Months Ended September 30,
 
Weighted Average Occupancy
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Same Properties
91.6
%
 
89.6
%
 
91.0
%
 
88.0
%

(1) 
Same property comparisons are based upon those consolidated properties owned or in-service for the entirety of the periods presented.
(2) 
Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.



Same Property NOI for the Maryland properties decreased $0.2 million for the three months ended September 30, 2015 compared with the same period in 2014 and increased $0.1 million for the nine months ended September 30, 2015 compared with the same period in 2014. Total same property revenues slightly increased for the three months ended September 30, 2015 and increased $0.7 million for the nine months ended September 30, 2015 compared with the same periods in 2014 due to an increase in occupancy. Total same property operating expenses increased $0.2 million for the three months ended September 30, 2015 compared with the same period in 2014 due to an increase in operating expenses related to higher occupancy. Total same property operating expenses increased $0.6 million for the nine months ended September 30, 2015 compared with the same period in 2014 due to an increase in anticipated bad debt reserves. Total same property operating expenses also increased for the nine months ended September 30, 2015 compared with the same period in 2014 due to an increase in snow and ice removal costs in the first quarter of 2015.


51


 
Northern Virginia
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
(dollars in thousands)
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Number of buildings(1)
49

 
49

 

 

 
48

 
48

 

 

Same property revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
10,942

 
$
10,962

 
$
(20
)
 
(0.2
)
 
$
29,535

 
$
29,434


$
101

 
0.3

Tenant reimbursements and other
2,770

 
2,348

 
422

 
18.0

 
8,443

 
7,559


884

 
11.7

Total same property revenues
13,712

 
13,310

 
402

 
3.0

 
37,978

 
36,993


985

 
2.7

Same property operating expenses
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Property(2)
3,286

 
2,981

 
305

 
10.2

 
9,519

 
9,293


226

 
2.4

Real estate taxes and insurance
1,284

 
1,228

 
56

 
4.6

 
3,811

 
3,925


(114
)
 
(2.9
)
Total same property operating expenses
4,570

 
4,209

 
361

 
8.6

 
13,330

 
13,218


112

 
0.8

Same property net operating income
$
9,142

 
$
9,101

 
$
41

 
0.5

 
$
24,648

 
$
23,775


$
873

 
3.7

Reconciliation to total property operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same property net operating income
$
9,142

 
$
9,101

 
 
 
 
 
$
24,648

 
$
23,775

 
 
 
 
Non-comparable net operating income
(59
)
 
(141
)
 
 
 
 
 
2,100

 
1,927

 
 
 
 
Total property operating income
$
9,083

 
$
8,960

 
 
 
 
 
$
26,748

 
$
25,702

 
 
 
 
 
Weighted Average Occupancy
For the Three Months Ended September 30,
 
Weighted Average Occupancy
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Same Properties
86.8
%
 
85.9
%
 
86.3
%
 
85.4
%

(1) 
Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same property results for the nine months ended September 30, 2015 and 2014 exclude the operating results of the following non-comparable property that was owned as of September 30, 2015: 1775 Wiehle Avenue.
(2) 
Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.


Same Property NOI for the Northern Virginia properties slightly increased for the three months ended September 30, 2015 compared with the same period in 2014 and increased $0.9 million for the nine months ended September 30, 2015 compared with the same period in 2014. Total same property revenues increased $0.4 million and $1.0 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 as a result of an increase in occupancy at Atlantic Corporate Park. Total same property operating expenses increased $0.4 million and $0.1 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 due to an increase in operating expenses related to higher occupancy.


52


Southern Virginia
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
(dollars in thousands)
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Number of buildings(1)
19

 
19

 

 

 
19

 
19

 

 

Same property revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
6,028

 
$
5,750

 
$
278

 
4.8

 
$
17,811

 
$
17,449

 
$
362

 
2.1

Tenant reimbursements and other
1,199

 
1,343

 
(144
)
 
(10.7
)
 
3,522

 
3,780

 
(258
)
 
(6.8
)
Total same property revenues
7,227

 
7,093

 
134

 
1.9

 
21,333

 
21,229

 
104

 
0.5

Same property operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property(2)
2,024

 
2,292

 
(268
)
 
(11.7
)
 
5,512

 
6,398

 
(886
)
 
(13.8
)
Real estate taxes and insurance
618

 
593

 
25

 
4.2

 
1,803

 
1,690

 
113

 
6.7

Total same property operating expenses
2,642

 
2,885

 
(243
)
 
