Attached files
file | filename |
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EX-4.3 - EXHIBIT 4.3 - FIRST POTOMAC REALTY TRUST | c16711exv4w3.htm |
EX-31.1 - EXHIBIT 31.1 - FIRST POTOMAC REALTY TRUST | c16711exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - FIRST POTOMAC REALTY TRUST | c16711exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - FIRST POTOMAC REALTY TRUST | c16711exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - FIRST POTOMAC REALTY TRUST | c16711exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly period ended March 31, 2011.
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-31824
FIRST POTOMAC REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND | 37-1470730 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
7600 Wisconsin Avenue, 11th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(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 definitions of large
accelerated filer, accelerated filter, 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 | 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 May 6, 2011, there were 50,037,732 common shares, par value $0.001 per share, outstanding.
FIRST POTOMAC REALTY TRUST
FORM 10-Q
INDEX
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
7 | ||||||||
27 | ||||||||
47 | ||||||||
47 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
Exhibit 4.3 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
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FIRST POTOMAC REALTY TRUST
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
March 31, 2011 | December 31, 2010 | |||||||
(unaudited) | ||||||||
Assets: |
||||||||
Rental property, net |
$ | 1,326,027 | $ | 1,217,897 | ||||
Cash and cash equivalents |
18,681 | 33,280 | ||||||
Escrows and reserves |
13,504 | 8,070 | ||||||
Accounts and other receivables, net of allowance
for doubtful accounts of $3,351 and $3,246,
respectively |
8,602 | 7,238 | ||||||
Accrued straight-line rents, net of allowance for
doubtful accounts of $893 and $849, respectively |
13,549 | 12,771 | ||||||
Notes receivable, net |
24,760 | 24,750 | ||||||
Investment in affiliates |
23,994 | 23,721 | ||||||
Deferred costs, net |
22,260 | 20,174 | ||||||
Prepaid expenses and other assets |
14,966 | 14,230 | ||||||
Intangible assets, net |
54,673 | 34,551 | ||||||
Total assets |
$ | 1,521,016 | $ | 1,396,682 | ||||
Liabilities: |
||||||||
Mortgage loans |
$ | 391,573 | $ | 319,096 | ||||
Exchangeable senior notes, net |
30,076 | 29,936 | ||||||
Senior notes |
75,000 | 75,000 | ||||||
Secured term loans |
100,000 | 110,000 | ||||||
Unsecured revolving credit facility |
116,000 | 191,000 | ||||||
Accounts payable and other liabilities |
34,342 | 16,827 | ||||||
Accrued interest |
3,736 | 2,170 | ||||||
Rents received in advance |
7,234 | 7,049 | ||||||
Tenant security deposits |
5,620 | 5,390 | ||||||
Deferred market rent, net |
5,676 | 6,032 | ||||||
Total liabilities |
769,257 | 762,500 | ||||||
Noncontrolling interests in the Operating Partnership |
37,420 | 16,122 | ||||||
Equity: |
||||||||
Series A Preferred Shares, $25 par value, 50,000
shares authorized: 4,600 and 0 shares issued and
outstanding, respectively |
115,000 | | ||||||
Common shares, $0.001 par value, 150,000 common
shares authorized: 50,041 and 49,922 shares issued
and outstanding, respectively |
50 | 50 | ||||||
Additional paid-in capital |
790,596 | 794,051 | ||||||
Noncontrolling interests in consolidated partnership |
3,077 | 3,077 | ||||||
Accumulated other comprehensive loss |
(293 | ) | (545 | ) | ||||
Dividends in excess of accumulated earnings |
(194,091 | ) | (178,573 | ) | ||||
Total equity |
714,339 | 618,060 | ||||||
Total liabilities, noncontrolling interests and equity |
$ | 1,521,016 | $ | 1,396,682 | ||||
See accompanying notes to condensed consolidated financial statements.
3
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FIRST POTOMAC REALTY TRUST
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Rental |
$ | 32,359 | $ | 27,016 | ||||
Tenant reimbursements and other |
8,111 | 7,757 | ||||||
Total revenues |
40,470 | 34,773 | ||||||
Operating expenses: |
||||||||
Property operating |
10,958 | 10,012 | ||||||
Real estate taxes and insurance |
4,002 | 3,328 | ||||||
General and administrative |
4,008 | 3,709 | ||||||
Acquisition costs |
2,185 | 19 | ||||||
Depreciation and amortization |
12,770 | 9,858 | ||||||
Impairment of real estate assets |
2,711 | | ||||||
Contingent consideration related to acquisition of property |
| 710 | ||||||
Total operating expenses |
36,634 | 27,636 | ||||||
Operating income |
3,836 | 7,137 | ||||||
Other expenses, net: |
||||||||
Interest expense |
8,633 | 8,861 | ||||||
Interest and other income |
(825 | ) | (112 | ) | ||||
Equity in losses of affiliates |
32 | 38 | ||||||
Total other expenses, net |
7,840 | 8,787 | ||||||
Loss from continuing operations before income taxes |
(4,004 | ) | (1,650 | ) | ||||
Benefit from income taxes |
313 | | ||||||
Loss from continuing operations |
(3,691 | ) | (1,650 | ) | ||||
Loss from discontinued operations |
(201 | ) | (558 | ) | ||||
Net loss |
(3,892 | ) | (2,208 | ) | ||||
Less: Net loss attributable to noncontrolling interests |
138 | 49 | ||||||
Net loss attributable to First Potomac Realty Trust |
(3,754 | ) | (2,159 | ) | ||||
Less: Dividends on preferred shares |
(1,783 | ) | | |||||
Net loss available to common shareholders |
$ | (5,537 | ) | $ | (2,159 | ) | ||
Basic and diluted earnings per share: |
||||||||
Loss from continuing operations |
$ | (0.12 | ) | $ | (0.06 | ) | ||
Loss from discontinued operations |
| (0.02 | ) | |||||
Net loss |
$ | (0.12 | ) | $ | (0.08 | ) | ||
Weighted average common shares outstanding: Basic and diluted |
49,234 | 30,560 |
See accompanying notes to condensed consolidated financial statements
4
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FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
(Unaudited, amounts in thousands)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,892 | ) | $ | (2,208 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Discontinued operations: |
||||||||
Depreciation and amortization |
129 | 279 | ||||||
Impairment of real estate asset |
| 565 | ||||||
Depreciation and amortization |
12,976 | 10,070 | ||||||
Stock based compensation |
691 | 1,053 | ||||||
Bad debt expense |
330 | 324 | ||||||
Benefit from income taxes |
(313 | ) | | |||||
Amortization of deferred market rent |
172 | 246 | ||||||
Amortization of financing costs and fair value discounts |
566 | 178 | ||||||
Equity in losses of affiliates |
31 | 38 | ||||||
Distributions from investments in affiliates |
9 | 81 | ||||||
Contingent consideration related to acquisition of property |
| 710 | ||||||
Impairment of real estate asset |
2,711 | | ||||||
Changes in assets and liabilities: |
||||||||
Escrows and reserves |
(5,434 | ) | (1,035 | ) | ||||
Accounts and other receivables |
(1,630 | ) | (1,372 | ) | ||||
Accrued straight-line rents |
(1,416 | ) | (647 | ) | ||||
Prepaid expenses and other assets |
126 | 1,266 | ||||||
Tenant security deposits |
230 | (116 | ) | |||||
Accounts payable and accrued expenses |
140 | (734 | ) | |||||
Accrued interest |
1,565 | 1,894 | ||||||
Rents received in advance |
184 | (158 | ) | |||||
Deferred costs |
(2,911 | ) | (1,612 | ) | ||||
Total adjustments |
8,156 | 11,030 | ||||||
Net cash provided by operating activities |
4,264 | 8,822 | ||||||
Cash flows from investing activities: |
||||||||
Purchase deposit on future acquisitions |
(3,465 | ) | | |||||
Proceeds from sale of real estate asset |
10,824 | | ||||||
Acquisition of rental property and associated intangible assets |
(9,974 | ) | | |||||
Additions to rental property |
(6,303 | ) | (2,534 | ) | ||||
Acquisition of land parcel |
(7,500 | ) | | |||||
Additions to construction in progress |
(2,807 | ) | (319 | ) | ||||
Investment in unconsolidated joint ventures |
(260 | ) | | |||||
Deconsolidation of joint venture |
| (896 | ) | |||||
Net cash used in investing activities |
(19,485 | ) | (3,749 | ) | ||||
Cash flows from financing activities: |
||||||||
Financing costs |
(920 | ) | (33 | ) | ||||
Issuance of shares, net |
111,016 | 87,068 | ||||||
Issuance of debt |
30,000 | | ||||||
Repayments of debt |
(128,652 | ) | (83,934 | ) | ||||
Distributions to noncontrolling interests |
(191 | ) | (146 | ) | ||||
Dividends to shareholders |
(10,649 | ) | (6,116 | ) | ||||
Stock option exercises |
18 | 8 | ||||||
Net cash provided by (used in) financing activities |
622 | (3,153 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(14,599 | ) | 1,920 | |||||
Cash and cash equivalents, beginning of period |
33,280 | 9,320 | ||||||
Cash and cash equivalents, end of period |
$ | 18,681 | $ | 11,240 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows Continued
(unaudited)
Consolidated Statements of Cash Flows Continued
(unaudited)
Supplemental disclosure of cash flow information for the three months ended March 31 is as
follows (amounts in thousands):
2011 | 2010 | |||||||
Cash paid for interest, net |
$ | 6,452 | $ | 6,954 | ||||
Non-cash investing and financing activities: |
||||||||
Debt assumed in connection with
acquisitions of real estate |
86,464 | | ||||||
Contingent consideration recorded at
acquisition |
9,356 | | ||||||
Conversion of Operating Partnership units
into common shares |
19 | | ||||||
Issuance of Operating Partnership units
in exchange for limited partnership
interests |
21,721 | |
Cash paid for interest on indebtedness is net of capitalized interest of $0.4 million and $0.2
million for the three months ended March 31, 2011 and 2010, respectively. During the three months
ended March 31, 2011, the Company did not pay any cash for franchise taxes levied by the city of
Washington, D.C. The Company made its first cash payments for Washington, D.C. franchise taxes in
April 2011. The Company did not own any properties in Washington, D.C. during the three months
ended March 31, 2010 and, therefore was not subject to any Washington D.C. franchise taxes.
During the three months ended March 31, 2011, 1,300 Operating Partnership units were redeemed
for an equivalent number of the Companys common shares. No Operating Partnership units were
redeemed for an equivalent number of the Companys common shares during the three months ended
March 31, 2010.
During the three months ended March 31, 2011, the Company acquired three consolidated
properties at an aggregate purchase price of $131.5 million, including the assumption of $86.5
million of mortgage debt and the issuance of 1,418,715 Operating Partnership units valued at $21.7
million on the date of acquisition. The 2011 acquisitions include 840 First Street, NE, which was
acquired for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional
consideration payable upon the terms of a lease renewal by the buildings sole tenant or the
re-tenanting of the property. At acquisition, the Company was in active negotiations with the
existing tenant to renew its lease through August 2023. As a result, the Company recorded a
contingent consideration obligation of $9.4 million at acquisition.
6
Table of Contents
FIRST POTOMAC REALTY TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
First Potomac Realty Trust (the Company) is a leader in the ownership, management,
development and redevelopment of office and industrial properties in the greater Washington, D.C.
region. The Company separates its properties into four distinct segments, which it refers to as the
Maryland, Washington, D.C., Northern Virginia and Southern Virginia reporting segments. The Company
strategically focuses on acquiring and redeveloping properties that it believes can benefit from
its intensive property management and seeks to reposition these properties to increase their
profitability and value. The Companys portfolio contains a mix of single-tenant and multi-tenant
office and industrial properties as well as business parks. Office properties are single-story and
multi-story buildings that are used primarily for office use; business parks contain buildings with
office features combined with some industrial property space; and industrial properties generally
are used as warehouse, distribution or manufacturing facilities.
References in these unaudited condensed consolidated financial statements to we, our or
First Potomac, refer to the Company and its subsidiaries, on a consolidated basis, unless the
context indicates otherwise.
The Company conducts its business through First Potomac Realty Investment Limited Partnership;
the Companys operating partnership (the Operating Partnership). The Company is the sole general
partner of, and, as of March 31, 2011, owned a 95.5% interest in, the Operating Partnership. The
remaining interests in the Operating Partnership, which are presented as noncontrolling interests
in the Operating Partnership in the accompanying unaudited condensed consolidated financial
statements, are limited partnership interests, some of which are owned by several of the Companys
executive officers and trustees who contributed properties and other assets to the Company upon its
formation, and other unrelated parties.
At March 31, 2011, the Company wholly-owned or had a controlling interest in properties
totaling 13.5 million square feet and had a noncontrolling ownership interest in properties
totaling an additional 0.5 million square feet through four unconsolidated joint ventures. The
Company also owned land that can accommodate approximately 1.7 million square feet of additional
development. The Company derives substantially all of its revenue from leases of space within its
properties. As of March 31, 2011, the Companys largest tenant was the U.S. Government, which along
with government contractors, accounted for over 20% of the Companys total annualized rental
revenue. The U.S Government also accounted for approximately a third of the Companys outstanding
accounts receivables at March 31, 2011. The Company operates so as to qualify as a real estate
investment trust (REIT) for federal income tax purposes.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The unaudited condensed consolidated financial statements of the Company include the accounts
of the Company, the Operating Partnership, the subsidiaries of the Operating Partnership in which
it has a controlling interest and First Potomac Management LLC, a wholly-owned subsidiary that
manages the majority of the Companys properties. All intercompany balances and transactions have
been eliminated in consolidation.
The Company has condensed or omitted certain information and footnote disclosures normally
included in financial statements presented in accordance with U.S. generally accepted accounting
principles (GAAP) in the accompanying unaudited condensed consolidated financial statements. The
Company believes the disclosures made are adequate to prevent the information presented from being
misleading. However, the unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto included in the Companys
annual report on Form 10-K for the year ended December 31, 2010 and as updated from time to time in
other filings with the Securities and Exchange Commission.
In the Companys opinion, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments and accruals
necessary to present fairly its financial position as of March 31, 2011, the results of its
operations and cash flows for the three months ended March 31, 2011 and 2010. Interim results are
not necessarily indicative of full-year performance due, in part, to the timing of transactions and
the impact of acquisitions and dispositions throughout the year.
7
Table of Contents
(b) Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP
requires management of the Company to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the period. Estimates include the amount of accounts receivable that may be
uncollectible; recoverability of notes receivable, future cash flows, discount and capitalization
rate assumptions used to fair value acquired properties and to test impairment of certain
long-lived assets and goodwill; market lease rates, lease-up periods, leasing and tenant
improvement costs used to fair value intangible assets acquired and probability weighted cash flow
analysis used to fair value contingent liabilities. Actual results could differ from those
estimates.
(c) Rental Property
Rental property is carried at initial cost less accumulated depreciation and, when
appropriate, impairment losses. Improvements and replacements are capitalized at cost when they
extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and
maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a
straight-line basis over the estimated useful lives of the assets. The estimated useful lives of
the Companys assets, by class, are as follows:
Buildings
|
39 years | |
Building improvements
|
5 to 20 years | |
Furniture, fixtures and equipment
|
5 to 15 years | |
Tenant improvements
|
Shorter of the useful lives of the assets or the terms of the related leases |
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions, changes in managements
intended holding period or potential sale to a third party indicate a possible impairment of the
fair value of a property, an impairment analysis is performed. The Company assesses potential
impairments based on an estimate of the future undiscounted cash flows (excluding interest charges)
expected to result from the propertys use and eventual disposition. This estimate is based on
projections of future revenues, expenses, capital improvement costs, expected holding periods and
capitalization rates. These cash flows consider factors such as expected market trends and leasing
prospects, as well as the effects of leasing demand, competition and other factors. If impairment
exists due to the inability to recover the carrying value of a real estate investment based on
forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying
value exceeds the estimated fair value of the property. The Company is required to make estimates
as to whether there are impairments in the carrying values of its investments in real estate.
Further, the Company will record an impairment loss if it expects to dispose of a property, in the
near term, at a price below carrying value. In such an event, the Company will record an impairment
loss based on the difference between a propertys carrying value and its projected sales price less
any estimated costs to sell.
The Company will classify a building as held-for-sale in the period in which it has made the
decision to dispose of the building, the Companys Board of Trustees or a designated delegate has
approved the sale, a binding agreement to purchase the property has been signed under which the
buyer has committed a significant amount of nonrefundable cash and no significant financing
contingencies exist that could cause the transaction not to be completed in a timely manner. The
Company will classify any impairment loss, together with the buildings operating results, as
discontinued operations in its consolidated statements of operations for all periods presented and
classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in
the period the sale criteria are met. Interest expense is reclassified to discontinued operations
only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage
debt will not be secured to another property owned by the Company after the disposition.
The Company recognizes the fair value, if sufficient information exists to reasonably estimate
the fair value, of any liability for conditional asset retirement obligations when incurred, which
is generally upon acquisition, construction, development or redevelopment and/or through the normal
operation of the asset.
The Company capitalizes interest costs incurred on qualifying expenditures for real estate
assets under development or redevelopment while being readied for their intended use in accordance
with accounting requirements regarding capitalization of interest. The Company will capitalize
interest when qualifying expenditures for the asset have been made, activities necessary to get the
asset ready for its intended use are in progress and interest costs are being incurred. Capitalized
interest also includes interest associated with expenditures incurred to acquire developable land
while development activities are in
progress. Capitalization of interest will end when the asset is substantially complete and
ready for its intended use, but no later than one year from completion of major construction
activity, if the property is not occupied. Capitalized interest is depreciated over the useful life
of the underlying assets, commencing when those assets are placed into service.
