Attached files
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EX-31.1 - EX-31.1 - FIRST POTOMAC REALTY TRUST | w76175exv31w1.htm |
EX-32.1 - EX-32.1 - FIRST POTOMAC REALTY TRUST | w76175exv32w1.htm |
EX-32.2 - EX-32.2 - FIRST POTOMAC REALTY TRUST | w76175exv32w2.htm |
EX-31.2 - EX-31.2 - FIRST POTOMAC REALTY TRUST | w76175exv31w2.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009.
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to .
Commission File Number 1-31824
FIRST POTOMAC REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND | 37-1470730 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
7600 Wisconsin Avenue, 11th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(301) 986-9200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2 of the Exchange Act)
YES o NO þ
YES o NO þ
As of November 6, 2009, there were 30,046,790 common shares, par value $0.001 per share,
outstanding.
FIRST POTOMAC REALTY TRUST
FORM 10-Q
INDEX
Page | ||||
Part I: Financial Information |
||||
Item 1. Financial Statements |
||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
23 | ||||
41 | ||||
42 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
2
FIRST POTOMAC REALTY TRUST
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
September 30, 2009 | December 31, 2008 | |||||||
(unaudited) | (as adjusted see | |||||||
footnote 2 (q)) | ||||||||
Assets: |
||||||||
Rental property, net |
$ | 961,340 | $ | 994,913 | ||||
Cash and cash equivalents |
11,968 | 16,352 | ||||||
Escrows and reserves |
9,141 | 8,808 | ||||||
Accounts and other receivables, net of
allowance for doubtful accounts of $2,050 and
$935, respectively |
6,257 | 6,872 | ||||||
Accrued straight-line rents, net of allowance
for doubtful accounts of $1,034 and $575,
respectively |
10,424 | 8,727 | ||||||
Investment in affiliate |
1,909 | | ||||||
Deferred costs, net |
17,619 | 17,165 | ||||||
Prepaid expenses and other assets |
9,835 | 6,365 | ||||||
Intangible assets, net |
15,089 | 21,047 | ||||||
Total assets |
$ | 1,043,582 | $ | 1,080,249 | ||||
Liabilities: |
||||||||
Mortgage loans |
$ | 291,747 | $ | 322,846 | ||||
Exchangeable senior notes, net |
48,485 | 80,435 | ||||||
Senior notes |
75,000 | 75,000 | ||||||
Secured term loans |
100,000 | 100,000 | ||||||
Unsecured revolving credit facility |
99,400 | 75,500 | ||||||
Financing obligation |
4,157 | 11,491 | ||||||
Accounts payable and other liabilities |
15,465 | 18,022 | ||||||
Accrued interest |
3,780 | 2,491 | ||||||
Rents received in advance |
5,924 | 4,812 | ||||||
Tenant security deposits |
5,031 | 5,243 | ||||||
Deferred market rent, net |
6,393 | 8,489 | ||||||
Total liabilities |
655,382 | 704,329 | ||||||
Noncontrolling interests in the Operating
Partnership (redemption value of $8,470 and $7,186,
respectively) |
9,800 | 10,627 | ||||||
Shareholders equity: |
||||||||
Common shares, $0.001 par value, 100,000 common
shares authorized: 29,966 and 27,353 shares
issued and outstanding, respectively |
30 | 27 | ||||||
Additional paid-in capital |
509,807 | 484,825 | ||||||
Accumulated other comprehensive loss |
(2,394 | ) | (3,823 | ) | ||||
Dividends in excess of accumulated earnings |
(129,043 | ) | (115,736 | ) | ||||
Total shareholders equity |
378,400 | 365,293 | ||||||
Total liabilities, noncontrolling interests and
shareholders equity |
$ | 1,043,582 | $ | 1,080,249 | ||||
See accompanying notes to consolidated financial statements.
3
FIRST POTOMAC REALTY TRUST
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(as adjusted see | (as adjusted see | |||||||||||||||
footnote 2 (q)) | footnote 2 (q)) | |||||||||||||||
Revenues: |
||||||||||||||||
Rental |
$ | 27,149 | $ | 25,491 | $ | 80,885 | $ | 75,316 | ||||||||
Tenant reimbursements and other |
5,725 | 5,577 | 18,134 | 16,304 | ||||||||||||
Total revenues |
32,874 | 31,068 | 99,019 | 91,620 | ||||||||||||
Operating expenses: |
||||||||||||||||
Property operating |
8,149 | 7,160 | 24,518 | 20,091 | ||||||||||||
Real estate taxes and insurance |
3,183 | 3,173 | 9,709 | 9,122 | ||||||||||||
General and administrative |
3,609 | 2,797 | 9,487 | 8,336 | ||||||||||||
Depreciation and amortization |
10,132 | 9,113 | 30,183 | 27,373 | ||||||||||||
Total operating expenses |
25,073 | 22,243 | 73,897 | 64,922 | ||||||||||||
Operating income |
7,801 | 8,825 | 25,122 | 26,698 | ||||||||||||
Other expenses (income): |
||||||||||||||||
Interest expense |
7,929 | 8,635 | 24,368 | 27,302 | ||||||||||||
Interest and other income |
(150 | ) | (142 | ) | (406 | ) | (377 | ) | ||||||||
Equity in losses of affiliate |
38 | | 92 | | ||||||||||||
Gain on early retirement of debt |
(640 | ) | | (6,346 | ) | (3,006 | ) | |||||||||
Total other expenses |
7,177 | 8,493 | 17,708 | 23,919 | ||||||||||||
Income from continuing operations |
624 | 332 | 7,414 | 2,779 | ||||||||||||
Discontinued operations: |
||||||||||||||||
Income from operations of disposed property |
| | | 1,335 | ||||||||||||
Gain on sale of disposed property |
| | | 14,274 | ||||||||||||
Income from discontinued operations |
| | | 15,609 | ||||||||||||
Net income |
624 | 332 | 7,414 | 18,388 | ||||||||||||
Less: Net income attributable to noncontrolling interests in the Operating Partnership |
(16 | ) | (10 | ) | (202 | ) | (567 | ) | ||||||||
Net income attributable to common shareholders |
$ | 608 | $ | 322 | $ | 7,212 | $ | 17,821 | ||||||||
Net income attributable to common shareholders per share basic and diluted: |
||||||||||||||||
Income from continuing operations |
$ | 0.02 | $ | 0.01 | $ | 0.25 | $ | 0.10 | ||||||||
Income from discontinued operations |
| | | 0.63 | ||||||||||||
Net income |
$ | 0.02 | $ | 0.01 | $ | 0.25 | $ | 0.73 | ||||||||
Weighted average common shares outstanding
basic |
28,134 | 24,150 | 27,434 | 24,121 | ||||||||||||
Weighted average common shares outstanding
diluted |
28,231 | 24,204 | 27,502 | 24,172 |
See accompanying notes to consolidated financial statements.
4
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
(as adjusted see | ||||||||
footnote 2 (q)) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 7,414 | $ | 18,388 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Discontinued operations: |
||||||||
Gain on sale of property |
| (14,274 | ) | |||||
Depreciation and amortization |
| 479 | ||||||
Depreciation and amortization |
30,828 | 28,025 | ||||||
Stock based compensation |
2,226 | 1,459 | ||||||
Bad debt expense |
1,780 | 216 | ||||||
Amortization of deferred market rent |
(1,107 | ) | (1,364 | ) | ||||
Amortization of deferred financing costs and bond discount |
2,010 | 2,407 | ||||||
Amortization of rent abatement |
1,329 | 1,120 | ||||||
Equity in losses of affiliate |
92 | | ||||||
Change in financing obligation |
(320 | ) | | |||||
Gain on early retirement of debt |
(6,347 | ) | (3,006 | ) | ||||
Changes in assets and liabilities: |
||||||||
Escrows and reserves |
(1,580 | ) | 4,657 | |||||
Accounts and other receivables |
(905 | ) | (157 | ) | ||||
Accrued straight-line rents |
(2,188 | ) | (1,635 | ) | ||||
Prepaid expenses and other assets |
(1,661 | ) | (1,537 | ) | ||||
Tenant security deposits |
(176 | ) | (24 | ) | ||||
Accounts payable and accrued expenses |
1,797 | 1,096 | ||||||
Accrued interest |
1,374 | 1,755 | ||||||
Rents received in advance |
1,200 | 591 | ||||||
Deferred costs |
(4,585 | ) | (6,290 | ) | ||||
Total adjustments |
23,767 | 13,518 | ||||||
Net cash provided by operating activities |
31,181 | 31,906 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of real estate assets |
| 50,573 | ||||||
Purchase deposit on future acquisitions |
(2,500 | ) | | |||||
Additions to rental property |
(17,818 | ) | (18,090 | ) | ||||
Additions to construction in progress |
(905 | ) | (9,533 | ) | ||||
Acquisition of rental property and associated intangible assets |
| (46,573 | ) | |||||
Net cash used in investing activities |
(21,223 | ) | (23,623 | ) | ||||
Cash flows from financing activities: |
||||||||
Financing costs |
(1 | ) | (1,090 | ) | ||||
Proceeds from debt |
31,500 | 192,300 | ||||||
Proceeds from the issuance of stock, net |
22,277 | 38,165 | ||||||
Repayments of debt |
(47,026 | ) | (209,428 | ) | ||||
Dividends to shareholders |
(20,520 | ) | (24,892 | ) | ||||
Distributions to noncontrolling interests |
(572 | ) | (795 | ) | ||||
Redemption of partnership units |
| (80 | ) | |||||
Stock option exercises |
| 38 | ||||||
Net cash used in financing activities |
(14,342 | ) | (5,782 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(4,384 | ) | 2,501 | |||||
Cash and cash equivalents, beginning of period |
16,352 | 5,198 | ||||||
Cash and cash equivalents, end of period |
$ | 11,968 | $ | 7,699 | ||||
See accompanying notes to consolidated financial statements.
5
FIRST POTOMAC REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
First Potomac Realty Trust (the Company) is a self-managed, self-administered real estate
investment trust that focuses on owning, operating, developing and redeveloping business parks and
industrial properties in the Washington, D.C. metropolitan area and other major markets in Maryland
and Virginia, which it refers to as the Southern Mid-Atlantic region. The Company separates its
properties into three distinct segments, which it refers to as the Maryland, Northern Virginia and
Southern Virginia reporting segments. The Company strategically focuses on acquiring and
redeveloping properties that it believes can benefit from its intensive property management and
seeks to reposition these properties to increase their profitability and value. The Companys
portfolio of properties contains a mix of single-tenant and multi-tenant business parks and
industrial properties. Business parks combine office building features with industrial property
space, while industrial properties generally are used as warehouse, distribution or manufacturing
facilities.
The Company conducts its business through First Potomac Realty Investment Limited Partnership;
the Companys operating partnership (the Operating Partnership). At September 30, 2009, the
Company was the sole general partner of, and owned a 97.6% interest in, the Operating Partnership.
The remaining interests in the Operating Partnership, which are presented as noncontrolling
interests in the accompanying unaudited consolidated financial statements, are limited partnership
interests, which are owned by several of the Companys executive officers and trustees who
contributed properties and other assets to the Company upon its formation, and other unrelated
parties.
As of September 30, 2009, the Companys consolidated portfolio totaled approximately 12
million square feet and the Companys properties were 86.6% occupied by 591 tenants. As of
September 30, 2009, the Companys largest tenant was the U.S. Government, which along with
government contractors, accounted for approximately 20% of the Companys total annualized rental
revenue. The Company also owned land that can accommodate approximately 1.4 million square feet of
additional development. The Company derives substantially all of its revenue from leases of space
within its properties. The Company operates so as to qualify as a real estate investment trust
(REIT) for federal income tax purposes.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The unaudited consolidated financial statements of the Company include the accounts of the
Company, the Operating Partnership, the subsidiaries of the Operating Partnership, a 25 percent
owned joint venture that owns RiversPark I and First Potomac Management LLC, a wholly-owned
subsidiary that manages the Companys properties. All intercompany balances and transactions have
been eliminated in consolidation.
The Company has condensed or omitted certain information and footnote disclosures
normally included in consolidated financial statements presented in accordance with U.S. generally
accepted accounting principles (GAAP) in the accompanying unaudited consolidated financial
statements. The Company believes the disclosures made are adequate to prevent the information
presented from being misleading. However, the unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto included in the
Companys annual report on Form 10-K for the year ended December 31, 2008 and as updated from time
to time in other filings with the Securities and Exchange Commission (SEC).
In the Companys opinion, the accompanying unaudited consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to
present fairly its financial position as of September 30, 2009, the results of its operations for
the three and nine months ended September 30, 2009 and 2008 and its cash flows for the nine months
ended September 30, 2009 and 2008. 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. We have evaluated all subsequent events through November 6, 2009,
the filing date of these consolidated financial statements.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires
management of the Company to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of
6
contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and
expenses during the period. Estimates include the amount of accounts receivable that may be
uncollectible; future cash flows, discount and cap rate assumptions used to value acquired
properties and to test impairment of certain long-lived assets and goodwill; market lease rates,
lease-up periods and leasing and tenant improvement costs used to value intangible assets acquired.
Actual results could differ from those estimates.
The United States stock and credit markets have experienced significant price volatility,
dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate
substantially and the spreads on prospective debt financings to widen considerably. These
circumstances have materially impacted liquidity in the financial markets, making terms for certain
financings less attractive, and in certain cases have resulted in the unavailability of certain
types of financing. These disruptions in the financial markets may have a material adverse effect
on the market value of our common shares and may have a material impact on the estimates discussed
above.
(c) Revenue Recognition
The Company generates substantially all of its revenue from leases on its business parks and
industrial properties. The Company recognizes rental revenue on a straight-line basis over the life
of its leases. Accrued straight-line rents represent the difference between rental revenue
recognized on a straight-line basis over the term of the respective lease agreements and the rental
payments contractually due for leases that contain abatement or fixed periodic increases. The
Company considers current information, credit quality, historical trends, economic conditions and
other events regarding the tenants ability to pay their obligations in determining if amounts due
from tenants, including accrued straight-line rents, are ultimately collectible. The uncollectible
portion of the amounts due from tenants, including accrued straight-line rents, is charged to
property operating expense in the period in which the determination is made.
Tenant leases generally contain provisions under which the tenants reimburse the Company for a
portion of property operating expenses and real estate taxes incurred by the Company. Such
reimbursements are recognized in the period that the expenses are incurred. The Company records a
provision for losses on estimated uncollectible accounts receivable based on its analysis of risk
of loss on specific accounts. Lease termination fees are recognized on the date of termination
when the related lease or portion thereof is cancelled, collectability is reasonably assured and
the Company has possession of the terminated space. The Company recognized lease termination fees
included in other income of $5 thousand and $106 thousand for the three and nine months ended
September 30, 2009, respectively, and $45 thousand and $863 thousand for the three and nine months
ended September 30, 2008, respectively.
Concurrent with the Companys August and September 2008 acquisitions of Triangle Business
Center and RiversPark I, respectively, the former owner entered into master lease agreements for
vacant space that was not producing rent at the time of the acquisitions. Payments received under
the master lease agreements are recorded as a reduction to rental property rather than as rental
income as the payments were determined to be a reduction in the purchase consideration at the time
of acquisition. Payments received under these master lease agreements totaled $0.1 million and $0.3
million for the three and nine months ended September 30, 2009, respectively. The Company did not
receive any payments under these master lease agreements for the three months ended September 30,
2008.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the
date of purchase to be cash equivalents.
(e) Escrows and Reserves
Escrows and reserves represent cash restricted for debt service, real estate taxes, insurance,
capital items and tenant security deposits.
(f) Rental Property
Rental property is carried at historical cost less accumulated depreciation and, when
appropriate, impairment losses. Improvements and replacements are capitalized at historical 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
7
recorded on a straight-line basis over the estimated useful lives of the assets. The estimated
useful lives of the Companys assets, by class, are as follows:
Buildings
|
39 years | |
Building improvements
|
5 to 15 years | |
Furniture, fixtures and equipment
|
5 to 15 years | |
Tenant improvements
|
Shorter of the useful lives of the assets or the terms of the related leases |
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions or changes in managements
intended holding period indicate a possible impairment of the value of a property, an impairment
analysis is performed. The Company assesses the recoverability based on an estimate of the future
undiscounted cash flows (excluding interest charges) expected to result from the propertys use and
eventual disposition. This estimate is based on projections of future revenues, expenses, capital
improvement costs, expected holding periods and cap rates. These cash flows consider factors such
as expected future operating income, market trends and 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 forecast undiscounted cash flows, an impairment
loss is recorded to the extent that the carrying value exceeds the estimated fair value of the
property. The Company is required to make estimates as to whether there are impairments in the
values of its investments in real estate. The Company did not record any impairment to its real
estate assets during the nine months ended September 30, 2009 and 2008.