(8.4
)
 
7,315

 
8,088

 
(773
)
 
(9.6
)
Same property net operating income
$
4,585

 
$
4,208

 
$
377

 
9.0

 
$
14,018

 
$
13,141

 
$
877

 
6.7

Reconciliation to total property operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same property net operating income
$
4,585

 
$
4,208

 
 
 
 
 
$
14,018

 
$
13,141

 
 
 
 
Non-comparable net operating loss
(105
)
 
(109
)
 
 
 
 
 
(314
)
 
(340
)
 
 
 
 
Total property operating income
$
4,480

 
$
4,099

 
 
 
 
 
$
13,704

 
$
12,801

 
 
 
 
 
Weighted Average Occupancy
For the Three Months Ended September 30,
 
Weighted Average Occupancy
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Same Properties
92.0
%
 
88.6
%
 
90.0
%
 
89.2
%

(1) 
Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented.
(2) 
Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Southern Virginia properties increased $0.4 million and $0.9 million for three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014. Total same property revenues increased $0.1 million for both the three and nine months ended September 30, 2015 compared with the same periods in 2014 as a result of an increase in occupancy at both Crossways Boulevard and Greenbrier Circle. Total same property operating expenses decreased $0.2 million and $0.8 million for the three and nine months ended September 30, 2015, respectively, compared with the same periods in 2014 primarily due to a decrease in anticipated bad debt reserves.


53


Liquidity and Capital Resources

Overview

We seek to maintain a flexible balance sheet, with an appropriate balance of cash, debt, equity and available funds under our unsecured revolving credit facility, to readily provide access to capital given the volatility of the market and to position us to take advantage of potential growth opportunities. As previously disclosed, we sold the Richmond Portfolio in the first quarter of 2015 for net proceeds of $53.8 million, which reflected the prepayment of $3.7 million of mortgage and other indebtedness secured by the properties, including $0.5 million of associated prepayment penalties. The majority of the remaining net proceeds from the sale were used to repay $48.0 million of the outstanding balance under our unsecured revolving credit facility. On July 28, 2015, we sold Rumsey Center, a four-building, single-story business park totaling 135,000 square feet, which is located in Columbia, Maryland, for net proceeds of $15.0 million. We used a portion of the net proceeds from the sale of Rumsey Center to fund the repurchase our common shares and the remainder to repay a portion of the outstanding balance of our unsecured revolving credit facility.

In July 2015, our Board of Trustees authorized a share repurchase program that allows us to acquire up to five million of our common shares of beneficial interest from time to time through July 2016 in open market transactions at prevailing prices or in negotiated private transactions. During the three months ended September 30, 2015, we repurchased 924,198 shares at a weighted-average share price of $10.99 for a total purchase price of $10.2 million. As of the date of this filing, we are authorized to repurchase an additional 4.1 million of our common shares. We are not obligated to acquire any particular amount of common shares and the share repurchase program may be suspended by the Board of Trustees at any time.

As previously disclosed, after thorough evaluation and discussion with the Board or Trustees, we implemented a plan designed to improve performance and create shareholder value by commencing a process to accelerate the sale of at least $200 million of assets. We are exploring the sale of Storey Park, as well as non-core assets and those assets where we feel we have maximized value. We intend to utilize the proceeds from dispositions to repurchase common shares under our share repurchase program, redeem our 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares, in whole or in part, beginning in late January 2016 and/or repay outstanding indebtedness.

We expect to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on our unsecured revolving credit facility. Our short-term obligations consist primarily of the lease for our corporate headquarters, normal recurring operating expenses, regular debt payments, recurring expenditures for corporate and administrative needs, non-recurring expenditures such as capital improvements, tenant improvements and redevelopments, leasing commissions and dividends to preferred and common shareholders.

At September 30, 2015, we had $155.0 million outstanding under our unsecured revolving credit facility. On July 21, 2015, we repaid $64.2 million of consolidated mortgage debt with a draw under our unsecured revolving credit facility. As of the date of this filing, we had $155.0 million outstanding and $142.0 million of availability under our unsecured revolving credit facility. In the next 12 months, we have a $32.2 million construction loan maturing, which has two one-year extension options at our discretion and has a borrowing capacity of up to $43.5 million. We also have a $22.0 million land loan maturing, which has a one-year extension option at our discretion. We can repay all or a portion of both the construction and land loan, without penalty, at any time during the term of the applicable loan.