8
Table of Contents
(d) Notes Receivable
The Company lends money to the owners of real estate properties, which are collateralized by
an interest in the real estate property. The Company records these investments as Notes
receivable, net in its consolidated balance sheets. The investments are recorded net of any
discount or issuance costs, which are amortized over the life of the respective note receivable using the
effective interest method. The Company records interest received from notes receivable and
amortization of any discount or issuance costs within Interest and other income in its
consolidated statements of operations.
In December 2010, the Company provided a $25.0 million subordinated loan to the owners of 950
F Street, NW, a 287,000 square-foot office building in Washington, D.C., which is secured by a
portion of the owners interest in the property. The loan has a fixed interest rate of 12.5% and
was initially recorded net of $0.3 million of issuance costs. The loan matures on April 1, 2017 and
is repayable in full on or after December 21, 2013. For the quarter ended March 31, 2011, the
Company recorded interest income associated with the loan of $0.8 million.
(e) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(f) Application of New Accounting Standards
In January 2010, new accounting requirements became effective regarding fair-value
measurements. Companies are required to make additional disclosures about recurring or nonrecurring
fair value measurements and separately disclose any significant transfers into and out of
measurements in the fair-value hierarchy. These new requirements also involve disclosing fair value
measurements by class instead of major category and disclosing the valuation technique and the
inputs used in determining the fair value for each class of assets and liabilities. Disclosure
requirements regarding Level 1 and Level 2 fair-value measurements were effective for fiscal years
beginning after December 15, 2009, and new disclosure requirements for Level 3 fair-value
measurements were effective for fiscal years beginning after December 15, 2010. Early adoption was
permitted. The Company adopted the Level 1 and Level 2 accounting requirements on January 1, 2010
and adopted Level 3 accounting requirements on January 1, 2011. See footnote 10, Fair Value
Measurements for further information. The adoption of these accounting requirements did not have a
material impact on the Companys condensed consolidated financial statements.
In July 2010, new accounting guidance regarding specific disclosures was issued that will be
required for the allowance for credit losses and all finance receivables. Finance receivables
include loans, lease receivables and other arrangements with a contractual right to receive money
on demand or on fixed or determinable dates that is recognized as an asset on an entitys statement
of financial position. The amendment requires companies to provide disaggregated levels of
disclosure by portfolio segment and class to enable users of the consolidated financial statements
to understand the nature of credit risk, how the risk is analyzed in determining the related
allowance for credit losses and changes to the allowance during the reporting period. The required
disclosures under this amendment as of the end of a reporting period were effective for the
Companys December 31, 2010 reporting period and disclosures regarding activities during a
reporting period are effective for the Companys March 31, 2011 interim reporting period. The
Companys adoption of this standard did not have a material effect on the Companys condensed
consolidated financial statements.
(3) Earnings Per Share
Basic earnings or loss per share (EPS) is calculated by dividing net income or loss
available to common shareholders by the weighted average common shares outstanding for the period.
Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common
equivalent shares outstanding during the period. The effect of stock options, non-vested shares,
preferred shares and Exchangeable Senior Notes, if dilutive, is computed using the treasury stock
method. The Company applies the two-class method for determining EPS as its outstanding unvested
shares with non-forfeitable dividend rights are considered participating securities. The Companys
excess of distributions over earnings related to participating securities are shown as a reduction
in total earnings attributable to common shareholders in the Companys computation of EPS.
9
Table of Contents
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 March 31, | ||||||||
2011 | 2010 | |||||||
Numerator for basic and diluted earnings per share: |
||||||||
Loss from continuing operations |
$ | (3,691 | ) | $ | (1,650 | ) | ||
Loss from discontinued operations |
(201 | ) | (558 | ) | ||||
Net loss |
(3,892 | ) | (2,208 | ) | ||||
Less: Net loss from continuing operations
attributable to noncontrolling interests |
134 | 37 | ||||||
Less: Net loss from discontinued operations
attributable to noncontrolling interests |
4 | 12 | ||||||
Net loss attributable to First Potomac Realty Trust |
(3,754 | ) | (2,159 | ) | ||||
Less: Dividends on preferred shares |
(1,783 | ) | | |||||
Net loss available to common shareholders |
(5,537 | ) | (2,159 | ) | ||||
Less: Allocation to participating securities |
(137 | ) | (147 | ) | ||||
Net loss available to common shareholders |
$ | (5,674 | ) | $ | (2,306 | ) | ||
Denominator for basic and diluted earnings per share: |
||||||||
Weighted average shares outstanding basic and diluted |
49,234 | 30,560 | ||||||
Basic and diluted earnings per share: |
||||||||
Loss from continuing operations |
$ | (0.12 | ) | $ | (0.06 | ) | ||
Loss from discontinued operations |
| (0.02 | ) | |||||
Net loss |
$ | (0.12 | ) | $ | (0.08 | ) | ||
In accordance with accounting requirements regarding earnings per share, the Company did
not include the following potential common shares in its calculation of diluted earnings per share
as they would be anti-dilutive (amounts in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Stock option awards |
902 | 850 | ||||||
Non-vested share awards |
421 | 351 | ||||||
Conversion of Exchangeable Senior Notes(1) |
854 | 1,416 | ||||||
Series A Preferred Shares(2) |
7,302 | | ||||||
9,479 | 2,617 | |||||||
(1) | At March 31, 2011 and 2010, each $1,000 principal amount of the
Exchangeable Senior Notes was convertible into 28.039 shares. |
|
(2) | The Companys Series A Preferred Shares are only convertible into shares of the
Companys common stock upon a change in control of the Company. |
10
Table of Contents
(4) Rental Property
Rental property represents property, net of accumulated depreciation, and developable land
that are wholly owned or owned by an entity in which the Company has a controlling interest. All of
the Companys rental properties are located within the greater Washington, D.C. region. Rental
property consists of the following (amounts in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Land |
$ | 336,735 | $ | 315,229 | ||||
Buildings and improvements |
998,055 | 930,077 | ||||||
Construction in process |
56,337 | 41,685 | ||||||
Tenant improvements |
102,021 | 92,002 | ||||||
Furniture, fixtures and equipment |
10,370 | 9,894 | ||||||
1,503,518 | 1,388,887 | |||||||
Less: accumulated depreciation |
(177,491 | ) | (170,990 | ) | ||||
$ | 1,326,027 | $ | 1,217,897 | |||||
(a) Development and Redevelopment Activity
The Company constructs office, business parks and/or industrial buildings on a build-to-suit
basis or with the intent to lease upon completion of construction. Also, the Company owns
developable land that can accommodate 1.7 million square feet of additional building space. Below
is a summary of the approximate building square footage that can be developed on the Companys
developable land and the Companys current development and redevelopment activity (amounts in
thousands):
Active | Active | |||||||||||
Reporting Segment | Developable Land | Development | Redevelopment | |||||||||
Maryland |
150 | | | |||||||||
Northern Virginia |
568 | | 227 | |||||||||
Southern Virginia |
959 | 48 | 39 | |||||||||
Washington, D.C. |
43 | | 135 | |||||||||
1,720 | 48 | 401 | ||||||||||
The Company anticipates the majority of the development and redevelopment efforts on
these projects will continue throughout 2011 and expected to be completed in 2012.
(b) Acquisitions
During the first quarter of 2011, the Company acquired the following properties, which are
included in its condensed consolidated financial statements from the date of acquisition (dollars
in thousands):
Leased and | Aggregate | Mortgage | ||||||||||||||||||||
Acquisition | Property | Square | Occupied at | Purchase | Debt | |||||||||||||||||
Location | Date | Type | Feet | Acquisition | Price | Assumed(1) | ||||||||||||||||
440 First Street, NW (2) |
Washington, D.C. | 1/11/2011 | Office | | | $ | 8,000 | $ | | |||||||||||||
Cedar Hill / Merrill Lynch |
Virginia / Maryland (3) | 2/22/2011 | Office | 239,013 | 100.0 | % | 33,795 | 29,982 | ||||||||||||||
840 First Street, NE |
Washington, D.C. | 3/25/2011 | Office | 244,298 | 100.0 | % | 97,738 | 56,482 | ||||||||||||||
483,311 | $ | 139,533 | $ | 86,464 | ||||||||||||||||||
(1) | Reflects the fair value of the mortgage debt at the time of acquisition. |
|
(2) | On December 28, 2010, the Company acquired 440 First Street, NW, a vacant
eight-story, 105,000 square foot office building in Washington, D.C., for $15.3 million. On
January 11, 2011, the Company purchased the fee interest in the propertys ground lease for
$8.0 million. Also, in the first quarter of 2011, the Company purchased 30,000 square feet of
transferable development rights for $0.3 million, which can be developed into leasable space. |
|
(3) | Cedar Hill and Merrill Lynch were acquired in a portfolio acquisition. Cedar Hill
is located in Tysons Corner, Virginia and Merrill Lynch is located in Columbia, Maryland. |
11
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The Company acquired 840 First Street, NE for an aggregate purchase price of $90.0
million, with up to $10.0 million of additional consideration payable upon the lease renewal by the
buildings sole tenant or the re-tenanting of the property. At acquisition, the Company was in
active negotiations with the existing tenant to renew its lease through August 2023. As a result,
the Company recorded $9.4 million of contingent consideration at acquisition, which reflects the
Companys estimate of the fair value of the obligation that will be payable to the seller under the
terms of the acquisition agreement. For information on the assumptions used by the Company in
determining fair value, see footnote 10, Fair Value Measurements.
The preliminary fair values of the acquired assets and liabilities are as
follows (amounts in thousands):
Land |
$ | 32,193 | ||
Acquired tenant improvements |
6,094 | |||
Building and improvements |
78,992 | |||
In-place leases |
19,484 | |||
Acquired leasing commissions |
1,563 | |||
Customer relationships |
243 | |||
Above-market leases acquired |
1,127 | |||
Total assets acquired |
139,696 | |||
Below-market leases acquired |
(163 | ) | ||
Debt assumed |
(86,464 | ) | ||
Acquisition related contingent consideration |
(9,356 | ) | ||
Net assets acquired |
$ | 43,713 | ||
The fair values for the assets and liabilities acquired in 2011 are preliminary as the Company
continues to finalize their acquisition date fair value determination.
The intangible assets acquired in the first quarter of 2011 are comprised of the following
categories with their respective weighted average amortization periods: in-place leases 7.5 years;
acquired leasing commissions 8.0 years; customer relationships 5.8 years; above market leases 3.9
years; and below market leases 7.6 years.
On January 25, 2011, the Company formed a joint venture with an affiliate of The Akridge
Company (Akridge) to acquire, for $39.6 million, a property located at 1200 17th Street, NW, in
Washington, DC, and to redevelop the property. The property currently consists of a land parcel
that contains an existing 85,000 square foot office building. The joint venture intends to demolish
the existing building and develop a new Class A office building expected to have approximately
170,000 square feet of gross leasable area. When the joint venture is fully capitalized, the
Company anticipates owning 95% of the joint venture (subject to adjustment depending on each
partys capital contributions and subject to a promoted interest granted to Akridge after specified
returns are achieved by the Company). The Companys total capital commitment to the joint venture
(including acquisition and development costs) is anticipated to be approximately $109 million, less
amounts funded through acquisition and construction financing. The acquisition of the property is
not expected to occur until late 2011 and is subject to various contingencies. Construction is
currently expected to commence in 2012 and is expected to be completed in late 2014.
Pro Forma Financial Information
The unaudited pro forma financial information set forth below present results as of March 31
as if all of the Companys 2011 acquisitions, and related financings, had occurred on January 1,
2010. The pro forma information is not necessarily indicative of the results that actually would
have occurred nor does it intend to indicate future operating results (amounts in thousands, except
per share amounts):
2011 | 2010 | |||||||
Pro forma total revenues |
$ | 44,006 | $ | 39,076 | ||||
Pro forma net loss |
$ | (3,667 | ) | $ | (5,802 | ) | ||
Pro forma net loss per share basic and diluted |
$ | (0.11 | ) | $ | (0.19 | ) |
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As of March 31, 2011, the properties acquired in 2011 had, since the date of their acquisition
by the Company, combined total revenues of $0.8 million and net income of $0.2 million, which were
included in the Companys consolidated statement of operations for the three months ended March 31,
2011.
(5) Investment in Affiliates
The Company owns a noncontrolling interest in several properties in which it is not entitled
to a majority of the propertys operations or cash flows. As a result, the assets, liabilities and
operating results of these noncontrolled properties are not consolidated within the Companys
condensed consolidated financial statements. The Companys investment in these properties is
recorded as Investment in affiliates in its consolidated balance sheets.
At January 1, 2010, the Company had a 25% noncontrolling interest in the two separate joint
ventures that owned RiversPark I and II. During the fourth quarter of 2010, the Company entered
into two separate joint ventures, in which it had a 50% noncontrolling interest, to own 1750 H
Street, NW and Aviation Business Park. The net assets of the Companys unconsolidated joint
ventures consisted of the following (amounts in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Assets: |
||||||||
Rental property, net |
$ | 103,807 | $ | 104,559 | ||||
Cash and cash equivalents |
2,746 | 1,706 | ||||||
Other assets |
10,812 | 11,442 | ||||||
Total assets |
117,365 | 117,707 | ||||||
Liabilities: |
||||||||
Mortgage loans(1) |
59,646 | 59,914 | ||||||
Other liabilities |
3,626 | 4,316 | ||||||
Total liabilities |
63,272 | 64,230 | ||||||
Net assets |
$ | 54,093 | $ | 53,477 | ||||
(1) | Of the total mortgage debt that encumbers the Companys unconsolidated
properties, $7.0 million is recourse to the Company. |
The following table summarizes the results of operations of the Companys unconsolidated
joint ventures. The Companys share of earnings or losses related to its unconsolidated joint
ventures is recorded in its consolidated statements of operations as Equity in losses of
affiliates (amounts in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Total revenues |
$ | 3,078 | $ | 1,118 | ||||
Total operating expenses |
(1,136 | ) | (352 | ) | ||||
Net operating income |
1,942 | 766 | ||||||
Depreciation and amortization |
(1,302 | ) | (453 | ) | ||||
Other expenses, net |
(723 | ) | (466 | ) | ||||
Net loss |
$ | (83 | ) | $ | (153 | ) | ||
(6) Discontinued Operations
Net loss from discontinued operations represents the operating results associated with Old
Courthouse Square, 7561 Lindbergh Drive and Deer Park, all of which were formerly in the Companys
Maryland reporting segment.
In February 2011, the Company sold its Old Courthouse Square property in Martinsburg, West
Virginia for net proceeds of $10.8 million. The property was acquired as part of a portfolio
acquisition in 2004, and was the Companys only retail asset. During the third quarter of 2010, the
Company recorded a $3.4 million impairment charge based on the difference between the
contractual sales price less anticipated selling costs and the carrying value of the property.
13
Table of Contents
In June 2010, the Company sold 7561 Lindbergh Drive, for net proceeds of $3.9 million. The
Company reported a gain on the sale of $0.6 million.
In April 2010, the Company sold Deer Park for net proceeds of $7.5 million. The property was
acquired as part of a portfolio acquisition in 2004 and was located in a non-core submarket of
Baltimore, Maryland. During the first quarter of 2010, the Company recorded a $0.6 million
impairment charge based on the contractual sale price.
The Company has had, and will have, no continuing involvement with Old Courthouse Square, 7561
Lindbergh Drive or Deer Park subsequent to their disposal. The disposed properties were not subject
to any income tax. The Company did not dispose of or enter into any binding agreements to sell any
other properties during the three months ended March 31, 2011 and 2010.
