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8-K - FORM 8-K - FIRST POTOMAC REALTY TRUSTc24035e8vk.htm
Exhibit 99.1
On October 27, 2011, First Potomac Realty Trust reported results for the three and nine months ended September 30, 2011.
Highlights:
 
Executed 1,134,000 square feet of leases, 443,000 square feet of which were new leases and 691,000 square feet were renewal leases, which reflected an 88% tenant retention rate.
 
 
Renewal leases included a 204,000 square foot lease with CareFirst BlueCross BlueShield at 840 First Street, NE, eliminating the Company’s largest 2013 lease expiration.
 
 
Entered into a $175.0 million unsecured term loan that is comprised of three-tranches with staggered maturity dates ranging from July 2016 to July 2018.
 
 
Acquired two properties through joint ventures located in Washington, D.C. for total consideration of $78.0 million and a property in Chesapeake, Virginia for $16.7 million.
The Company’s net loss increased for the three and nine months ended September 30, 2011 compared with the same periods in 2010 due to an increase in acquisition costs and impairment charges, which were partially offset by a gain related to the retirement of a contingent consideration obligation. During the nine months ended September 30, 2011, the Company acquired six properties compared with the acquisition of two properties for the nine months ended September 30, 2010. During the third quarter of 2011, the Company incurred a $3.1 million impairment charge on its Airpark Place property that reflects management’s shorter anticipated holding period for the property. The additional impairment charges incurred during the nine months ended September 30, 2011 and 2010 relate to properties that were subsequently disposed of by the Company. Funds from operations (“FFO”) and Core FFO increased for the three and nine months ended September 30, 2011 compared with the same periods in 2010. Compared with the same periods in 2010, same-property net operating income (“Same-Property NOI”) decreased 1.4% for the three months ended September 30, 2011, due to an increase in vacancy, and increased 0.2% for the nine months ended September 30, 2011, due to a decline in real estate taxes and property operating expenses. FFO, Core FFO and Same-Property NOI are non-GAAP financial measures. For a description of FFO, Core FFO and Same-Property NOI, including why management believes their presentation is useful, see “Non-GAAP Financial Measures” below. See pages 5 and 6 for a reconciliation of FFO and Core FFO to the Company’s net loss and see page 8 for a reconciliation of Same-Property NOI to the Company’s net loss.
The Company’s consolidated portfolio was 84.7% leased and 81.2% occupied at September 30, 2011 compared with 83.0% leased and 80.4% occupied at June 30, 2011. Excluding the Company’s 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 Company’s consolidated portfolio was 86.1% leased and 83.5% occupied at September 30, 2011.
Acquisition
On July 19, 2011, the Company acquired Greenbrier Towers I & II in Chesapeake, Virginia for $16.7 million. The property consists of two office buildings totaling 172,000 square feet and is 86% leased to over 40 tenants. The acquisition was funded with proceeds from the sale of Aquia Commerce Center I & II and a draw on the Company’s unsecured revolving credit facility.

 

 


 