We own three single-tenant buildings that have leases expiring in 2016 and 2017 (540 Gaither Road - Department of Health and Human Services, One Fair Oaks - CACI International, and 500 First Street, NW - Bureau of Prisons). In October 2015, we received notice from the Department of Health and Human Services, which fully leases the building at 540 Gaither Road within our Redland Corporate Center property in our Maryland reporting segment, that it will be exercising its early termination right and vacating the building in March of 2017. We underwrote the Department of Health and Human Services exercising its termination right when we acquired the building in 2013. The Bureau of Prisons, which fully leases 500 First Street, NW in our Washington, D.C. reporting segment, and CACI International, which fully leases One Fair Oaks in our Northern Virginia reporting segment, have leases that are scheduled to expire on July 31, 2016 and December 31, 2016, respectively; however, these tenants have not yet indicated whether they intend to renew or terminate their respective leases. We are currently evaluating various strategies, including renewal discussions with the respective tenants at 500 First Street and One Fair Oaks, with the ultimate goal of achieving the best possible outcome upon the expiration of these leases. However, we can provide no assurances regarding the outcome of these renewal discussions or the alternative strategies for such properties.

Over the next twelve months, we believe that we will generate sufficient cash flow from operations and have access to the capital resources, through debt and equity markets, necessary to expand and develop our business, to fund our operating and administrative expenses, to continue to meet our debt service obligations and to pay distributions in accordance with REIT

54


requirements. However, our cash flow from operations and ability to access the debt and equity markets could be adversely affected due to uncertain economic factors and volatility in the financial and credit markets. In particular, we cannot assure that our tenants will not default on their leases or fail to make full rental payments if their businesses are challenged due to, among other things, the economic conditions (particularly if the tenants are unable to secure financing to operate their businesses). This may be particularly true for our tenants that are smaller companies. Further, approximately 9.4% of our annualized cash basis rent is scheduled to expire during the next twelve months and, if we are unable to renew these leases or re-lease the space, our cash flow could be negatively impacted.

We also believe, based on our historical experience and forecasted operations, that we will have sufficient cash flow or access to capital to meet our obligations over the next five years. We intend to meet our long-term funding requirements for property acquisitions, development, redevelopment and other non-recurring capital improvements through net cash provided from operations, long-term secured and unsecured indebtedness, including borrowings under our unsecured revolving credit facility and unsecured term loan, proceeds from disposal of strategically identified assets (outright or through joint ventures) and/or the issuance of equity and/or debt securities. In the process of exploring different financing options, we actively monitor the impact that each potential financing decision will have on our financial covenants in order to avoid any issues of non-compliance with the terms of our existing financial covenants.

Our ability to raise funds through sales of debt and equity securities and access to other third party sources of capital in the future will be dependent on, among other things, general economic conditions, general market conditions for REITs, rental rates, occupancy levels, market perceptions and the trading price of our shares. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but the capital markets may not be consistently available on terms we deem attractive, or at all.

Financial Covenants

Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. As of September 30, 2015, we were in compliance with the covenants of our unsecured term loan, unsecured revolving credit facility, the 440 First Street Construction Loan, the Northern Virginia Construction Loan and Storey Park land loan.

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

55



Below is a summary of certain financial covenants associated with these debt agreements at September 30, 2015 (dollars in thousands):

Unsecured Revolving Credit Facility, Unsecured Term Loan, Construction Loans and Storey Park Land Loan
Covenants
Quarter Ended September 30, 2015
 
Covenant
Consolidated Total Leverage Ratio(1)
47.8%
 
≤ 60%
Tangible Net Worth(1)
$901,898
 
≥ $601,202
Fixed Charge Coverage Ratio(1)
2.24x
 
≥ 1.50x
Maximum Dividend Payout Ratio
66.6%
 
≤ 95%
Restricted Investments:
 
 
 
Joint Ventures
5.6%
 
≤ 15%
Real Estate Assets Under Development
1.1%
 
≤ 15%
Undeveloped Land
1.0%
 
≤ 5%
Structured Finance Investments
2.0%
 
≤ 5%
Total Restricted Investments
4.0%
 
≤ 25%
Restricted Indebtedness:
 
 
 
Maximum Secured Debt
20.9%
 
≤ 40%
Unencumbered Pool Leverage(1)
43.6%
 
≤ 60%
Unencumbered Pool Interest Coverage Ratio(1)
5.73x
 
≥ 1.75x
 
(1) 
These are the only covenants that apply to our 440 First Street, NW construction loan, Northern Virginia Construction Loan and our Storey Park land loan and, in each case, are calculated in accordance with the amended and restated unsecured revolving credit facility.