The following table summarizes the components of net loss from discontinued operations
(amounts in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
$ | 44 | $ | 598 | ||||
Net loss |
(201 | ) | (558 | ) |
(7) Debt
The Companys borrowings consisted of the following (amounts in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Mortgage loans, effective interest rates ranging from 4.40% to 7.29%, maturing at various dates
through June 2021 |
$ | 391,573 | $ | 319,096 | ||||
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing December
2011(1) |
30,076 | 29,936 | ||||||
Series A senior notes, effective interest rate of 6.41%, maturing June 2013 |
37,500 | 37,500 | ||||||
Series B senior notes, effective interest rate of 6.55%, maturing June 2016 |
37,500 | 37,500 | ||||||
Secured term loan, effective interest rate of LIBOR plus 3.50%, maturing January 2014(2) |
30,000 | 40,000 | ||||||
Secured term loan, effective interest rate of LIBOR plus 2.50%, maturing August 2011 |
20,000 | 20,000 | ||||||
Secured term loan, effective interest rate of LIBOR plus 3.50%, maturing May 2011 |
50,000 | 50,000 | ||||||
Unsecured revolving credit facility, effective interest rate of LIBOR plus 3.00%, maturing January
2014(3) |
116,000 | 191,000 | ||||||
$ | 712,649 | $ | 725,032 | |||||
(1) | The principal balance of the Exchangeable Senior Notes was $30.4
million at March 31, 2011 and December 31, 2010. |
|
(2) | On January 1, 2011, the loans applicable interest rate increased to
LIBOR plus 3.50% and will continue to increase by 100 basis points every year, to a maximum of
550 basis points. |
|
(3) | The unsecured revolving credit facility matures in 2013 with a one-year
extension at the Companys option, which it intends to exercise. |
14
Table of Contents
(a) | Mortgage Loans |
The following table provides a summary of the Companys mortgage debt at March 31, 2011 and
December 31, 2010 (dollars in thousands): |
Effective | ||||||||||||||||||||
Contractual | Interest | Maturity | March 31, | December 31, | ||||||||||||||||
Encumbered Property | Interest Rate | Rate | Date | 2011 | 2010 | |||||||||||||||
Indian Creek Court (1) |
7.80 | % | 5.90 | % | January 2011 | $ | | $ | 11,982 | |||||||||||
403/405 Glenn Drive |
7.60 | % | 5.50 | % | July 2011 | 7,883 | 7,960 | |||||||||||||
4612 Navistar Drive (2) |
7.48 | % | 5.20 | % | July 2011 | 12,065 | 12,189 | |||||||||||||
Campus at Metro Park (2) |
7.11 | % | 5.25 | % | February 2012 | 22,345 | 22,556 | |||||||||||||
1434 Crossways Blvd Building II |
7.05 | % | 5.38 | % | August 2012 | 9,388 | 9,484 | |||||||||||||
Crossways Commerce Center |
6.70 | % | 6.70 | % | October 2012 | 24,061 | 24,179 | |||||||||||||
Newington Business Park Center |
6.70 | % | 6.70 | % | October 2012 | 15,178 | 15,252 | |||||||||||||
Prosperity Business Center |
6.25 | % | 5.75 | % | January 2013 | 3,479 | 3,502 | |||||||||||||
Aquia Commerce Center I(3) |
7.28 | % | 7.28 | % | February 2013 | 318 | 353 | |||||||||||||
Cedar Hill |
6.00 | % | 6.58 | % | February 2013 | 16,146 | | |||||||||||||
Merrill Lynch Building |
6.00 | % | 7.29 | % | February 2013 | 13,769 | | |||||||||||||
1434 Crossways Blvd Building I |
6.25 | % | 5.38 | % | March 2013 | 8,154 | 8,225 | |||||||||||||
Linden Business Center |
6.01 | % | 5.58 | % | October 2013 | 7,039 | 7,080 | |||||||||||||
840 First Street, NE |
5.18 | % | 6.05 | % | October 2013 | 56,381 | | |||||||||||||
Owings Mills Business Center |
5.85 | % | 5.75 | % | March 2014 | 5,420 | 5,448 | |||||||||||||
Annapolis Commerce Park East |
5.74 | % | 6.25 | % | June 2014 | 8,457 | 8,491 | |||||||||||||
Cloverleaf Center |
6.75 | % | 6.75 | % | October 2014 | 17,127 | 17,204 | |||||||||||||
Plaza 500, Van Buren Business Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center, Northridge I & II and 15395 John Marshall Highway |
5.19 | % | 5.19 | % | August 2015 | 98,791 | 99,151 | |||||||||||||
Hanover Business Center: |
||||||||||||||||||||
Building D |
8.88 | % | 6.63 | % | August 2015 | 612 | 642 | |||||||||||||
Building C |
7.88 | % | 6.63 | % | December 2017 | 1,012 | 1,041 | |||||||||||||
Chesterfield Business Center: |
||||||||||||||||||||
Buildings C,D,G and H |
8.50 | % | 6.63 | % | August 2015 | 1,605 | 1,681 | |||||||||||||
Buildings A,B,E and F |
7.45 | % | 6.63 | % | June 2021 | 2,358 | 2,398 | |||||||||||||
7458 Candlewood Road Note 1 |
4.67 | % | 6.04 | % | January 2016 | 4,741 | 4,761 | |||||||||||||
7458 Candlewood Road Note 2 |
6.57 | % | 6.30 | % | January 2016 | 9,891 | 9,938 | |||||||||||||
Gateway Centre, Building I |
7.35 | % | 5.88 | % | November 2016 | 1,146 | 1,189 | |||||||||||||
500 First Street, NW |
5.72 | % | 5.79 | % | July 2020 | 38,667 | 38,793 | |||||||||||||
Battlefield Corporate Center |
4.26 | % | 4.40 | % | November 2020 | 4,254 | 4,289 | |||||||||||||
Airpark Business Center |
7.45 | % | 6.63 | % | June 2021 | 1,286 | 1,308 | |||||||||||||
Total Mortgage Debt |
5.84 | %(4) | $ | 391,573 | $ | 319,096 | ||||||||||||||
(1) | The loan was repaid on January 3, 2011 with available cash. |
|
(2) | The maturity date presented for 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 effective interest rate was
calculated based on the anticipated period the debt is expected to be outstanding. |
|
(3) | The loan was repaid on April 1, 2011 with available cash. |
|
(4) | Weighted average interest rate on total mortgage debt. |
On February 22, 2011, the Company acquired a two-property portfolio consisting of Cedar
Hill and The Merrill Lynch Building. The acquisition was funded by the assumption of two mortgage
loans totaling $30.0 million and proceeds from the sale of a property located in its Maryland
region. Both mortgage loans have a fixed contractual interest rate of 6.00% and both notes mature
in February 2013.
On March 25, 2011, the Company acquired 840 First Street, NE in Washington, D.C. The
acquisition was funded by the assumption of a $57.2 million mortgage loan, the issuance of
1,418,715 Operating Partnership units and a draw on the Companys unsecured revolving credit
facility. The mortgage loan has a fixed contractual interest rate of 5.18% and matures in October
2013.
15
Table of Contents
(b) Secured Term Loans
On November 10, 2010, the Company entered into a three-month $50.0 million senior secured term
loan with Key Bank, N.A. In February 2011, the Company extended the maturity date of the term loan
to May 10, 2011. The loan has an interest rate of LIBOR plus 350 basis points.
On December 29, 2009, the Company refinanced a $50.0 million secured term loan, issued in
August 2007, which resulted in the repayment of $10.0 million of the principal balance and the
restructuring of the remaining balance. The remaining balance was divided into four $10 million
loans, with their maturities staggered in one-year intervals beginning January 15, 2011 and ending
on January 15, 2014. On January 14, 2011, the Company repaid the first $10.0 million loan with
available cash. At March 31, 2011, the loan bears interest at LIBOR plus 350 basis points, which
increased by 100 basis points on January 1, 2011 and will continue to increase by 100 basis points
every year, to a maximum of 550 basis points. Interest on the loan is payable on a monthly basis.
(c) Unsecured Revolving Credit Facility
During the first quarter of 2011, the Company repaid $105.0 million of the outstanding balance
of its unsecured revolving credit facility with proceeds from its Series A Cumulative Redeemable
Perpetual Preferred Shares (the Series A Preferred Shares). During the first quarter of 2011, the
Company borrowed $30.0 million on its unsecured revolving credit facility to partially fund the
acquisition of 840 First Street, NE and for general corporate purposes. The weighted average
borrowings outstanding on the unsecured revolving credit facility were $114.6 million with a
weighted average interest rate of 3.3% for the three months ended March 31, 2011, compared with
$151.6 million and 3.9%, respectively, for the three months ended March 31, 2010. At March 31,
2011, outstanding borrowings under the unsecured revolving credit facility were $116.0 million with
a weighted average interest rate of 3.2%. The Company is required to pay an annual commitment fee
of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility,
which was $108.9 million at March 31, 2011.
(d) Interest Rate Swap Agreement
On January 18, 2011, the Company fixed LIBOR at 1.474% on $50.0 million of its variable rate
debt though an interest rate swap agreement that matures on January 15, 2014.
(e) Debt Covenants
At March 31, 2011, the Company was in compliance with all of the financial and non-financial
covenants associated with its debt instruments with the exception of the mortgage loans explained
below.
Certain of the Companys subsidiaries are borrowers on mortgage loans, the terms of which
prohibit certain direct or indirect transfers of ownership interests in the borrower subsidiary (a
Prohibited Transfer). Under the terms of the mortgage loan documents, a lender could assert that
a Prohibited Transfer includes the trading of the Companys common shares on the NYSE, the issuance
of common shares by the Company, or the issuance of units of limited partnership interest in the
Operating Partnership. As of March 31, 2011, the Company believes that there were nine mortgage
loans with such Prohibited Transfer provisions, representing an aggregate principal amount
outstanding of approximately $78 million. Two of these mortgage loans were entered into prior to
the Companys initial public offering (IPO) in 2003 and seven were assumed subsequent to its IPO.
In April 2011, the Company repaid, with available cash, a $0.3 million mortgage with a Prohibited
Transfer provision that was assumed subsequent to its IPO. In each instance, the Company received
the consent of the mortgage lender to consummate its IPO (for the two pre-IPO loans) or to acquire
the property or the ownership interests of the borrower (for the post-IPO loans), including the
assumption by its subsidiary of the mortgage loan. Generally, the underlying mortgage documents,
previously applicable to a privately held owner, were not changed at the time of the IPO or the
later loan assumptions, although the Company believes that each of the lenders or servicers was
aware that the borrowers ultimate parent was or would become a publicly traded company. Subsequent
to the IPO and the assumption of these additional mortgage loans, the Company has issued new common
shares and shares of the Company have been transferred on the New York Stock Exchange. Similarly,
the Operating Partnership has issued units of limited partnership interest. To date, no lender or
servicer has asserted that a Prohibited Transfer has occurred as a result of any such transfer of
shares or units of limited partnership interest. If a lender were to be successful in any such
action, the Company could be required to immediately repay or refinance the amounts outstanding, or
the lender may be able to foreclose on the property securing the loan or take other adverse
actions. In addition, in certain cases a Prohibited Transfer could result in the loan becoming
fully recourse to the Company or its Operating Partnership. In addition, if a violation of a
Prohibited Transfer provision were to occur that would permit the Companys mortgage lenders to
accelerate the indebtedness owed to them, it could result in an event of default under the
Companys
Senior Unsecured Series A and Series B Notes, its unsecured revolving credit facility, its two
Secured Term Loans and its Exchangeable Senior Notes.
16
Table of Contents
(8) Income Taxes
During 2010 and the first quarter of 2011, some of the Companys subsidiaries acquired
properties located in Washington D.C., which are subject to local franchise taxes. During the three
months ended March 31, 2011, the Company recognized a benefit for income taxes of $0.3 million
related to franchise taxes levied by the city of Washington D.C. at an effective rate of 9.975%.
Since the Company did not own any properties in Washington D.C. during the first quarter of 2010,
it was not subject to any franchise taxes during that reporting period.
The Company recognizes deferred tax assets only to the extent that it is more likely than not
that deferred tax assets will be realized based on consideration of available evidence, including
future reversals of existing taxable temporary differences, future projected taxable income and tax
planning strategies. The Companys deferred tax assets and liabilities are primarily associated
with differences in the GAAP and tax basis of its real estate assets arising from acquisition
costs, intangible assets and deferred market rent assets and liabilities that are associated with
properties located in Washington D.C. and recorded in its consolidated balance sheets. As of March
31, 2011 and December 31, 2010, the Company recorded its deferred tax assets within Prepaid
expenses and other assets and recorded its deferred tax liabilities within Accounts payable and
other liabilities in the Companys consolidated balance sheets.
The Company has not recorded a valuation allowance against its deferred tax assets as it
determined that is more likely than not that future operations will generate sufficient taxable
income to realize the deferred tax assets. The Company has not recognized any deferred tax assets
or liabilities as a result of uncertain tax positions and has no material net operating loss,
capital loss or alternative minimum tax carryovers. There was no (benefit) provision for income
taxes associated with the Companys discontinued operations for any period presented.
As the Company believes it both qualifies as a REIT and will not be subject to federal income
tax, a reconciliation between the income tax provision calculated at the statutory federal income
tax rate and the actual income tax provision has not been provided.
(9) Derivative Instruments and Comprehensive Loss
The Company is exposed to certain risks arising from business operations and economic factors.
The Company uses derivative financial instruments to manage exposures that arise from business
activities in which its future exposure to interest rate fluctuations is unknown. The objective in
the use of an interest rate derivative is to add stability to interest expenses and manage exposure
to interest rate changes. No hedging activity can completely insulate the Company from the risks
associated with changes in interest rates. Moreover, interest rate hedging could fail to protect
the Company or adversely affect it because, among other things:
| available interest rate hedging may not correspond directly with the interest rate risk
for which the Company seeks protection; |
| the duration of the hedge may not match the duration of the related liability; |
| the party owing money in the hedging transaction may default on its obligation to pay;
and |
| the credit quality of the party owing money on the hedge may be downgraded to such an
extent that it impairs the Companys ability to sell or assign its side of the hedging
transaction.
|
17
Table of Contents
The Company enters into interest rate swap agreements to hedge its exposure on its variable
rate debt against fluctuations
in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified
interest rate, however, the swap agreements do not affect the contractual spreads associated with
each variable debt instruments applicable interest rate. The table below summarizes the Companys
interest rate swap agreements as of March 31, 2011 (dollars in thousands):
Interest Rate | ||||||||||||||||
Contractual | Fixed Effective | |||||||||||||||
Transaction Date | Maturity Date | Amount | Component | Interest Rate | ||||||||||||
Consolidated: |
July 2010(1) | January 2014 | $ | 50,000 | LIBOR | 1.474 | % | |||||||||
Unconsolidated: |
September 2008 | September 2011 | 28,000 | (2) | LIBOR | 3.47 | % |
(1) | The interest rate swap agreement became effective on January 18, 2011. |
|
(2) | The Company remains liable, in the event of default by the joint venture, for
$7.0 million, or 25% of the total, which reflects its ownership percentage in the joint
venture. |
The Companys interest rate swap agreements are designated as effective cash flow hedges
and the Company records any unrealized gains associated with the change in fair value of the swap
agreements within equity and Prepaid expenses and other assets and any unrealized losses within
equity and Accounts payable and other liabilities. The Company records its proportionate share of
unrealized gains or losses on its cash flow hedges associated with its unconsolidated joint
ventures within equity and Investment in affiliates.
Total comprehensive loss is summarized as follows (amounts in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (3,892 | ) | $ | (2,208 | ) | ||
Unrealized gain on derivative instruments |
257 | 528 | ||||||
Total comprehensive loss |
(3,635 | ) | (1,680 | ) | ||||
Comprehensive loss attributable to noncontrolling interests |
95 | 39 | ||||||
Comprehensive loss attributable to First Potomac Realty Trust |
$ | (3,540 | ) | $ | (1,641 | ) | ||
(10) Fair Value Measurements
The Company adopted accounting provisions that outline a valuation framework and create a fair
value hierarchy, which distinguishes between assumptions based on market data (observable inputs)
and a reporting entitys own assumptions about market data (unobservable inputs). The new
disclosures increase the consistency and comparability of fair value measurements and the related
disclosures. Fair value is identified, under the standard, as the price that would be received to
sell an asset or paid to transfer a liability between willing third parties at the measurement date
(an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair
value, and the Company provides the necessary disclosures that are required for items measured at
fair value as outlined in the accounting requirements regarding fair value.
Financial assets and liabilities, as well as those non-financial assets and liabilities
requiring fair value measurement, are measured using inputs from three levels of the fair value
hierarchy.
The three levels are as follows:
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date. An active market is
defined as a market in which transactions for the assets or liabilities occur with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Level 2 Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active
(markets with few transactions), inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or
corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 Unobservable inputs, only used to the extent that observable inputs are not
available, reflect the Companys
assumptions about the pricing of an asset or liability.
18
Table of Contents
In accordance with accounting provisions and the fair value hierarchy described above, the
following table shows the fair value of the Companys consolidated assets and liabilities that are
measured on a non-recurring and recurring basis as of March 31, 2011 and December 31, 2010 (amounts
in thousands):
Balance at | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | Level 1 | Level 2 | Level 3 | |||||||||||||
Non-recurring Measurements: |
||||||||||||||||
Impaired real estate asset |
$ | 4,766 | $ | | $ | 4,766 | $ | | ||||||||
Recurring Measurements: |
||||||||||||||||
Derivative instrument-swap agreement |
193 | | 193 | | ||||||||||||
Contingent consideration related to acquisition of: |
||||||||||||||||
Ashburn Center |
1,398 | | | 1,398 | ||||||||||||
840 First Street, NE |
9,356 | | | 9,356 |
Balance at | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
Non-recurring Measurements: |
||||||||||||||||
Impaired real estate asset |
$ | 10,950 | $ | | $ | 10,950 | $ | | ||||||||
Recurring Measurements: |
||||||||||||||||
Derivative instrument-swap agreement |
396 | | 396 | | ||||||||||||
Contingent consideration related to acquisition of: |
||||||||||||||||
Ashburn Center |
1,398 | | | 1,398 |
Impairment of Real Estate Assets
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions, changes in managements
intended holding period or potential sale to a third party indicate a possible impairment of a
property, an impairment analysis is performed.
In the first quarter of 2011, the Company adjusted its anticipated holding period for its
Gateway West property, which is located in the Companys Maryland reporting segment. The Company
entered into a non-binding contract to sell its Gateway West property in April 2011. As a result,
the Company realized a $2.7 million impairment charge to reduce the propertys carrying value to
reflect its fair value, less potential selling costs. At March 31, 2011, the property did not meet
the criteria under GAAP to classify it as held-for-sale and, therefore, its operations were not
classified as discontinued operations. The Company determined the fair value of the property
through an assessment of market data in working with a real estate broker on the transaction and
based on a signed contract. The fair value was further validated through an income approach based
on discounted cash flows that reflected a reduced holding period.
On December 29, 2010, the Company acquired 7458 Candlewood Road, which is located in the
Companys Maryland reporting segment. Due to the bankruptcy of an acquired tenant, the Company
realized an impairment charge of $2.4 million to reflect the fair value of the intangible asset
associated with the tenants lease, which was determined to have no value. The non-recoverable
value of the intangible assets was based on, among other items, an analysis of current market
rates, the present value of future cash flows that were discounted using capitalization rates,
lease renewal probabilities, hypothetical leasing timeframes, historical leasing commissions,
expected value of tenant improvements and recently executed leases.
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Table of Contents
In September 2010, the Company adjusted its anticipated holding period for its Old Courthouse
Square property, which is
located in the Companys Maryland reporting segment. The Company entered into a non-binding
contract to sell the asset in October 2010. As a result, the Company realized a $3.4 million
impairment charge to reduce the propertys carrying value to reflect its fair value, less any
potential selling costs. The property was sold on February 18, 2011 for net proceeds of $10.8
million. The Company determined the fair value of the property through an assessment of market data
in working with a real estate broker on the transaction and based on the execution of a non-binding
letter of intent. The fair value was further validated through an income approach based on
discounted cash flows that reflected a reduced holding period.