Development Joint Ventures
On August 4, 2011, the Company formed a joint venture with an affiliate of Perseus Realty, LLC to acquire the Greyhound Bus Terminal site at 1005 First Street, NE in Washington, D.C. for $46.8 million, of which, $38.4 million was paid at closing and the remaining $8.4 million will be paid in August 2013. The Company funded its share of the purchase price through a draw on its unsecured revolving credit facility. The site is currently occupied by the Greyhound Bus Terminal, which leased back the site under a ten-year lease agreement with a termination option after the second year. The Company estimates a 6.5% return on the lease-back. Greyhound has announced that it intends to relocate its operations to nearby Union Station, at which point the joint venture anticipates developing the 1.6 acre site, which can accommodate up to approximately 712,000 square feet of office space. However, there can be no assurance regarding the timing of Greyhound’s relocation or commencement of the development and, if commenced, no assurance regarding the timing of completion, the costs or the size of the development. The Company anticipates owning 97% of the joint venture when it is fully capitalized.
During the first quarter of 2011, the Company entered into a joint venture with an affiliate of the Akridge Company. On October 12, 2011, the joint venture acquired a property located in Washington, D.C. at 1200 17th Street, NW for $39.6 million. The property currently consists of a land parcel that contains an 85,000 square foot office building. The joint venture intends to demolish the existing building and develop a new Class A 170,000 square foot office building. Construction is currently expected to commence in 2012 and is expected to be completed in late 2014. However, there can be no assurance that the development will be commenced and, if commenced, that it will be completed on time or on budget. The Company funded its share of the purchase price through a draw on its unsecured revolving credit facility and available cash. The Company anticipates owning a 95% interest in the joint venture when it is fully capitalized.
Balance Sheet
The Company had $872.4 million of debt outstanding at September 30, 2011. Of the total debt outstanding, $525.4 million was fixed-rate debt with a weighted average effective interest rate of 6.0% and a weighted average maturity of 2.8 years. At September 30, 2011, the Company’s variable-rate debt consisted of borrowings of $175.0 million on a three-tranche unsecured term loan, $142.0 million on its unsecured revolving credit facility and $30.0 million on a secured term loan.
On July 18, 2011, the Company entered into a three-tranche $175.0 million unsecured term loan. The unsecured term loan’s three tranches have maturity dates staggered in one-year intervals. Tranche A has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 215 basis points and matures on July 18, 2016. Tranche B has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 225 basis points and matures on July 18, 2017. Tranche C has an outstanding balance of $55.0 million at an interest rate of LIBOR plus 230 basis points and matures on July 18, 2018. The Company used the funds to pay down $117.0 million of the outstanding balance on its unsecured revolving credit facility, to repay its $50.0 million secured term loan and for other general corporate purposes.
On August 11, 2011, the Company repaid its $20.0 million secured term loan with a draw on its unsecured revolving credit facility. The Company’s interest coverage ratio was 2.4 times for the quarter ended September 30, 2011.
During the third quarter of 2011, the Company entered into five interest rate swap agreements that fixed LIBOR on $150.0 million of its variable rate debt. The table below summarizes the Company’s five new interest rate swap agreements.
                     
            Interest Rate      
    Notional   Contractual   Fixed LIBOR  
Maturity Date   Amount   Component   Rate  
July 2016
  $ 35 million   LIBOR     1.754 %
July 2016
  25 million   LIBOR     1.7625 %
July 2017
  30 million   LIBOR     2.093 %
July 2017
  30 million   LIBOR     2.093 %
July 2018
  30 million   LIBOR     1.660 %

 

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As of September 30, 2011, the Company had hedged $200.0 million of its variable rate debt through six interest rate swap agreements. At September 30, 2011, the Company’s variable-rate debt had a weighted average effective interest rate of 2.7% and a weighted average maturity of 3.4 years. After accounting for the interest rate swap agreements, the Company’s total debt had a weighted average effective interest rate of 5.1%
Dividends
On October 25, 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 November 11, 2011 to common shareholders of record as of November 4, 2011. The Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The dividend is payable on November 15, 2011 to preferred shareholders of record as of November 4, 2011.
About First Potomac Realty Trust
First Potomac Realty Trust is a self-administered, self-managed real estate investment trust that focuses on owning, operating, developing and redeveloping office and industrial properties in the greater Washington, D.C. region. As of September 30, 2011, the Company’s portfolio totaled approximately 13.9 million square feet.
Non-GAAP Financial Measures
Funds from Operations — Funds from operations (“FFO”) represents net income (computed in accordance with U.S. generally accepted accounting principles (“GAAP”)), plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures and gains or losses on the sale of property. The Company also excludes, from its FFO calculation, any depreciation and amortization related to third parties from its consolidated joint venture. The Company considers FFO a useful measure of performance for an equity REIT because it facilitates an understanding of the operating performance of its properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, the Company believes that FFO provides a meaningful indication of its performance. The Company also considers FFO an appropriate performance measure given its wide use by investors and analysts. The Company computes FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO utilized by other equity real estate investment trusts (“REITs”) and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties, nor is it indicative of funds available to fund the Company’s cash needs, including its ability to make distributions. The Company presents FFO per diluted share calculations that are based on the outstanding dilutive common shares plus the outstanding Operating Partnership units for the periods presented.
The Company’s presentation of FFO in accordance with the NAREIT white paper, or as adjusted by the Company, should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of the Company’s financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of its liquidity. The Company’s FFO calculations are reconciled to net income in the Company’s Consolidated Statements of Operations included below.