Cash Flows

Due to the nature of our business, we rely on working capital and net cash provided by operations and, if necessary, borrowings under our unsecured revolving credit facility to fund our short-term liquidity needs. Net cash provided by operations is substantially dependent on the continued receipt of rental payments and other expenses reimbursed by our tenants. The ability of tenants to meet their obligations, including the payment of rent contractually owed to us, and our ability to lease space to new or replacement tenants on favorable terms, could affect our cash available for short-term liquidity needs. We intend to meet short and long term funding requirements for debt maturities, interest payments, dividend distributions, repurchases of our common shares and capital expenditures through cash flow provided by operations, long-term secured and unsecured indebtedness, including borrowings under our unsecured revolving credit facility, proceeds from asset dispositions and/or the issuance of equity and/or debt securities. However, we may not be able to obtain capital from such sources on favorable terms, in the time period we desire, or at all. In addition, our continued ability to borrow under our existing debt instruments is subject to compliance with our financial and operating covenants and a failure to comply with such covenants could cause a default under the applicable debt agreement. In the event of a default, we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all.

We may also fund building acquisitions, development, redevelopment and other non-recurring capital improvements through additional borrowings, issuance of common Operating Partnership units or sales of assets, outright or through joint ventures.

Consolidated cash flow information is summarized as follows:

 
Nine Months Ended September 30,
 
(dollars in thousands)
2015
 
2014
 
Change
Net cash provided by operating activities
$
42,740

 
$
45,414

 
$
(2,674
)
Net cash provided by (used in) investing activities
51,544

 
(108,779
)
 
160,323

Net cash (used in) provided by financing activities
(94,732
)
 
66,618

 
(161,350
)



56



Net cash provided by operating activities decreased $2.7 million for the nine months ended September 30, 2015 compared with the same period in 2014, primarily due to the timing of cash payments and receipts, as we had an increase in straight-line rents and a decrease in rents received in advance. The decrease in net cash provided by operating activities was partially offset by an increase in net operating income for the nine months ended September 30, 2015 compared with the same period in 2014, which was due to higher occupancy in our portfolio.

Net cash provided by investing activities was $51.5 million for the nine months ended September 30, 2015 compared with cash used in investing activities of $108.8 million for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, we received aggregate net proceeds of $71.9 million from the sale of Rumsey Center and the sale of the Richmond Portfolio, which does not include cash used to prepay $3.2 million of mortgage and other indebtedness debt secured by the Richmond Portfolio. For the nine months ended September 30, 2014, we acquired three properties for an aggregate purchase price of $150.7 million, which excludes the assumption of a $37.3 million mortgage loan, and sold four properties for aggregate net proceeds of $85.3 million. During the nine months ended September 30, 2015, the owners of America’s Square prepaid a mezzanine loan that had an outstanding balance of $29.7 million. The proceeds from the loan repayment were used to pay down a portion of the outstanding balance of our unsecured revolving credit facility. For the nine months ended September 30, 2014, we used cash to fund a $9.0 million increase in the existing mezzanine loan to the owners of 950 F Street, NW, which was provided by a draw under our unsecured revolving credit facility. The increase in cash provided by investing activities for the nine months ended September 30, 2015 compared with the same period in 2014 was partially offset by a $15.1 million combined increase in cash used for construction activities and additions to rental property and furniture, fixtures and equipment, which was primarily driven by tenant improvement costs at Atlantic Corporate Park in our Northern Virginia region, as well as costs incurred for the to-be-constructed 167,000 square foot office building that is currently in development in Northern Virginia.

Net cash used in financing activities was $94.7 million for the nine months ended September 30, 2015 compared with net cash provided by financing activities of $66.6 million for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, we incurred $181.0 million of debt and repaid $226.2 million of outstanding debt, and during the nine months ended September 30, 2014, we issued $209.8 million of debt and the repaid $106.1 million of outstanding debt. The increase in net cash used in financing activities for the nine months ended September 30, 2015 also includes $10.2 million of cash used to repurchase 0.9 million common shares during the third quarter of 2015.