For the three months ended March 31, 2011 and 2010, the Company incurred impairment charges of
$2.7 million and $0.6 million, respectively. The impairment charge recorded during the three months
ended March 31, 2010 relates to a property in the Companys Maryland reporting segment that was
sold in the second quarter of 2010 and is reflected in discontinued operations in the Companys
consolidated statements of operations.
Interest Rate Derivatives
On January 18, 2011, the Company fixed LIBOR at 1.474% on $50.0 million of its variable rate
debt through an interest rate swap agreement that matures on January 15, 2014. The derivative is
fair valued based on prevailing market yield curve on the measurement date. Also, the Company
evaluates counter-party risk in calculating the fair value of the interest rate swap derivative
instrument. The Companys interest rate swap derivative is an effective cash flow hedge and any
change in fair value is recorded in the Companys equity section as Accumulated Other
Comprehensive Loss.
The Company uses a third party to assist with the valuation of its interest rate swap
agreements. The third party takes a daily snapshot of the market to obtain close of business
rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap
rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from
Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their
historical values. Any rate that has changed by more than normal mean and related standard
deviation would be considered an outlier and flagged for further investigation. The rates are than
compiled through a valuation process that generates daily valuations, which are used to value the
Companys interest rate swap agreements.
A summary of the Companys interest rate derivatives liability is as follows (amounts in
thousands):
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Balance at
December 31,
|
$ | 396 | $ | 1,741 | ||||
Deconsolidation (1)
|
— | (396 | ) | |||||
Unrealized gain
|
(203 | ) | (524 | ) | ||||
|
||||||||
Balance at
March 31,
|
$ | 193 | $ | 821 | ||||
|
(1) | On January 1, 2010, the Company deconsolidated RiversPark I and all its assets and liabilities, including its interest rate derivative liability, were removed from the Company’s consolidated balance sheets. |
For the three months ended March 31, 2011 and 2010, the Company recorded an unrealized gain of
$0.2 million and $0.5 million, respectively, related to its derivative liability, which is included
in Accounts payable and other liabilities in the Companys consolidated balance sheets.
Contingent Consideration
On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an
aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration
payable upon the terms of a lease renewal by the buildings sole tenant or the re-tenanting of the
property. At acquisition, the Company was in active negotiations with the existing tenant to renew
its lease through August 2023. As a result, the Company recorded a contingent consideration
obligation of $9.4 million at acquisition. The fair value of the contingent consideration
obligation was determined based on several probability weighted discounted cash flow scenarios that
projected stabilization being achieved at certain timeframes. The fair value was based, in part, on
significant inputs, which are not observable in the market, thus representing a Level 3 measurement
in accordance with the fair value hierarchy.
The Company has a contingent consideration obligation associated with the 2009 acquisition of
Ashburn Center. As part of the acquisition price of Ashburn Center, the Company entered into a fee
agreement with the seller under which the Company will be obligated to pay additional consideration
upon the property achieving stabilization per specified terms of the agreement. The Company
determines the fair value of the obligation through an income approach based on discounted cash
flows that project stabilization being achieved within a certain timeframe. The more significant
inputs associated with the fair value determination of the contingent consideration include
estimates of capitalization rates, discount rates and various assumptions regarding the propertys
operating performance and profitability.
20
Table of Contents
The Company did not recognize any gain or loss associated with its contingent consideration
for the three months ended March 31, 2011. During the first quarter of 2010, the Company fully
leased the Ashburn Center, which resulted in an increase
in its potential obligation, and recorded a $0.7 million increase in its contingent
consideration to reflect the increase in the Companys potential obligation with a corresponding
entry to Contingent Consideration Related to Acquisition of Property in its consolidated
statements of operations. The Company has classified its contingent consideration liabilities
within Accounts payable and other liabilities and any changes in its fair value subsequent to
their acquisition date valuation are charged to earnings.
A summary of the Companys consolidated contingent consideration obligations is as follows
(amounts in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Balance at
December 31,
|
$ | 1, 398 | $ | 688 | ||||
Increase in fair value
|
— | 710 | ||||||
Additions to contingent
consideration obligation
|
9,356 | — | ||||||
|
||||||||
Balance at
March 31,
|
$ | 10,754 | $ | 1,398 | ||||
|
With the exception of its contingent consideration obligation, the Company did not re-measure
or complete any transactions involving non-financial assets or non-financial liabilities that are
measured on a recurring basis during the three months ended March 31, 2011. Also, no transfers into
and out of fair value measurements levels occurred during the three months ended March 31, 2011 or
2010.
Financial Instruments
The carrying amounts of cash equivalents, accounts and other receivables and accounts
payable, with the exception of any items listed above, approximate their fair values due to their
short-term maturities. The Company calculates the fair value of its note receivable based on the
expected future cash flows discounted at risk-adjusted rates and the fair value of its debt
instruments by discounting future contractual principal and interest payments using prevailing
market rates for securities with similar terms and characteristics at the balance sheet date. The
carrying amount and estimated fair value of the Companys note receivable and debt instruments at
March 31, 2011 and December 31, 2010 are as follows (amounts in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Financials Assets: |
||||||||||||||||
Note
receivable(1) |
$ | 24,760 | $ | 27,226 | $ | 24,750 | $ | 24,750 | ||||||||
Financial Liabilities: |
||||||||||||||||
Mortgage debt |
$ | 391,573 | $ | 386,835 | $ | 319,096 | $ | 316,169 | ||||||||
Exchangeable senior notes(2) |
30,076 | 30,564 | 29,936 | 30,412 | ||||||||||||
Series A senior notes |
37,500 | 38,037 | 37,500 | 37,850 | ||||||||||||
Series B senior notes |
37,500 | 37,816 | 37,500 | 37,251 | ||||||||||||
Secured term loans |
100,000 | 100,044 | 110,000 | 109,976 | ||||||||||||
Unsecured revolving credit facility |
116,000 | 117,625 | 191,000 | 191,073 | ||||||||||||
Total |
$ | 712,649 | $ | 710,921 | $ | 725,032 | $ | 722,731 | ||||||||
(1) | The face value of the note receivable was $25.0 million at March 31, 2011 and
December 31, 2010. |
|
(2) | The face value of the notes was $30.4 million at March 31, 2011 and December 31,
2010. |
(11) Equity
In January 2011, the Company issued 4.6 million 7.750% Series A Preferred Shares at a price of
$25.00 per share, which generated net proceeds of $111.0 million, net of issuance costs. The
issuance costs were recorded as a reduction to the Companys Additional paid in capital in its
consolidated balance sheets. Dividends on the Series A Preferred Shares are cumulative from the
date of original issuance and payable on a quarterly basis beginning on February 15, 2011. The
Series A Preferred Shares are convertible into the Companys common shares upon a change in control
of the Company and have no maturity date or voting rights. The Company can redeem the Series A
Preferred Shares, at their par value plus accrued and unpaid dividends, any time after January 18,
2016. The Company used the proceeds from the issuance of its Series A Preferred Shares to pay down
$105.0 million of the outstanding balance on its unsecured revolving credit facility and for other
general corporate purposes.
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Table of Contents
On February 11, 2011, the Company paid a dividend of $0.20 per common share to common
shareholders of record as of February 4, 2011 and paid a dividend of $0.1453125 per preferred share
to preferred shareholders of record as of February 4, 2011. On April 26, 2011, the Company declared
a dividend of $0.20 per common share, equating to an annualized dividend of $0.80 per common share.
The dividend is payable on May 13, 2011 to common shareholders of record as of May 6, 2011. The
Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The
dividend is payable on May 16, 2011 to preferred shareholders of record as of May 6, 2011.
Dividends on all non-vested share awards are recorded as a reduction of shareholders equity.
As a result of the redemption feature of the Operating Partnership units, the noncontrolling
interests are recorded outside of permanent equity. The Companys allocation between noncontrolling
interests is as follows (amounts in thousands):
Non- | ||||||||||||||||
First | redeemable | Redeemable | ||||||||||||||
Potomac | noncontrolling | noncontrolling | ||||||||||||||
Realty Trust | interests | Total Equity | interests | |||||||||||||
Balance, December 31, 2010 |
$ | 614,983 | $ | 3,077 | $ | 618,060 | $ | 16,122 | ||||||||
Net loss |
(3,754 | ) | (2 | ) | (3,756 | ) | (136 | ) | ||||||||
Changes in ownership, net |
110,430 | 2 | 110,424 | 21,620 | ||||||||||||
Distributions to owners |
(10,649 | ) | | (10,641 | ) | (191 | ) | |||||||||
Other comprehensive income |
252 | | 252 | 5 | ||||||||||||
Balance, March 31, 2011 |
$ | 711,262 | $ | 3,077 | $ | 714,339 | $ | 37,420 | ||||||||
Non- | ||||||||||||||||
First | redeemable | Redeemable | ||||||||||||||
Potomac | noncontrolling | noncontrolling | ||||||||||||||
Realty Trust | interests | Total Equity | interests | |||||||||||||
Balance, December 31, 2009 |
$ | 377,759 | $ | | $ | 377,759 | $ | 9,585 | ||||||||
Net loss |
(2,159 | ) | | (2,159 | ) | (49 | ) | |||||||||
Changes in ownership, net |
86,355 | | 86,355 | 1,609 | ||||||||||||
Distributions to owners |
(6,116 | ) | | (6,116 | ) | (146 | ) | |||||||||
Other comprehensive income |
518 | | 518 | 10 | ||||||||||||
Balance, March 31, 2010 |
$ | 456,357 | $ | | $ | 456,357 | $ | 11,009 | ||||||||
(12) Noncontrolling Interests in Operating Partnership
(a) Noncontrolling Interests in Operating Partnership
Noncontrolling interests relate to the interests in the Operating Partnership not owned by the
Company. Interests in the Operating Partnership are owned by limited partners who contributed
buildings and other assets to the Operating Partnership in exchange for Operating Partnership
units. Limited partners have the right to tender their units for redemption in exchange for, at the
Companys option, common shares of the Company on a one-for-one basis or cash based on the fair
value of the Companys common shares at the date of redemption. Unitholders receive a distribution
per unit equivalent to the dividend per common share.
Differences between amounts paid to redeem noncontrolling interests and their carrying values
are charged or credited to equity. As a result of the redemption feature of the Operating
Partnership units, the noncontrolling interests are recorded outside of permanent equity.
Noncontrolling interests are presented at the greater of their fair value or their cost basis,
which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling
interests share of net income, losses, distributions received, preferred dividends paid or
additional contributions. Based on the closing share price of the Companys common stock at March
31, 2011, the cost to acquire, through cash purchase or issuance of the Companys common shares,
all of the outstanding Operating Partnership units not owned by the Company would be approximately
$37.4 million, which exceeded the noncontrolling interests historical cost by $3.6 million.
At December 31, 2010, 958,473 Operating Partnership units, or 1.9%, were not owned by the
Company. During the first quarter of 2011, the Company issued 1,418,715 Operating Partnership units
valued at $21.7 million to partially fund the
acquisition of 840 First Street, NE. There were also 1,300 Operating Partnership units
redeemed for 1,300 common shares fair valued at $19 thousand. As a result, 2,375,888 of the total
outstanding Operating Partnership units, or 4.5%, were not owned by the Company at March 31, 2011.
There were no Operating Partnership units redeemed with available cash during the three months
ended March 31, 2011.
22
Table of Contents
(b) Noncontrolling Interests in Consolidated Partnership
When the Company is deemed to have a controlling interest in a partially-owned entity, it will
consolidate all of the entitys assets, liabilities and operating results within its consolidated
financial statements. The cash contributed to the consolidated entity by the third party, if any,
will be reflected in the permanent equity section of the Companys consolidated balance sheets to
the extent they are not mandatorily redeemable. The amount will be recorded based on the third
partys initial investment in the consolidated entity and will be adjusted to reflect the third
partys share of earnings or losses in the consolidated entity and for any distributions received
or additional contributions made by the third party. The earnings or losses from the entity
attributable to the third party are recorded as a component of net loss (income) attributable to
noncontrolling interests.
On November 10, 2010, the Company acquired Redland Corporate Center II and III through a joint
venture with Perseus Realty, LLC (Perseus). As a result of the partnership structure, the Company
has a 97% economic interest in the joint venture and Perseus has the remaining 3% interest.
(13) Share-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The expense associated with the share
based awards will be recognized over the period during which an employee is required to provide
services in exchange for the award the requisite service period (usually the vesting period).
The fair value for all share-based payment transactions are recognized as a component of income
from continuing operations.
Stock Options Summary
During the first quarter of 2011, the Company issued 132,500 to its employees. 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 contractual life of the stock options granted
is ten years. The Company recognized compensation expense related to stock options of $65 thousand
and $54 thousand during the three months ended March 31, 2011 and 2010, respectively.
A summary of the Companys stock option activity during the three months ended March 31, 2011
is presented below:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | Aggregate | ||||||||||||||
Average | Contractual | Intrinsic | ||||||||||||||
Shares | Exercise Price | Term | Value | |||||||||||||
Outstanding, December 31, 2010 |
811,580 | $ | 16.72 | 4.8 years | $ | 1,641,148 | ||||||||||
Granted |
132,500 | 16.68 | ||||||||||||||
Exercised |
(1,719 | ) | 10.25 | |||||||||||||
Forfeited |
(16,944 | ) | 18.46 | |||||||||||||
Outstanding, March 31, 2011 |
925,417 | $ | 16.69 | 5.3 years | $ | 1,062,668 | ||||||||||
Exercisable, March 31, 2011 |
671,297 | $ | 17.53 | 3.9 years | $ | 576,076 | ||||||||||
Options expected to vest,
March 31, 2011 |
223,598 | $ | 14.44 | 9.0 years | $ | 434,905 |
As of March 31, 2011, the Company had $0.8 million of unrecognized compensation cost, net of
estimated forfeitures, related to stock option awards. The Company anticipates this cost will be
recognized over a weighted-average period of approximately 3.3 years. The Company calculates the
grant date fair value of option awards using a Black-Scholes option-pricing model. Expected
volatility is based on an assessment of the Companys realized volatility over the preceding five
years, which is equivalent to the awards expected life. The expected term represents the period of
time the options are anticipated to remain outstanding as well as the Companys historical
experience for groupings of employees that have similar behavior and considered separately for
valuation purposes. The risk-free rate is based on the U.S. Treasury rate at the time of grant for
instruments of similar term. The expected dividend yield is based on an analysis of the
dividend yield of other REITs over the preceding year.
23
Table of Contents
The assumptions used in the fair value determination of stock options granted in 2011 are
summarized as follows:
2011 | ||||
Risk-free interest rate |
2.01 | % | ||
Expected volatility |
48.0 | % | ||
Expected dividend yield |
3.55 | % | ||
Weighted average expected life of options |
5 years |
The weighted average grant date fair value of the stock options issued during the three
months ended March 31, 2011 was $5.40.
Option Exercises
The Company received approximately $18 thousand and $8 thousand from the exercise of stock
options during the three months ended March 31, 2011 and 2010, respectively. Shares issued as a
result of stock option exercises are funded through the issuance of new shares. The total
intrinsic value of options exercised during the quarter ended March 31, 2011 and 2010 were $10
thousand and $3 thousand, respectively.
Non-vested share awards
In February 2011, the Company granted 162,079 restricted common shares to its officers. The
award will vest ratably over a five year term and was fair valued based on the share price of the
underlying common shares on the date of issuance.
The Company recognized $0.6 million and $1.0 million of compensation expense associated with
its restricted share awards during the three months ended March 31, 2011 and 2010, respectively.
Dividends on all restricted share awards are recorded as a reduction of equity. The Company applies
the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable
dividend rights are considered participating securities. The Companys excess of distributions over
earnings related to participating securities are shown as a reduction in income available to common
shareholders in the Companys computation of EPS.
A summary of the Companys non-vested share awards as of March 31, 2011 is as follows:
Weighted | ||||||||
Non-vested | Average Grant | |||||||
Shares | Date Fair Value | |||||||
Non-vested at December 31, 2010 |
702,753 | $ | 11.76 | |||||
Granted |
162,079 | 16.35 | ||||||
Vested |
(50,358 | ) | 9.87 | |||||
Expired |
(32,041 | ) | 14.70 | |||||
Non-vested at March 31, 2011 |
782,433 | $ | 12.70 | |||||
As of March 31, 2011, the Company had $5.0 million of unrecognized compensation cost related
to non-vested shares. The Company anticipates this cost will be recognized over a weighted-average
period of 3.5 years.
(14) Segment Information
The Companys reportable segments consist of four distinct reporting and operational segments
within the greater Washington D.C, region in which it operates: Maryland, Washington, D.C.,
Northern Virginia and Southern Virginia. Prior to 2011, the Company had reported its properties
located in Washington, D.C. within its Northern Virginia reporting segment. However, due to the
Companys growth within the Washington, D.C. region, it has altered its internal structure, which
includes changing the Companys internal decision making process regarding its Washington, D.C.
properties. Therefore, the Company feels it is appropriate to separate the properties owned in
Washington, D.C. into its own reporting segment.
24
Table of Contents
The Company evaluates the performance of its segments based on the operating results of the
properties located within each segment, which excludes large non-recurring gains and losses, gains
from sale of real estate assets, interest expense, general and administrative costs, acquisition
costs or any other indirect corporate expense to the segments. In addition, the segments do not
have significant non-cash items other than straight-line and deferred market rent amortization
reported in their operating results. There are no inter-segment sales or transfers recorded between
segments.