The Company will classify a building as held-for-sale in the period in which it has made the
decision to dispose of the building, a binding agreement to purchase the property has been signed
under which the buyer has committed a significant amount of nonrefundable cash and no significant
financing contingencies exist that could cause the transaction not to be completed in a timely
manner. If these criteria are met, the Company will record an impairment loss if the fair value,
less anticipated selling costs, is lower than the carrying amount of the property. The Company will
classify any impairment loss, together with the buildings operating results, as discontinued
operations in its statements of operations and classify the assets and related liabilities as
held-for-sale on its consolidated balance sheets. Interest expense is reclassified to discontinued
operations only to the extent the held-for-sale property is secured by specific mortgage debt and
the mortgage debt will not be transferred to another property owned by the Company after the
disposition.
The Company recognizes the fair value, if sufficient information exists to reasonably estimate
the fair value, of any liability for conditional asset retirement obligations when incurred, which
is generally upon acquisition, construction, development or redevelopment and/or through the normal
operation of the asset.
The Company capitalizes interest costs incurred on qualifying expenditures for real estate
assets under development or redevelopment while being readied for their intended use in accordance
with accounting requirements regarding capitalization of interest cost. The Company will capitalize
interest when qualifying expenditures for the asset have been made, activities necessary to get the
asset ready for its intended use are in progress and interest costs are being incurred. Capitalized
interest also includes interest associated with expenditures incurred to acquire developable land
while development activities are in progress. Capitalization of interest will end when the asset is
substantially complete and ready for its intended use, but no later than one year from cession of
major construction activity, if the property is not occupied. Total interest expense capitalized to
construction in progress was $0.1 million and $0.3 million for the three and nine months ended
September 30, 2009, respectively, and $0.4 million and $1.2 million for the three and nine months
ended September 30, 2008, respectively. Capitalized interest is depreciated over the useful life of
the underlying assets, commencing when those assets are placed into service.
(g) Purchase Accounting
Acquisitions of rental property from third parties are accounted for at fair value, which is
allocated between land and building (on an as-if vacant basis) based on managements estimate of
the fair value of those components for each type of property and to tenant improvements based on
the depreciated replacement cost of the tenant improvements, which approximates their fair value.
The purchase price is also allocated as follows:
■ | the value of leases in-place on the date of acquisition based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred; |
8
■ | the value of above and below market in-place leases based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the lease and the estimated fair market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to fourteen years; and | ||
■ | the intangible value of tenant or customer relationships. |
The Companys determination of these values requires it to estimate market rents for each of
the leases and make certain other assumptions. These estimates and assumptions affect the rental
revenue, and depreciation and amortization expense recognized for these leases and associated
intangible assets and liabilities.
(h) Investment in Affiliate
The Company may continue to grow its portfolio by entering into joint venture agreements with
third parties. The structure of the joint venture will affect the Companys accounting treatment
for the joint venture as the Company adheres to requirements regarding consolidation of variable
interest entities. When the Companys investment in a joint venture meets the requirements for the
equity accounting method, it will record its initial investment on its consolidated balance sheets
as Investment in Affiliate. The initial investment in the joint venture is adjusted to recognize
the Companys share of earnings, losses and distributions received from the joint venture. The
Companys respective share of all earnings or losses from the joint venture will be recorded on its
consolidated statements of operations as Equity in Earnings or Losses of Affiliate.
When the Company is deemed to have a controlling interest in a joint venture, it will
consolidate all of the joint ventures assets, liabilities and operating results within its
consolidated financial statements. The cash contributed to the consolidated joint venture by the
third party, if any, will be reflected in the liability section of the Companys consolidated
balance sheets under Financing Obligation. The amount will be recorded based on the third partys
initial investment in the consolidated joint venture and will be adjusted to reflect the third
partys share of earnings or losses in the consolidated joint venture and for any distributions
received by the third party from the joint venture. The earnings or losses from the joint venture
attributable to the third party are recorded as interest expense on the Financing Obligation within
the Companys consolidated statements of operations. All distributions received by the Company from
the consolidated joint venture will be recorded as an increase in the Financing Obligation.
(i) Sales of Real Estate
The Company accounts for sales of real estate in accordance with the requirements for full
profit recognition, which occurs when the sale is consummated, the buyer has made adequate initial
and continuing investments in the property, the Companys receivable is not subject to future
subordination, and the seller does not have a substantial continuing involvement with the property,
the related assets and liabilities are removed from the balance sheet and the resultant gain or
loss is recorded in the period the sale is consummated. For sales transactions that do not meet the
criteria for full profit recognition, the Company accounts for the transactions as partial sales or
financing arrangements required by GAAP. For sales transactions with continuing involvement after
the sale, if the continuing involvement with the property is limited by the terms of the sales
contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss
related to the nature of the continuing involvement. Sales to entities in which the Company has or
receives an interest are accounted for as partial sales.
For sales transactions that do not meet sale criteria, the Company evaluates the nature of the
continuing involvement, including put and call provisions, if present, and accounts for the
transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other
alternate method of accounting rather than as a sale, based on the nature and extent of the
continuing involvement. Some transactions may have numerous forms of continuing involvement. In
those cases, the Company determines which method is most appropriate based on the substance of the
transaction.
If the Company has an obligation to repurchase the property at a higher price or at a future
indeterminable value (such as fair market value), or it guarantees the return of the buyers
investment or a return on that investment for an extended period, the Company accounts for such
transaction as a financing transaction. If the Company has an option to repurchase the property at
a higher price and it is likely it will exercise this option, the transaction is accounted for as a
financing transaction. For transactions treated as financings, the Company records the amounts
received from the buyer as a Financing Obligation and continues to consolidate the property and its
operating results in its consolidated statements of operations. The results of operations of the
property are allocated to the joint venture partner for their equity interest and reflected as
interest expense on the Financing Obligation.
9
(j) Intangible Assets
Intangible assets include the value of acquired tenant or customer relationships and the value
of in-place leases at acquisition. Customer relationship values are determined based on the
Companys evaluation of the specific characteristics of each tenants lease and its overall
relationship with the tenant. Characteristics the Company considers include the nature and
extent of its existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenants credit quality and expectations of lease renewals. The
value of customer relationship intangible assets is amortized to expense over the lesser of the
initial lease term and any expected renewal periods or the remaining useful life of the building.
The Company determines the fair value of the in-place leases at acquisition by estimating the
leasing commissions avoided by having in-place tenants and the operating income that would have
been lost during the estimated time required to lease the space occupied by existing tenants at the
acquisition date. The cost of acquiring existing tenants is amortized to expense over the initial
term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the
in-place lease value is charged to expense by the date of termination.
Deferred market rent liability consists of the acquired leases with below-market rents at the
date of acquisition. The value attributed to deferred market rent assets, which consist of
above-market rents at the date of acquisition, is recorded as a component of deferred costs. Above
and below market lease values are determined on a lease-by-lease basis based on the present value
(using a discounted rate that reflects the risks associated with the acquired leases) of the
difference between the contractual rent amounts to be paid under the lease and the estimated fair
market lease rates for the corresponding spaces over the remaining non-cancelable terms of the
related leases including any below-market fixed rate renewal periods. The capitalized below-market
lease values are amortized as an increase to rental revenue over the initial term and any
below-market fixed-rate renewal periods of the related leases. Capitalized above-market lease
values are amortized as a decrease to rental revenue over the initial term of the related leases.
The total accumulated amortization of intangible assets was $30.5 million and $29.0 million at
September 30, 2009 and December 31, 2008, respectively.
In conjunction with the Companys initial public offering and related formation transactions,
First Potomac Management, Inc. contributed all of the capital interests in First Potomac Management
LLC, the entity that manages the Companys properties, to the Operating Partnership. The $2.1
million fair value of the in-place workforce acquired has been classified as goodwill and is
included as a component of intangible assets on the consolidated balance sheets. In accordance with
accounting requirements regarding goodwill and other intangibles, all acquired goodwill that
relates to the operations of a reporting unit and is used in determining the fair value of a
reporting unit is allocated to the Companys appropriate reporting unit in a reasonable and
consistent manner. The Company assesses goodwill for impairment annually at the end of its fiscal
year and in interim periods if certain events occur indicating the carrying value may be impaired.
The Company performs its analysis for potential impairment of goodwill in accordance with GAAP,
which requires that a two-step impairment test be performed on goodwill. In the first step, the
fair value of the reporting unit is compared with its carrying value. If the fair value exceeds its
carrying value, goodwill is not impaired, and no further testing is required. If the carrying
value of the reporting unit exceeds its fair value, then a second step must be performed in order
to determine the implied fair value of the goodwill and compare it to the carrying value of the
goodwill. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is
recorded equal to the difference. No impairment losses were recognized during the nine months ended
September 30, 2009 and 2008.
(k) Derivatives and Hedging
In the normal course of business, the Company is exposed to the effect of interest rate
changes. The Company may enter into derivative agreements to mitigate exposure to unexpected
changes in interest rates and may use interest rate protection or cap agreements to reduce the
impact of interest rate changes. The Company intends to enter into derivative agreements only with
counterparties that it believes have a strong credit rating to mitigate the risk of counterparty
default or insolvency.
The Company may designate a derivative as either a hedge of the cash flows from a debt
instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt
instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair
value. For effective hedging relationships, the change in the fair value of the assets or
liabilities is recorded in Accumulated Other Comprehensive Income (Loss), an element of
shareholders equity (cash flow hedge), or through earnings, along with the change in fair value of
the asset or liability being hedged (fair value hedge). Ineffective portions of derivative
transactions will result in changes in fair value recognized in earnings. The Company incorporates
credit valuation adjustments to appropriately reflect both its own nonperformance risk and the
respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair
value of its derivative contracts for the effect of nonperformance risk, the Company has considered
the impact of netting any applicable credit enhancements, such as collateral postings, thresholds,
mutual inputs and guarantees.
10
(l) Income Taxes
The Company has elected to be taxed as a REIT. To maintain its status as a REIT, the Company
is required to distribute at least 90% of its ordinary taxable income annually to its shareholders
and meet other organizational and operational requirements. As a REIT, the Company will not be
subject to federal income tax and any non-deductible excise tax if it distributes at least 100% of
its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any
taxable
year, it will be subject to federal income tax on its taxable income at regular corporate tax
rates. The Company had a taxable REIT subsidiary that was inactive for the nine months ended
September 30, 2009 and 2008.
(m) Noncontrolling Interests
Noncontrolling interests relate to the interests in the Operating Partnership not owned by the
Company. Interests in the Operating Partnership are owned by limited partners who contributed
buildings and other assets to the Operating Partnership in exchange for Operating Partnership
units. Limited partners have the right to tender their units for redemption in exchange for, at the
Companys option, common shares of the Company on a one-for-one basis or cash based on the value of
the Companys common shares at the date of redemption. Unitholders receive a distribution per unit
equivalent to the dividend per common share.
Noncontrolling interests are recorded based on 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 loss and distributions received. Differences
between amounts paid to redeem noncontrolling interests and their carrying values are charged or
credited to shareholders equity. As a result of the redemption feature of the Operating
Partnership units, the noncontrolling interests are recorded outside of permanent equity.
At December 31, 2008, 2.7% of the total outstanding Operating Partnership units were not owned
by the Company. For the nine months ended September 30, 2009, the Company issued 2.1 million common
shares through its controlled equity offering agreement, which resulted in the issuance in an
equivalent amount of Operating Partnership units. During the third quarter of 2009, 40,000
Operating Partnership units were redeemed for 40,000 common shares valued at $0.5 million. At
September 30, 2009, 732,712 Operating Partnership units, or 2.4% of the total outstanding Operating
Partnership units were not owned by the Company. There were no Operating Partnership units
purchased with available cash during the nine months ended September 30, 2009. Based on the
closing share price of the Companys common stock at September 30, 2009, the cost to acquire,
through cash purchase or issuance of the Companys common shares, all of the outstanding Operating
Partnership units not owned by the Company would be approximately $8.5 million.
(n) Earnings Per Share
Basic earnings per share (EPS), is calculated by dividing net income available to common
shareholders by the weighted average common shares outstanding for the period. Diluted EPS is
computed after adjusting the basic EPS computation for the effect of dilutive common equivalent
shares outstanding during the period. The effect of stock options, non-vested shares and
Exchangeable Senior Notes, if dilutive, is computed using the treasury stock method. In September
2008, new accounting guidance was issued regarding whether instruments granted in share-based
payment transactions are participating securities. As a result of the Companys outstanding
unvested shares with non-forfeitable dividend rights, which are considered participating
securities, it has applied the two-class method of determining EPS. The Companys excess of
distributions over earnings related to participating securities are shown as a reduction in income
available to common shareholders in the Companys computation of EPS.
11
The following table sets forth the computation of the Companys basic and diluted earnings per
share (amounts in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator for basic and diluted earnings per share
calculations: |
||||||||||||||||
Income from continuing operations |
$ | 624 | $ | 332 | $ | 7,414 | $ | 2,779 | ||||||||
Income from discontinued operations |
| | | 15,609 | ||||||||||||
Net income |
624 | 332 | 7,414 | 18,388 | ||||||||||||
Less: Net income attributable to
noncontrolling interests in the
Operating Partnership |
(16 | ) | (10 | ) | (202 | ) | (567 | ) | ||||||||
Net income attributable to common
shareholders |
608 | 322 | 7,212 | 17,821 | ||||||||||||
Less: Allocation to participating securities |
(153 | ) | (120 | ) | (362 | ) | (297 | ) | ||||||||
Income available to common shareholders |
$ | 455 | $ | 202 | $ | 6,850 | $ | 17,524 | ||||||||
Denominator for basic and diluted earnings per
share calculations: |
||||||||||||||||
Weighted average shares outstanding basic |
28,134 | 24,150 | 27,434 | 24,121 | ||||||||||||
Effect of dilutive shares: |
||||||||||||||||
Employee stock options and non-vested shares |
97 | 54 | 68 | 51 | ||||||||||||
Weighted average shares outstanding diluted |
28,231 | 24,204 | 27,502 | 24,172 | ||||||||||||
Amounts attributable to common shareholders per
share basic and diluted: |
||||||||||||||||
Income from continuing operations |
$ | 0.02 | $ | 0.01 | $ | 0.25 | $ | 0.10 | ||||||||
Income from discontinued operations |
| | | 0.63 | ||||||||||||
Net income |
$ | 0.02 | $ | 0.01 | $ | 0.25 | $ | 0.73 | ||||||||
Amounts attributable to common shareholders: |
||||||||||||||||
Income from continuing operations |
$ | 608 | $ | 322 | $ | 7,212 | $ | 2,693 | ||||||||
Income from discontinued operations |
| | | 15,128 | ||||||||||||
Net income |
$ | 608 | $ | 322 | $ | 7,212 | $ | 17,821 | ||||||||
In accordance with accounting requirements regarding earnings per share, the Company did
not include the following anti-dilutive shares in its calculation of diluted earnings per share
(amounts in thousands). |
||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock option awards |
763 | 667 | 771 | 684 | ||||||||||||
Non-vested share awards |
212 | 77 | 252 | 89 | ||||||||||||
975 | 744 | 1,023 | 773 | |||||||||||||
Approximately 1.4 million anti-dilutive shares from the assumed conversion of the
Companys Exchangeable Senior Notes were excluded from its calculation of earnings per share for
the three and nine months ended September 30, 2009 and 2.5 million anti-dilutive shares were
excluded for the three and nine months ended September 30, 2008.
(o) Share-Based Compensation
Stock Options Summary
During the first quarter of 2009, the Company issued 103,250 options to non-executive
officers. The stock options vest 25% on the first anniversary of the date of grant and 6.25% in
each subsequent calendar quarter thereafter until fully vested. The maximum term of the options
granted is ten years. The Company recognized compensation expense related to stock options of $48
thousand and $50 thousand for the three months ended September 30, 2009 and 2008, respectively, and
$140 thousand and $157 thousand for the nine months ended September 30, 2009 and 2008,
respectively.
12
Non-vested share awards
On February 24, 2009, the Company granted 102,714 restricted common shares to its officers.
The awards will vest ratably over a four year award term and were valued based on the outstanding
share price at the date of issuance. On May 21, 2009, the Company granted 308,142 restricted common
shares in two separate awards to its officers. The first award of 102,714 common shares will vest
ratably over a four year award term and was valued based on the outstanding share price at the date
of issuance. The second award of 205,428 common shares will vest in four separate tranches based upon the
Companys achievement of specified performance conditions.
On May 21, 2009, the Company issued a total of 27,120 common shares to its non-employee
trustees, all of which will vest on the anniversary of the award date. The trustee shares were
valued based on the outstanding share price at the date of issuance. The Company recognized
compensation expense associated with all restricted share based awards of $0.9 million and $0.5
million for the three months ended September 30, 2009 and 2008, respectively, and $2.1 million and
$1.3 million for the nine months ended September 30, 2009 and 2008, respectively.