Contractual Obligations

As of September 30, 2015, we had contractual construction in progress obligations, which included amounts accrued at September 30, 2015, of $22.1 million. The amount of contractual construction in progress obligations are primarily related to development activities for the to-be-constructed building in our Northern Virginia reporting segment. As of September 30, 2015, we had contractual rental property and furniture, fixtures and equipment obligations of $10.5 million outstanding, which included amounts accrued at September 30, 2015. The amount of contractual rental property and furniture, fixtures and equipment obligations at September 30, 2015 included significant tenant improvement costs for leases at both the to-be-constructed building at our development project in Northern Virginia and at Cedar Hill, which are both located in our Northern Virginia reporting segment. We anticipate meeting our contractual obligations related to our construction activities with cash from our operating activities. In the event cash from our operating activities is not sufficient to meet our contractual obligations, we can access additional capital through our unsecured revolving credit facility.

We remain liable, solely to the extent of our proportionate ownership percentage, to fund any capital shortfalls or commitments from properties owned through unconsolidated joint ventures.

We have various obligations to certain local municipalities associated with our development projects that will require completion of specified site improvements, such as sewer and road maintenance, grading and other general landscaping work. As of September 30, 2015, we remained liable to those local municipalities for $2.6 million in the event that we do not complete the specified work. We intend to complete the site improvements in satisfaction of these obligations.

We had no other material contractual obligations as of September 30, 2015.

Distributions

We are required to distribute at least 90% of our REIT taxable income to our shareholders in order to maintain qualification as a REIT, including some types of taxable income we recognize for tax purposes but with regard to which we do not receive corresponding cash. In addition, we must distribute 100% of our taxable income to our shareholders to eliminate our U.S. federal income tax liability. The funds we use to pay dividends on our common and preferred shares are provided through distributions

57


from the Operating Partnership. For each of our common and preferred shares, the Operating Partnership has issued a corresponding common and preferred unit to us. We are the sole general partner of and, as of September 30, 2015, owned 100% of the preferred interest and 95.7% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership are limited partnership interests, some of which are owned by two of our executive officers and one of our trustees each of whom contributed certain properties and other assets to us upon our formation, and the remainder of which are owned by other unrelated parties. The Operating Partnership is required to make cash distributions to us in an amount sufficient to meet our distribution requirements. The cash distributions by the Operating Partnership reduce the amount of cash that is available for general corporate purposes, which includes repayment of debt, funding acquisitions or construction activities, and for other corporate operating activities.

On a quarterly basis, our management team recommends a distribution amount that must then be approved by our Board of Trustees in its sole discretion. The amount of future distributions will be at the discretion of our Board of Trustees and will be based on, among other things: (i) the taxable income and cash flow generated by our operating activities; (ii) cash generated by, or used in, our financing and investing activities; (iii) the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended; and (iv) such other factors as the Board of Trustees deems relevant. Our ability to make cash distributions will also be limited by the covenants contained in our Operating Partnership agreement and our financing arrangements as well as limitations imposed by state law and the agreements governing any future indebtedness. See “—Financial Covenants” above and “Item 1A – Risk Factors – Risks Related to Our Business and Properties – Covenants in our debt agreements could adversely affect our liquidity and financial condition” in Part I, Item 1A in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2014 for additional information regarding the financial covenants.

Dividends

On October 27, 2015, we 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 16, 2015 to common shareholders of record as of November 9, 2015. We also declared a dividend of $0.484375 per share on our Series A Preferred Shares. The dividend will be paid on November 16, 2015 to preferred shareholders of record as of November 9, 2015.

Funds From Operations

Funds from operations (“FFO”), which is a non-GAAP measure used by many investors and analysts that follow the public real estate industry, represents net income (computed in accordance with U.S. generally accepted accounting principles (“GAAP”)), excluding gains (losses) on sales of rental property and impairments of rental property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We also exclude from our FFO calculation, the impact related to third parties from our consolidated joint venture. FFO available to common shareholders is calculated as FFO less accumulated dividends on our preferred shares for the applicable periods presented.

We consider FFO and FFO available to common shareholders useful measures of performance for an equity real estate investment trust (“REIT”) as they facilitate an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assume that the value of rental property diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance. We also consider FFO an appropriate supplemental performance measure given its wide use by investors and analysts. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which may differ from the methodology for calculating FFO, or similarly title measures, utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for our 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 our cash needs, including our ability to make distributions. Our methodology for computing FFO adds back noncontrolling interests in the income from our Operating Partnership in determining FFO. We believe this is appropriate as common Operating Partnership units are presented on an as-converted, one-for-one basis for shares of stock in determining FFO per diluted share. FFO available to common shareholders is calculated as FFO less accumulated dividends on our preferred shares for all periods presented.