The results of operations for the Companys four reportable segments are as follows (dollars
in thousands):
Three months ended March 31, 2011 | ||||||||||||||||||||
Maryland | Washington, D.C. | Northern Virginia | Southern Virginia | Consolidated | ||||||||||||||||
Number of buildings |
71 | 4 | 57 | 55 | 187 | |||||||||||||||
Square feet |
3,986,034 | 633,452 | 3,512,734 | 5,361,332 | 13,493,552 | |||||||||||||||
Total revenues |
$ | 13,400 | $ | 3,572 | $ | 10,930 | $ | 12,568 | $ | 40,470 | ||||||||||
Property operating expense |
(4,045 | ) | (721 | ) | (3,090 | ) | (3,102 | ) | (10,958 | ) | ||||||||||
Real estate taxes and insurance |
(1,195 | ) | (573 | ) | (1,217 | ) | (1,017 | ) | (4,002 | ) | ||||||||||
Total property operating income |
$ | 8,160 | $ | 2,278 | $ | 6,623 | $ | 8,449 | 25,510 | |||||||||||
Depreciation and amortization expense |
(12,770 | ) | ||||||||||||||||||
General and administrative |
(4,008 | ) | ||||||||||||||||||
Acquisition costs |
(2,185 | ) | ||||||||||||||||||
Other expenses, net |
(10,238 | ) | ||||||||||||||||||
Loss from discontinued operations |
(201 | ) | ||||||||||||||||||
Net loss |
$ | (3,892 | ) | |||||||||||||||||
Total assets(1) |
$ | 482,565 | $ | 265,313 | $ | 367,836 | $ | 340,953 | $ | 1,521,016 | ||||||||||
Capital expenditures(2) |
$ | 2,799 | $ | 260 | $ | 3,608 | $ | 1,755 | $ | 9,110 | ||||||||||
Three months ended March 31, 2010 | ||||||||||||||||||||
Maryland | Washington, D.C. | Northern Virginia | Southern Virginia | Consolidated | ||||||||||||||||
Number of buildings |
73 | | 51 | 54 | 178 | |||||||||||||||
Square feet |
3,621,438 | | 3,016,532 | 5,264,052 | 11,902,022 | |||||||||||||||
Total revenues |
$ | 11,239 | $ | | $ | 11,089 | $ | 12,445 | $ | 34,773 | ||||||||||
Property operating expense |
(3,498 | ) | | (3,232 | ) | (3,282 | ) | (10,012 | ) | |||||||||||
Real estate taxes and insurance |
(1,097 | ) | | (1,172 | ) | (1,059 | ) | (3,328 | ) | |||||||||||
Total property operating income |
$ | 6,644 | $ | | $ | 6,685 | $ | 8,104 | 21,433 | |||||||||||
Depreciation and amortization expense |
(9,858 | ) | ||||||||||||||||||
General and administrative |
(3,709 | ) | ||||||||||||||||||
Acquisition costs |
(19 | ) | ||||||||||||||||||
Other expenses, net |
(9,497 | ) | ||||||||||||||||||
Loss from discontinued operations |
(558 | ) | ||||||||||||||||||
Net loss |
$ | (2,208 | ) | |||||||||||||||||
Total assets(1) |
$ | 393,603 | $ | | $ | 311,962 | $ | 321,369 | $ | 1,055,243 | ||||||||||
Capital expenditures(2) |
$ | 325 | $ | | $ | 927 | $ | 1,548 | $ | 2,853 | ||||||||||
(1) | Corporate assets not allocated to any of our reportable segments totaled $64,349 and
$28,309 at March 31, 2011 and 2010, respectively. |
|
(2) | Capital expenditures for corporate assets not allocated to any of our reportable
segments totaled $688 and $53 at March 31, 2011 and 2010, respectively. |
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(15) Subsequent Events
On April 8, 2011, the Company acquired One Fair Oaks, a 12-story, 214,000 square foot office
building in Fairfax, Virginia for $60.3 million. The property is 100% leased to one tenant. The
acquisition was funded by the assumption of a $52.4 million mortgage loan and available cash.
On April 15, 2011, the Company provided a $30.0 million mezzanine loan to the owners of
Americas Square, a 461,000 square foot, Class A office complex in Washington, D.C., located
approximately one block from the U.S. Capitol Building. The office complex consists of two
buildings, 51 Louisiana Avenue and 300 New Jersey Avenue, which total 461,000 square feet and are
collectively 93% leased. The properties are subject to a $220.0 million first mortgage loan. The
Companys loan is secured by an interest in the property. The loan has a fixed interest rate of
9.0%, matures on May 1, 2016 and is prepayable in full on or after October 16, 2012, subject to
yield maintenance. The transaction was funded by a draw on the Companys unsecured revolving credit
facility. The Company is still assessing its initial fair value determination of its acquired
assets and liabilities.
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ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the condensed consolidated financial statements and
notes thereto appearing elsewhere in this Form 10-Q. The discussion and analysis is derived from
the consolidated operating results and activities of First Potomac Realty Trust.
First Potomac Realty Trust (the Company) is a leader in the ownership, management,
development and redevelopment of office and industrial properties in the greater Washington, D.C.
region. The Company separates its properties into four distinct segments, which it refers to as the
Maryland, Washington, D.C., Northern Virginia and Southern Virginia reporting segments. The Company
strategically focuses on acquiring and redeveloping properties that it believes can benefit from
its intensive property management and seeks to reposition these properties to increase their
profitability and value. The Companys portfolio contains a mix of single-tenant and multi-tenant
office and industrial properties as well as business parks. Office properties are single-story and
multi-story buildings that are used primarily for office use; business parks contain buildings with
office features combined with some industrial property space; and industrial properties generally
are used as warehouse, distribution or manufacturing facilities.
The Company conducts its business through First Potomac Realty Investment Limited Partnership;
the Companys operating partnership (the Operating Partnership). The Company is the sole general
partner of, and, as of March 31, 2011, owned a 95.5% interest in, the Operating Partnership. The
remaining interests in the Operating Partnership, which are presented as noncontrolling interests
in the accompanying unaudited condensed consolidated financial statements, are limited partnership
interests, some of which are owned by several of the Companys executive officers and trustees who
contributed properties and other assets to the Company upon its formation, and other unrelated
parties.
At March 31, 2011, the Company wholly-owned or had a controlling interest in properties
totaling 13.5 million square feet and had an ownership interest in properties totaling an
additional 0.5 million square feet through four unconsolidated joint ventures. The Companys
consolidated properties were 81.9% occupied by 586 tenants. Excluding the Companys fourth quarter
2010 acquisitions of Atlantic Corporate Park, which was vacant at acquisition, and Redland
Corporate Center II, which was 99% vacant at acquisition, the Companys consolidated portfolio was
84.6% occupied at March 31, 2011. The Company does not include square footage that is in
development or redevelopment in its occupancy calculation, which totaled 0.5 million square feet at
March 31, 2011. As of March 31, 2011, the Companys largest tenant was the U.S. Government, which
along with government contractors, accounted for over 20% of the Companys total annualized rental
revenue. The Company also owned land that can accommodate approximately 1.7 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.
The primary source of the Companys revenue and earnings is rent received from customers under
long-term (generally three to ten years) operating leases at its properties, including
reimbursements from customers for certain operating costs. Additionally, the Company may generate
earnings from the sale of assets either outright or contributed into joint ventures.
The Companys long-term growth will principally be driven by its ability to:
| maintain and increase occupancy rates and/or increase rental rates at its
properties; |
||
| sell assets to third parties at favorable prices or contribute properties to
joint ventures; and |
||
| continue to grow its portfolio through acquisition of new properties, potentially
through joint ventures. |
Executive Summary
The Company incurred a net loss of $3.9 million during the first quarter of 2011 compared with
a net loss of $2.2 million during the first quarter of 2010. The Companys funds from operations
(FFO) for the first quarter of 2011 was $7.7 million, or $0.15 per diluted share, compared with
FFO of $8.0 million, or $0.26 per diluted share, during the first quarter of 2010. FFO is a
non-GAAP financial measure. For a description of FFO, including why management believes its
presentation is useful and a reconciliation of FFO to net (loss) income attributable to common
shareholders, see Funds From Operations.
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The increase in the Companys net loss for the quarter ended March 31, 2011 compared with 2010
is primarily due to an increase in acquisition costs and impairment charges, which also caused a
decrease in the Companys FFO. The Company acquired three properties during the three months ended
March 31, 2011, incurring $2.2 million in acquisition costs. The Company did not acquire any
properties during the three months ended March 31, 2010. In the first quarter of 2011, the Company
adjusted its anticipated holding period for its Gateway West property, which is located in the
Companys Maryland reporting segment, and, in April 2011, the Company entered into a contract to
sell the property. As a result, the Company recorded a $2.7 million impairment charge in the first
quarter of 2011. During the first quarter of 2010, the Company incurred a $0.6 impairment charge on
a property in its Maryland region that was sold in the second quarter of 2010.
Significant Transactions
| Completed four acquisitions, including one acquisition in April 2011, for total
consideration of $184.1 million and sold a property for net proceeds of $10.8 million; |
| Executed 417,000 square feet of leases; and |
| Raised net proceeds of approximately $111 million through the issuance of 4.6 million
7.75% Series A Preferred Shares. |
Development and Redevelopment Activity
As of March 31, 2011, the Company continued development of several parcels of land, including
land adjacent to previously acquired properties and land acquired with the intent to develop. The
Company constructs office, business parks and/or industrial buildings on a build-to-suit basis or
with the intent to lease upon completion of construction. Also, the Company expects to continue
redevelopment efforts on unfinished vacant spaces in its portfolio through the investment of
capital in electrical, plumbing and other capital improvements in order to expedite the leasing of
the spaces.
In January 2011, the Company completed development efforts on a 57,000 square foot office
building at Sterling Park Business Center in the Companys Northern Virginia reporting segment. A
portion of the building was pre-leased to a tenant with rent commencing in the second quarter of
2011.
As of March 31, 2011, 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 in
the Companys Southern Virginia reporting segment has been designed and all permits have
been received. Costs to date include civil, architectural, mechanical, electrical and
plumbing design as well as permit fees. |
Redevelopment
| Three Flint Hill a 174,000 square foot eight-story Class A office building has been
designed, permitted, and is under construction. Costs incurred to date include
architectural and engineering design fees and permit fees as well as demolition, glass,
HVAC, electrical, plumbing, and finish work; |
| Davis Drive a 54,000 square foot building has been designed and permitted. Costs
incurred to date include architectural and engineering design fees and permit fees; and |
| 440 First Street, NW 105,000 square foot vacant office building in Washington, D.C.
that was acquired on December 28, 2010. The Company intends to spend approximately $13
million to redevelop the entire building, which may include adding an additional 30,000
square feet. |
On January 25, 2011, the Company formed a joint venture with an affiliate of The Akridge
Company (Akridge) to acquire, for $39.6 million, a property located at 1200 17th Street, NW, in
Washington, DC, and to redevelop the property. The property currently consists of a land parcel
that contains an existing 85,000 square foot office building. The joint venture intends to demolish
the existing building and develop a new Class A office building expected to have approximately
170,000 square feet of gross leasable area. When the joint venture is fully capitalized, the
Company anticipates owning 95% of the joint
venture (subject to adjustment depending on each partys capital contributions and subject to
a promoted interest granted to Akridge after specified returns are achieved by the Company). The
Companys total capital commitment to the joint venture (including acquisition and development
costs) is anticipated to be approximately $109 million, less amounts funded through acquisition and
construction financing. The acquisition of the property is not expected to occur until late 2011
and is subject to various contingencies. Construction is currently expected to commence in 2012 and
is expected to be completed in late 2014.
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The Company anticipates development and redevelopment efforts on these projects will continue
throughout 2011 and into 2012. At March 31, 2011, the Company owned developable land that can
accommodate approximately 1.7 million square feet of additional building space, which includes 0.1
million square feet in Maryland, 30 thousand square feet in Washington, D.C., 0.6 million square
feet in Northern Virginia and 1.0 million square feet in Southern Virginia.
Critical Accounting Policies and Estimates
The Companys condensed consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP) that require the Company to make certain
estimates and assumptions. Critical accounting policies and estimates are those that require
subjective or complex judgments and are the policies and estimates that the Company deems most
important to the portrayal of its financial condition and results of operations. It is possible
that the use of different reasonable estimates or assumptions in making these judgments could
result in materially different amounts being reported in its condensed consolidated financial
statements. The Companys critical accounting policies relate to revenue recognition, including
evaluation of the collectability of accounts receivable, impairment of long-lived assets, purchase
accounting for acquisitions of real estate, derivative instruments and share-based compensation.
The following is a summary of certain aspects of these critical accounting policies and
estimates.
Revenue Recognition
The Company generates substantially all of its revenue from leases on its office and
industrial properties as well as business parks. The Company recognizes rental revenue on a
straight-line basis over the term of its leases, which include fixed-rate renewal periods leased at
below market rates at acquisition or inception. Accrued straight-line rents represent the
difference between rental revenue recognized on a straight-line basis over the term of the
respective lease agreements and the rental payments contractually due for leases that contain
abatement or fixed periodic increases. The Company considers current information, credit quality,
historical trends, economic conditions and other events regarding the tenants ability to pay their
obligations in determining if amounts due from tenants, including accrued straight-line rents, are
ultimately collectible. The uncollectible portion of the amounts due from tenants, including
accrued straight-line rents, is charged to property operating expense in the period in which the
determination is made.
Tenant leases generally contain provisions under which the tenants reimburse the Company for a
portion of property operating expenses and real estate taxes incurred by the Company. Such
reimbursements are recognized in the period in which the expenses are incurred. The Company records
a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk
of loss on specific accounts. Lease termination fees are recognized on the date of termination
when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably
assured and the Company has possession of the terminated space.
Accounts Receivable
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 initially recorded at fair value and carried at initial cost,
less accumulated depreciation and, when appropriate, impairment losses. Improvements and
replacements are capitalized at fair value when they extend the useful life, increase capacity, or
improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred.
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Depreciation and amortization are recorded on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives of the Companys assets, by class, are as follows:
Buildings
|
39 years | |
Building improvements
|
5 to 20 years | |
Furniture, fixtures and equipment
|
5 to 15 years | |
Tenant improvements
|
Shorter of the useful lives of the assets or the terms of the related leases | |
Lease related intangible assets
|
Term of related lease |
The Company regularly reviews market conditions for possible impairment of a propertys
carrying value. When circumstances such as adverse market conditions, changes in managements
intended holding period or potential sale to a third party indicate a possible impairment of the
fair value of a property, an impairment analysis is performed. The Company assesses potential
impairments based on an estimate of the future undiscounted cash flows (excluding interest charges)
expected to result from the propertys use and eventual disposition. This estimate is based on
projections of future revenues, expenses, capital improvement costs, expected holding periods and
capitalization rates. These cash flows consider factors such as expected market trends and leasing
prospects, as well as the effects of leasing demand, competition and other factors. If impairment
exists due to the inability to recover the carrying value of a real estate investment based on
forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying
value exceeds the estimated fair value of the property. The Company is required to make estimates
as to whether there are impairments in the carrying values of its investments in real estate.
Further, the Company will record an impairment loss if it expects to dispose of a property, in the
near term, at a price below carrying value. In such an event, the Company will record an impairment
loss based on the difference between a propertys carrying value and its projected sales price,
less any estimated costs to sell.
The Company will classify a building as held-for-sale in the period in which it has made the
decision to dispose of the building, a binding agreement to purchase the property has been signed
under which the buyer has committed a significant amount of nonrefundable cash and no significant
financing contingencies exist that could cause the transaction not to be completed in a timely
manner. The Company will classify any impairment loss, together with the buildings operating
results, as discontinued operations in its consolidated statements of operations for all periods
presented and classify the assets and related liabilities as held-for-sale in its consolidated
balance sheets in the period the sale criteria are met. Interest expense is reclassified to
discontinued operations only to the extent the held-for-sale property is secured by specific
mortgage debt and the mortgage debt will not be transferred to another property owned by the
Company after the disposition.
The Company recognizes the fair value, if sufficient information exists to reasonably estimate
the fair value, of any liability for conditional asset retirement obligations when incurred, which
is generally upon acquisition, construction, development or redevelopment and/or through the normal
operation of the asset.
The Company capitalizes interest costs incurred on qualifying expenditures for real estate
assets under development or redevelopment while being readied for their intended use in accordance
with accounting requirements regarding capitalization of interest. The Company will capitalize
interest when qualifying expenditures for the asset have been made, activities necessary to get the
asset ready for its intended use are in progress and interest costs are being incurred. Capitalized
interest also includes interest associated with expenditures incurred to acquire developable land
while development activities are in progress. Capitalization of interest will end when the asset is
substantially complete and ready for its intended use, but no later than one year from completion
of major construction activity, if the property is not occupied. Capitalized interest is
depreciated over the useful life of the underlying assets, commencing when those assets are placed
into service.
Purchase Accounting
Acquisitions of rental property from third parties are accounted for at fair value. Any
liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The
fair value of the acquired property is allocated between land and building (on an as-if vacant
basis) based on managements estimate of the fair value of those components for each type of
property and to tenant improvements based on the depreciated replacement cost of the tenant
improvements, which approximates their fair value. The fair value of the in-place leases is
recorded as follows:
| the fair value of leases in-place on the date of acquisition is based on absorption
costs for the estimated lease-up period in which vacancy and foregone revenue are avoided
due to the presence of the acquired leases; |
| the fair value of above and below-market in-place leases based on the present value
(using a discount rate that reflects the risks associated with the acquired leases) of the
difference between the contractual rent amounts to be paid under the assumed lease and the
estimated market lease rates for the corresponding spaces over the remaining non-cancelable
terms of the related leases, which range from one to fifteen years; and |
| the fair value of intangible tenant or customer relationships.
|
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The Companys determination of these fair values requires it to estimate market rents for each
of the leases and make certain other assumptions. These estimates and assumptions affect the rental
revenue, and depreciation and amortization expense recognized for these leases and associated
intangible assets and liabilities.
Derivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate
changes. The Company may enter into derivative agreements to mitigate exposure to unexpected
changes in interest rates and may use interest rate protection or cap agreements to reduce the
impact of interest rate changes. The Company does not use derivatives for trading or speculative
purposes and intends to enter into derivative agreements only with counterparties that it believes
have a strong credit rating to mitigate the risk of counterparty default or insolvency.