(p) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(q) Application of New Accounting Standards
Effective January 1, 2009, the Company retrospectively adopted new accounting requirements
regarding accounting for convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement. These new requirements specify that issuers of such instruments
should separately account for the liability and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when the interest costs are recognized in subsequent
periods. The Company compared the present value of its Exchangeable Senior Notes, which were issued
in December 2006, to the present value of hypothetical senior notes, without a conversion feature,
issued at the same time. The difference attributed to the conversion feature was retrospectively
recorded as part of shareholders equity with a corresponding discount recorded to the Companys
Exchangeable Senior Notes. The discount is amortized over the estimated life of the Exchangeable
Senior Notes as interest expense. During 2008 and through the first nine months of 2009, the
Company repurchased $74.5 million of principal of its Exchangeable Senior Notes at a discount. In
accordance with the new accounting requirements, at the time of repurchase, the Company allocated a
portion of the settlement consideration to the extinguishment of the liability component equal to
the fair value of that component immediately prior to extinguishment. Any difference between the
consideration attributed to the liability component and the sum of (a) the net carrying amount of
the liability component and (b) any unamortized debt issuance costs is recognized in the statement
of operations as a gain or loss on debt extinguishment. The Company will allocate any
remaining settlement consideration to the reacquisition of the equity component and recognize that
amount as a reduction of shareholders equity. In all of the Companys 2008 and 2009 repurchases of
its Exchangeable Senior Notes, the consideration paid was below the fair value of the liability
immediately prior to extinguishment, therefore, the Company did not allocate any consideration to
the repurchase of the equity component. The Companys cash interest payments are unaffected by
this implementation. The overall impact on the Companys consolidated financial statements is
summarized as follows:
| Contractual cash interest expense includes $0.6 million and $0.9 million for the three months ended September 30, 2009 and 2008, respectively, and $2.0 million and $3.1 million for the nine months ended September 30, 2009 and 2008, respectively. Non-cash interest expense related to the amortization of the discount on the liability component includes $0.2 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively, and $0.7 million and $1.1 million for the nine months ended September 30, 2009 and 2008, respectively; |
| Additional paid in capital increased by the total discount recorded of $8.7 million, with a shareholders equity increase of $3.4 million at December 31, 2008; |
| The gain on the early retirement of debt previously reported was reduced by $1.7 million for the nine months ended September 30, 2008, respectively; |
| The unamortized discount was $1.5 million and $3.4 million at September 30, 2009 and December 31, 2008, respectively; and |
| The total impact of adoption of these new requirements was a reduction in net income attributable to common shareholders of $0.5 million, or $0.02 per diluted share, and $1.9 million, or $0.06 per diluted share, for the three and nine months ended September 30, 2009, respectively, and $0.3 million, or $0.01 per diluted share, and $2.8 million, or $0.12 per diluted share, for the three and nine months ended September 30, 2008, respectively. |
13
The Company adopted new accounting requirements regarding subsequent events. Companies are
required to evaluate events that occurred subsequent to the balance sheet date through the date the
consolidated financial statements are issued. The new requirements enhance the accounting and
disclosures regarding recognized subsequent events that occurred at the balance sheet date (Type I)
and non-recognized subsequent events that occurred after the balance sheet date (Type II). The
Company applied the new requirements prospectively, effective for the quarter ended June 30, 2009.
See footnote 2(a), Summary of Significant Account Policies. The Companys adoption of this new
accounting requirement did not have a material impact on its consolidated financial statements.
In June 2009, new accounting requirements were issued regarding amendments to previous
guidance regarding consolidation of variable interest entities in the determination of whether a
reporting entity is required to consolidate another entity based on, among other things, the other
entitys purpose and design and the reporting entitys ability to direct the activities of the
other entity that most significantly impact the other entitys economic performance. The new
requirements also involve ongoing assessments as to whether an enterprise is the primary
beneficiary of a Variable Interest Entity (VIE), modifies the presentation of consolidated VIE
assets and liabilities, and requires additional disclosures about a companys involvement in VIEs.
Also, a reporting entity will be required to disclose how its involvement with a VIE affects the
reporting entitys consolidated financial statements. These new requirements will be effective for
fiscal years beginning after November 15, 2009. The Company is currently determining the effect
that adoption of these requirements will have on its consolidated financial statements.
In July 2009, new guidance was issued regarding the codification of accounting standards. This
new guidance requires companies to update their existing references and disclosures of GAAP in
consolidated financial statements to a format categorized by topic, subtopic, section and/or
paragraph. The codification of such financial information is the sole authoritative reference for
nongovernmental GAAP for use in consolidated financial statements and was effective for fiscal
periods ending after September 15, 2009. The Companys adoption of this new requirement did not
have a material impact on its consolidated financial statements.
(3) Rental Property
Rental property represents the property, net of accumulated depreciation, and developable land
that are wholly owned by the Company or owned by the Company through a consolidated joint venture.
All of the Companys rental properties are located in the Southern Mid-Atlantic region. Rental
property is comprised of the following (amounts in thousands):
September 30, 2009 | December 31, 2008 | |||||||
Land |
$ | 225,333 | $ | 235,911 | ||||
Buildings and improvements |
772,812 | 786,401 | ||||||
Construction in process |
13,234 | 12,687 | ||||||
Tenant improvements |
73,731 | 61,674 | ||||||
Furniture, fixtures and equipment |
9,898 | 9,898 | ||||||
1,095,008 | 1,106,571 | |||||||
Less: accumulated depreciation |
(133,668 | ) | (111,658 | ) | ||||
$ | 961,340 | $ | 994,913 | |||||
(a) Development and Redevelopment Activity
The Company constructs business parks and/or industrial buildings on a build-to-suit basis or
with the intent to lease upon completion of construction. At September 30, 2009, the Company had a
total of approximately 0.1 million square feet under development, which consisted of 57 thousand
square feet in Northern Virginia and 48 thousand square feet in Southern Virginia. At September 30,
2009, the Company had a total of approximately 0.1 million square feet under redevelopment, which
consisted of 42 thousand square feet in Maryland and 71 thousand square feet in Southern Virginia.
The Company anticipates that development and redevelopment efforts on the majority of these
projects will be completed in 2010.
At September 30, 2009, the Company owned land that can accommodate approximately 1.4 million
square feet of building space, which includes 0.1 million square feet in Maryland, 0.6 million
square feet in Northern Virginia and 0.7 million square feet in Southern Virginia.
14
(b) Acquisitions
On October 8, 2009, the Company acquired Cloverleaf Center, a four-building, 174,000 square
foot business park in Germantown, Maryland, for $25.5 million. The property is currently 97% leased
to seven tenants. The acquisition was financed with a $17.5 million mortgage loan and available
cash that was funded with proceeds from shares issued through the Companys controlled equity
offering agreement.
The Company acquired the following buildings at an aggregate purchase cost of $46.4 million
during 2008: four buildings at Triangle Business Center; and six buildings at RiversPark I and II.
On December 12, 2008, the Company entered into a
consolidated joint venture with a third party to own RiversPark I and II. The Company
deconsolidated RiversPark II on March 17, 2009 as discussed below in footnote 4, Investment in
Affiliate.
(4) Investment in Affiliate
On December 12, 2008, the Company entered into joint venture arrangements with a third party
to own RiversPark I and II. As a condition of the joint venture arrangements, the Company provided
a guarantee to the joint venture for several lease agreements entered into by the former owner for
certain vacancy at RiversPark I and rental payments in the event a specified tenant did not renew
its lease at RiversPark II. On March 17, 2009, the specified tenant renewed its lease at RiversPark
II, which effectively terminated the Companys lease guarantee related to RiversPark II. As a
result, the Company was no longer required to consolidate the joint venture and applied the equity
accounting method to its investment in RiversPark II. The assets, liabilities and operating results
of RiversPark II are no longer consolidated on the Companys consolidated financial statements
effective March 17, 2009. There was no significant gain or loss recognized upon the
deconsolidation. The Companys net investment in RiversPark II is recorded as Investment in
Affiliate on the Companys consolidated balance sheets. Since the Company is still guaranteeing
the leases at RiversPark I, it consolidates all of RiversPark Is assets, liabilities and
operations within its consolidated financial statements. The Company will continue to consolidate
RiversPark I until the lease guarantees expire or the underlying space is re-leased, at which time,
the Company will no longer consolidate the assets, liabilities and operating results of RiversPark
I on its consolidated financial statements and will account for its share of the investment using
the equity accounting method.
As of September 30, 2009, the balance sheet of RiversPark II was as follows (amounts in
thousands):
September 30, 2009 | ||||
Assets: |
||||
Rental property, net |
$ | 25,208 | ||
Cash and cash equivalents |
560 | |||
Other assets |
2,087 | |||
Total assets |
$ | 27,855 | ||
Liabilities: |
||||
Mortgage loan |
$ | 18,144 | ||
Other liabilities |
1,663 | |||
Total liabilities |
19,807 | |||
Equity: |
8,048 | |||
Total liabilities and equity |
$ | 27,855 | ||
The following table summarizes the results of operations of RiversPark II for the period
subsequent to its deconsolidation. The Companys share of RiversPark II losses is recorded in its
consolidated statements of operations as Equity in Losses of Affiliate (amounts in thousands):
The period March 17, | ||||||||
Three Months Ended | 2009 through | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Total revenues |
$ | 703 | $ | 1,426 | ||||
Total operating expenses |
(185 | ) | (326 | ) | ||||
Net operating income |
518 | 1,100 | ||||||
Depreciation and amortization |
(365 | ) | (814 | ) | ||||
Interest expense |
(303 | ) | (653 | ) | ||||
Net loss |
$ | (150 | ) | $ | (367 | ) | ||
15
(5) Discontinued Operations
Income from discontinued operations represents revenues and expenses associated with
Alexandria Corporate Park, which was sold during the second quarter of 2008. The property was
located in the Companys Northern Virginia reporting segment. The Company reported a gain on the
sale of $14.3 million in the third quarter of 2008. The Company has had no continuing involvement
with this property subsequent to its disposal. The Company did not dispose of any other properties
during the nine months ended September 30, 2009 and 2008.
The following table summarizes the components of income from discontinued operations (amounts
in thousands):
Nine Months Ended | ||||
September 30, 2008 | ||||
Revenue |
$ | 2,473 | ||
Income from operations of disposed property |
1,335 | |||
Gain on sale of disposed property |
14,274 |
(6) Debt
The Companys borrowings consisted of the following (amounts in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(as adjusted | ||||||||
see footnote | ||||||||
2 (q)) | ||||||||
Mortgage loans, effective interest rates ranging from 5.19% to 8.53%, maturing at various
dates through September 2021(1) |
$ | 291,747 | $ | 322,846 | ||||
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing
December 2011(2) |
48,485 | 80,435 | ||||||
Series A senior notes, effective interest rate of 6.41%, maturing September 2013 |
37,500 | 37,500 | ||||||
Series B senior notes, effective interest rate of 6.55%, maturing September 2016 |
37,500 | 37,500 | ||||||
Secured term loan, effective interest rate of 3.81%, maturing August 2011(3)(4) |
50,000 | 50,000 | ||||||
Secured term loan, effective interest rate of 5.83%, maturing August 2011(4)(5) |
35,000 | 35,000 | ||||||
Secured term loan, effective interest rate of LIBOR plus 2.50%, maturing August
2011(4)(5) |
15,000 | 15,000 | ||||||
Unsecured revolving credit facility, effective interest rate of LIBOR plus 1.20%,
maturing April 2011(4)(6) |
99,400 | 75,500 | ||||||
$ | 614,632 | $ | 653,781 | |||||
(1) | Mortgage loans include a variable interest rate mortgage of $9.9 million for RiversPark I, which has an interest rate of LIBOR plus 2.50%. In September 2008, the Company entered into an interest rate swap agreement that fixed the underlying interest rate on the loan at 5.97%. | |
(2) | The principal balance of the Exchangeable Senior Notes was $50.5 million and $85.0 million at September 30, 2009 and December 31, 2008, respectively. | |
(3) | The term loan has a contractual interest rate of LIBOR plus 1.10%. In January 2008, the Company entered into an interest rate swap agreement that fixed the underlying interest rate on the loan at 2.71% plus a spread of 70 to 125 basis points. | |
(4) | The unsecured revolving credit facility and secured term loans mature in April 2010 and August 2010, respectively, and provide for a one-year extension of the maturity date at the Companys option. The Company intends to exercise its extension option or refinance the debt before it reaches maturity. The table above assumes the exercise by the Company of the one-year extension, which is conditioned upon the payment of an extension fee, the absence of an existing default under the loan agreement and the continued accuracy of the representations and warranties contained in the loan agreement. | |
(5) | In August 2008, the Company entered into a $35.0 million variable-rate secured term loan and an interest rate swap agreement that fixed the underlying interest rate on the loan. In December 2008, the Company borrowed an additional $15.0 million under an amendment to the loan, which increased its total obligation to $50.0 million. The transaction increased the contractual interest rate on the entire loan balance by 0.25% to LIBOR plus 250 basis points. As of September 30, 2009, the initial term loan balance is fixed at 5.83%. | |
(6) | The unsecured revolving credit facility has a contractual interest rate of LIBOR plus a spread of 80 to 135 basis points. |
16
(a) Mortgage Loans
At September 30, 2009 and December 31, 2008, the Companys mortgage debt was as follows
(dollars in thousands):
Contractual | Effective | Maturity | September 30, | December 31, | ||||||||||||||||
Property | Interest Rate | Interest Rate | Date | 2009 | 2008 | |||||||||||||||
Glenn Dale Business Center (1) |
7.83 | % | 5.13 | % | | $ | | $ | 8,152 | |||||||||||
4200 Tech Court (2)(4) |
8.07 | % | 8.07 | % | October 2009 | 1,705 | 1,726 | |||||||||||||
Park Central I (3) |
8.00 | % | 5.66 | % | November 2009 | 4,565 | 4,754 | |||||||||||||
4212 Tech Court |
8.53 | % | 8.53 | % | June 2010 | 1,671 | 1,689 | |||||||||||||
Park Central II |
8.32 | % | 5.66 | % | November 2010 | 5,670 | 5,902 | |||||||||||||
Enterprise Center (4) |
8.03 | % | 5.20 | % | December 2010 | 17,576 | 18,102 | |||||||||||||
Indian Creek Court (4) |
7.80 | % | 5.90 | % | January 2011 | 12,518 | 12,818 | |||||||||||||
403/405 Glenn Drive |
7.60 | % | 5.50 | % | July 2011 | 8,324 | 8,529 | |||||||||||||
4612 Navistar Drive (4) |
7.48 | % | 5.20 | % | July 2011 | 12,791 | 13,130 | |||||||||||||
RiversPark I and II (5) |
LIBOR+2.50% | 5.97 | % | September 2011 | 9,856 | 28,000 | ||||||||||||||
Campus at Metro Park (4) |
7.11 | % | 5.25 | % | February 2012 | 23,579 | 24,154 | |||||||||||||
1434 Crossways Blvd Building II |
7.05 | % | 5.38 | % | August 2012 | 9,940 | 10,202 | |||||||||||||
Crossways Commerce Center |
6.70 | % | 6.70 | % | October 2012 | 24,711 | 25,008 | |||||||||||||
Newington Business Park Center |
6.70 | % | 6.70 | % | October 2012 | 15,588 | 15,775 | |||||||||||||
Prosperity Business Center |
6.25 | % | 5.75 | % | January 2013 | 3,665 | 3,752 | |||||||||||||
Aquia Commerce Center I |
7.28 | % | 7.28 | % | February 2013 | 518 | 610 | |||||||||||||
1434 Crossways Blvd Building I |
6.25 | % | 5.38 | % | March 2013 | 8,557 | 8,749 | |||||||||||||
Linden Business Center |
6.01 | % | 5.58 | % | October 2013 | 7,271 | 7,379 | |||||||||||||
Owings Mills Business Center |
5.85 | % | 5.75 | % | March 2014 | 5,577 | 5,650 | |||||||||||||
Annapolis Commerce Park East |
5.74 | % | 6.25 | % | June 2014 | 8,643 | 8,728 | |||||||||||||
Plaza 500, Van Buren Business Park,
Rumsey Center, Snowden Center,
Greenbrier Technology Center II, Norfolk
Business Center, Northridge I & II and
15395 John Marshall Highway |
5.19 | % | 5.19 | % | August 2015 | 99,625 | 100,000 | |||||||||||||
Hanover Business Center: |
||||||||||||||||||||
Building D |
8.88 | % | 6.63 | % | August 2015 | 783 | 862 | |||||||||||||
Building C |
7.88 | % | 6.63 | % | December 2017 | 1,181 | 1,260 | |||||||||||||
Chesterfield Business Center: |
||||||||||||||||||||
Buildings C,D,G and H |
8.50 | % | 6.63 | % | August 2015 | 2,042 | 2,245 | |||||||||||||
Buildings A,B,E and F |
7.45 | % | 6.63 | % | June 2021 | 2,588 | 2,695 | |||||||||||||
Gateway Centre Building I |
7.35 | % | 5.88 | % | November 2016 | 1,391 | 1,505 | |||||||||||||
Airpark Business Center |
7.45 | % | 6.63 | % | June 2021 | 1,412 | 1,470 | |||||||||||||
Total Mortgage Debt |
5.63 | %(6) | $ | 291,747 | $ | 322,846 | ||||||||||||||
(1) | The loan was repaid on May 1, 2009. | |
(2) | The loan was repaid on October 1, 2009. | |
(3) | The loan was repaid on November 2, 2009. | |
(4) | The maturity date on these loans represents the anticipated repayment date of the loans, after which date the interest rates on the loans will increase to a predetermined amount identified in the debt agreement. The Company calculates interest expense using the effective interest method over the anticipated period during which it expects the debt to be outstanding. | |
(5) | On March 17, 2009, the Company deconsolidated RiversPark II and, therefore, the assets, liabilities and operating results of RiversPark II are no longer consolidated on the Companys consolidated financial statements, which include $18.1 million of mortgage debt. For more information, see footnote 4, Investment in Affiliate. | |
(6) | Weighted average interest rate on total mortgage debt. |
During the fourth quarter of 2009, the Company repaid a $1.7 million mortgage loan
encumbering 4200 Tech Court and a $4.5 million mortgage loan encumbering Park Central I with
available cash.