Our presentation of FFO in accordance with the NAREIT’s definition should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.





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The following table presents a reconciliation of net income (loss) attributable to common shareholders to FFO and FFO available to common shareholders and unitholders (dollars in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income attributable to First Potomac Realty Trust
$
3,959

 
$
180

 
$
5,154

 
$
16,614

Less: Dividends on preferred shares
(3,100
)
 
(3,100
)
 
(9,300
)
 
(9,300
)
Net income (loss) attributable to common shareholders
859

 
(2,920
)
 
(4,146
)
 
7,314

Add: Depreciation and amortization:
 
 
 
 
 
 
 
Rental property
16,758

 
15,217

 
49,909

 
44,357

Discontinued operations

 
783

 
1,222

 
2,853

Unconsolidated joint ventures
1,006

 
1,004

 
3,049

 
3,307

Impairment of rental property(1)

 

 

 
3,956

Gain on sale of rental property(2)
(3,384
)
 

 
(4,241
)
 
(22,568
)
Net income (loss) attributable to noncontrolling interests in the Operating Partnership
38

 
(131
)
 
(186
)
 
327

FFO available to common shareholders and unitholders
15,277

 
13,953

 
45,607

 
39,546

Dividends on preferred shares
3,100

 
3,100

 
9,300

 
9,300

FFO
$
18,377

 
$
17,053

 
$
54,907

 
$
48,846

Weighted average common shares and Operating Partnership units outstanding – diluted
60,664

 
60,882

 
60,857

 
60,839


(1) 
Impairment charges of $4.0 million are included in continuing operations in our consolidated statements of operations for the nine months ended September 30, 2014 related to the sale of four buildings at Owings Mills Business Park.
(2) 
Includes gains on the sale of property that are classified within continuing operations and gains on the sale of property that are classified within discontinued operations in our consolidated statements of operations. For more information, see note 7 - Dispositions.

Off-Balance Sheet Arrangements

We are secondarily liable for $2.8 million of mortgage debt, which represents our proportionate share of the mortgage debt that is secured by two properties, which we own through two unconsolidated joint ventures. Management believes the fair value of the potential liability to us is inconsequential as the likelihood of our need to perform under the debt agreement is remote. See note 6, Investment in Affiliates, in the notes to our condensed consolidated financial statements for more information.

ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. In the normal course of business, we are exposed to the effect of interest rate changes. We have historically entered into derivative agreements to mitigate a portion of our exposure to unexpected changes in interest. Market risk refers to the risk of loss from adverse changes in market interest rates. We periodically use derivative financial instruments to seek to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency.

We had $768.2 million of debt outstanding at September 30, 2015, of which $249.8 million was fixed rate debt and $300.0 million was hedged variable rate debt. The remainder of our debt, $218.4 million, was unhedged variable rate debt that consisted of $155.0 million under the unsecured revolving credit facility, a $22.0 million loan that encumbers the Storey Park land, a $32.2 million outstanding balance under the 440 First Street Construction Loan and a $9.2 million outstanding balance under the Northern Virginia Construction Loan. At September 30, 2015, both the Storey Park land loan and the 440 First Street Construction Loan had a contractual interest rate of LIBOR plus 2.50%, and the Northern Virginia Construction Loan had a contractual interest rate of LIBOR plus 1.85%. At September 30, 2015, LIBOR was 0.19%. A change in interest rates of 1% would result in an increase or decrease of $2.2 million in interest expense on our unhedged variable rate debt on an annualized basis.