The Company may designate a derivative as either a hedge of the cash flows from a debt
instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt
instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair
value. For effective hedging relationships, the change in the fair value of the assets or
liabilities is recorded within equity (cash flow hedge), or through earnings (fair value hedge).
Ineffective portions of derivative transactions will result in changes in fair value recognized in
earnings. The Company records its proportionate share of unrealized gains or losses on its
derivative instruments associated with its unconsolidated joint ventures within equity and
Investment in affiliates. The Company incorporates credit valuation adjustments to appropriately
reflect both its own nonperformance risk and the respective counterpartys nonperformance risk in
the fair value measurements. In adjusting the fair value of its derivative contracts for the effect
of nonperformance risk, the Company has considered the impact of netting any applicable credit
enhancements, such as collateral postings, thresholds, mutual inputs and guarantees.
Share-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. For options awards, the Company uses a
Black-Scholes option-pricing model. Expected volatility is based on an assessment of the Companys
realized volatility over the preceding five years, which is equivalent to the awards expected life.
The expected term represents the period of time the options are anticipated to remain outstanding
as well as the Companys historical experience for groupings of employees that have similar
behavior and considered separately for valuation purposes. For non-vested share awards that vest
over a predetermined time period, the Company uses the outstanding share price at the date of
issuance to fair value the awards. For non-vested shares awards that vest based on performance
conditions, the Company uses a Monte Carlo simulation (risk-neutral approach) to determine the
value and derived service period of each tranche. The expense associated with the share based
awards will be recognized over the period during which an employee is required to provide services
in exchange for the award the requisite service period (usually the vesting period). The fair
value for all share-based payment transactions are recognized as a component of income from
continuing operations.
Results of Operations
Comparison of the Three months ended March 31, 2011 with the Three Months Ended March 31, 2010
During the first quarter of 2011, the Company acquired the following properties: two buildings
at Cedar Hill; a building at Merrill Lynch; and a building at 840 First Street, NE for an aggregate
purchase cost of $131.5 million.
During 2010, the Company acquired the following consolidated properties: a building at Three
Flint Hill; a building at 500 First Street, NW; a building at Battlefield Corporate Center; two
buildings at Redland Corporate Center; two buildings at Atlantic Corporate Park; a building at 1211
Connecticut Ave, NW; a building at 440 First Street, NW and a building at 7458 Candlewood Road for
an aggregate purchase cost of $286.2 million.
Collectively, the properties are referred to as the Non-comparable Properties.
The term Comparable Portfolio refers to all consolidated properties owned by the Company for
the entirety of the periods being presented.
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Total Revenues
Total revenues are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
Rental |
$ | 32,359 | $ | 27,016 | $ | 5,343 | 20 | % | ||||||||
Tenant reimbursements and other |
$ | 8,111 | $ | 7,757 | $ | 354 | 5 | % |
Rental Revenue
Rental revenue is comprised of contractual rent, the impacts of straight-line revenue and the
amortization of deferred market rent assets and liabilities representing above and below market
rate leases at acquisition. Rental revenue increased $5.3 million for the three months ended March
31, 2011 compared to the same period in 2010, which was due to increased revenues from the
Companys recent acquisitions. The Non-comparable Properties contributed $5.3 million of additional
rental revenue for the three months ended March 31, 2011. Rental revenue for the Comparable
Portfolio remained flat for the three months ended March 31, 2011 compared to 2010, as an increase
in rental rates was offset by an increase in vacancy. The weighted average occupancy of the
Comparable Portfolio was 83.9% for the quarter ended March 31, 2011 compared with 85.0% for the
same period in 2010. The Company expects aggregate rental revenues will increase throughout 2011
due to a full-year of revenues from the properties acquired in 2010 and additional properties
acquired in 2011. The increase in rental revenue for the three months ended March 31, 2011 compared
to 2010 includes $2.2 million for the Maryland reporting segment, $2.8 million for the Washington,
D.C. reporting segment, $0.1 million for the Northern Virginia reporting segment and $0.2 million
for the Southern Virginia reporting segment.
The Companys consolidated portfolio was 81.9% occupied at March 31, 2011 compared with 84.2%
occupied at March 31, 2010. Excluding the Companys fourth quarter 2010 acquisitions of Atlantic
Corporate Park, which was vacant at acquisition, and Redland Corporate Center II, which was 99%
vacant at acquisition, the Companys consolidated portfolio was 84.6% occupied at March 31, 2011.
The Company does not include square footage that is in development or redevelopment in its
occupancy calculation.
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 $0.4 million during the three months ended March 31, 2011 compared with the same period
in 2010. The increase is due to the Non-comparable Properties, which contributed $1.1 million of
additional tenant reimbursements and other revenues for the three months ended March 31, 2011
compared with 2010. For the Comparable Portfolio, tenant reimbursements and other revenues
decreased $0.7 million for the three months ended March 31, 2011 compared with the same period in
2010 primarily due to a decrease in recoverable property operating expenses, primarily snow and ice
removal costs. The Company expects tenant reimbursements and other revenues to increase throughout
2011 due to a full-year of recoverable operating expenses from properties acquired in 2010 and
additional properties acquired in 2011.
The increase in tenant reimbursements and other revenues for the three months ended March 31,
2011 compared to 2010 includes $0.8 million for the Washington, D.C. reporting segment. Tenant
reimbursements and other revenues remained flat for the Maryland reporting segment and decreased
$0.3 million for the Northern Virginia reporting segment and $0.1 million for the Southern Virginia
reporting segment.
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Total Expenses
Property Operating Expenses
Property operating expenses are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
Property operating |
$ | 10,958 | $ | 10,012 | $ | 946 | 9 | % | ||||||||
Real estate taxes and insurance |
$ | 4,002 | $ | 3,328 | $ | 674 | 20 | % |
Property operating expenses increased $0.9 million for the three months ended March 31, 2011
compared with the same period in 2010. The increase is due to the Non-comparable Properties, which
contributed $1.8 million of additional property operating expenses for the three months ended March
31, 2011. For the Comparable Portfolio, property operating expenses decreased $0.9 million for the
three months ended March 31, 2011 compared with the same period in 2010 primarily due to a
reduction in snow and ice removal costs. The Company expects property operating expenses to
increase for the remainder of the year compared with prior year results due primarily to the
Companys new acquisitions. The increase in property operating expenses for the three months ended
March 31, 2011 compared with 2010 includes $0.5 million for the Maryland reporting segment and $0.7
million for the Washington, D.C. reporting segment. For the Northern Virginia and Southern Virginia
reporting segments, property operating expenses decreased $0.1 million and $0.2 million,
respectively.
Real estate taxes and insurance expense increased $0.7 million for the three months ended
March 31, 2011 compared with the same period in 2010. The Non-comparable Properties contributed an
increase in real estate taxes and insurance expense of $0.9 million for the three months ended
March 31, 2011. For the Comparable Portfolio, real estate taxes and insurance expense decreased
$0.2 million for the three months ended March 31, 2011 compared with the same period in 2010
primarily due to lower real estate assessments and real estate tax rates. Real estate taxes and
insurance for the three months ended March 31, 2011 compared with 2010, increased $0.1 million for
the Maryland reporting segment, $0.6 million for the Washington, D.C. reporting segment and $44
thousand for the Northern Virginia reporting segment. For the Southern Virginia reporting segment,
real estate taxes and insurance decreased $41 thousand for the three months ended March 31, 2011
compared with 2010.
Other Operating Expenses
General and administrative expenses are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 4,008 | $ | 3,709 | $ | 299 | 8 | % |
General and administrative expenses increased $0.3 million for the three months ended March
31, 2011 compared to the same period in 2010, primarily due to an increase in compensation
accruals. The increase in general and administrative expenses was partially offset by a decrease in
non-cash, share-based compensation expense as certain performance awards vested in 2010, which
caused the acceleration of share-based compensation expense during the first quarter of 2010.
Acquisition costs are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 2,185 | $ | 19 | $ | 2,166 | 114 | % |
During the first quarter of 2011, the Company incurred acquisition costs of $2.2 million
associated with the acquisitions of Cedar Hill, Merrill Lynch and 840 First Street, NE. The
Company did not acquire any properties during the first quarter of
2010.
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Depreciation and amortization expenses are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 12,770 | $ | 9,858 | $ | 2,912 | 30 | % |
Depreciation and amortization expense includes depreciation of real estate assets and
amortization of intangible assets and leasing commissions. Depreciation and amortization expense
increased $2.9 million for the three months ended March 31, 2011 compared with the same period in
2010 primarily due to the Companys recent acquisitions. The Non-comparable Properties contributed
additional depreciation and amortization expense of $2.4 million for the three months ended March
31, 2011. The increase in depreciation and amortization expense was also attributed to the
Comparable Portfolio, which contributed additional depreciation and amortization expense of $0.5
million for the three months ended March 31, 2011 compared with the same period in 2010. The
Company anticipates depreciation and amortization expense to increase the remainder of 2011 due to
recognizing a full-year of depreciation and amortization expense for properties acquired in 2010
and additional properties acquired in 2011.
Impairment of real estate assets is summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 2,711 | $ | | $ | 2,711 | |
During the three months ended March 31, 2011, the Company shortened its anticipated holding
period for its Gateway West property and, in April 2011, the Company entered into a contract to
sell its property, which is located in its Maryland reporting segment. Based on the contractual
sale price, less anticipated selling costs, the Company recorded a $2.7 million impairment charge
to record the property at its fair value during the first quarter of 2011. The Company anticipates
the disposition will be completed during the second quarter of 2011; however, the sale is subject
to customary due diligence and closing conditions. At March 31, 2011, the property did not meet the
Companys guidelines to classify it as held-for-sale and, therefore, its operations were not
classified as discontinued operations.
Contingent consideration related to acquisition of property is summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Decrease | Change | ||||||||||||
$ | | $ | 710 | $ | 710 | 100 | % |
As part of the consideration for the Companys 2009 acquisition of Ashburn Center, the Company
is obligated to record contingent consideration arising from a fee agreement entered into with the
seller in which the Company will be obligated to pay additional consideration if certain returns
are achieved over the five year term of the agreement or if the property is sold within the term of
the five year agreement. The Company initially recorded $0.7 million at the time of acquisition in
December 2009, which represented the fair value of the Companys potential obligation at
acquisition. During the first quarter of 2010, the Company was able to lease vacant space at
Ashburn Center faster than it had anticipated and, therefore, recorded additional contingent
consideration of $0.7 million that reflected an increase in the potential consideration that may be
owed to the seller. There was no significant change in the fair value of the contingent
consideration during the three months ended March 31, 2011.
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Other Expenses (Income)
Interest expense is summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Decrease | Change | ||||||||||||
$ | 8,633 | $ | 8,861 | $ | 228 | 3 | % |
The Company seeks to employ cost-effective financing methods to fund its acquisitions,
development and redevelopment projects and to refinance its existing debt to provide greater
balance sheet flexibility or to take advantage of lower interest rates. The methods used to fund
the Companys activities impact the period-over-period comparisons of interest expense.
Interest expense decreased $0.2 million for the three months ended March 31, 2011 compared
with the same period in 2010. At March 31, 2011, the Company had $712.6 million of debt outstanding
with a weighted average interest rate of 5.3% compared with $551.0 million of debt outstanding with
a weighted average interest rate of 5.6% at March 31, 2010.
The decline in interest expense for the three months ended March 31, 2011 compared with 2010
is primarily attributable to a $0.5 million decrease in interest expense associated with the
Companys unsecured revolving credit facility as a result of lower interest rates and a lower
weighted average outstanding balance. In January 2011, the Company repaid $105.0 million of the
outstanding balance of its unsecured revolving credit facility with proceeds from its Series A
Preferred Shares. The average balance on the Companys unsecured revolving credit facility was
$114.6 million with a weighted average interest rate of 3.3% for the three months ended March 31,
2011 compared with $151.6 million with a weighted average interest rate of 3.9% for the three
months ended March 31, 2010.
The Company uses derivative financial instruments to manage exposure to interest rate
fluctuations on its variable rate debt. On January 18, 2011, the Company fixed LIBOR at 1.474% on
$50.0 million of its variable rate debt though an interest rate swap agreement that matures on
January 15, 2014. During the first quarter of 2010, the Company had fixed LIBOR on $85.0 million of
variable rate debt through two interest rate swap agreements, which both expired in August 2010. As
a result, interest expense related to the interest rate swap agreements decreased $0.5 million for
the three months ended March 31, 2011 compared with 2010.
The decline in interest expense for the three months ended March 31, 2011, was also
attributable to a $0.3 million decrease in interest expense associated with the Companys
repurchase of $20.1 million of the Exchangeable Senior Notes in the second quarter of 2010. Also,
the Company recorded an increase in capitalized interest of $0.2 million for the three months ended
March 31, 2011 compared with 2010.
The decrease in the Companys interest expense for the three months ended March 31, 2011
compared with 2010 was partially offset by a $0.5 million increase in mortgage interest expense due
to the assumption of new mortgages associated with the Companys 2010 and 2011 acquisitions. During
the fourth quarter of 2010, the Company entered into a $50.0 million secured term loan, which
contributed additional interest of $0.5 million for the three months ended March 31, 2011 compared
with the same period in 2010. Due to the Companys recent debt issuances and refinancing, it
incurred additional deferred financing costs, which increased interest expense $0.3 million for the
three months ended March 31, 2011 compared with 2010.
Interest and other income are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 825 | $ | 112 | $ | 713 | 637 | % |
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In December 2010, the Company provided a $25.0 million subordinated loan to the owners of 950
F Street, NW, a 287,000 square-foot office building in Washington, D.C. The loan has a fixed
interest rate of 12.5%. The Company recorded interest income of $0.8 million for the three months
ended March 31, 2011. The increase in interest and other income was partially offset by a $0.1
million decline in other income from the Company subleasing its former corporate office space. The
Companys lease on its former corporate office space and its subleasing arrangements expired on
December 31, 2010.
Equity in losses of affiliates is summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Decrease | Change | ||||||||||||
$ | 32 | $ | 38 | $ | 6 | 16 | % |
Equity in losses of affiliates reflects the Companys ownership interest in the operating
results of the properties, in which, it does not have a controlling interest. The decrease in
equity in losses of affiliates reflects a smaller aggregate loss from the Companys nonconsolidated
properties during the three months ended March 31, 2011 compared with the same period in 2010.
Benefit from Income Taxes
Benefit from income taxes is summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 313 | $ | | $ | 313 | |
The Company owns three consolidated properties in Washington, D.C., 840 First Street, NE, 1211
Connecticut Avenue, NW and 440 First Street, NW, which are subject to income-based franchise taxes
as a result of conducting business in Washington, D.C. The Company recorded a benefit from income
taxes of $0.3 million for the quarter ended March 31, 2011. The Company did not own any properties
located in Washington D.C. during the quarter ended March 31, 2010 and, therefore, was not subject
to any Washington D.C. income-based franchise taxes.
Discontinued Operations
Discontinued operations are summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Decrease | Change | ||||||||||||
$ | 201 | $ | 558 | $ | 357 | 64 | % |
Discontinued operations reflect the operating results, gains on sale and impairments of the
Companys disposed properties. In February 2011, the Company sold Old Courthouse Square, which was
located in its Maryland reporting segment. The Company did not recognize a gain on the sale as an
impairment charge was recorded during 2010 to record the property at its fair value. During the
second quarter of 2010, the Company sold 7561 Lindbergh Drive and Deer Park, which were both
located in its Maryland reporting segment. During the first quarter of 2010, the Company recorded a
$0.6 million impairment charge on its Deer Park property based on the contractual sale price, less
anticipated selling costs, which was recorded as discontinued operations. The Company has had, and
will have, no continuing involvement with these properties subsequent to their disposal.
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Table of Contents
Net loss attributable to noncontrolling interests
Net loss attributable to noncontrolling interests is summarized as follows:
Three Months Ended March 31, | Percent | |||||||||||||||
(amounts in thousands) | 2011 | 2010 | Increase | Change | ||||||||||||
$ | 138 | $ | 49 | $ | 89 | 182 | % |
Net loss attributable to noncontrolling interests reflects the ownership interests in the
Companys net loss attributable to parties other than the Company. The increase in net loss
attributable to noncontrolling interests can be attributed to an increase in net loss during the
three months ended March 31, 2011 compared with the same period in 2010.
The percentage of the Operating Partnership owned by noncontrolling interests increased to
4.5% as of March 31, 2011 compared with 1.9% as of March 31, 2010, primarily due to the issuance of
1,418,715 Operating Partnership units to partially fund the acquisition of 840 First Street, NE
during the first quarter of 2011. During the fourth quarter of 2010, the Company acquired Redland
Corporate Center through a joint venture, in which, it has a 97% economic interest. The Company
consolidates the operating results of the property and recognizes its joint venture partners
percentage of gains or losses from Redland Corporate Center in net loss attributable to
noncontrolling interests. For the three months ended March 31, 2011, the joint venture partners
share of the loss in the operations of Redland Corporate Center was $2 thousand.
Same Property Net Operating Income
Same Property Net Operating Income (Same Property NOI), defined as operating revenues
(rental, tenant reimbursements and other revenues) less operating expenses (property operating
expenses, real estate taxes and insurance) from the properties 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. Same Property NOI is a non-GAAP measure. As an indication
of the Companys operating performance, Same Property NOI should not be considered an alternative
to net income calculated in accordance with GAAP. A reconciliation of the Companys Same Property
NOI to net income from its consolidated statements of operations is presented below. The Same
Property NOI results exclude corporate-level expenses, as well as certain transactions, such as the
collection of termination fees, as these items vary significantly period-over-period and thus
impact trends and comparability. Also, the Company eliminates depreciation and amortization
expense, which are property level expenses, in computing Same Property NOI because these are
non-cash expenses that are based on historical cost accounting assumptions and management believes
these expenses do not offer the investor significant insight into the operations of the property.