On October 8, 2009, the Company acquired Cloverleaf Center, which was financed with a $17.5
million mortgage loan and available cash that was funded with proceeds from shares issued through
the Companys controlled equity offering agreement. The mortgage loan has a fixed interest rate of
6.75% and matures in October 2014, with two one-year extension options. The
17
Company has the right to exercise the two one-year options, which provide for a fixed interest
rate to be calculated at the beginning of each extension period and not to be lower than 6.50%.
(b) Exchangeable Senior Notes
During the third quarter of 2009, the Company used available cash and proceeds from the sale
of common stock issued through its controlled equity offering agreement to repurchase $8.5 million
of its Exchangeable Senior Notes, at a weighted average discount of 12%. The transactions resulted
in a gain of $0.6 million, net of deferred financing costs and discounts. The Company evaluated the
fair value of the repurchased debt based on the cash flows at the date of repurchase, which were
discounted at risk-adjusted rates. Based on this calculation, the fair value of repurchased debt
was greater than the repurchase price; therefore, the Company did not allocate any of the
repurchase price to the equity components of the Exchangeable Senior Notes. At September 30, 2009,
the Exchangeable Senior Notes were convertible into 28.039 shares for each $1,000 of principal
amount for a total of approximately 1.4 million shares. The Company was in compliance with all the
terms of its Exchangeable Senior Notes at September 30, 2009.
(c) Unsecured Revolving Credit Facility
During the third quarter of 2009, the Company borrowed $6.0 million on its unsecured revolving
credit facility, which it repaid during the quarter. As of September 30, 2009, the effective
underlying interest rate on the Companys unsecured revolving credit facility was 1.5% At September
30, 2009, the Company had available borrowings of $25.5 million under its unsecured revolving
credit facility and the Company was in compliance with all of the terms of its unsecured revolving
credit facility.
(7) Derivative Instruments and Comprehensive Income
The Company is exposed to certain risks arising from business operations and economic factors.
The Company uses derivative financial instruments to manage exposures that arise from business
activities in which its future exposure to interest rate fluctuations is unknown. The objective in
the use of an interest rate derivative is to add stability to interest expenses and manage exposure
to interest rate changes. No hedging activity can completely insulate the Company from the risks
associated with changes in interest rates. Moreover, interest rate hedging could fail to protect
the Company or adversely affect it because, among other things:
| available interest rate hedging may not correspond directly with the interest rate risk for which the Company seeks protection; |
| the duration of the hedge may not match the duration of the related liability; |
| the party owing money in the hedging transaction may default on its obligation to pay; and |
| the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the Companys ability to sell or assign its side of the hedging transaction. |
During 2008, the Company entered into three separate interest rate swap agreements to hedge
its exposure on its variable rate debt against fluctuations in prevailing interest rates. The
interest rate swap agreements are effective over the life of the debt instrument that is being
hedged. The table below summarizes the Companys three interest rate swap agreements as of
September 30, 2009 (dollars in thousands):
Transaction Date | Instrument | Amount | Contractual Interest Rate | Effective Interest Rate | ||||||
January 2008 |
Term Loan | $ | 50,000 | LIBOR plus variable spread (1) | 2.71% plus a variable spread(1) | |||||
August 2008 |
Term Loan | 35,000 | LIBOR plus 250 basis points | 5.83% | ||||||
September 2008 |
Mortgage Loan(2) | 9,856 | LIBOR plus 250 basis points | 5.97% | ||||||
$ | 94,856 | |||||||||
(1) | At September 30, 2009, the contractual interest rate on the Companys $50 million term loan was LIBOR plus 1.10% and the effective interest rate was 3.81%. | |
(2) | Excludes the $18.1 million mortgage loan for RiversPark II, which was deconsolidated with the assets, liabilities and operating results of RiversPark II on March 17, 2009. The swap agreement associated with the $18.1 million deconsolidated mortgage loan remains in effect and under the same terms as the consolidated mortgage loan. |
The Companys interest rate swap agreements qualify as effective cash flow hedges and the
Company records any unrealized gains associated with the change in fair value of the swap
agreements within shareholders equity and prepaid expenses and other assets and any unrealized
losses within shareholders equity and other liabilities.
18
Total comprehensive income is summarized as follows (amounts in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income |
$ | 624 | $ | 332 | $ | 7,414 | $ | 18,388 | ||||||||
Unrealized gain (loss) on derivative instruments |
154 | (289 | ) | 785 | 393 | |||||||||||
Total comprehensive income |
778 | 43 | 8,199 | 18,781 | ||||||||||||
Comprehensive income attributable to
noncontrolling interests in the Operating
Partnership |
(20 | ) | (1 | ) | (223 | ) | (580 | ) | ||||||||
Comprehensive income attributable to common
shareholders |
$ | 758 | $ | 42 | $ | 7,976 | $ | 18,201 | ||||||||
(8) Fair Value of Financial Instruments
The Company adopted accounting provisions which outline a valuation framework and create a
fair value hierarchy that distinguishes between market assumptions based on market data (observable
inputs) and a reporting entitys own assumptions about market data (unobservable inputs). The
standard increases 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 at the measurement date (an exit price). In
accordance with GAAP, certain assets and liabilities must be measured at fair value, and the
Company provides the necessary disclosures that are required for items measured at fair value as
outlined in the accounting requirements regarding fair value.
The Company has three interest rate swap derivative instruments that are measured under the
accounting provisions regarding fair value. The derivatives are valued based on the prevailing
market yield curve on the measurement date. Financial assets and liabilities are measured using
inputs from three levels of the fair value hierarchy.
The three levels are as follows:
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date. An active market is
defined as a market in which transactions for the assets or liabilities occur with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Level 2 Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active
(markets with few transactions), inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or
corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 Unobservable inputs, only used to the extent that observable inputs are not
available, reflect the Companys assumptions about the pricing of an asset or liability.
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys financial assets and liabilities that are required to be measured at
fair value as of September 30, 2009. The derivative instruments in the table below are recorded on
the Companys consolidated balance sheets under Accounts payable and other liabilities (amounts
in thousands):
Balance at | ||||||||||||||||
September 30, 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: |
||||||||||||||||
Derivative instrument-swap agreements |
$ | 2,252 | $ | | $ | 2,252 | $ | | ||||||||
For the nine months ended September 30, 2009, the Company did not re-measure or complete any
transactions involving non-financial assets or non-financial liabilities that are measured on a
recurring basis.
The carrying amounts of cash, accounts and other receivables and accounts payable approximate
their fair values due to their short-term maturities. The Company calculates fair value of its
financial 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.
19
The carrying amount and estimated fair value of the Companys financial instruments at
September 30, 2009 and December 31, 2008 are as follows (amounts in thousands):
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Mortgage debt |
$ | 291,747 | $ | 268,150 | $ | 322,846 | $ | 307,247 | ||||||||
Exchangeable senior notes(1) |
48,485 | 46,460 | 80,435 | 60,350 | ||||||||||||
Series A senior notes |
37,500 | 37,467 | 37,500 | 28,199 | ||||||||||||
Series B senior notes |
37,500 | 36,781 | 37,500 | 24,239 | ||||||||||||
Secured term loans |
100,000 | 96,851 | 100,000 | 101,691 | ||||||||||||
Unsecured revolving credit facility |
99,400 | 94,512 | 75,500 | 76,739 | ||||||||||||
Total |
$ | 614,632 | $ | 580,221 | $ | 653,781 | $ | 598,465 | ||||||||
(1) | During the nine months ended September 30, 2009, the Company repurchased $34.5 million of its Exchangeable Senior Notes at a discount. |
(9) Shareholders Equity
During the third quarter of 2009, the Company issued 1.6 million common shares through its
controlled equity offering agreement at a weighted average price of $10.68 per share. In October
2009, the Company issued an additional 0.1 million common shares through its controlled equity
offering agreement at a weighted average price of $11.75 per share. The offerings generated net
proceeds of $17.9 million, which were used to repurchase a portion of the Companys Exchangeable
Senior Notes at a discount, to reduce a portion of its unsecured revolving credit facility and to
fund the cash portion of the Cloverleaf Center acquisition, which closed in October 2009.
As a result of the redemption feature of the Operating Partnership units, the noncontrolling
interests are recorded outside of permanent equity, and therefore, the Company does not allocate
its equity to any noncontrolling interests. The Companys equity and redeemable noncontrolling
interests are as follows (amounts in thousands):
Redeemable | ||||||||
First Potomac | noncontrolling | |||||||
Realty Trust | interests | |||||||
Balance, December 31, 2008 |
$ | 365,293 | $ | 10,627 | ||||
Net income |
7,212 | 202 | ||||||
Changes in ownership |
25,651 | (478 | ) | |||||
Distributions to owners |
(20,520 | ) | (572 | ) | ||||
Other comprehensive income |
764 | 21 | ||||||
Balance, September 30, 2009 |
$ | 378,400 | $ | 9,800 | ||||
(10) Segment Information
The Companys reportable segments consist of three distinct reporting and operational segments
within the broader Southern Mid-Atlantic geographic area in which it operates: Maryland, Northern
Virginia and Southern Virginia.
The Company evaluates the performance of its segments based on the operating results of the
properties located within each segment, which excludes large non-recurring gains and losses, gains
from sale of assets, interest expense, general and administrative 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 amortization reported in their operating
results. There are no inter-segment sales or transfers recorded between segments.
20
The results of operations for the Companys three reportable segments are as follows (dollars
in thousands):
Three Months Ended September 30, 2009 | ||||||||||||||||
Maryland(1) | Northern Virginia | Southern Virginia | Consolidated | |||||||||||||
Number of buildings |
72 | 48 | 54 | 174 | ||||||||||||
Square feet |
3,610,072 | 2,820,535 | 5,262,230 | 11,692,837 | ||||||||||||
Total revenues |
$ | 10,706 | $ | 10,010 | $ | 12,158 | $ | 32,874 | ||||||||
Property operating expense |
(2,866 | ) | (2,281 | ) | (3,002 | ) | (8,149 | ) | ||||||||
Real estate taxes and insurance |
(1,142 | ) | (971 | ) | (1,070 | ) | (3,183 | ) | ||||||||
Total property operating income |
$ | 6,698 | $ | 6,758 | $ | 8,086 | 21,542 | |||||||||
Depreciation and amortization expense |
(10,132 | ) | ||||||||||||||
General and administrative |
(3,609 | ) | ||||||||||||||
Other expenses, net |
(7,177 | ) | ||||||||||||||
Net income |
$ | 624 | ||||||||||||||
Total assets(2) |
$ | 383,701 | $ | 294,577 | $ | 318,954 | $ | 1,043,582 | ||||||||
Capital expenditures(3) |
$ | 4,068 | $ | 7,605 | $ | 6,988 | $ | 18,723 | ||||||||
Three Months Ended September 30, 2008 | ||||||||||||||||
Maryland | Northern Virginia | Southern Virginia | Consolidated | |||||||||||||
Number of buildings |
74 | 47 | 54 | 175 | ||||||||||||
Square feet |
3,749,989 | 2,816,409 | 5,254,201 | 11,820,599 | ||||||||||||
Total revenues |
$ | 10,263 | $ | 9,335 | $ | 11,470 | $ | 31,068 | ||||||||
Property operating expense |
(2,137 | ) | (2,041 | ) | (2,982 | ) | (7,160 | ) | ||||||||
Real estate taxes and insurance |
(1,040 | ) | (1,090 | ) | (1,043 | ) | (3,173 | ) | ||||||||
Total property operating income |
$ | 7,086 | $ | 6,204 | $ | 7,445 | 20,735 | |||||||||
Depreciation and amortization expense |
(9,113 | ) | ||||||||||||||
General and administrative |
(2,797 | ) | ||||||||||||||
Other expenses, net |
(8,493 | ) | ||||||||||||||
Net income |
$ | 332 | ||||||||||||||
Total assets(2) |
$ | 431,507 | $ | 281,872 | $ | 308,236 | $ | 1,069,972 | ||||||||
Capital expenditures(3) |
$ | 8,178 | $ | 9,647 | $ | 9,582 | $ | 27,623 | ||||||||
Nine Months Ended September 30, 2009 | ||||||||||||||||
Maryland(1) | Northern Virginia | Southern Virginia | Consolidated | |||||||||||||
Total revenues |
$ | 33,302 | $ | 29,636 | $ | 36,081 | $ | 99,019 | ||||||||
Property operating expense |
(8,969 | ) | (6,822 | ) | (8,727 | ) | (24,518 | ) | ||||||||
Real estate taxes and insurance |
(3,319 | ) | (3,204 | ) | (3,186 | ) | (9,709 | ) | ||||||||
Total property operating income |
$ | 21,014 | $ | 19,610 | $ | 24,168 | 64,792 | |||||||||
Depreciation and amortization expense |
(30,183 | ) | ||||||||||||||
General and administrative |
(9,487 | ) | ||||||||||||||
Other expenses, net |
(17,708 | ) | ||||||||||||||
Net income |
$ | 7,414 | ||||||||||||||
21
Nine Months Ended September 30, 2008 | ||||||||||||||||
Maryland | Northern Virginia | Southern Virginia | Consolidated | |||||||||||||
Total revenues |
$ | 30,928 | $ | 27,203 | $ | 33,489 | $ | 91,620 | ||||||||
Property operating expense |
(6,314 | ) | (5,830 | ) | (7,947 | ) | (20,091 | ) | ||||||||
Real estate taxes and insurance |
(2,926 | ) | (3,093 | ) | (3,103 | ) | (9,122 | ) | ||||||||
Total property operating income |
$ | 21,688 | $ | 18,280 | $ | 22,439 | 62,407 | |||||||||
Depreciation and amortization expense |
(27,373 | ) | ||||||||||||||
General and administrative |
(8,336 | ) | ||||||||||||||
Other expenses, net |
(23,919 | ) | ||||||||||||||
Income from discontinued operations |
15,609 | |||||||||||||||
Net income |
$ | 18,388 | ||||||||||||||
(1) | Includes the results of a three-building, 160,470 square foot property that is owned by the Company through a consolidated joint venture. | |
(2) | Corporate assets not allocated to any of our reportable segments totaled $46,350 and $48,357 at September 30, 2009 and 2008, respectively. | |
(3) | Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $62 and $216 for the nine months ended September 30, 2009 and 2008, respectively. |
(11) Supplemental Disclosure of Cash Flow Information
Supplemental disclosures of cash flow information for the nine months ended September 30 are
as follows (amounts in thousands):
2009 | 2008 | |||||||
Cash paid for interest, net |
$ | 22,882 | $ | 24,389 | ||||
Non-cash investing and financing activities: |
||||||||
Conversion of Operating Partnership units
into common shares |
507 | 358 |
Cash paid for interest on indebtedness is net of capitalized interest of $0.3 million and $1.2
million for the nine months ended September 30, 2009 and 2008, respectively.
During the nine months ended September 30, 2009 and 2008, 40,000 and 26,181 Operating
Partnership units, respectively, were redeemed for the Companys common shares.
On March 17, 2009, the Company deconsolidated a joint venture that owned RiversPark II and
removed all its related assets and liabilities from its consolidated balance sheet as of the date of
deconsolidation. For more information, see footnote 4 Investment in Affiliate.