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The table below summarizes our interest rate swap agreements as of September 30, 2015 (dollars in thousands): 
Maturity Date
 
Notional
Amount
 
Interest Rate
Contractual
Component
 
Fixed LIBOR
Interest Rate
July 2016
 
$
35,000

 
LIBOR
 
1.754
%
July 2016
 
25,000

 
LIBOR
 
1.763
%
July 2017
 
30,000

 
LIBOR
 
2.093
%
July 2017
 
30,000

 
LIBOR
 
2.093
%
July 2017
 
25,000

 
LIBOR
 
1.129
%
July 2017
 
12,500

 
LIBOR
 
1.129
%
July 2017
 
50,000

 
LIBOR
 
0.955
%
July 2018
 
12,500

 
LIBOR
 
1.383
%
July 2018
 
30,000

 
LIBOR
 
1.660
%
July 2018
 
25,000

 
LIBOR
 
1.394
%
July 2018
 
25,000

 
LIBOR
 
1.135
%
Total/Weighted Average
 
$
300,000

 
 
 
1.505
%

For fixed rate debt, changes in interest rates generally affect the fair value of debt but not our earnings or cash flow. See note 10, Fair Value Measurements, in the notes to our condensed consolidated financial statements for more information on the fair value of our debt.


ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION
Item 1. Legal Proceedings

We are subject to legal proceedings and claims arising in the ordinary course of our business. In the opinion of our management, as of September 30, 2015, we were not involved in any material litigation, nor, to management’s knowledge, is any material litigation threatened against us or the Operating Partnership.

Item 1A. Risk Factors

As of September 30, 2015, there were no material changes to our risk factors previously disclosed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.


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

Unregistered Sales of Equity Securities

We did not sell any unregistered equity securities during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, 11,508 common Operating Partnership units were redeemed with available cash. No common Operating Partnership units were redeemed for common shares during the nine months ended September 30, 2015.
 
Issuer Purchases of Equity Securities

In July 2015, our Board of Trustees authorized a share repurchase program that allows us to acquire up to five million of our common shares from time to time through July 2016 in open market transactions at prevailing prices or in negotiated private transactions. We are not obligated to acquire any particular amount of common shares and the share repurchase program may be suspended by the Board of Trustees at any time. During the quarter ended September 30, 2015, we repurchased 924,198 shares at a weighted-average share price of $10.99. As of the date of this release, we had 57.8 million common shares outstanding.

The following table summarizes all of the repurchases during the three months ended September 30, 2015.
 
Period
Total Number of
Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number Of
Shares Purchased
As Part Of Publicly
Announced Plans
Or Programs
 
Maximum Number
Of Shares That May
Yet Be Purchased
Under The Plans Or
Programs
July 1, 2015 through July 31, 2015

 
$

 
N/A

 
5,000,000

August 1, 2015 through August 31, 2015
529,405

 
11.32

 
529,405

 
4,470,595

September 1, 2015 through September 30, 2015
394,793

 
10.56

 
394,793

 
4,075,802

Total
924,198

 
$
10.99

 
924,198

 
4,075,802

 
    


Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information

Not applicable.


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Item 6. Exhibits
  
No.
 
Description
3.1
 
First Amended and Restated Declaration of Trust of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-11 (Registration No. 333-107172) filed on October 1, 2003).
3.2
 
Articles Supplementary designating the Company’s 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per share (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed on January 18, 2011 (File No. 001-31824)).
3.3
 
Articles Supplementary establishing additional shares of the Company’s 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per share (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2012 (File No. 001-31824)).
3.4
 
Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (Registration No. 333-107172) filed on October 1, 2003).
4.1
 
Form of share certificate evidencing the Company’s Common Shares (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (Registration No. 333-120821) filed on November 30, 2004).
4.2
 
Form of share certificate evidencing the Company’s 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per share (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed on January 18, 2011 (File No. 001-31824)).
31.1*
 
Section 302 Certification of Chief Executive Officer.
31.2*
 
Section 302 Certification of Chief Financial Officer.
32.1**
 
Section 906 Certification of Chief Executive Officer.
32.2**
 
Section 906 Certification of Chief Financial Officer.

101*
  
XBRL (Extensible Business Reporting Language). The following materials from the First Potomac Realty Trust’s Quarterly Report on Form 10-Q for the period ended September 30, 2015, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014; (ii) Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2015 and 2014; (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014; and (v) Notes to Condensed Consolidated Financial Statements (unaudited).
 
 
 
*
Filed herewith.
**
Furnished herewith.
 
 



62


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
FIRST POTOMAC REALTY TRUST
 
 
 
Date: October 29, 2015
 
 
 
/s/ Douglas J. Donatelli
 
 
 
 
Douglas J. Donatelli
 
 
 
 
Chief Executive Officer
 
 
 
Date: October 29, 2015
 
 
 
/s/ Andrew P. Blocher
 
 
 
 
Andrew P. Blocher
 
 
 
 
Executive Vice President and Chief Financial Officer


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