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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.








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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.


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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