This presentation allows management and investors to distinguish whether growth or declines in net
operating income are a result of increases or decreases in property operations or the acquisition
of additional properties. While this presentation provides useful information to management and
investors, the results below should be read in conjunction with the results from the consolidated
statements of operations to provide a complete depiction of total Company performance. The Company
also presents Same Property NOI results for each of its reporting segments, with the exception of
its Washington, D.C. reporting segment, which did not have any properties owned for the entirety of
the periods presented.
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Comparison of the Three months ended March 31, 2011 with the Three Months Ended March 31, 2010
The following table of selected operating data provides the basis for our discussion of Same
Property NOI for the periods presented:
Three Months Ended March 31, | ||||||||||||||||
(dollars in thousands) | 2011 | 2010 | $ Change | % Change | ||||||||||||
Number of buildings (1) |
171 | 171 | | | ||||||||||||
Same property revenues |
||||||||||||||||
Rental |
$ | 26,969 | $ | 26,870 | $ | 99 | 0.4 | |||||||||
Tenant reimbursements and other |
6,607 | 7,301 | (694 | ) | (9.5 | ) | ||||||||||
Total same property revenues |
33,576 | 34,171 | (595 | ) | (1.7 | ) | ||||||||||
Same property operating expenses |
||||||||||||||||
Property |
8,597 | 9,688 | (1,091 | ) | (11.3 | ) | ||||||||||
Real estate taxes and insurance |
3,048 | 3,302 | (254 | ) | (7.7 | ) | ||||||||||
Total same property operating expenses |
11,645 | 12,990 | (1,345 | ) | (10.4 | ) | ||||||||||
Same property net operating income |
$ | 21,931 | $ | 21,181 | $ | 750 | 3.5 | |||||||||
Reconciliation to net (loss) income: |
||||||||||||||||
Same property net operating income |
$ | 21,931 | $ | 21,181 | ||||||||||||
Non-comparable net operating income (2) |
3,579 | 252 | ||||||||||||||
General and administrative expenses |
(4,008 | ) | (3,709 | ) | ||||||||||||
Depreciation and amortization |
(12,770 | ) | (9,858 | ) | ||||||||||||
Other expenses, net |
(12,423 | ) | (9,516 | ) | ||||||||||||
Discontinued operations(3) |
(201 | ) | (558 | ) | ||||||||||||
Net loss |
$ | (3,892 | ) | $ | (2,208 | ) | ||||||||||
Weighted Average Occupancy | ||||||||
at March 31, | ||||||||
2011 | 2010 | |||||||
Same Properties |
83.9 | % | 85.0 | % | ||||
(1) | Same property comparisons are based
upon those properties owned for the entirety of the periods
presented. Same property results exclude the results of
the following non same-properties: Three Flint Hill, 500
First Street, NW, Battlefield Corporate Center, Redland
Corporate Center, Atlantic Corporate Park, NW, 440 First
Street, NW, 7458 Candlewood Road, 1750 H Street, NW, Cedar
Hill, Merrill Lynch, 840 First Street, NE, Davis Drive and
Sterling Park Building 7. |
|
(2) | Non-comparable net operating
income has been adjusted to reflect a normalized management
fee percentage in lieu of an administrative
overhead allocation for comparative purposes.
|
|
(3) |
Discontinued operations consists
of the operating results of Old Courthouse Square, which
was sold in the first quarter of 2011, and Deer Park and
7561 Lindbergh Drive, which were both sold in the second
quarter of 2010. |
Same Property NOI increased $0.8 million, or 3.5%, for the three months ended March 31, 2011
compared with the same period in 2010. Total same property revenues decreased $0.6 million for the
three months ended March 31, 2011 primarily due to a decline in tenant reimbursements from
recoverable operating expenses. Total same property expenses decreased $1.3 million for the three
months ended March 31, 2011 compared with 2011 primarily due to a decline in real estate taxes and
snow and ice removal costs.
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Maryland
Three Months Ended March 31, | ||||||||||||||||
(dollars in thousands) | 2011 | 2010 | $ Change | % Change | ||||||||||||
Number of buildings (1) |
67 | 67 | | | ||||||||||||
Same property revenues |
||||||||||||||||
Rental |
$ | 8,884 | $ | 8,771 | $ | 113 | 1.3 | |||||||||
Tenant reimbursements and other |
2,140 | 2,417 | (277 | ) | (11.5 | ) | ||||||||||
Total same property revenues |
11,024 | 11,188 | (164 | ) | (1.5 | ) | ||||||||||
Same property operating expenses |
||||||||||||||||
Property |
3,037 | 3,410 | (373 | ) | (10.9 | ) | ||||||||||
Real estate taxes and insurance |
993 | 1,094 | (101 | ) | (9.2 | ) | ||||||||||
Total same property operating expenses |
4,030 | 4,504 | (474 | ) | (10.5 | ) | ||||||||||
Same property net operating income |
$ | 6,994 | $ | 6,684 | $ | 310 | 4.6 | |||||||||
Reconciliation to total property operating income: |
||||||||||||||||
Same property net operating income |
$ | 6,994 | $ | 6,684 | ||||||||||||
Non-comparable net operating income (loss)(2) |
1,166 | (40 | ) | |||||||||||||
Total property operating income |
$ | 8,160 | $ | 6,644 | ||||||||||||
Weighted Average Occupancy | ||||||||
at March 31, | ||||||||
2011 | 2010 | |||||||
Same Properties |
81.3 | % | 82.8 | % |
(1) | Same property comparisons are
based upon those properties owned for the entirety
of the periods presented. Same property results
exclude the results of the following non
same-properties: Redland Corporate Center, 7458
Candlewood Road and Merrill Lynch. |
|
(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 Maryland properties increased $0.3 million, or 4.6%, for the
quarter ended March 31, 2011 compared with the same period in 2010. Total same property revenues
decreased $0.2 million due to a decrease in recoverable property operating expenses. Total same
property operating expenses for the Maryland properties decreased $0.5 million primarily due to
lower real estate taxes, snow and ice removal costs and utility expenses.
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Table of Contents
Northern Virginia
Three Months Ended March 31, | ||||||||||||||||
(dollars in thousands) | 2011 | 2010 | $ Change | % Change | ||||||||||||
Number of buildings (1) |
50 | 50 | | | ||||||||||||
Same property revenues |
||||||||||||||||
Rental |
$ | 8,368 | $ | 8,378 | $ | (10 | ) | (0.1 | ) | |||||||
Tenant reimbursements and other |
2,144 | 2,478 | (334 | ) | (13.5 | ) | ||||||||||
Total same property revenues |
10,512 | 10,856 | (344 | ) | (3.2 | ) | ||||||||||
Same property operating expenses |
||||||||||||||||
Property |
2,697 | 3,126 | (429 | ) | (13.7 | ) | ||||||||||
Real estate taxes and insurance |
1,074 | 1,152 | (78 | ) | (6.8 | ) | ||||||||||
Total same property operating expenses |
3,771 | 4,278 | (507 | ) | (11.9 | ) | ||||||||||
Same property net operating income |
$ | 6,741 | $ | 6,578 | $ | 163 | 2.5 | |||||||||
Reconciliation to total property operating income |
||||||||||||||||
Same property net operating income |
$ | 6,741 | $ | 6,578 | ||||||||||||
Non-comparable net operating (loss) income(2) |
(118 | ) | 107 | |||||||||||||
Total property operating income |
$ | 6,623 | $ | 6,685 | ||||||||||||
Weighted Average Occupancy | ||||||||
at March 31, | ||||||||
2011 | 2010 | |||||||
Same Properties |
84.8 | % | 84.5 | % |
(1) | Same property comparisons are based upon those properties owned for the entirety of the periods
presented. Same property results exclude
the results of Three Flint Hill, Atlantic Corporate Park, Cedar Hill, Davis Drive and Sterling Park-Building 7. |
|
(2) | Non-comparable net operating income (loss) has been adjusted to reflect a normalized management fee
percentage in lieu of an administrative overhead allocation for comparative purposes. |
Same Property NOI for the Northern Virginia properties increased $0.2 million, or 2.5%,
for the three months ended March 31, 2011 compared with the same period in 2010. Total same
property revenues decreased $0.3 million for the three months ended March 31, 2011 compared with
2010 primarily due to a decline in recoverable property operating expenses. Total same property
operating expenses decreased $0.5 million during the first quarter of 2011 primarily due to lower
real estate taxes and snow and ice removal costs.
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Table of Contents
Southern Virginia
Three Months Ended March 31, | |||||||||||||||||
(dollars in thousands) | 2011 | 2010 | $ Change | % Change | |||||||||||||
Number of buildings (1) |
54 | 54 | | | |||||||||||||
Same property revenues |
|||||||||||||||||
Rental |
$ | 9,717 | $ | 9,721 | $ | (4 | ) | | |||||||||
Tenant reimbursements and other |
2,323 | 2,406 | (83 | ) | (3.4 | ) | |||||||||||
Total same property revenues |
12,040 | 12,127 | (87 | ) | (0.7 | ) | |||||||||||
Same property operating expenses |
|||||||||||||||||
Property |
2,863 | 3,152 | (289 | ) | (9.2 | ) | |||||||||||
Real estate taxes and insurance |
981 | 1,056 | (75 | ) | (7.1 | ) | |||||||||||
Total same property operating expenses |
3,844 | 4,208 | (364 | ) | (8.7 | ) | |||||||||||
Same property net operating income |
$ | 8,196 | $ | 7,919 | $ | 277 | 3.5 | ||||||||||
Reconciliation to total property operating income |
|||||||||||||||||
Same property net operating income |
$ | 8,196 | $ | 7,919 | |||||||||||||
Non-comparable net operating income(2) |
253 | 185 | |||||||||||||||
Total property operating income |
$ | 8,449 | $ | 8,104 | |||||||||||||
Weighted Average Occupancy | ||||||||
at March 31, | ||||||||
2011 | 2010 | |||||||
Same Properties |
85.4 | % | 86.7 | % |
(1) | Same property comparisons are based
upon those properties owned for the entirety of the periods
presented. Same property results exclude
the results of Battlefield Corporate Center. |
|
(2) | Non-comparable property 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 $0.3 million, or 3.5%,
for the three months ended March 31, 2011 compared with the same period in 2010. Total same
property revenues decreased $0.1 million for the three months ended March 31, 2011 compared with
2010 as a result of a decrease in recoverable property operating expenses and an increase in
vacancy, which was partially offset by an increase in rental rates. Total same property operating
expense decreased $0.4 million primarily due to a decline in real estate taxes, snow and ice
removal costs and reserves for anticipated bad debt expense.
Liquidity and Capital Resources
Overview
The Company seeks to maintain a flexible balance sheet, with an appropriate balance of cash,
debt, equity and available funds under its unsecured revolving credit facility, to readily provide
access to capital given the volatility of the market and to position itself to take advantage of
potential growth opportunities. The Company expects to meet short-term liquidity requirements
generally through working capital, net cash provided by operations, and, if necessary, borrowings
on its unsecured revolving credit facility. The Companys short-term obligations consist primarily
of the lease for its corporate headquarters, normal recurring operating expenses, regular debt
payments, recurring expenditures for corporate and
administrative needs, non-recurring expenditures such as capital improvements, tenant
improvements and redevelopments, leasing commissions and dividends to preferred and common
shareholders.
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Table of Contents
Over the next twelve months, the Company believes that it will generate sufficient cash flow
from operations and have access to the capital resources through debt and equity markets, necessary
to expand and develop its
business, to fund its operating and administrative expenses, to continue to meet its debt service
obligations and to pay distributions in accordance with REIT requirements. However, the Companys
cash flow from operations could be adversely affected due to uncertain economic factors and
volatility in the financial and credit markets. In particular, the Company cannot assure that its
tenants will not default on their leases or fail to make full rental payments if their businesses
are challenged due to, among other things, the economic conditions (particularly if the tenants are
unable to secure financing to operate their businesses). This may be particularly true for the
Companys tenants that are smaller companies. Further, approximately 12% of the Companys
annualized base rent is scheduled to expire during the next twelve months and, if it is unable to
renew these leases or re-let the space, its cash flow could be negatively impacted.
The Company intends to meet long-term funding requirements for property acquisitions,
development, redevelopment and other non-recurring capital improvements through net cash provided
from operations, long-term secured and unsecured indebtedness, including borrowings under its
unsecured revolving credit facility, secured term loans and unsecured senior notes, proceeds from
disposal of strategically identified assets (outright and through joint ventures) and the issuance
of equity and debt securities. For example, in January 2011, the Company raised net proceeds of
approximately $111 million through the issuance of 4.6 million 7.75% Series A Preferred Shares. The
Company used $105.0 million of the proceeds to pay down a portion of its unsecured revolving credit
facility.
The Companys ability to raise funds through sales of debt and equity securities in the future
will be dependent on, among other things, general economic conditions, general market conditions
for REITs, rental rates, occupancy levels, market perceptions and the trading price of the
Companys shares. The Company will continue to analyze which sources of capital are most
advantageous to it at any particular point in time, but the capital markets may not be consistently
available on terms the Company deems attractive.
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 March
31, 2011, the Company was in compliance with all of the financial covenants of its outstanding debt
instruments. Below is a summary of certain financial covenants associated with the Companys
outstanding debt at March 31, 2011 (dollars in thousands):
Unsecured Revolving Credit Facility and Secured Term Loans
Unsecured | ||||||||||||||||
Revolving Credit | ||||||||||||||||
Facility and 2007 | ||||||||||||||||
Secured Term | 2008 Secured | |||||||||||||||
Loan | Covenant | Term Loan | Covenant | |||||||||||||
Unencumbered Pool Leverage(1) |
34.3 | % | ≤ 62.5 | % | | | ||||||||||
Unencumbered Pool Debt Service Coverage
Ratio(1),(2) |
3.76 | x | ≥ 1.75 | x | | | ||||||||||
Maximum Consolidated Total Indebtedness |
48.7 | % | ≤ 62.5 | % | 46.6 | % | ≤ 60 | % | ||||||||
Minimum Tangible Net Worth |
$ | 820,371 | ≥$690,290 | $ | 891,919 | ≥$690,290 | ||||||||||
Fixed Charge Coverage Ratio |
2.02 | x | ≥ 1.50 | x | 2.02 | x | ≥ 1.50 | x | ||||||||
Maximum Dividend Payout Ratio |
81.3 | % | ≤ 95 | % | 81.3 | % | ≤ 95 | % | ||||||||
Maximum Secured Debt |
32.2 | % | ≤ 40 | % | 30.8 | % | ≤ 40 | % |
(1) | Covenant does not apply to the Companys secured term loans. |
|
(2) | Covenant applies only to the Companys unsecured revolving credit facility. |
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Senior Notes
Senior Notes | Covenant | |||||||
Unencumbered Pool Leverage |
3.01 | x | ≥ 1.50 | x | ||||
Unencumbered Pool Debt Service Coverage Ratio(1),(2) |
3.79 | x | ≥ 1.75 | x | ||||
Maximum Consolidated Total Indebtedness |
47.6 | % | ≤ 65 | % | ||||
Minimum Tangible Net Worth |
$ | 855,061 | ≥ $690,290 | |||||
Fixed Charge Coverage Ratio |
2.02 | x | ≥ 1.50 | x | ||||
Maximum Dividend Payout Ratio |
81.3 | % | ≤ 95 | % | ||||
Maximum Secured Debt |
31.5 | % | ≤ 40 | % |
Non-Financial Covenants in Mortgage Loan Documents
Certain of the Companys subsidiaries are borrowers on mortgage loans, the terms of which
prohibit certain direct or indirect transfers of ownership interests in the borrower subsidiary (a
Prohibited Transfer). Under the terms of the mortgage loan documents, a lender could assert that
a Prohibited Transfer includes the trading of the Companys common shares on the NYSE, the issuance
of common shares by the Company, or the issuance of units of limited partnership interest in the
Companys operating partnership. As of March 31, 2011, the Company believes that there were nine
mortgage loans with such Prohibited Transfer provisions, representing an aggregate principal amount
outstanding of approximately $78 million. Two of these mortgage loans were entered into prior to
the Companys initial public offering (IPO) in 2003 and seven were assumed subsequent to its IPO.
In April 2011, the Company repaid, with available cash, a $0.3 million mortgage with a Prohibited
Transfer provision that was assumed subsequent to its IPO. In each instance, the Company received
the consent of the mortgage lender to consummate its IPO (for the two pre-IPO loans) or to acquire
the property or the ownership interests of the borrower (for the post-IPO loans), including the
assumption by its subsidiary of the mortgage loan. Generally, the underlying mortgage documents,
previously applicable to a privately held owner, were not changed at the time of the IPO or the
later loan assumptions, although the Company believes that each of the lenders or servicers was
aware that the borrowers ultimate parent was or would become a publicly traded company. Subsequent
to the IPO and the assumption of these additional mortgage loans, the Company has issued new common
shares and shares of the Company have been transferred on the New York Stock Exchange. Similarly,
the Companys operating partnership has issued units of limited partnership interest. To date, no
lender or servicer has asserted that a Prohibited Transfer has occurred as a result of any such
transfer of shares or units of limited partnership interest. If a lender were to be successful in
any such action, the Company could be required to immediately repay or refinance the amounts
outstanding, or the lender may be able to foreclose on the property securing the loan or take other
adverse actions. In addition, in certain cases a Prohibited Transfer could result in the loan
becoming fully recourse to the Company or its Operating Partnership. In addition, if a violation of
a Prohibited Transfer provision were to occur that would permit the Companys mortgage lenders to
accelerate the indebtedness owed to them, it could result in an event of default under the
Companys Senior Unsecured Series A and Series B Notes, its unsecured revolving credit facility,
its two Secured Term Loans and its Exchangeable Senior Notes.