22
ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-Q. The discussion and analysis is derived from the
consolidated operating results and activities of First Potomac Realty Trust.
First Potomac Realty Trust (the Company) is a self-managed, self-administered real estate
investment trust (REIT). The Company focuses on owning, operating, developing and redeveloping
business parks and industrial properties in the Washington, D.C. metropolitan area and other major
markets in Maryland and Virginia, which it refers to as the Southern Mid-Atlantic region. The
Company separates its properties into three distinct segments, which it refers to as the Maryland,
Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on
acquiring and redeveloping properties that it believes can benefit from its intensive property
management and seeks to reposition these properties to increase their profitability and value. The
Companys portfolio of properties contains a mix of single-tenant and multi-tenant business parks
and industrial properties. Business parks combine office building features with industrial property
space, while industrial properties generally are used as warehouse, distribution or manufacturing
facilities.
The Company conducts its business through First Potomac Realty Investment Limited Partnership;
the Companys operating partnership (the Operating Partnership). At September 30, 2009, the
Company was the sole general partner of, and owned a 97.6% interest in, the Operating Partnership.
The remaining interests in the Operating Partnership, which are presented as noncontrolling
interests in the accompanying unaudited consolidated financial statements, are limited partnership
interests, which are owned by several of the Companys executive officers and trustees who
contributed properties and other assets to the Company upon its formation, and other unrelated
parties.
The primary source of the Companys revenue and earnings is rent received from customers under
long-term (generally three to ten years) operating leases at its properties, including
reimbursements from customers for certain operating costs. Additionally, the Company may generate
earnings from the sale of assets either outright or contributed into joint ventures.
The Companys long-term growth will be driven by its ability to:
| maintain and increase occupancy rates and/or increase rental rates at its properties; | ||
| sell assets to third parties or contribute properties to joint ventures; and | ||
| continue to grow its portfolio through acquisition of new properties, potentially through joint ventures. |
As of September 30, 2009, the Companys consolidated portfolio totaled approximately 12
million square feet and the Companys properties were 86.6% occupied by 591 tenants. As of
September 30, 2009, the Companys largest tenant was the U.S. Government, which along with
government contractors, accounted for approximately 20% of the Companys total annualized rental
revenue. The Company derives substantially all of its revenue from leases of space within its
properties. The Company operates so as to qualify as a REIT for federal income tax purposes.
Executive Summary
The Companys funds from operations (FFO) for the third quarter of 2009 were $10.7 million,
or $0.37 per diluted share ($0.35 per diluted share, excluding gains on the retirement of debt),
compared with $9.4 million, or $0.38 per diluted share, during the third quarter of 2008. The
Companys net income attributable to common shareholders for the third quarter of 2009 increased to
$0.6 million, or $0.02 per diluted share, compared with net income attributable to common
shareholders of $0.3 million, or $0.01 per diluted share, for the third quarter of 2008.
The Companys FFO for the first nine months of 2009 increased to $37.1 million, or $1.31 per
diluted share ($1.09 per diluted share, excluding gains on the retirement of debt), compared with
$32.0 million, or $1.28 per diluted share ($1.16 per diluted share, excluding gains on the
retirement of debt), for the first nine months of 2008. The Company reported net income
attributable to common shareholders for the first nine months of 2009 of $7.2 million, or $0.25 per
diluted share, compared with net income attributable to common shareholders of $17.8 million, or
$0.73 per diluted share, for the first nine months of 2008, which included a gain from the sale of
a property of $14.3 million, or $0.57 per diluted share after noncontrolling interests.
23
Significant Third Quarter and Subsequent Event Transactions
| During the third quarter of 2009, the Company issued 1.6 million common shares through its controlled equity offering agreement at a weighted average price of $10.68 per share. In October 2009, the Company issued an additional 0.1 million common shares through its controlled equity offering agreement at a weighted average price of $11.75 per share. The offerings generated net proceeds of $17.9 million, which were used to repurchase a portion of the Companys Exchangeable Senior Notes at a discount, to reduce a portion of its unsecured revolving credit facility and to fund the cash portion of the Cloverleaf Center acquisition. Since the beginning of 2009 and through the filing date of these consolidated financial statements, the Company has issued 2.2 million common shares through its controlled equity offering agreement, generating net proceeds of $23.3 million; | ||
| The Company repurchased $8.5 million of its Exchangeable Senior Notes, at a 12% discount, resulting in a gain of $0.6 million, or $0.02 per diluted share. For the nine months ended September 30, 2009, the Company repurchased $34.5 million of its Exchange Senior Notes, at a 23% discount, resulting in a gain of $6.3 million, or $0.23 per diluted share; | ||
| The Company executed 80,000 square feet of new leases, including 24,000 square feet at 1400 Cavalier Boulevard, which is located in the Companys Southern Virginia reporting segment, and 18,000 square feet at Annapolis Commerce Park East, which is located in the Companys Maryland reporting segment. Rent is expected to commence for the majority of these new leases by the end of the first quarter of 2010; and | ||
| The Company executed 370,000 square feet of renewal leases, which reflects a 90% retention rate. Renewal leases in the quarter include 79,000 square feet at Annapolis Commerce Park East, 66,000 square feet at Crossways Commerce Center and 59,000 square feet at Frederick Industrial Park. | ||
| On October 8, 2009, the Company acquired Cloverleaf Center, a four-building, 174,000 square foot business park in Germantown, Maryland, for $25.5 million. The property is currently 97% leased to seven tenants. The acquisition was financed with a $17.5 million mortgage loan and available cash that was funded with proceeds from shares issued through the Companys controlled equity offering agreement. |
Development and Redevelopment Activity
As of September 30, 2009, the Company continued development of several parcels of land,
including land adjacent to previously acquired properties and land acquired with the intent to
develop. The Company intends to construct business parks and/or industrial buildings on a
build-to-suit basis or with the intent to lease upon completion of construction. The Company also
continued to redevelop several of its assets to attract new tenants.
During the third quarter of 2009, the Company completed redevelopment efforts on approximately
57,000 square feet of space at Interstate Plaza in its Northern Virginia reporting segment and
8,000 square feet of space at Park Central in its Southern Virginia reporting segment.
As of September 30, 2009, the Company had incurred development and redevelopment expenditures
for several buildings, of which the more significant projects are noted below:
Development
| Greenbrier Technology Center III a 48,000 square foot three-story office building has been designed, all permits have been received and construction is set to commence. Costs to date include civil, architectural, mechanical, electrical and plumbing design as well as permit fees; and | ||
| Sterling Park Business Center, Lot 7 a 57,000 square foot office building, adjacent to a recently completed building, has been designed, all permits have been received and construction is pending further leasing activity. Costs to date include civil site preparation work, architectural, mechanical, electrical and plumbing design as well as permit fees. |
Redevelopment
| Enterprise Parkway a 71,000 square foot multi-tenanted office redevelopment. Costs incurred to date include building, lobby and common corridor renovations, design documents and permit fees for major common area bathroom renovations as well as schematic architectural and engineering design for future tenant layouts; and |
24
| Gateway 270 a 42,000 square foot business park redevelopment has been designed, all permits have been processed and construction is set to commence. The majority of the costs incurred to date include architectural and engineering design work. |
The Company anticipates development and redevelopment efforts on these projects will continue
into 2010. The Company will commence redevelopment efforts on unfinished vacant space through the
investment of capital in electrical, plumbing and other capital improvements in order to expedite
the leasing of the space. At September 30, 2009, the Company owned developable land that can
accommodate approximately 1.4 million square feet of building space, which includes 0.1 million
square feet in Maryland, 0.6 million square feet in Northern Virginia and 0.7 million square feet
in Southern Virginia.
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) that require the Company to make certain estimates and
assumptions. Critical accounting policies and estimates are those that require subjective or
complex judgments and are the policies and estimates that the Company deems most important to the
portrayal of its financial condition and results of operations. It is possible that the use of
different reasonable estimates or assumptions in making these judgments could result in materially
different amounts being reported in its consolidated financial statements. The Companys critical
accounting policies relate to revenue recognition, including evaluation of the collectability of
accounts receivable, impairment of long-lived assets, purchase accounting for acquisitions of real
estate and share-based compensation.
The following is a summary of certain aspects of these critical accounting policies.
Revenue Recognition
Rental revenue under leases with scheduled rent increases or rent abatements is recognized
using the straight-line method over the term of the leases. Accrued straight-line rents included in
the Companys consolidated balance sheets represent the aggregate excess of rental revenue
recognized on a straight-line basis over contractual rent under applicable lease provisions. The
Companys leases generally contain provisions under which the tenants reimburse the Company for a
portion of the Companys property operating expenses and real estate taxes. Such reimbursements are
recognized in the period that the expenses are incurred. Lease termination fees are recognized on
the date of termination when the related leases are canceled and the Company has no continuing
obligation to provide services to such former tenants.
The Company must make estimates of the collectability of its accounts receivable related to
minimum rent, deferred rent, tenant reimbursements, lease termination fees and other income. The
Company specifically analyzes accounts receivable and historical bad debt experience, tenant
concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of
its allowance for doubtful accounts receivable. These estimates have a direct impact on the
Companys net income as a higher required allowance for doubtful accounts receivable will result in
lower net income. The uncollectible portion of the amounts due from tenants, including
straight-line rents, is charged to property operating expense in the period in which the
determination is made.
Investments in Real Estate and Real Estate Entities
Investments in real estate are recorded at cost. Improvements and replacements are
capitalized at historical cost when they extend the useful life, increase capacity, or improve the
efficiency of the asset. Repairs and maintenance are charged to expense when incurred.
Depreciation and amortization are recorded on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives of the Companys assets, by class, are as follows:
Buildings
|
39 years | |
Building improvements
|
5 to 15 years | |
Furniture, fixtures and equipment
|
5 to 15 years | |
Tenant improvements
|
Shorter of the useful lives of the assets or the terms of the related leases | |
Lease related intangible assets
|
Term of related lease |
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions or changes in managements
intended holding period indicate a possible
25
impairment of the value of a property, an impairment
analysis is performed. The Company assesses the recoverability based on an estimate of the future
undiscounted cash flows (excluding interest charges) expected to result from the propertys use and
eventual disposition. This estimate is based on projections of future revenues, expenses, capital
improvement costs, expected holding periods and cap rates. These cash flows consider factors such
as expected future operating income, market trends and 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 forecast undiscounted cash flows, an impairment
loss is recorded to the extent that the carrying value exceeds the estimated fair value of the
property. The Company is required to make estimates as to whether there are impairments in the
values of its investments in real estate. The Company did not record any impairment to its real
estate assets during the nine months ended September 30, 2009 and 2008.
The Company will classify a building as held-for-sale in the period in which it has made the
decision to dispose of the building, a binding agreement to purchase the property has been signed
under which the buyer has committed a significant amount of nonrefundable cash and no significant
financing contingencies exist that could cause the transaction not to be completed in a timely
manner. If these criteria are met, the Company will record an impairment loss if the fair value,
less anticipated selling costs, is lower than the carrying amount of the property. The Company will
classify any impairment loss, together with the buildings operating results, as discontinued
operations in its statements of operations and classify the assets and related liabilities as
held-for-sale on its consolidated balance sheets. Interest expense is reclassified to discontinued
operations only to the extent the held-for-sale property is secured by specific mortgage debt and
the mortgage debt will not be transferred to another property owned by the Company after the
disposition.
Purchase Accounting
Acquisitions of rental property from third parties are accounted for at fair value, which is
allocated between land and building (on an as-if vacant basis) based on managements estimate of
the fair value of those components for each type of property and to tenant improvements based on
the depreciated replacement cost of the tenant improvements, which approximates their fair value.
The purchase price is also allocated as follows:
■ | the value of leases in-place on the date of acquisition based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred; |
■ | the value of above and below market in-place leases based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the lease and the estimated fair market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to fourteen years; and |
■ | the intangible value of tenant or customer relationships. |
The Companys determination of these values requires it to estimate market rents for each of
the leases and make certain other assumptions. These estimates and assumptions affect the rental
revenue, and depreciation and amortization expense recognized for these leases and associated
intangible assets and liabilities.
Goodwill and Impairment Analysis
In conjunction with the Companys initial public offering and related formation transactions,
First Potomac Management, Inc. contributed all of the capital interests in First Potomac Management
LLC, the entity that manages the Companys properties, to the Operating Partnership. The $2.1
million fair value of the in-place workforce acquired has been classified as goodwill and is
included as a component of intangible assets on the consolidated balance sheets. All acquired
goodwill that relates to the operations of a reporting unit and is used in determining the fair
value of a reporting unit is allocated to the Companys appropriate reporting unit in a reasonable
and consistent manner. The Company assesses goodwill for impairment annually at the end of its
fiscal year and in interim periods if certain events occur indicating the carrying value may be
impaired. The Company performs its analysis for potential impairment of goodwill, which requires
that a two-step impairment test be performed on goodwill. In the first step, the fair value of the
reporting unit is compared with its carrying value. If the fair value exceeds its carrying value,
goodwill is not impaired, and no further testing is required. If the carrying value of the
reporting unit exceeds its fair value, then a second step must be performed in order to determine
the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the
carrying value of goodwill exceeds its implied fair value then an impairment loss is recorded equal
to the difference. No impairment losses were recognized during the nine months ended
September 30, 2009 and 2008.
26
Investment in Affiliate
The Company may continue to grow its portfolio by entering into joint venture agreements with
third parties. The structure of the joint venture will affect the Companys accounting treatment
for the joint venture as the Company adheres to requirements regarding consolidation of variable
interest entities. When the Companys investment in a joint venture meets the requirements for the
equity accounting method, it will record its initial investment on its consolidated balance sheets
as Investment in Affiliate. The initial investment in the joint venture is adjusted to recognize
the Companys share of earnings, losses and distributions received from the joint venture. The
Companys respective share of all earnings or losses from the joint venture will be recorded on its
consolidated statements of operations as Equity in Earnings or Losses of Affiliate.
When the Company is deemed to have a controlling interest in a joint venture, it will
consolidate all of the joint ventures assets, liabilities and operating results within its
consolidated financial statements. The cash contributed to the consolidated joint venture by the
third party, if any, will be reflected in the liability section of the Companys consolidated
balance sheets under Financing Obligation. The amount will be recorded based on the third partys
initial investment in the consolidated joint venture and will be adjusted to reflect the third
partys share of earnings or losses in the consolidated joint venture and for any distributions
received by the third party from the joint venture. The earnings or losses from the joint venture
attributable to the third party are recorded as interest expense on the Financing Obligation within
the Companys consolidated statements of operations. All distributions received by the Company from
the consolidated joint venture will be recorded as an increase in the Financing Obligation.
Derivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate
changes. The Company may enter into derivative agreements to mitigate exposure to unexpected
changes in interest rates and may use interest rate protection or cap agreements to reduce the
impact of interest rate changes. The Company intends to enter into derivative agreements only with
counterparties that it believes have a strong credit rating to mitigate the risk of counterparty
default or insolvency.
The Company may designate a derivative as either a hedge of the cash flows from a debt
instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt
instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair
value. For effective hedging relationships, the change in the fair value of the assets or
liabilities is recorded in Accumulated Other Comprehensive Income (Loss), an element of
shareholders equity (cash flow hedge), or through earnings, along with the change in fair value of
the asset or liability being hedged (fair value hedge). Ineffective portions of derivative
transactions will result in changes in fair value recognized in earnings. The Company incorporates
credit valuation adjustments to appropriately reflect both its own nonperformance risk and the
respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair
value of its derivative contracts for the effect of nonperformance risk, the Company has considered
the impact of netting any applicable credit enhancements, such as collateral postings, thresholds,
mutual inputs and guarantees.
Share-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to provide services in
exchange for the award the requisite service period (usually the vesting period). The value for
all share-based payment transactions are recognized as a component of income from continuing
operations.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2009 to the Three and Nine Months Ended
September 30, 2008
2008 Acquisitions
The Company acquired the following buildings at an aggregate purchase cost of $46.4 million
during 2008: four buildings at Triangle Business Center; three buildings at RiversPark I; and three
buildings at RiversPark II. In December 2008, the Company contributed the RiversPark I and II
buildings to a newly formed joint venture, which it consolidated in its consolidated financial
statements as a result of certain lease guarantees. On March 17, 2009, a tenant at RiversPark II
renewed its lease, which effectively terminated the Companys lease guarantee related to RiversPark
II. As a result, the Company deconsolidated the assets, liabilities and operating results for
RiversPark II effective March 17, 2009. Collectively, the properties are referred to as the 2008
Acquisitions.
27
The balance of the portfolio is referred to as the Remaining Portfolio. The operating
results of the Companys Cloverleaf Center acquisition are not included in the below results as the
property was acquired in the fourth quarter of 2009.