 

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Core FFO — The computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by the Company’s operating portfolio and affect the comparability of the Company’s period-over-period performance. These items include, but are not limited to, gains and losses on the retirement of debt, contingent consideration charges, acquisition costs and impairments to real estate assets. The Company provides a reconciliation of FFO to Core FFO below.
Same-Property NOI — Same Property Net Operating Income (“Same Property NOI”), defined as operating revenues (rental, tenant reimbursements and other revenues) less operating expenses (property operating expenses, real estate taxes and insurance) from the properties owned by the Company for the entirety of the periods presented, is a primary performance measure the Company uses to assess the results of operations at its properties. As an indication of the Company’s operating performance, Same Property NOI should not be considered an alternative to net income calculated in accordance with GAAP. A reconciliation of the Company’s Same Property NOI to net income from its consolidated statements of operations is presented below. The Same Property NOI results exclude corporate-level expenses, as well as certain transactions, such as the collection of termination fees, as these items vary significantly period-over-period thus impacting trends and comparability. Also, the Company eliminates depreciation and amortization expense, which are property level expenses, in computing Same Property NOI as these are non-cash expenses that are based on historical cost accounting assumptions and do not offer the investor significant insight into the operations of the property. This presentation allows management and investors to distinguish whether growth or declines in net operating income are a result of increases or decreases in property operations or the acquisition of additional properties. While this presentation provides useful information to management and investors, the results below should be read in conjunction with the results from the consolidated statements of operations to provide a complete depiction of total Company performance.
Forward Looking Statements
The forward-looking statements contained herein are subject to various risks and uncertainties. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that its expectations will be achieved. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete acquisitions on acceptable terms; the Company’s ability to manage its current debt levels and repay or refinance its indebtedness upon maturity or other required payment dates; the Company’s ability to obtain debt and/or financing on attractive terms, or at all; and other risks detailed in the Company’s Annual Report on Form 10-K and described from time to time in the Company’s filings with the SEC. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

 

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FIRST POTOMAC REALTY TRUST
Consolidated Statements of Operations
(unaudited, amounts in thousands, except per share amounts)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
Revenues:
                               
Rental
  $ 36,121     $ 27,520     $ 103,025     $ 80,665  
Tenant reimbursements and other
    8,993       6,179       24,776       19,791  
 
                       
 
                               
Total revenues
    45,114       33,699       127,801       100,456  
 
                       
 
                               
Operating expenses:
                               
Property operating
    11,211       7,672       31,476       24,272  
Real estate taxes and insurance
    4,253       2,948       12,284       9,339  
General and administrative
    4,354       3,475       12,546       10,859  
Acquisition costs
    1,737       361       4,475       2,025  
Depreciation and amortization
    16,088       10,608       45,381       30,487  
Impairment of real estate asset
    3,111             3,111        
Contingent consideration related to acquisition of property
    (1,487 )           (1,487 )     710  
 
                       
 
                               
Total operating expenses
    39,267       25,064       107,786       77,692  
 
                       
 
                               
Operating income
    5,847       8,635       20,015       22,764  
 
                       
 
                               
Other expenses, net:
                               
Interest expense
    11,207       8,431       30,307       25,333  
Interest and other income
    (1,534 )     (89 )     (3,769 )     (285 )
Equity in losses of affiliates
    81       75       112       134  
Gain on early retirement of debt
                      (164 )
 
                       
 
                               
Total other expenses, net
    9,754       8,417       26,650       25,018  
 
                       
 
                               
(Loss) income from continuing operations before income taxes
    (3,907 )     218       (6,635 )     (2,254 )
 
                       
 
                               
Benefit from income taxes
    195             655        
 
                       
 
                               
(Loss) income from continuing operations
    (3,712 )     218       (5,980 )     (2,254 )
 
                       
 
                               
Discontinued operations:
                               
Loss from operations of disposed properties
          (3,153 )     (2,827 )     (3,412 )
Gain on sale of real estate properties
                1,954       557  
 
                       
 
                               
Loss from discontinued operations
          (3,153 )     (873 )     (2,855 )
 
                       
 
                               
Net loss
    (3,712 )     (2,935 )     (6,853 )     (5,109 )
 
                       
 
                               
Less: Net loss attributable to noncontrolling interests
    265       55       469       103  
 
                       
 
                               
Net loss attributable to First Potomac Realty Trust
    (3,447 )     (2,880 )     (6,384 )     (5,006 )
 
                       
 
                               
Less: Dividends on preferred shares
    (2,228 )           (6,239 )      
 
                       
 
                               
Net loss available to common shareholders
  $ (5,675 )   $ (2,880 )   $ (12,623 )   $ (5,006 )
 
                       
 
                               
Depreciation and amortization:
                               
Real estate assets
    16,088       10,608       45,381       30,487  
Discontinued operations
          284       520       1,099  
Unconsolidated joint ventures
    520       188       1,556       426  
Consolidated joint venture
    (21 )           (61 )      
Gain on sale of real estate properties
                (1,954 )     (557 )
Net loss attributable to noncontrolling interests in the Operating Partnership
    (272 )     (55 )     (476 )     (103 )
 
                       
 
                               
Funds from operations (FFO)
  $ 10,640     $ 8,145     $ 32,343     $ 26,346  
 
                       

 

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FIRST POTOMAC REALTY TRUST
Consolidated Statements of Operations
(unaudited, amounts in thousands, except per share amounts)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
 
                               
Funds from operations (FFO)
  $ 10,640     $ 8,145     $ 32,343     $ 26,346  
 
                               
Acquisition costs
    1,737       361       4,475       2,025  
Gain on early retirement of debt
                      (164 )
Contingent consideration related to acquisition of property
    (1,487 )           (1,487 )     710  
Impairment of real estate assets(1)
    3,111       3,448       5,821       4,013  
 
                       
 
                               
Core FFO
  $ 14,001     $ 11,954     $ 41,152     $ 32,930  
 
                       
 
                               
Basic and diluted earnings per common share:
                               
(Loss) income from continuing operations
  $ (0.12 )   $     $ (0.25 )   $ (0.08 )
Loss from discontinued operations
          (0.08 )     (0.02 )     (0.08 )
 
                       
Net loss
  $ (0.12 )   $ (0.08 )   $ (0.27 )   $ (0.16 )
 
                       
 
                               
Weighted average common shares outstanding:
                               
Basic and diluted
    49,308       37,269       49,275       34,804  
 
                               
FFO per share — basic and diluted
  $ 0.21     $ 0.21     $ 0.63     $ 0.74  
Core FFO per share — diluted
  $ 0.27     $ 0.31     $ 0.80     $ 0.92  
 
                               
Weighted average common shares and units outstanding:
                               
Basic
    51,714       37,999       51,230       35,536  
Diluted
    51,830       38,165       51,380       35,718  
     
(1)  
The impairment charge for the three months ended September 30, 2011 is included within continuing operations. All other impairment charges incurred during the nine months ended September 30, 2011 and 2010 are included within discontinued operations.

 

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FIRST POTOMAC REALTY TRUST
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
                 
    September 30, 2011     December 31, 2010  
    (unaudited)        
Assets:
               
Rental property, net
  $ 1,427,788     $ 1,217,897  
Cash and cash equivalents
    14,646       33,280  
Escrows and reserves
    16,730       8,070  
Accounts and other receivables, net of allowance for doubtful accounts of $3,138 and $3,246, respectively
    7,935       7,238  
Accrued straight-line rents, net of allowance for doubtful accounts of $360 and $849, respectively
    16,337       12,771  
Notes receivable, net
    54,644       24,750  
Investment in affiliates
    24,338       23,721  
Deferred costs, net
    33,447       20,174  
Prepaid expenses and other assets
    18,331       14,230  
Intangible assets, net
    59,587       34,551  
 
           
 
               
Total assets
  $ 1,673,783     $ 1,396,682  
 
           
 
               
Liabilities:
               
Mortgage loans
  $ 420,089     $ 319,096  
Exchangeable senior notes, net
    30,357       29,936  
Senior notes
    75,000       75,000  
Secured term loans
    30,000       110,000  
Unsecured term loan
    175,000        
Unsecured revolving credit facility
    142,000       191,000  
Accounts payable and other liabilities
    50,902       16,827  
Accrued interest
    4,157       2,170  
Rents received in advance
    7,129       7,049  
Tenant security deposits
    5,574       5,390  
Deferred market rent, net
    5,049       6,032  
 
           
 
               
Total liabilities
    945,257       762,500  
 
           
 
               
Noncontrolling interests in the Operating Partnership (redemption value of $36,419 and 16,122, respectively)
    39,360       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 shares authorized; 50,061 and 49,922 shares issued and outstanding, respectively
    50       50  
Additional paid-in capital
    795,480       794,051  
Noncontrolling interests in consolidated partnerships
    5,237       3,077  
Accumulated other comprehensive loss
    (5,405 )     (545 )
Dividends in excess of accumulated earnings
    (221,196 )     (178,573 )
 
           
 
               
Total equity
    689,166       618,060  
 
           
 
               
Total liabilities, noncontrolling interests and equity
  $ 1,673,783     $ 1,396,682  
 
           

 

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FIRST POTOMAC REALTY TRUST
Same-Property Analysis

(unaudited, dollars in thousands)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
Reconciliation of Same-Property NOI to Net Loss (1)(2)   2011     2010     2011     2010  
Same-Property:
                               
Rental revenue
  $ 27,599     $ 27,807     $ 78,862     $ 79,611  
Tenant reimbursements and other revenue
    6,120       5,949       17,453       18,105  
Property operating expenses
    (7,894 )     (7,735 )     (22,095 )     (23,233 )
Real estate taxes and insurance
    (3,048 )     (2,924 )     (8,689 )     (9,083 )
 
                       
 
                               
Same-Property NOI
    22,777       23,097       65,531       65,400  
 
                       
 
                               
Non-same property NOI(3)
    6,873       (18 )     18,510       1,445  
Depreciation and amortization
    (16,088 )     (10,608 )     (45,381 )     (30,487 )
General and administrative
    (4,354 )     (3,475 )     (12,546 )     (10,859 )
Acquisition costs
    (1,737 )     (361 )     (4,475 )     (2,025 )
Contingent consideration related to acquisition of property
    1,487             1,487       (710 )
Impairment of real estate
    (3,111 )           (3,111 )      
Loss from discontinued operations
          (3,153 )     (873 )     (2,855 )
Benefit from income taxes
    195             655        
Other expenses, net
    (9,754 )     (8,417 )     (26,650 )     (25,018 )
 
                       
 
                               
Net Loss
  $ (3,712 )   $ (2,935 )   $ (6,853 )   $ (5,109 )
 
                       
     
(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: RiversPark I and II, Three Flint Hill, NW, Battlefield Corporate Center, Redland Corporate Center, Atlantic Corporate Park, 1211 Connecticut Ave, NW, 440 First Street, NW, 7458 Candlewood Road, 1750 H Street, NW, Aviation Business Park, Cedar Hill I & III, Merrill Lynch, 840 First Street, NE, One Fair Oaks, Greenbrier Towers I & II, 1005 First Street, NE, Davis Drive and Sterling Park – Building 7.
 
(2)  
The Company acquired 500 First Street, NW on June 30, 2010. The property was the Company’s first acquisition in its Washington, D.C. region and is only included above in the quarter over quarter comparison as it was not owned by the Company for the entirety of the nine months ended September 30, 2010.
 
(3)  
Non-same property NOI has been adjusted reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

 

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