Cash Flows
Due to the nature of the Companys business, it relies on net cash provided by operations to
fund its short-term liquidity needs. Net cash provided by operations is substantially dependent on
the continued receipt of rental payments and other expenses reimbursed by the Companys tenants.
The ability of tenants to meet their obligations, including the payment of rent contractually owed
to the Company, and the Companys ability to lease space to new or replacement tenants on favorable
terms, could affect the Companys cash available for short-term liquidity needs. The Company
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 Company could also fund building acquisitions, development, redevelopment and other
non-recurring capital improvements through additional borrowings, issuance of Operating Partnership
units or sales of assets, outright or through joint ventures.
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Table of Contents
Consolidated cash flow information is summarized as follows:
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
(amounts in thousands) | 2011 | 2010 | Change | |||||||||
Cash provided by operating activities |
$ | 4,264 | $ | 8,822 | $ | (4,558 | ) | |||||
Cash used in investing activities |
(19,485 | ) | (3,749 | ) | (15,736 | ) | ||||||
Cash provided by (used in) financing activities |
622 | (3,153 | ) | 3,775 |
Net cash provided by operating activities decreased $4.6 million for the three months ended
March 31, 2011 compared with 2010 primarily due to a $4.4 million increase in the Companys escrow
and reserve accounts. As a result of the new properties the Company acquired in 2011, including the
mortgage debt assumed in the property acquisitions, the Company was required to escrow additional
funds during the first quarter of 2011 compared with 2010. The decrease in cash provided by
operating activities during the first quarter of 2011 compared with 2010 was also the result of an
increase in accounts and other receivables and an increase in the Companys deferred costs. The
decrease in cash provided by operating activities was partially offset by an increase in the
Companys net operating income for the three months ended March 31, 2011 compared with the three
months ended March 31, 2010.
Net cash used in investing activities increased $15.7 million for the three months ended March
31, 2011 compared with the same period in 2010. The increase in cash used in investing activities
is primarily due to the use of $17.5 million in cash to acquire three properties and a parcel of
land during the first quarter of 2011. The Company did not acquire any properties or land parcels
during the three months ended March 31, 2010. Also, as of March 31, 2011, the Company had paid $3.5
million in deposits on potential acquisitions. The increase in cash used in investing activities
was also attributable to a $6.3 million increase in additions to rental property and construction
in progress during the first quarter of 2011 compared with 2010. The increase in cash used in
investing activities was partially offset by $10.8 million of proceeds the Company received from
the sale of its Old Courthouse Square property in the first quarter of 2011. The Company did not
dispose of any properties during the first quarter of 2010.
Net cash provided by financing activities was $0.6 million for the three months ended March
31, 2011 compared with cash used in financing activities of $3.2 million for the three months ended
March 31, 2010. During the first quarter of 2011, the Company issued $30.0 million of debt
consisting of borrowings on its unsecured revolving credit facility and did not issue any debt
during the first quarter of 2010. During the first quarter of 2011, the Company issued 4.6 million
of Series A Preferred Shares for net proceeds of $111.0 million compared with the issuance of 6.3
million common shares for net proceeds of $87.1 million during the first quarter of 2010. The
proceeds from both the preferred and common share issuances during the first quarters of 2011 and
2010 were used to pay down a portion of the Companys outstanding balance on its unsecured
revolving credit facility. The Company repaid outstanding debt of $128.7 million during the first
quarter of 2011 compared with the repayment of $83.9 million of debt during the first quarter of
2010. As a result of the Companys equity issuances during 2011 and 2010, its cash paid for
dividends increased $4.5 million for the three months ended March 31, 2011 compared with the same
period in 2010.
Contractual Obligations
As of March 31, 2011, the Company had development and redevelopment contractual obligations of
$8.0 million outstanding, primarily related to redevelopment activities at Three Flint Hill, which
is undergoing a complete redevelopment,
and capital improvement obligations of $1.0 million outstanding. Capital improvement
obligations represent commitments for roof, asphalt, HVAC and common area replacements
contractually obligated as of March 31, 2011. Also, as of March 31, 2011, the Company had $7.1
million of tenant improvement obligations, primarily related to a tenant at Indian Creek Court.
The Company owns a 25% interest in RiversPark I and II through two unconsolidated joint
ventures. The properties are encumbered by a $28.0 million mortgage loan, of which the Company
remains liable for its proportionate share, or $7.0 million. Upon formation of the joint venture
to own RiversPark I, the Company guaranteed to the joint ventures the rental payments associated
with four leases with the former owner of RiversPark I. Two of the guarantees were terminated in
2008, and another guarantee was terminated in the fourth quarter of 2009. The final guarantee was
terminated in February 2011.
44
Table of Contents
In connection with the Companys 2009 acquisition of Ashburn Center, the Company entered into
a contingent consideration fee agreement with the seller under which the Company will be obligated
to pay additional consideration upon the property achieving stabilization per specified terms of
the agreement. During the first quarter of 2010, the Company leased the remaining vacant space at
the property and recorded a contingent consideration charge of $0.7 million, which reflected an
increase in the anticipated fee to the seller. As of March 31, 2011, the Companys total contingent
consideration obligation to the former owner of Ashburn Center was approximately $1.4 million.
On December 29, 2010, the Company entered into an unconsolidated joint venture with AEW
Capital Management, L.P. and acquired Aviation Business Park, a three-building, single-story,
office park totaling 121,000 square feet in Glen Burnie, Maryland. The property was acquired by the
joint venture through a deed-in-lieu of foreclosure in return for additional consideration to the
owner if certain future leasing hurdles are met. As of March 31, 2011, the Companys total
contingent consideration obligation to the former owner of Aviation Business Park was approximately
$0.1 million, which is not reflected on the Companys condensed consolidated financial statements.
On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an
aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration
payable upon the lease renewal by the buildings sole tenant or the re-tenanting of the property.
At acquisition, the Company was in negotiations with the existing tenant to renew its lease through
August 2023. As a result, the Company recorded a contingent consideration obligation of $9.4
million at acquisition.
As of March 31, 2011, the Company had $6.1 million in deposits outstanding, of which, $3.1
million was related to One Fair Oaks, which was acquired in April 2011. The Company had no other
material contractual obligations as of March 31, 2011.
Distributions
The Company is required to distribute to its shareholders at least 90% of its REIT taxable
income in order to qualify as a REIT, including some types of taxable income it recognizes for tax
purposes but with regard to which it does not receive corresponding cash. In addition, the Company
must distribute to its shareholders 100% of its taxable income to eliminate its U.S. federal income
tax liability. Funds used by the Company to pay dividends on its common shares are provided through
distributions from the Operating Partnership. For every common share of the Company, the Operating
Partnership has issued to the Company a corresponding common unit. The Company is the sole general
partner of and, as of March 31, 2011, owned 95.5% interest in, the Operating Partnerships units.
The remaining interests in the Operating Partnership are limited partnership interests, some of
which are owned by certain of the Companys executive officers, trustees and unrelated parties who
contributed properties and other assets to the Company upon its formation. The Operating
Partnership is required to make cash distributions to the Company in an amount sufficient to meet
its distribution requirements. The cash distributions by the Operating Partnership reduce the
amount of cash that is available for general corporate purposes, which includes repayment of debt,
funding acquisitions or construction activities, and for other corporate operating activities. On a
quarterly basis, the Companys management team recommends a distribution amount that is approved by
the Companys Board of Trustees. The amount of future distributions will be based on taxable
income, cash from operating activities and available cash and at the discretion of the Companys
Board of Trustees.
Dividends
On April 26, 2011, the Company declared a dividend of $0.20 per common share, equating to an
annualized dividend of $0.80 per share. The dividend is payable on May 13, 2011 to common
shareholders of record as of May 6, 2011. The Company also declared a dividend of $0.484375 per
share on its Series A Preferred Shares. The dividend is payable on May 16, 2011 to preferred
shareholders of record as of May 6, 2011.
Funds From Operations
Funds from operations (FFO) is a non-GAAP measure used by many investors and analysts that
follow the real estate industry. The Company considers FFO a useful measure of performance for an
equity REIT because it facilitates an understanding of the operating performance of its properties
without giving effect to real estate depreciation and amortization, which assume that the value of
real estate assets diminishes predictably over time. Since real estate values have historically
risen or fallen with market conditions, the Company believes that FFO provides a meaningful
indication of its performance. Management also considers FFO an appropriate supplemental
performance measure given its wide use by and relevance to investors and analysts. FFO, reflecting
the assumption that real estate asset values rise or fall with market conditions, principally
adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume
that the value of real estate diminishes predictably over time.
45
Table of Contents
As defined by the National Association of Real Estate Investment Trusts (NAREIT) in its
March 1995 White Paper (as amended in November 1999 and April 2002), FFO represents net income
(computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real
estate-related depreciation and amortization and after adjustments for unconsolidated partnerships
and joint ventures. The Company computes FFO in accordance with NAREITs definition, which may
differ from the methodology for calculating FFO, or similarly titled measures, used by other
companies and this may not be comparable to those presentations. The Companys methodology for
computing FFO adds back noncontrolling interests in the income from its Operating Partnership in
determining FFO. The Company believes this is appropriate as Operating Partnership units are
presented on an as-converted, one-for-one basis for shares of stock in determining FFO per diluted
share.
Further, FFO does not represent amounts available for managements discretionary use because
of needed capital replacement or expansion, debt service obligations or other commitments and
uncertainties, nor is it indicative of funds available to fund the Companys cash needs, including
its ability to make distributions. The Companys presentation of FFO should not be considered as an
alternative to net income (computed in accordance with GAAP) as an indicator of the Companys
financial performance or to cash flow from operating activities (computed in accordance with GAAP)
as an indicator of its liquidity.
The following table presents a reconciliation of net loss available to common shareholders to
FFO available to common shareholders and unitholders (amounts in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net loss available to common shareholders |
$ | (5,537 | ) | $ | (2,159 | ) | ||
Add: Depreciation and amortization: |
||||||||
Real estate assets |
12,770 | 9,858 | ||||||
Discontinued operations |
129 | 279 | ||||||
Unconsolidated joint ventures |
524 | 114 | ||||||
Consolidated joint venture |
(19 | ) | | |||||
Net loss attributable to noncontrolling
interests in the Operating Partnership |
(136 | ) | (49 | ) | ||||
FFO available to common shareholders and unitholders |
$ | 7,731 | $ | 8,043 | ||||
Weighted average common shares and Operating
Partnership units outstanding diluted |
50,506 | 31,489 |
Off-Balance Sheet Arrangements
On January 1, 2010 and March 17, 2009, the Company deconsolidated the joint ventures that own
RiversPark I and II, respectively, and removed all their related assets and liabilities from its
consolidated balance sheets as of the date of deconsolidation. The Company remains liable for $7.0
million of mortgage debt, which represents its proportionate share. During the fourth quarter
2010, the Company entered into separate unconsolidated joint ventures with a third party to
acquire 1750 H Street, NW and Aviation Business Park. For more information, see footnote 5 -
Investment in Affiliates.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the federal securities
laws. Forward-looking statements, which are based on certain assumptions and describe future
plans, strategies and expectations of the Company, are generally identifiable by use of the words
believe, expect, intend, anticipate, estimate, project or similar expressions. The
Companys ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Certain factors that could cause actual results to differ materially from
the Companys expectations include changes in general or regional economic conditions; the 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; the Companys ability to manage its current debt levels and repay or
refinance its indebtedness upon maturity or other required payment dates; the Companys ability to
obtain debt and/or financing on attractive terms, or at all; and other risks detailed under Risk
Factors in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2010
and in the other documents the Company files with the SEC. Many of these factors are beyond the
Companys ability to control or predict. Forward-looking statements are not guarantees of
performance. For forward-looking statements herein, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995. The Company assumes no obligation to update or supplement forward-looking statements that
become untrue because of subsequent events. We have no duty to, and do not intend to, update or
revise the forward-looking statements in this discussion after the date hereof, except as may be
required by law. In light of these risks and uncertainties, you should keep in mind that any
forward-looking statement made in this discussion, or elsewhere, might not occur.
46
Table of Contents
ITEM 3: | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK |
The Companys future income, cash flows and fair values relevant to financial instruments are
dependent upon prevailing market interest rates. In the normal course of business, the Company is
exposed to the effect of interest rate changes. The Company has historically entered into
derivative agreements to mitigate exposure to unexpected changes in interest. Market risk refers to
the risk of loss from adverse changes in market interest rates. The Company periodically uses
derivative financial instruments to seek to manage, or hedge, interest rate risks related to its
borrowings. The Company does not use derivatives for trading or speculative purposes and only
enters into contracts with major financial institutions based on their credit rating and other
factors. The Company intends to enter into derivative agreements only with counterparties that it
believes have a strong credit rating to mitigate the risk of counterparty default or insolvency.
At March 31, 2011, the Companys exposure to variable interest rates consisted of $116.0
million of borrowings on its unsecured revolving credit facility and $100.0 million on three
secured term loans. A change in interest rates of 1% would result in an increase or decrease of
$2.2 million in interest expense on an annualized basis. The Company entered into an interest rate
swap agreement that, beginning on January 18, 2011, fixed LIBOR at 1.474% on $50 million of the
Companys variable rate debt. The swap agreement will mature on January 15, 2014.
For fixed rate debt, changes in interest rates generally affect the fair value of debt but not
the earnings or cash flow of the Company. See footnote 10, Fair Value Measurements for more
information on the fair value of the Companys debt.
ITEM 4: | CONTROLS AND PROCEDURES |
The Company carried out an evaluation with the participation of the Companys management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this
report. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports that the Company files, or
submits under the Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Companys internal control over financial reporting during the
quarter ended March 31, 2011, that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
47
Table of Contents
PART II: OTHER INFORMATION
Item 1. | Legal Proceedings |
As of March 31, 2011, the Company was not subject to any material pending legal proceedings.
Item 1A. | Risk Factors |
As of March 31, 2011, 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, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Removed and Reserved |
Item 5. | Other Information |
Not applicable.
Item 6. | Exhibits |
No. | Description | |||
3.1 | Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed
with the SEC on October 1, 2003). |
|||
3.2 | Articles Supplementary designating First Potomac Realty Trusts 7.750% Series A Cumulative
Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per
share (incorporated by reference to Exhibit 3.2 to the Companys Form 8-A filed on January 18, 2011) |
|||
3.3 | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the
SEC on October 1, 2003). |
|||
4.1 | Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated
September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration
Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
|||
4.2 | Amendment No. 13 to Amended and Restated Limited Partnership Agreement of First Potomac Realty
Investment Limited Partnership (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on January 19, 2011). |
|||
4.3 | * | Amendment No. 14 to Amended and Restated Limited Partnership Agreement of First Potomac Realty
Investment Limited Partnership. |
||
4.4 | Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006). |
|||
4.5 | Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006). |
|||
4.6 | Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22,
2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
on June 23, 2006). |
|||
4.7 | First Amendment, Consent and Waiver dated as of November 5, 2010 to the Note Purchase Agreement
dated as of June 22, 2006, by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto (incorporated by
reference to Exhibit 4.6 to the Registrants Annual Report on Form 10-K for the year ended December
31, 2010). |
48
Table of Contents
No. | Description | |||
4.8 | Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference
to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.9 | Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.10 | Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited
Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
December 12, 2006). |
|||
4.11 | Form of First Potomac Realty
Investment Limited Partnership
4.0% Exchangeable Senior Note due
2011 (incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report on
Form 8-K filed on December 12,
2006). |
|||
10.1 | Form of Restricted Stock Agreement
(Time Vesting) (incorporated by
reference to Exhibit 10.1 to the
Registrants Current Report on Form
8-K filed on February 28, 2011) |
|||
31.1 | * | Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
||
32.1 | * | Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.) |
||
32.2 | * | Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.) |
* | Filed herewith. |
49
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST POTOMAC REALTY TRUST |
||||
Date: May 6, 2011 | /s/ Douglas J. Donatelli | |||
Douglas J. Donatelli | ||||
Chairman of the Board and Chief Executive Officer |
||||
Date: May 6, 2011 | /s/ Barry H. Bass | |||
Barry H. Bass | ||||
Executive Vice President and Chief Financial Officer |
50
Table of Contents
EXHIBIT INDEX
No. | Description | |||
3.1 | Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed
with the SEC on October 1, 2003). |
|||
3.2 | Articles Supplementary designating First Potomac Realty Trusts 7.750% Series A Cumulative
Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.001 per
share (incorporated by reference to Exhibit 3.2 to the Companys Form 8-A filed on January 18, 2011) |
|||
3.3 | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the
SEC on October 1, 2003). |
|||
4.1 | Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated
September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration
Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003). |
|||
4.2 | Amendment No. 13 to Amended and Restated Limited Partnership Agreement of First Potomac Realty
Investment Limited Partnership (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on January 19, 2011). |
|||
4.3 | * | Amendment No. 14 to Amended and Restated Limited Partnership Agreement of First Potomac Realty
Investment Limited Partnership. |
||
4.4 | Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006). |
|||
4.5 | Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006). |
|||
4.6 | Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22,
2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
on June 23, 2006). |
|||
4.7 | First Amendment, Consent and Waiver dated as of November 5, 2010 to the Note Purchase Agreement
dated as of June 22, 2006, by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto (incorporated by
reference to Exhibit 4.6 to the Registrants Annual Report on Form 10-K for the year ended December
31, 2010). |
|||
4.8 | Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference
to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.9 | Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed on June 23, 2006). |
|||
4.10 | Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited
Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
December 12, 2006). |
|||
4.11 | Form of First Potomac Realty
Investment Limited Partnership
4.0% Exchangeable Senior Note due
2011 (incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report on
Form 8-K filed on December 12,
2006). |
|||
10.1 | Form of Restricted Stock Agreement
(Time Vesting) (incorporated by
reference to Exhibit 10.1 to the
Registrants Current Report on Form
8-K filed on February 28, 2011) |
|||
31.1 | * | Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
||
32.1 | * | Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.) |
||
32.2 | * | Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.) |
* | Filed herewith. |