Total Revenues
Total revenues are summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Rental |
$ | 27,149 | $ | 25,491 | $ | 80,885 | $ | 75,316 | $ | 1,658 | 7 | % | $ | 5,569 | 7 | % | ||||||||||||||||
Tenant reimbursements & other |
$ | 5,725 | $ | 5,577 | $ | 18,134 | $ | 16,304 | $ | 148 | 3 | % | $ | 1,830 | 11 | % |
Rental Revenue
Rental revenue is comprised of contractual rent, the impacts of straight-line revenue and the
amortization of intangible assets and liabilities representing above and below market leases.
Rental revenue increased $1.7 million and $5.6 million for the three and nine months ended
September 30, 2009, respectively, compared with the same period in 2008. The increase in rental
revenue was primarily attributable to the Remaining Portfolio, which had an increase of $1.3
million and $3.9 million of rental revenue for the three and nine months ended September 30, 2009,
respectively, compared with 2008 due to an increase in rental rates when compared with the prior
year. The increase in rental revenue was also attributed to an increase in occupancy as the
Companys portfolio weighted average occupancy was 86.5% for the nine months ended September 30,
2009 compared with 86.3% for the nine months ended September 30, 2008. The 2008 Acquisitions
contributed additional rental revenue of $0.4 million and $1.7 million for the three and nine
months ended September 30, 2009, respectively.
The increase in rental revenue for the three and nine months ended September 30, 2009 compared
with 2008 includes $0.5 million and $2.0 million, respectively, for the Companys Maryland
reporting segment, $0.6 million and $1.6 million, respectively, for the Northern Virginia reporting
segment and $0.6 million and $2.0 million, respectively, for the Southern Virginia reporting
segment. The increase in rental revenue for the Maryland reporting segment was due to the 2008
Acquisitions, which was partially offset by an increase in vacancy in the region. The increase in
rental revenue in the Northern and Southern Virginia reporting segments was primarily due to higher
market rental rates and higher occupancy for the three and nine months ended September 30, 2009
compared with 2008.
Tenant Reimbursements and Other Revenues
Tenant reimbursements and other revenues include operating and common area maintenance costs
reimbursed by the Companys tenants as well as other incidental revenues such as lease termination
payments, construction management fees and late fees. Tenant reimbursements and other revenues
increased $0.1 million and $1.8 million during the three and nine months ended September 30, 2009,
respectively, compared with the same period in 2008. The Remaining Portfolio contributed an
increase in tenant reimbursements and other revenues of $60 thousand and $1.4 million for the three
and nine months ended September 30, 2009, respectively, compared with the same period in 2008, due
to an increase in recoverable property operating expenses. The 2008 Acquisitions contributed $90
thousand and $0.4 million of additional tenant reimbursements and other revenues for the three and
nine months ended September 30, 2009, respectively.
The increases in tenant reimbursements and other revenues for the three and nine months ended
September 30, 2009 compared with 2008 include $0.1 million and $0.8 million, respectively, for the
Northern Virginia reporting segment and $0.1 million and $0.6 million, respectively, for the
Southern Virginia reporting segment. Tenant reimbursements and other revenues decreased $0.1
million for the three months ended September 30, 2009 and increased $0.4 million for the nine
months ended September 30, 2009 for the Companys Maryland reporting segment. The decrease for the
three months ended September 30, 2009 was a result of lower reimbursement revenue due to lower
occupancy for the region.
28
Total Expenses
Property Operating Expenses
Property operating expenses are summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Property operating |
$ | 8,149 | $ | 7,160 | $ | 24,518 | $ | 20,091 | $ | 989 | 14 | % | $ | 4,427 | 22 | % | ||||||||||||||||
Real estate taxes & insurance |
$ | 3,183 | $ | 3,173 | $ | 9,709 | $ | 9,122 | $ | 10 | | $ | 587 | 6 | % |
Property operating expenses increased $1.0 million and $4.4 million for the three and
nine months ended September 30, 2009, respectively, compared with the same period in 2008. Property
operating expenses for the Remaining Portfolio increased $0.8 million and $3.6 million during the
three and nine months ended September 30, 2009, respectively, compared with the same period in
2008, primarily due to higher bad debt expense and utility expense. The Companys 2008 Acquisitions
contributed $0.2 million and $0.8 million of additional property operating expenses for the three
and nine months ended September 30, 2009, respectively. In anticipation of higher tenant credit
losses, the Company increased its reserves for bad debt expense in 2009, which contributed bad debt
expense of $0.4 million and $1.8 million for the three and nine months ended September 30, 2009,
respectively, compared with $0.2 million for both the three and nine months ended September 30,
2008.
The increase in total property operating expenses for the three and nine months ended
September 30, 2009 compared with 2008 include $0.7 million and $2.7 million, respectively, for the
Companys Maryland reporting segment, $0.2 million and $1.0 million, respectively, for the Northern
Virginia reporting segment and $19 thousand and $0.7 million, respectively, for the Southern
Virginia reporting segment.
Real estate taxes and insurance expense increased $10 thousand and $0.6 million for the three
and nine months ended September 30, 2009, respectively, compared with the same period in 2008. The
Remaining Portfolio experienced a $36 thousand decrease in real estate taxes and insurance for the
three months ended September 30, 2009 compared with 2008 and an increase in real estate taxes and
insurance expense of $0.4 million for the nine months ended September 30, 2009 compared with 2008.
The 2008 Acquisitions contributed $47 thousand and $0.2 million of additional real estate taxes and
insurance for the three and nine months ended September 30, 2009, respectively.
Real estate taxes and insurance for the three and nine months ended September 30, 2009
compared with 2008 increased $0.1 million and $0.4 million, respectively, for the Companys
Maryland reporting segment. For the Northern Virginia reporting segment, real estate taxes and
insurance decreased $0.1 million for the three months ended September 30, 2009 and increased $0.1
million for the nine months ended September 30, 2009. For the Southern Virginia reporting segment,
real estate taxes and insurance increased $27 thousand and $0.1 million for the three and nine
months ended September 30, 2009, respectively, compared with 2008.
Other Operating Expenses
General and administrative expenses are summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
General and
administrative |
$ | 3,609 | $ | 2,797 | $ | 9,487 | $ | 8,336 | $ | 812 | 29 | % | $ | 1,151 | 14 | % |
General and administrative expenses increased $0.8 million and $1.2 million for the three
and nine months ended September 30, 2009, respectively, compared with 2008, primarily due to
increased share-based compensation expense as a result of restricted shares issued to the Companys
executives in 2009.
29
Depreciation and amortization expenses are summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Depreciation and amortization |
$ | 10,132 | $ | 9,113 | $ | 30,183 | $ | 27,373 | $ | 1,019 | 11 | % | $ | 2,810 | 10 | % | ||||||||||||||||
Depreciation and amortization expense includes depreciation of real estate assets and
amortization of intangible assets and leasing commissions. For the three and nine months ended
September 30, 2009, depreciation and amortization expense increased $1.0 million and $2.8 million,
respectively. The Remaining Portfolio generated additional depreciation and amortization expense of
$0.8 million and $1.9 million, respectively, due to an increase in expense related to the disposal
of assets from tenants that vacated during the year. The remaining increase in depreciation and
amortization expense for the three and nine months ended September 30, 2009 was attributed to the
2008 Acquisitions. |
||||||||||||||||||||||||||||||||
Other Expenses (Income) |
||||||||||||||||||||||||||||||||
Interest expense is summarized as follows: |
||||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Decrease | Change | Decrease | Change | ||||||||||||||||||||||||
Interest expense |
$ | 7,929 | $ | 8,635 | $ | 24,368 | $ | 27,302 | $ | 706 | 8 | % | $ | 2,934 | 11 | % |
The Company seeks to employ cost-effective financing methods to fund its acquisitions and
development projects and to refinance its existing debt to provide greater balance sheet
flexibility or to take advantage of lower interest rates. The methods used to fund the Companys
activities impact the period over period comparisons of interest expense.
Interest expense decreased $0.7 million and $2.9 million for the three and nine months ended
September 30, 2009, respectively, compared with the same period in 2008, primarily due to the
Companys efforts in refinancing its existing debt at lower interest rates as well as reducing its
outstanding debt level. At September 30, 2009, the Company had $614.6 million of debt outstanding
at a weighted average interest rate of 4.9% compared with $650.9 million of debt outstanding at a
weighted average interest rate of 5.6% at September 30, 2008.
For the three and nine months ended September 30, 2009, the Companys mortgage interest
expense decreased $0.4 million and $2.5 million, respectively, as the Company retired $87.6 million
of mortgage debt encumbering Herndon Corporate Center, Norfolk Commerce Park II and the Suburban
Maryland Portfolio in 2008. The prepayment of the $72.1 million Suburban Maryland Portfolio
mortgage loan, in the third quarter of 2008, was partially financed through the issuance of a $35.0
million term loan, later amended to increase the total commitment to $50.0 million, which resulted
in an additional $0.1 million and $0.9 million of interest expense during the three and nine months
ended September 30, 2009, respectively. The remainder was financed with a draw on the Companys
unsecured revolving credit facility. The Company also used its unsecured revolving credit facility
to primarily fund the partial repurchase its Exchangeable Senior Notes. Since the beginning of
2008, the Company has repurchased $74.5 million of its Exchangeable Senior Notes at a discount,
which resulted in a $0.5 million and $1.6 million decrease of interest expense and discount
amortization for the three and nine months ended September 30, 2009, respectively. The increased
borrowings on the unsecured revolving credit facility were offset by a lower weighted average
interest rate. For the three and nine months ended September 30, 2009, the Companys average
balance on its unsecured revolving credit facility was $102.5 million and $92.0 million,
respectively, with a weighted average interest rate of 1.5% and 1.6%, respectively, compared with
$83.0 million and $69.3 million with a weighted average interest rate of 3.7% and 4.1% for the
three and nine months ended September 30, 2008, respectively. The lower weighted average interest
rate on the unsecured revolving credit facility resulted in a $0.4 million and $1.0 million
decrease of interest expense during the three and nine months ended September 30, 2009,
respectively. The decline in interest rates in 2009 compared with 2008 resulted in $0.3 million and
$1.0 million less of interest expense related to a $50.0 million variable-rate term loan that
originated in 2007 for the three and nine months ended September 30, 2009, respectively. The
Company entered into interest rate swap agreements to fix
30
the interest rates of its $50.0 million term loan and the original $35.0 million of the above
mentioned term loan, which due to a decline in interest rates resulted in a combined $0.5 million
and $1.6 million of additional interest expense for the three and nine months ended September 30,
2009, respectively.
The decrease in the Companys interest expense was partially offset by a $0.4 million and $0.9
million decrease in capitalized interest for the three and nine months ended September 30, 2009 due
to a decline in development and redevelopment activity in 2009 compared with 2008. Also, the
Company recorded Financing Obligation income of $0.1 million and $0.3 million for the three and
nine months ended September 30, 2009, respectively, compared with 2008 as the Companys
consolidated joint venture, which was entered into during December 2008, incurred a loss for the
three and nine months ended September 30, 2009.
Interest and other income are summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Interest and
other income |
$ | 150 | $ | 142 | $ | 406 | $ | 377 | $ | 8 | 6 | % | $ | 29 | 8 | % |
Interest and other income include amounts earned on the Companys funds held in various
cash operating and escrow accounts. Interest and other income increased for the three and nine
months ended September 30, 2009 primarily due to higher average cash balances. The Company earned a
weighted average interest rate of 3.5% and 3.5% on average cash balances of $8.7 million and $7.0
million for the three and nine months ended September 30, 2009, respectively, compared with a
weighted average interest rate of 3.5% and 3.7% on average cash balances of $5.1 million and $4.3
million during the three and nine months ended September 30, 2008, respectively.
Equity in losses of affiliate is summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Equity in losses of affiliate |
$ | 38 | $ | | $ | 92 | $ | | $ | 38 | | $ | 92 | |
On December 12, 2008, the Company entered into joint venture arrangements with a third
party to own RiversPark I and II. As a condition of the joint ventures, the Company provided a
guarantee to the joint venture for several lease agreements entered into by the former owner for
certain vacancies at RiversPark I and rental payments in the event a specified tenant did not renew
its lease at RiversPark II. On March 17, 2009, the specified tenant renewed its lease at RiversPark
II, which effectively terminated the Companys lease guarantee related to RiversPark II. As a
result, the Company applied equity accounting to RiversPark II and, therefore, the operating
results of RiversPark II are no longer consolidated on the Companys consolidated financial
statements effective March 17, 2009.
Gain on early retirement of debt is summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Increase | Change | ||||||||||||||||||||||||
Gain on early
retirement of debt |
$ | 640 | $ | | $ | 6,346 | $ | 3,006 | $ | 640 | | $ | 3,340 | 111 | % |
During the third quarter of 2009, the Company used available cash and a draw on its
unsecured revolving credit facility to repurchase $8.5 million of its Exchangeable Senior Notes at
a discount, which resulted in a gain of $0.6 million, net of deferred
31
financing costs and discounts. The Company did not repurchase any Exchangeable Senior Notes during
the third quarter of 2008. For the nine months ended September 30, 2009, the Company repurchased
$34.5 million of its Exchangeable Senior Notes at a 23% discount compared with the repurchase of
$34.0 million at a 16% discount for the nine months ended September 30, 2008.
For the nine months ended September 30, 2009, the Company used available cash and draws on its
unsecured revolving credit facility to retire $34.5 million of its Exchangeable Senior Notes at a
discount, which resulted in a gain of $6.3 million, net of deferred financing costs and discounts.
During the nine months of 2008, the Company used available cash and draws on its unsecured
revolving credit facility to retire $34.0 million of its Exchangeable Senior Notes at a discount,
which resulted in a gain of $3.0 million, net of deferred financing costs and discounts.
Noncontrolling Interests
Noncontrolling interests are summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Increase | Change | Decrease | Change | ||||||||||||||||||||||||
Noncontrolling
interests |
$ | 16 | $ | 10 | $ | 202 | $ | 567 | $ | 6 | 60 | % | $ | 365 | 64 | % |
Noncontrolling interests reflect the ownership interests of the Operating Partnership
held by parties other than the Company. Noncontrolling interests slightly increased for the three
months ended September 30, 2009 and decreased $0.4 million for the nine months ended September 30,
2009. The increase in noncontrolling interest for the three months ended September 30, 2009 was
attributable to higher income net income for the period compared with 2008. The decrease in
noncontrolling interests for the nine months ended September 30, 2009 compared with 2008 can be
attributed to a $15.6 million decrease in income from discontinued operations for the nine months
ended September 30, 2009 compared with 2008. Income from discontinued operations was higher in the
prior year period as the Company sold its Alexandria Corporate Park property in June 2008 for a
$14.3 million gain. Operating results of the property and the gain on sale are reflected as
discontinued operations in the Companys consolidated statements of operations. The Company did not
dispose of any properties during the nine months ended September 30, 2009. The noncontrolling
interests owned by limited partners decreased to 2.4% as of September 30, 2009 compared with 2.8%
as of September 30, 2008, primarily due to the Company issuing 2.1 million shares of its common
stock in the nine months ended September 30, 2009.
Income from Discontinued Operations
Income from discontinued operations is summarized as follows:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||||||||||
September 30, | September 30, | Percent | Percent | |||||||||||||||||||||||||||||
(amounts in thousands) | 2009 | 2008 | 2009 | 2008 | Change | Change | Decrease | Change | ||||||||||||||||||||||||
Income from
discontinued
operations |
$ | | $ | | $ | | $ | 15,609 | $ | | | $ | 15,609 | 100 | % |
Income from discontinued operations represents revenues and expenses from Alexandria
Corporate Park, formerly in the Companys Northern Virginia reporting segment. In June 2008, the
Company sold its Alexandria Corporate Park property in Alexandria, Virginia, and recognized a gain
on sale of $14.3 million. Operating results of the property and the gain on sale of the property
are reflected as discontinued operations in the Companys consolidated statements of operations.
The Company has had no continuing involvement with the property subsequent to its disposal. The
Company had not committed to a disposition plan nor had it disposed of any additional real estate
assets as of September 30, 2009.
32
Liquidity and Capital Resources
The Company expects to meet short-term liquidity requirements generally through working
capital, net cash provided by operations, and, if necessary, borrowings on its unsecured revolving
credit facility. The Companys short-term liquidity requirements consist primarily of obligations
under the lease for its corporate headquarters, normal recurring operating expenses, regular debt
service requirements, recurring expenditures, non-recurring expenditures (such as capital
improvements, tenant improvements and redevelopments), leasing commissions, and related costs, and
dividends to common shareholders. As a REIT, the Company is required to distribute at least 90% of
its taxable income to its shareholders on an annual basis.
The Company intends to meet long-term funding requirements for property acquisitions,
development, redevelopment and other non-recurring capital improvements through net cash from
operations, long-term secured and unsecured indebtedness, including borrowings under its unsecured
revolving credit facility, secured term loans, unsecured senior notes, proceeds from sales of
strategically identified assets and potential joint ventures, and the issuance of equity and debt
securities. The Companys ability to raise funds through sales of debt and equity securities is
dependent on, among other things, general economic conditions, general market conditions for REITs,
rental rates, occupancy levels, market perceptions and the trading price of the Companys shares.
In 2009, the Company entered into a controlled equity offering agreement, which allows the Company
to issue, from time to time, up to 3.0 million shares of its common stock. Through the date of this
filing, the Company has issued 2.2 million shares of its common stock, which generated net proceeds
of $23.3 million. The Company used the proceeds to repay outstanding debt and fund the cash portion
of its Cloverleaf Center acquisition. The Company will continue to analyze which sources of capital
are most advantageous to it at any particular point in time, but the capital markets may not be
consistently available on terms the Company deems attractive.
Due to the nature of the Companys business, it relies on net cash provided by operations to
fund its short-term liquidity needs. Net cash provided by operations is substantially dependent on
the continued receipt of rental payments and other expenses reimbursed by the Companys tenants.
The recent economic downturn may affect tenants ability to meet their obligations, including the
payment of rent contractually owed to the Company, and the Companys ability to lease space to new
or replacement tenants on favorable terms, all of which could effect the Companys cash available
for short-term liquidity needs. Although the recent economic downturn and uncertainty in the
global credit markets has had varying impacts that have negatively impacted debt financing and the
availability of capital across many industries, the Company anticipates that its available cash
flow from operating activities, and available cash from borrowings and other sources, will be
adequate to meet its capital and liquidity needs in both the short and long term. The Companys
unsecured revolving credit facility and secured term loans mature in April 2010 and August 2010,
respectively, and provide for a one-year extension of the maturity date at the Companys option.
The Company intends to exercise the extension option or refinance the debt before it reaches
maturity. As of September 30, 2009, assuming the one-year extensions are exercised, the Company has
approximately $30 million, or 4.9% of its principal debt maturing prior to January 1, 2011. In
October and November 2009, the Company repaid a $1.7 million mortgage loan encumbering 4200 Tech
Court and a $4.5 million mortgage loan encumbering Park Central I, respectively, with available
cash. As a result, the Company does not have any additional debt maturing in 2009 and has
approximately $24 million maturing in 2010, with the majority maturing near the end of the year. At
September 30, 2009, the Company had $25.5 million of additional capacity available on its unsecured
revolving credit facility.
On October 27, 2009, the Company declared a dividend of $0.20 per common share. The Company
reduced its dividend in the first quarter of 2009 in order to further enhance its financial
flexibility and in light of the recent change in the tax laws relative to recognition of gains on
cancellation of debt. The reduction in the dividend will also provide additional financial
capacity and balance sheet flexibility in the event the capital markets remain challenging for an
extended period.
The Company could also fund building acquisitions, development, redevelopment and other
non-recurring capital improvements through additional borrowings, sales of assets or joint
ventures. The Company could also issue Operating Partnership units to fund a portion of the
purchase price for some of its future building acquisitions.
Financial Covenants
The Companys outstanding corporate debt agreements contain specific financial covenants that
may impact future financing decisions made by the Company or may be impacted by a decline in
operations. These covenants differ by debt instrument and relate to the Companys allowable
leverage, minimum tangible net worth, fixed debt coverage and other financial metrics. As of
September 30, 2009, the Company was in compliance with all of the covenants of its outstanding debt
33
instruments. Below is a summary of certain covenants associated with the Companys outstanding debt
for the quarter ended September 30, 2009 (dollars in thousands):
Unsecured Revolving Credit Facility and Secured Term Loans
Unsecured | ||||||||||||
Revolving Credit | ||||||||||||
Facility and 2007 | 2008 Secured | |||||||||||
Secured Term Loan | Term Loan | Covenant | ||||||||||
Unencumbered Pool Leverage(1) |
50.1 | % | | ≤ 65 | % | |||||||
Unencumbered Pool Debt Service Coverage
Ratio(1) |
3.50 | x | | ≥ 1.75 | x | |||||||
Maximum Consolidated Total Indebtedness |
55.0 | % | 55.4 | % | ≤ 60 | %(2) | ||||||
Minimum Tangible Net Worth |
$517,030 | $506,929 | ≥ $373,279 | |||||||||
Fixed Charge Coverage Ratio |
1.93 | x | 1.91 | x | ≥ 1.50 | x | ||||||
Maximum Dividend Payout Ratio(1) |
53.5 | % | | ≤ 95 | % |
(1) | Covenant does not apply to the Companys 2007 secured term loan. | |
(2) | Company has a one time right to increase indebtedness to 65% for three consecutive quarters. |
Senior Notes
Senior Notes | Covenant | |||||||
Maximum Consolidated Total Indebtedness |
56.6 | % | ≤ 65 | % | ||||
Minimum Tangible Net Worth |
$483,654 | ≥ $373,279 | ||||||
Fixed Charge Coverage Ratio |
1.93 | x | ≥ 1.50 | x | ||||
Maximum Dividend Payout Ratio |
53.5 | % | ≤ 95 | % |
Cash Flows
Consolidated cash flow information is summarized as follows:
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
(amounts in thousands) | 2009 | 2008 | Change | |||||||||
Cash provided by operating activities |
$ | 31,181 | $ | 31,906 | $ | (725 | ) | |||||
Cash used in investing activities |
(21,223 | ) | (23,623 | ) | 2,400 | |||||||
Cash used in financing activities |
(14,342 | ) | (5,782 | ) | (8,560 | ) |
Net cash provided by operating activities decreased $0.7 million for the nine months ended
September 30, 2009 compared to the same period in 2008, which was primarily attributable to a
change in cash flows from its escrows and reserves accounts. In August 2008, the Company repaid a
loan encumbering its Suburban Maryland Portfolio and all the associated escrowed funds were
released to the Company, which accounted for the majority of the $4.7 million of cash provided by
escrows and reserves accounts for the nine months ended September 30, 2008. In 2009, the Company
contributed $1.6 million into its escrows and reserves accounts. The decline in cash provided by
operating activities was partially offset by an increase in non-cash expenses, such as,
depreciation and amortization, stock based compensation and bad debt expense for the nine months
ended September 30, 2009.
Net cash used in investing activities decreased $2.4 million for the nine months ended
September 30, 2009 compared to the same period in 2008. The decline is primarily due to an $8.6
million reduction in cash used for development and redevelopment projects as the Company completed
several large development and redevelopment projects in 2008. During the nine months ended
September 30, 2008, the Company sold its Alexandria Corporate Park property for net proceeds of
$50.6 million and acquired two properties for $46.6 million. The Company did not dispose of or
acquire any properties during the nine months ended September 30, 2009, though it paid a deposit of
$2.5 million for a property it subsequently acquired in the fourth quarter of 2009. The Company
decreased its additions to rental property by $0.3 million for the nine months ended September 30,
2009 compared to the same period in 2008.
Net cash used in financing activities increased $8.6 million for the nine months ended
September 30, 2009 compared to the same period in 2008, primarily, due to a decrease in proceeds
received from the issuance of the Companys common stock. In 2009 the Company issued 2.1 million
shares of common stock, through its controlled equity offering agreement, for net
34
proceeds of $22.3 million. For the nine months ended September 30, 2008, the Company issued 2.5
million shares of its common stock, in a September offering, for net proceeds of approximately
$38.2 million. The proceeds from the stock issuances were used to partially fund acquisitions and
pay down debt. In 2009, the Company borrowed $31.5 million on its unsecured revolving credit
facility and used $47.0 million of cash to retire outstanding debt, which includes repayments
totaling $7.6 million on the outstanding balance of its unsecured revolving credit facility.
Comparatively, in 2008 the Company borrowed $42.2 million, net of repayments, on its unsecured
revolving credit facility, issued a $35.0 million term loan and used a $28.0 million mortgage to
partially fund an acquisition. During 2008, the Company used cash of $122.3 million to retire
outstanding debt, which excludes repayments on its unsecured revolving credit facility. The
retirement of debt includes $26.5 million and $28.6 million of cash used to retire $34.5 million
and $34.0 million of the Companys Exchangeable Senior Notes, which resulted in gains of $6.3
million and $3.0 million during the nine months ended September 30, 2009 and 2008, respectively.
The Company paid dividends in the second and third quarters of 2009 of $0.20 per common share as
compared with $0.34 per common share paid in the first quarter of 2009 and throughout 2008. The
decline in the dividend rate resulted in a total reduction of dividends paid to shareholders and
distributions paid to unitholders of $4.6 million in 2009 compared to 2008.
Same Property Net Operating Income
Same Property Net Operating Income (Same Property NOI), defined as operating revenues
(rental, tenant reimbursements and other revenues) less operating expenses (property operating
expenses, real estate taxes and insurance) from the properties owned by the Company for the
entirety of the periods presented, is a primary performance measure the Company uses to assess the
results of operations at its properties. As an indication of the Companys operating performance,
Same Property NOI should not be considered an alternative to net income calculated in accordance
with GAAP. A reconciliation of the Companys Same Property NOI to net income from its consolidated
statements of operations is presented below. The Same Property NOI results exclude corporate-level
expenses, as well as certain transactions, such as the collection of termination fees, as these
items vary significantly period over period thus impacting trends and comparability. Also, the
Company eliminates depreciation and amortization expense, which are property level expenses, in
computing Same Property NOI as these are non-cash expenses that are based on historical cost
accounting assumptions and do not offer the investor significant insight into the operations of the
property. This presentation allows management and investors to distinguish whether growth or
declines in net operating income are a result of increases or decreases in property operations or
the acquisition of additional properties. While this presentation provides useful information to
management and investors, the results below should be read in conjunction with the results from the
consolidated statements of operations to provide a complete depiction of total Company performance.
35
Comparison of the Three and Nine Months Ended September 30, 2009 to the Three and Nine Months Ended
September 30, 2008
The following table of selected operating data provides the basis for our discussion of Same
Property NOI for the periods presented:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2009 | 2008 | Change | Change | 2009 | 2008 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
166 | 166 | | | 166 | 166 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 26,452 | $ | 25,431 | $ | 1,021 | 4.0 | $ | 78,332 | $ | 75,257 | $ | 3,075 | 4.1 | ||||||||||||||||||
Tenant reimbursements |
5,511 | 5,475 | 36 | 0.7 | 17,195 | 15,294 | 1,901 | 12.4 | ||||||||||||||||||||||||
Total same property revenue |
31,963 | 30,906 | 1,057 | 3.4 | 95,527 | 90,551 | 4,976 | 5.5 | ||||||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
7,404 | 6,971 | 433 | 6.2 | 22,433 | 19,247 | 3,186 | 16.6 | ||||||||||||||||||||||||
Real estate taxes and insurance |
3,121 | 3,177 | (56 | ) | (1.8 | ) | 9,493 | 9,161 | 332 | 3.6 | ||||||||||||||||||||||
Total same property operating expenses |
10,525 | 10,148 | 377 | 3.7 | 31,926 | 28,408 | 3,518 | 12.4 | ||||||||||||||||||||||||
Same property net operating income |
$ | 21,438 | $ | 20,758 | $ | 680 | 3.3 | $ | 63,601 | $ | 62,143 | $ | 1,458 | 2.3 | ||||||||||||||||||
Reconciliation to net income |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 21,438 | $ | 20,758 | $ | 63,601 | $ | 62,143 | ||||||||||||||||||||||||
Non-comparable net operating income
(loss)(2)(3)(4) |
104 | (23 | ) | 1,191 | 264 | |||||||||||||||||||||||||||
General and administrative expenses |
(3,609 | ) | (2,797 | ) | (9,487 | ) | (8,336 | ) | ||||||||||||||||||||||||
Depreciation and amortization |
(10,132 | ) | (9,113 | ) | (30,183 | ) | (27,373 | ) | ||||||||||||||||||||||||
Other expenses, net |
(7,177 | ) | (8,493 | ) | (17,708 | ) | (23,919 | ) | ||||||||||||||||||||||||
Discontinued operations |
| | | 15,609 | ||||||||||||||||||||||||||||
Net income |
$ | 624 | $ | 332 | $ | 7,414 | $ | 18,388 | ||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Same Properties |
86.8 | % | 86.3 | % | 86.7 | % | 86.1 | % | ||||||||||||||||||||||||
Total |
86.5 | % | 86.4 | % | 86.5 | % | 86.2 | % |
(1) | Represents properties owned for the entirety of the periods presented. | |
(2) | Non-comparable Properties include: Alexandria Corporate Park, Triangle Business Center and RiversPark I and II. | |
(3) | Excludes a 76,000 square foot redevelopment building at Ammendale Commerce Center, which was placed in-service during the fourth quarter of 2008. | |
(4) | Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes. | |
(5) | Discontinued operations represent income and the gain on sale related to Alexandria Corporate Park, which was sold in June 2008. |
Same Property NOI increased $0.7 million, or 3.3%, and $1.5 million, or 2.3%, for the
three and nine months ended September 30, 2009, respectively, compared with the same periods in
2008. Total same property revenue increased $1.1 million and $5.0 million for the three and nine
months ended September 30, 2009, respectively, as a result of higher rental rates, much of which
can be attributed to the significant leasing activity completed in 2008. Total same property
operating expenses
36
increased $0.4 million and $3.5 million for the three and nine months ended
September 30, 2009, respectively. The increased
operating expenses throughout 2009 are due to increased reserves for estimated uncollectible
accounts, legal fees associated with tenant legal matters as well as leasing efforts and generally
higher non-recoverable related costs associated with vacant space.
Maryland
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2009 | 2008 | Change | Change | 2009 | 2008 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
64 | 64 | | | 64 | 64 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 8,298 | $ | 8,423 | $ | (125 | ) | (1.5 | ) | $ | 25,025 | $ | 25,586 | $ | (561 | ) | (2.2 | ) | ||||||||||||||
Tenant reimbursements |
1,548 | 1,767 | (219 | ) | (12.4 | ) | 4,997 | 5,025 | (28 | ) | (0.6 | ) | ||||||||||||||||||||
Total same property revenue |
9,846 | 10,190 | (344 | ) | (3.4 | ) | 30,022 | 30,611 | (589 | ) | (1.9 | ) | ||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
2,314 | 2,077 | 237 | 11.4 | 7,496 | 6,041 | 1,455 | 24.1 | ||||||||||||||||||||||||
Real estate taxes and insurance |
1,082 | 1,049 | 33 | 3.1 | 3,114 | 2,973 | 141 | 4.7 | ||||||||||||||||||||||||
Total same property operating expenses |
3,396 | 3,126 | 270 | 8.6 | 10,610 | 9,014 | 1,596 | 17.7 | ||||||||||||||||||||||||
Same property net operating income |
$ | 6,450 | $ | 7,064 | $ | (614 | ) | (8.7 | ) | $ | 19,412 | $ | 21,597 | $ | (2,185 | ) | (10.1 | ) | ||||||||||||||
Reconciliation to total property operating income: |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 6,450 | $ | 7,064 | $ | 19,412 | $ | 21,597 | ||||||||||||||||||||||||
Non-comparable net operating income(2) (3) |
248 | 22 | 1,602 | 91 | ||||||||||||||||||||||||||||
Total property operating income |
$ | 6,698 | $ | 7,086 | $ | 21,014 | $ | 21,688 | ||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Same Properties |
82.6 | % | 88.6 | % | 84.5 | % | 89.0 | % | ||||||||||||||||||||||||
Total |
82.3 | % | 88.7 | % | 83.9 | % | 89.0 | % |
(1) | Represents properties owned for the entirety of the periods presented. | |
(2) | Non-comparable Properties include: Triangle Business Center, RiversPark I and II, and a 76,000 square foot redevelopment building at Ammendale Commerce Center. | |
(3) | Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes. |
Same Property NOI for the Maryland properties decreased $0.6 million and $2.2 million for
the three and nine months ended September 30, 2009, respectively, compared with the same period in
2008. Total same property revenue decreased by $0.3 million and $0.6 million for the three and
nine months ended September 30, 2009, respectively, as a result of a decrease in occupancy. Total
same property operating expenses for the Maryland properties increased $0.3 million and $1.6
million for the three and nine months ended September 30, 2009, respectively. The increased
operating expenses throughout 2009 are due largely to increased reserves for estimated
uncollectible accounts, legal fees associated with tenant legal matters and generally higher
non-recoverable related costs associated with vacant space. The expense for estimated
uncollectible accounts disproportionately impacted our Maryland region when compared to the overall
portfolio, particularly in the Baltimore submarket which accounted for approximately 75% of the
estimated reserves for bad debt expense within Maryland.
37
Northern Virginia
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2009 | 2008 | Change | Change | 2009 | 2008 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
48 | 48 | | | 48 | 48 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 8,214 | $ | 7,641 | $ | 573 | 7.5 | $ | 24,061 | $ | 22,446 | $ | 1,615 | 7.2 | ||||||||||||||||||
Tenant reimbursements |
1,796 | 1,695 | 101 | 6.0 | 5,575 | 4,734 | 841 | 17.8 | ||||||||||||||||||||||||
Total same property revenue |
10,010 | 9,336 | 674 | 7.2 | 29,636 | 27,180 | 2,456 | 9.0 | ||||||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
2,230 | 2,004 | 226 | 11.3 | 6,632 | 5,655 | 977 | 17.3 | ||||||||||||||||||||||||
Real estate taxes and insurance |
971 | 1,090 | (119 | ) | (10.9 | ) | 3,204 | 3,093 | 111 | 3.6 | ||||||||||||||||||||||
Total same property operating
expenses |
3,201 | 3,094 | 107 | 3.5 | 9,836 | 8,748 | 1,088 | 12.4 | ||||||||||||||||||||||||
Same property net operating income |
$ | 6,809 | $ | 6,242 | $ | 567 | 9.1 | $ | 19,800 | $ | 18,432 | $ | 1,368 | 7.4 | ||||||||||||||||||
Reconciliation to total property operating income |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 6,809 | $ | 6,242 | $ | 19,800 | $ | 18,432 | ||||||||||||||||||||||||
Non-comparable net operating loss(2) (3) |
(51 | ) | (38 | ) | (190 | ) | (152 | ) | ||||||||||||||||||||||||
Total property operating income |
$ | 6,758 | $ | 6,204 | $ | 19,610 | $ | 18,280 | ||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Same Properties |
88.3 | % | 87.8 | % | 88.8 | % | 86.6 | % | ||||||||||||||||||||||||
Total |
88.3 | % | 87.8 | % | 88.8 | % | 86.7 | % |
(1) | Represents properties owned for the entirety of the periods presented. | |
(2) | Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes. | |
(3) | Non-comparable Properties include: Alexandria Corporate Park. |
Same Property NOI for the Northern Virginia properties increased $0.6 million and $1.4
million for the three and nine months ended September 30, 2009, respectively, compared with the
same period in 2008. Total same property revenue increased $0.7 million and $2.5 million for the
three and nine months ended September, respectively, as a result of higher occupancy and an
increase in rental rates. Total same property operating expenses increased $0.1 million and $1.1
million for the three and nine months ended September 30, 2008, respectively. The nine month
increase in operating expenses can be attributed to higher utility costs, increased real estate
taxes and higher estimated reserves for uncollectible revenue.
38
Southern Virginia
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
(dollars in thousands) | 2009 | 2008 | Change | Change | 2009 | 2008 | Change | Change | ||||||||||||||||||||||||
Number of buildings (1) |
54 | 54 | | | 54 | 54 | | | ||||||||||||||||||||||||
Same property revenue |
||||||||||||||||||||||||||||||||
Rental |
$ | 9,940 | $ | 9,367 | $ | 573 | 6.1 | $ | 29,246 | $ | 27,225 | $ | 2,021 | 7.4 | ||||||||||||||||||
Tenant reimbursements |
2,167 | 2,013 | 154 | 7.7 | 6,623 | 5,535 | 1,088 | 19.7 | ||||||||||||||||||||||||
Total same property revenue |
12,107 | 11,380 | 727 | 6.4 | 35,869 | 32,760 | 3,109 | 9.5 | ||||||||||||||||||||||||
Same property operating expenses |
||||||||||||||||||||||||||||||||
Property |
2,860 | 2,890 | (30 | ) | (1.0 | ) | 8,305 | 7,551 | 754 | 10.0 | ||||||||||||||||||||||
Real estate taxes and insurance |
1,068 | 1,038 | 30 | 2.9 | 3,175 | 3,095 | 80 | 2.6 | ||||||||||||||||||||||||
Total same property operating
expenses |
3,928 | 3,928 | | | 11,480 | 10,646 | 834 | 7.8 | ||||||||||||||||||||||||
Same property net operating income |
$ | 8,179 | $ | 7,452 | $ | 727 | 9.8 | $ | 24,389 | $ | 22,114 | $ | 2,275 | 10.3 | ||||||||||||||||||
Reconciliation to total property operating income |
||||||||||||||||||||||||||||||||
Same property net operating income |
$ | 8,179 | $ | 7,452 | $ | 24,389 | $ | 22,114 | ||||||||||||||||||||||||
Non-comparable net operating
(loss) income (2) |
(93 | ) | (7 | ) | (221 | ) | 325 | |||||||||||||||||||||||||
Total property operating income |
$ | 8,086 | $ | 7,445 | $ | 24,168 | $ | 22,439 | ||||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||
Occupancy | Occupancy | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Same Properties |
88.6 | % | 84.1 | % | 87.0 | % | 84.0 | % | ||||||||||||||||||||||||
Total |
88.6 | % | 84.1 | % | 87.0 | % | 84.0 | % |
(1) | Represents properties owned for the entirety of the periods presented. | |
(2) | Non-Comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes. |
Same Property NOI for the Southern Virginia properties increased $0.7 million and $2.3
million for the three and nine months ended September 30, 2009, respectively, compared with the
same period in 2008. Total same property revenue increased $0.7 million and $3.1 million for the
three and nine months ended September 30, 2009, respectively, due to an increase in occupancy and
higher rental rates, largely as a result of the significant leasing activity completed in 2008.
Total same property operating expenses remained consistent comparing third quarter 2009 to third
quarter 2008 and increased $0.8 million for the nine months ended September 30, 2009. This
increase was driven by higher property operating expenses in generally all categories as a result
of the increase in occupancy which also correlates to the increase in tenant reimbursement revenue
as a portion of these costs are recovered.
Contractual Obligations
On December 12, 2008, the Company entered into joint venture arrangements with a third party
to own RiversPark I and II. The Company has guaranteed to the joint ventures the rental payments
associated with a three-year master lease with the former owner of RiversPark I. This guarantee
will expire in September 2011 or earlier if the space is re-leased. The Company also provided a
guarantee to the joint venture in connection with a specified tenant lease at RiversPark II that
will guarantee rental payments for an 18-month period in the event the tenant did not renew its
lease by the end of the third quarter of 2009.
39
On March 17, 2009, the specified tenant renewed its lease at RiversPark II, effectively
terminating the lease guarantee related to RiversPark II. The maximum potential amount of future
payments the Company could be required to make related to the rent guarantees at RiversPark I is
$0.7 million as of September 30, 2009.
As of September 30, 2009, the Company had development and redevelopment contractual
obligations of $46 thousand outstanding and capital improvement obligations of $1.2 million
outstanding. Capital improvement obligations represent commitments for roof, asphalt, HVAC and
common area replacements contractually obligated as of September 30, 2009. Also, as of September
30, 2009, the Company had $1.6 million of tenant improvement obligations which it expects to incur
on its in-place leases. The Company had no other material contractual obligations as of September
30, 2009.
Dividends and Distributions
The Company is required to distribute to its shareholders at least 90% of its taxable income
in order to qualify as a REIT, including taxable income it recognizes for tax purposes but with
regard to which it does not receive corresponding cash. Funds used by the Company to pay dividends
on its common shares are provided through distributions from the Operating Partnership. For every
common share of the Company, the Operating Partnership has issued to the Company a corresponding
common unit. At September 30, 2009, the Company was the sole general partner of and owns 97.6% of
the Operating Partnerships units. The remaining interests in the Operating Partnership are limited
partnership interests, some of which are owned by certain of the Companys executive officers,
trustees and unrelated parties who contributed properties and other assets to the Company upon its
formation. As a general rule, when the Company pays a common dividend, the Operating Partnership
pays an equivalent per unit distribution on all common units.
On October 27, 2009, the Company declared a dividend of $0.20 per common share. The dividend
will be paid on November 13, 2009, to common shareholders of record as of November 6, 2009.
Funds From Operations
Funds from operations (FFO) is a non-GAAP measure used by many investors and analysts that
follow the real estate industry. The Company considers FFO a useful measure of performance for an
equity REIT because it facilitates an understanding of the operating performance of its properties
without giving effect to real estate depreciation and amortization, which assume that the value of
real estate assets diminishes predictably over time. Since real estate values have historically
risen or fallen with market conditions, the Company believes that FFO provides a meaningful
indication of its performance. Management also considers FFO an appropriate supplemental
performance measure given its wide use by and relevance to investors and analysts. FFO, reflecting
the assumption that real estate asset values rise or fall with market conditions, principally
adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume
that the value of real estate diminishes predictably over time.
As defined by the National Association of Real Estate Investment Trusts (NAREIT) in its
March 1995 White Paper (as amended in November 1999 and April 2002), FFO represents net income
(computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real
estate-related depreciation and amortization and after adjustments for unconsolidated partnerships
and joint ventures. The Company computes FFO in accordance with NAREITs definition, which may
differ from the methodology for calculating FFO, or similarly titled measures, used by other
companies and this may not be comparable to those presentations. The Companys methodology for
computing FFO adds back noncontrolling interest in the income from its Operating Partnership in
determining FFO. The Company believes this is appropriate as Operating Partnership units are
presented on an as-converted, one-for-one basis for shares of stock in determining FFO per fully
diluted share.
Further, FFO does not represent amounts available for managements discretionary use because
of needed capital replacement or expansion, debt service obligations or other commitments and
uncertainties, nor is it indicative of funds available to fund the Companys cash needs, including
its ability to make distributions. The Companys presentation of FFO should not be considered as an
alternative to net income (computed in accordance with GAAP) as an indicator of the Companys
financial performance or to cash flow from operating activities (computed in accordance with GAAP)
as an indicator of its liquidity.
40
The following table presents a reconciliation of net income attributable to common
shareholders to FFO available to common shareholders and unitholders (amounts in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income attributable to common shareholders |
$ | 608 | $ | 322 | $ | 7,212 | $ | 17,821 | ||||||||
Add: |
||||||||||||||||
Depreciation and amortization: |
||||||||||||||||
Real estate assets |
10,132 | 9,113 | 30,183 | 27,373 | ||||||||||||
Discontinued operations |
| | | 479 | ||||||||||||
Unconsolidated joint venture |
91 | | 202 | | ||||||||||||
Consolidated joint venture |
(149 | ) | | (652 | ) | | ||||||||||
Gain on sale of disposed property |
| | | (14,274 | ) | |||||||||||
Net income attributable to noncontrolling interests |
16 | 10 | 202 | 567 | ||||||||||||
FFO available to common shareholders and unitholders |
$ | 10,698 | $ | 9,445 | $ | 37,147 | $ | 31,966 | ||||||||
Weighted average common shares and Operating Partnership
units outstanding diluted |
28,991 | 24,980 | 28,271 | 24,952 |
Off-Balance Sheet Arrangements
On March 17, 2009, the Company deconsolidated a joint venture that owned RiversPark II. For
more information see footnote 4, Investment in Affiliate.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the federal securities
laws. Forward-looking statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by use of the words
believe, expect, intend, anticipate, estimate, project or similar expressions. The
Companys ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Certain factors that could cause actual results to differ materially from
the Companys expectations include changes in general or regional economic conditions; the length
and severity of the recent economic downturn; the Companys ability to timely lease or re-lease
space at current or anticipated rents; changes in interest rates; changes in operating costs; the
Companys ability to complete current and future acquisitions; the Companys ability to obtain
additional financing and other risks detailed under sell additional common shares; and other risks
disclosed herein and in Part I, Item 1A, Risk Factors in our annual report on Form 10-K for the
year ended December 31, 2008. Many of these factors are beyond the Companys ability to control or
predict. Forward-looking statements are not guarantees of performance. For forward-looking
statements herein, the Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes
no obligation to update or supplement forward-looking statements that become untrue because of
subsequent events. We have no duty to, and do not intend to, update or revise the forward-looking
statements in this discussion after the date hereof, except as may be required by law. In light of
these uncertainties, you should keep in mind that any forward-looking statement made in this
discussion, or elsewhere, might not occur.
ITEM 3: | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK |
The Companys future income, cash flows and fair values relevant to financial instruments are
dependent upon prevailing market interest rates. Market risk refers to the risk of loss from
adverse changes in market interest rates. The Company periodically uses derivative financial
instruments to seek to manage, or hedge, interest rate risks related to its borrowings. The
Company does not use derivatives for trading or speculative purposes and only enters into contracts
with major financial institutions based on their credit rating and other factors.
At September 30, 2009, the Companys exposure to variable interest rates consisted of $99.4
million of borrowings on its unsecured revolving credit facility and $15.0 million on a secured
term loan. A change in interest rates of 1% would result in an increase or decrease of $1.0 million
in interest expense on an annualized basis. As of September 30, 2009, the Company had $94.9 million
of variable-rate term debt, comprised of a $50.0 million secured term loan, a $35.0 million secured
term loan and a $9.9 million variable-rate mortgage loan, which were hedged through various
interest rate swap agreements that fixed the loans respective interest rates.
41
For fixed rate debt, changes in interest rates generally affect the fair value of debt but not
the earnings or cash flow of the Company. See footnote 8, Fair Value of Financial Instruments for
more information on the Companys current accounting treatment on exposure to fixed interest rates.
In the normal course of business, the Company is exposed to the effect of interest rate
changes. The Company has historically entered into derivative agreements to mitigate exposure to
unexpected changes in interest. The Company intends to enter into derivative agreements only with
counterparties that it believes have a strong credit rating to mitigate the risk of counterparty
default or insolvency.
ITEM 4: | CONTROLS AND PROCEDURES |
The Company carried out an evaluation with the participation of the Companys management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this
report. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports that the Company files, or
submits under the Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Companys internal control over financial reporting during the
quarter ended September 30, 2009, that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
42
PART II: OTHER INFORMATION
Item 1. | Legal Proceedings |
As of September 30, 2009, the Company was not subject to any material pending legal
proceedings, nor, to its knowledge, was any legal proceeding threatened against it, which would be
reasonably likely to have a material adverse effect on its liquidity or results of operations.
Item 1A. | Risk Factors |
As of September 30, 2009, there were no material changes to the Companys risk factors
previously disclosed in Item 1A, Risk Factors in its Annual Report on Form 10-K for the year
ended December 31, 2008, except as set forth below.
Recent disruptions in the financial markets could affect our ability to obtain financing on
reasonable terms and have other adverse effects on us and the market price of our common shares.
The United States stock and credit markets have recently experienced significant price
volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks
to fluctuate substantially and the spreads on prospective debt financings to widen considerably.
These circumstances have materially impacted liquidity in the financial markets, making terms for
certain financings less attractive, and in certain cases have resulted in the unavailability of
certain types of financing. Continued uncertainty in the stock and credit markets may negatively
affect our ability to make acquisitions. A prolonged downturn in the stock or credit markets may
cause us to seek alternative sources of potentially less attractive financing, and may require us
to adjust our business plan accordingly. In addition, these factors may make it more difficult for
us to sell properties or may adversely affect the price we receive for properties that we do sell,
as prospective buyers may experience increased costs of financing or difficulties in obtaining
financing. These events in the stock and credit markets may make it more difficult or costly for
us to raise capital through the issuance of our common shares or preferred shares. These
disruptions in the financial markets also may have a material adverse effect on the market value of
our common shares and other adverse effects on us or the economy generally.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None. |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
No. | Description | |
3.1
|
Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). | |
3.2
|
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). | |
4.1
|
Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
43
No. | Description | |
4.2
|
Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013 (incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed with the SEC on June 23, 2006). | |
4.3
|
Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016 (incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed with the SEC on June 23, 2006). | |
4.4
|
Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed on June 23, 2006). | |
4.5
|
Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006). | |
4.6
|
Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the Registrants Current Report on Form 8-K filed on June 23, 2006). | |
4.7
|
Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on December 12, 2006). | |
4.8
|
Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011 (incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K filed on December 12, 2006). | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST POTOMAC REALTY TRUST |
||||
Date: November 6, 2009 | /s/ Douglas J. Donatelli | |||
Douglas J. Donatelli | ||||
Chairman of the Board and Chief Executive Officer | ||||
Date: November 6, 2009 | /s/ Barry H. Bass | |||
Barry H. Bass | ||||
Executive Vice President and Chief Financial Officer | ||||
45
EXHIBIT INDEX
No. | Description | |
3.1
|
Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). | |
3.2
|
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). | |
4.1
|
Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). | |
4.2
|
Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013 (incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed with the SEC on June 23, 2006). | |
4.3
|
Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016 (incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed with the SEC on June 23, 2006). | |
4.4
|
Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed on June 23, 2006). | |
4.5
|
Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006). | |
4.6
|
Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the Registrants Current Report on Form 8-K filed on June 23, 2006). | |
4.7
|
Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on December 12, 2006). | |
4.8
|
Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011 (incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K filed on December 12, 2006). | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |