e10vq

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

Smaller reporting company o

(Do not check if smaller reporting company)

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 June 30, 2009.


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)


MARYLAND		37-1470730
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7600 Wisconsin Avenue, 11^th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)

(301) 986-9200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of August 7, 2009, there were 28,643,090 common shares, par value $0.001 per share, outstanding.

FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)


	June 30, 2009			December 31, 2008
	(unaudited)			(as adjusted – see
				footnote 2 (q))
Assets:
Rental property, net	$	965,811		$	994,913
Cash and cash equivalents		5,879			16,352
Escrows and reserves		9,451			8,808
Accounts and other receivables, net of allowance for doubtful accounts of $1,841 and $935, respectively		8,414			6,872
Accrued straight-line rents, net of allowance for doubtful accounts of $973 and $575, respectively		9,574			8,727
Investment in affiliate		1,963			—
Deferred costs, net		17,950			17,165
Prepaid expenses and other assets		4,294			6,365
Intangible assets, net		16,122			21,047


Total assets	$	1,039,458		$	1,080,249


Liabilities:
Mortgage loans	$	293,606		$	322,846
Exchangeable senior notes, net		56,374			80,435
Senior notes		75,000			75,000
Secured term loans		100,000			100,000
Unsecured revolving credit facility		99,400			75,500
Financing obligation		4,227			11,491
Accounts payable and other liabilities		15,310			18,022
Accrued interest		2,125			2,491
Rents received in advance		6,109			4,812
Tenant security deposits		5,086			5,243
Deferred market rent, net		6,775			8,489


Total liabilities		664,012			704,329


Noncontrolling interests in the Operating Partnership (redemption value of $7,534 and $7,186, respectively)		10,435			10,627

Shareholders’ equity:
Common shares, $0.001 par value, 100,000 common shares authorized: 28,299 and 27,353 shares issued and outstanding, respectively		28			27
Additional paid-in capital		491,442			484,825
Accumulated other comprehensive loss		(2,537	)		(3,823	)
Dividends in excess of accumulated earnings		(123,922	)		(115,736	)


Total shareholders’ equity		365,011			365,293


Total liabilities, noncontrolling interests and shareholders’ equity	$	1,039,458		$	1,080,249

See accompanying notes to consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues:
Rental	$	26,709		$	25,160		$	53,736		$	49,826
Tenant reimbursements and other		5,810			5,252			12,409			10,727


Total revenues		32,519			30,412			66,145			60,553


Operating expenses:
Property operating		8,052			6,227			16,369			12,931
Real estate taxes and insurance		3,213			3,032			6,526			5,949
General and administrative		2,922			2,838			5,879			5,539
Depreciation and amortization		10,005			9,022			20,051			18,261


Total operating expenses		24,192			21,119			48,825			42,680

Operating income		8,327			9,293			17,320			17,873


Other expenses (income):
Interest expense		8,113			9,117			16,439			18,667
Interest and other income		(118	)		(104	)		(257	)		(235	)
Equity in losses of affiliate		47			—			54			—
Gain on early retirement of debt		(1,367	)		(1,611	)		(5,706	)		(3,006	)


Total other expenses		6,675			7,402			10,530			15,426


Income from continuing operations		1,652			1,891			6,790			2,447


Discontinued operations:
Income from operations of disposed property		—			651			—			1,335
Gain on sale of disposed property		—			14,274			—			14,274


Income from discontinued operations		—			14,925			—			15,609


Net income		1,652			16,816			6,790			18,056


Less: Net income attributable to noncontrolling interests in the Operating Partnership		(45	)		(518	)		(186	)		(557	)


Net income attributable to common shareholders	$	1,607		$	16,298		$	6,604		$	17,499


Net income attributable to common shareholders per share — basic:
Income from continuing operations	$	0.06		$	0.08		$	0.24		$	0.10
Income from discontinued operations		—			0.60			—			0.63

Net income	$	0.06		$	0.68		$	0.24		$	0.73


Net income attributable to common shareholders per share — diluted:
Income from continuing operations	$	0.06		$	0.07		$	0.24		$	0.10
Income from discontinued operations		—			0.60			—			0.62

Net income	$	0.06		$	0.67		$	0.24		$	0.72


Weighted average common shares outstanding — basic		27,157			24,115			27,079			24,106
Weighted average common shares outstanding — diluted		27,230			24,173			27,132			24,154

See accompanying notes to consolidated financial statements

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)


	Six Months Ended June 30,
	2009			2008
				(as adjusted – see
				footnote 2 (q))
Cash flows from operating activities:
Net income	$	6,790		$	18,056
Adjustments to reconcile net income to net cash provided by operating activities:
Discontinued operations:
Gain on sale of property		—			(14,274	)
Depreciation and amortization		—			478
Depreciation and amortization		20,482			18,993
Stock based compensation		1,291			919
Bad debt expense (recovery)		1,406			(12	)
Amortization of deferred market rent		(861	)		(903	)
Amortization of deferred financing costs and bond discount		1,411			1,635
Amortization of rent abatement		854			1,233
Equity in losses of affiliate		54			—
Change in financing obligation		(250	)		—
Gain on early retirement of debt		(5,706	)		(3,006	)
Changes in assets and liabilities:
Escrows and reserves		(1,891	)		(425	)
Accounts and other receivables		(2,798	)		88
Accrued straight-line rents		(1,227	)		(1,086	)
Prepaid expenses and other assets		1,582			1,172
Tenant security deposits		(121	)		(194	)
Accounts payable and accrued expenses		1,929			892
Accrued interest		(281	)		(296	)
Rents received in advance		1,385			(945	)
Deferred costs		(3,536	)		(4,102	)

Total adjustments		13,723			167

Net cash provided by operating activities		20,513			18,223


Cash flows from investing activities:
Proceeds from sale of real estate assets		—			50,573
Additions to rental property		(14,218	)		(9,819	)
Additions to construction in progress		(742	)		(7,685	)

Net cash (used in) provided by investing activities		(14,960	)		33,069


Cash flows from financing activities:
Financing costs		(1	)		(328	)
Proceeds from debt		25,500			58,300
Proceeds from the issuance of stock, net		5,350			—
Repayments of debt		(31,667	)		(90,921	)
Dividends to shareholders		(14,791	)		(16,570	)
Distributions to noncontrolling interests		(417	)		(531	)
Redemption of partnership units		—			(80	)
Stock option exercises		—			38

Net cash used in financing activities		(16,026	)		(50,092	)


Net (decrease) increase in cash and cash equivalents		(10,473	)		1,200

Cash and cash equivalents, beginning of period		16,352			5,198


Cash and cash equivalents, end of period	$	5,879		$	6,398

See accompanying notes to consolidated financial statements.

FIRST POTOMAC REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a self-managed, self-administered Maryland real estate investment trust. The Company focuses on owning, developing, redeveloping and operating industrial properties and business parks in the Washington, D.C. metropolitan area and other major markets in Maryland and Virginia, which it refers to as the Southern Mid-Atlantic region. The Company separates its properties into three distinct segments, which it refers to as the Maryland, Northern Virginia and Southern Virginia regions. 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 Company’s portfolio of properties contains a mix of single-tenant and multi-tenant industrial properties and business parks. Industrial properties generally are used as warehouse, distribution or manufacturing facilities, while business parks combine office building features with industrial property space.

The Company conducts its business through First Potomac Realty Investment Limited Partnership; the Company’s operating partnership (the “Operating Partnership”). At June 30, 2009, the Company was the sole general partner of, and owned a 97.3% interest in, the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the accompanying unaudited consolidated financial statements, are limited partnership interests, which are owned by several of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

As of June 30, 2009, the Company’s portfolio totaled approximately 12 million square feet. The Company also owned land that can accommodate approximately 1.4 million square feet of additional development. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The unaudited consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, the subsidiaries of the Operating Partnership, a 25 percent owned joint venture that owns RiversPark I and First Potomac Management LLC, a wholly-owned subsidiary that manages the Company’s 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 consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 and as updated from time to time in other filings with the Securities and Exchange Commission (“SEC”).

In the Company’s opinion, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly its financial position as of June 30, 2009, the results of its operations for the three and six months ended June 30, 2009 and 2008 and its cash flows for the six months ended June 30, 2009 and 2008. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year. We have evaluated all subsequent events through August 7, 2009, the date of these financial statements.

(b) Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible; future cash flows, discount and cap rate assumptions used to value acquired properties and to test impairment of certain long-lived assets and goodwill; market lease

rates, lease-up periods and leasing and tenant improvement costs used to value intangible assets acquired. Actual results could differ from those estimates.

(c) Revenue Recognition

The Company generates substantially all of its revenue from leases on its industrial properties and business parks. The Company recognizes rental revenue on a straight-line basis over the life of its leases. Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. The Company considers current information, credit quality, historical trends, economic conditions and other events regarding the tenants’ ability to pay their obligations in determining if amounts due from tenants, including accrued straight-line rents, are ultimately collectible. The uncollectible portion of the amounts due from tenants, including accrued straight-line rents, is charged to property operating expense in the period in which the determination is made.

Tenant leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred by the Company. Such reimbursements are recognized in the period that the expenses are incurred. The Company records a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination when the related lease or portion thereof is cancelled, collectability is reasonably assured and the Company has possession of the terminated space. The Company recognized lease termination fees included in other income of $18 thousand and $0.1 million for the three and six months ended June 30, 2009, respectively, and $0.3 million and $0.8 million for the three and six months ended June 30, 2008, respectively.

Concurrent with the Company’s August and September 2008 acquisitions of Triangle Business Center and RiversPark I, respectively, the former owner entered into master lease agreements for vacant space that was not producing rent at the time of the acquisitions. Payments received under the master lease agreements are recorded as a reduction to rental property rather than as rental income as the payments were determined to be a reduction in the purchase consideration at the time of acquisition. Payments received under these master lease agreements totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2009, respectively.

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents.

(e) Escrows and Reserves

Escrows and reserves represent cash restricted for debt service, real estate taxes, insurance, capital items and tenant security deposits.

(f) Rental Property

Rental property is carried at historical cost less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at historical cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:


Buildings		39 years
Building improvements		5 to 15 years
Furniture, fixtures and equipment		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions or changes in management’s intended holding period indicate a possible impairment of the value of a property, an impairment analysis is performed. The Company assesses the recoverability based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and cap rates. These cash flows consider factors such as expected future operating income, market trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecast undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make estimates as to whether there are impairments in the values of its investments in real estate.

The Company will classify a building as held-for-sale in the period in which it has made the decision to dispose of the building, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will record an impairment loss if the fair value, less anticipated selling costs, is lower than the carrying amount of the property. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its statements of operations and classify the assets and related liabilities as held-for-sale on its consolidated balance sheets. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be transferred to another property owned by the Company after the disposition.

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

The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest cost. The Company will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from cession of major construction activity, if the property is not occupied. Total interest expense capitalized to construction in progress was $0.1 million and $0.2 million for the three and six months ended June 30, 2009, respectively, and $0.4 million and $0.8 million for the three and six months ended June 30, 2008, respectively. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(g) Purchase Accounting

Acquisitions of rental property from third parties are accounted for at fair value, which is allocated between land and building (on an as-if vacant basis) based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the depreciated replacement cost of the tenant improvements, which approximates their fair value. The purchase price is also allocated as follows:

	§		the value of leases in-place on the date of acquisition based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred;

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

	§		the intangible value of tenant or customer relationships.

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

(h) Investment in Affiliate

The Company may continue to grow its portfolio by entering into joint venture agreements with third parties. The structure of the joint venture will affect the Company’s accounting treatment for the joint venture as the Company adheres to requirements regarding consolidation of variable interest entities. When the Company’s investment in a joint venture meets the requirements for the equity accounting method, it will record its initial investment on its consolidated balance sheets as “Investment in Affiliate.” The initial investment in the joint venture is adjusted to recognize the Company’s share of earnings or losses and distributions received from the joint venture. The Company’s respective share of all earnings or losses from the joint venture will be recorded on its consolidated statements of operations as “Equity in Earnings or Losses of Affiliate.”

When the Company is deemed to have a controlling interest in a joint venture, it will consolidate all of the joint venture’s assets, liabilities and operating results within its consolidated financial statements. The cash contributed to the consolidated joint venture by the third party, if any, will be reflected in the liability section of the Company’s consolidated balance sheets under “Financing Obligation.” The amount will be recorded based on the third party’s initial investment in the consolidated joint venture and will be adjusted to reflect the third party’s share of earnings or losses in the consolidated joint venture and for any distributions received by the third party from the joint venture. The earnings or losses from the joint venture attributable to the third party are recorded as interest expense on the Financing Obligation within the Company’s consolidated statements of operations. All distributions received by the Company from the consolidated joint venture will be recorded as an increase in the Financing Obligation.

(i) Sales of Real Estate

The Company accounts for sales of real estate in accordance with accounting requirements regarding sales of real estate. For sales transactions meeting the requirements for full profit recognition, which occurs when the sale is consummated, the buyer has made adequate initial and continuing investments in the property, the Company’s receivable is not subject to future subordination, and the seller does not have a substantial continuing involvement with the property, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the sale is consummated. For sales transactions that do not meet the criteria for full profit recognition, the Company accounts for the transactions as partial sales or financing arrangements required by GAAP. For sales transactions with continuing involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement. Sales to entities in which the Company has or receives an interest are accounted for as partial sales.

For sales transactions that do not meet sale criteria, the Company evaluates the nature of the continuing involvement, including put and call provisions, if present, and accounts for the transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other alternate method of accounting rather than as a sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, the Company determines which method is most appropriate based on the substance of the transaction.

If the Company has an obligation to repurchase the property at a higher price or at a future indeterminable value (such as fair market value), or it guarantees the return of the buyer’s investment or a return on that investment for an extended period, the Company accounts for such transaction as a financing transaction. If the Company has an option to repurchase the property at a higher price and it is likely it will exercise this option, the transaction is accounted for as a financing transaction. For transactions treated as financings, the Company records the amounts received from the buyer as a Financing Obligation and continues to consolidate the property and its operating results in its consolidated statements of operations. The results of operations of the property are allocated to the joint venture partner for their equity interest and reflected as “interest expense” on the Financing Obligation.

(j) Intangible Assets

Intangible assets include the value of acquired tenant or customer relationships and the value of in-place leases at acquisition. Customer relationship values are determined based on the Company’s evaluation of the specific characteristics of each tenant’s lease and its overall relationship with the tenant. Characteristics the Company considers include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of customer relationship intangible assets is amortized to expense over the lesser of the initial lease term and any expected renewal periods or the remaining useful life of the building. The Company determines the fair value of the in-place leases at acquisition by estimating the leasing commissions avoided by having in-place tenants and the operating income that would have been lost during the estimated time required to lease the space occupied by existing tenants at the acquisition date. The cost of acquiring existing tenants is amortized to expense over the

initial term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to expense by the date of termination.

Deferred market rent liability consists of the acquired leases with below-market rents at the date of acquisition. The value attributed to deferred market rent assets, which consist of above-market rents at the date of acquisition, is recorded as a component of deferred costs. Above and below market lease values are determined on a lease-by-lease basis based on the present value (using a discounted rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the lease and the estimated fair market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases including any below-market fixed rate renewal periods. The capitalized below-market lease values are amortized as an increase to rental revenue over the initial term and any below-market fixed-rate renewal periods of the related leases. Capitalized above-market lease values are amortized as a decrease to rental revenue over the initial term of the related leases. The total accumulated amortization of intangible assets was $30.5 million and $29.0 million at June 30, 2009 and December 31, 2008, respectively.

In conjunction with the Company’s initial public offering and related formation transactions, First Potomac Management, Inc. contributed all of the capital interests in First Potomac Management LLC, the entity that manages the Company’s properties, to the Operating Partnership. The $2.1 million fair value of the in-place workforce acquired has been classified as goodwill and is included as a component of intangible assets on the consolidated balance sheets. In accordance with accounting requirements regarding goodwill and other intangibles, all acquired goodwill that relates to the operations of a reporting unit and is used in determining the fair value of a reporting unit is allocated to the Company’s appropriate reporting unit in a reasonable and consistent manner. The Company assesses goodwill for impairment annually at the end of its fiscal year and in interim periods if certain events occur indicating the carrying value may be impaired. The Company performs its analysis for potential impairment of goodwill in accordance with GAAP, which requires that a two-step impairment test be performed on goodwill. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed in order to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is recorded equal to the difference. No impairment losses were recognized during the three and six months ended June 30, 2009 and 2008.

(k) Derivatives and Hedging

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company may enter into derivative agreements to mitigate exposure to unexpected changes in interest rates and may use interest rate protection or cap agreements to reduce the impact of interest rate changes. The Company intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency.

The Company may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair value. For effective hedging relationships, the change in the fair value of the assets or liabilities is recorded in “Accumulated Other Comprehensive Income (Loss),” an element of shareholders’ equity (cash flow hedge), or through earnings, along with the change in fair value of the asset or liability being hedged (fair value hedge). Ineffective portions of derivative transactions will result in changes in fair value recognized in earnings. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s 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.

(l) Income Taxes

The Company has elected to be taxed as a REIT. To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income annually to its shareholders and meet other organizational and operational requirements. As a REIT, the Company will not be subject to federal income tax and any non-deductible excise tax if it distributes at least 100% of its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate tax rates. The Company had a taxable REIT subsidiary that was inactive for the three and six months ended June 30, 2009 and 2008.

(m) Noncontrolling Interests

Noncontrolling interests relate to the interests in the Operating Partnership not owned by the Company. Interests in the Operating Partnership are owned by limited partners who contributed buildings and other assets to the Operating Partnership in exchange for Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at the Company’s option, common shares of the Company on a one-for-one basis or cash based on the value of the Company’s common shares at the date of redemption. Unitholders receive a distribution per unit equivalent to the dividend per common share. Noncontrolling interests are recorded based on the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or loss and distributions received. Differences between amounts paid to redeem noncontrolling interests and their carrying values are charged or credited to shareholders’ equity. As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity.

At December 31, 2008 and June 30, 2009, 772,712 Operating Partnership units, or 2.7% of the total outstanding Operating Partnership units, were not owned by the Company. There were no Operating Partnership units redeemed for common shares or Operating Partnership units purchased with available cash during the three and six months ended June 30, 2009. Based on the closing share price of the Company’s common stock at the end of the second quarter, the cost to acquire, through cash purchase or issuance of the Company’s common shares, all of the outstanding Operating Partnership units not owned by the Company at June 30, 2009 would be approximately $7.5 million.

(n) Earnings Per Share

Basic earnings per share (“EPS”), is calculated by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the period. The effect of stock options, non-vested shares and Exchangeable Senior Notes, if dilutive, is computed using the treasury stock method. In June 2008, new accounting guidance was issued regarding whether instruments granted in share-based payment transactions are participating securities. As a result of the Company’s outstanding unvested shares with non-forfeitable dividend rights, which are considered participating securities, it has applied the two-class method of determining EPS. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income available to common shareholders in the Company’s computation of EPS.

The following table sets forth the computation of the Company’s basic and diluted earnings per share (amounts in thousands, except per share amounts):


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Numerator for basic and diluted earnings per share calculations:
Income from continuing operations	$	1,652		$	1,891		$	6,790		$	2,447
Income from discontinued operations		—			14,925			—			15,609

Net income		1,652			16,816			6,790			18,056
Less: Net income attributable to noncontrolling interests in the Operating Partnership		(45	)		(518	)		(186	)		(557	)

Net income attributable to common shareholders		1,607			16,298			6,604			17,499

Less: Allocation to participating securities		(89	)		—			(209	)		—

Income available to common shareholders	$	1,518		$	16,298		$	6,395		$	17,499


Denominator for basic and diluted earnings per share calculations:
Weighted average shares outstanding — basic		27,157			24,115			27,079			24,106
Effect of dilutive shares:
Employee stock options and non-vested shares		73			58			53			48

Weighted average shares outstanding — diluted		27,230			24,173			27,132			24,154


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Net income attributable to common shareholders per share — basic:
Income from continuing operations	$	0.06	$	0.08	$	0.24	$	0.10
Income from discontinued operations		—		0.60		—		0.63

Net income	$	0.06	$	0.68	$	0.24	$	0.73


Net income attributable to common shareholders per share — diluted:
Income from continuing operations	$	0.06	$	0.07	$	0.24	$	0.10
Income from discontinued operations		—		0.60		—		0.62

Net income	$	0.06	$	0.67	$	0.24	$	0.72


Amounts available to common shareholders:
Income from continuing operations	$	1,607	$	1,833	$	6,604	$	2,371
Income from discontinued operations		—		14,465		—		15,128

Net income	$	1,607	$	16,298	$	6,604	$	17,499

In accordance with accounting requirements regarding earnings per share, the Company did not include the following anti-dilutive shares in its calculation of diluted earnings per share (amounts in thousands).


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Stock option awards		778		680		781		693
Non-vested share awards		244		85		272		96

		1,022		765		1,053		789

Approximately 1.7 million anti-dilutive shares from the assumed conversion of the Company’s Exchangeable Senior Notes were excluded from its calculation of earnings per share for the three and six months ended June 30, 2009 and 2.5 million anti-dilutive shares were excluded for the three and six months ended June 30, 2008.

(o) Share-Based Compensation

The Company has issued share-based compensation in the form of stock options and non-vested shares as permitted in the Company’s 2003 Equity Compensation Plan ( the “2003 Plan”), which was amended in 2005. On May 21, 2009, the Company received shareholder approval for the 2009 Equity Compensation Plan (the “2009 Plan”) that authorized an additional 650,000 shares for issuance. Total awards authorized under the 2003 Plan and the 2009 Plan are 2,210,800 common share equity awards. The compensation plans provide for the issuance of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Stock options granted under the plans are non-qualified, and all employees and non-employee trustees are eligible to receive grants. Of the total number of common share equity awards authorized, 419,653 awards remained available for issuance at June 30, 2009.

Stock Options Summary

During the first quarter of 2009, the Company issued 103,250 options to non-executive officers. The stock options vest 25% on the first anniversary of the date of grant and 6.25% in each subsequent calendar quarter thereafter until fully vested. The maximum term of the options granted is ten years. The Company recognized compensation expense related to stock options of $42 thousand and $52 thousand for the three months ended June 30, 2009 and 2008, respectively, and $92 thousand and $107 thousand for the six months ended June 30, 2009 and 2008, respectively. The decline in stock option expense in 2009 is primarily attributable to options being fully vested in 2008 that were granted in 2004 and 2005.

Non-vested share awards

On February 24, 2009, the Company granted 102,714 restricted common shares to its officers. The awards will vest ratably over a four year award term and was valued based on the outstanding share price at the date of issuance. On May 21, 2009, the Company granted 308,142 restricted common shares in two separate awards to its officers. The first award of 102,714 common shares will vest ratably over a four year award term and was valued based on the outstanding share price at the date of issuance. The second award of 205,428 common shares will vest in four separate tranches based upon the Company’s achievement of

specified performance conditions. The Company used a Monte Carlo Simulation (risk-neutral approach) to determine the value of each tranche of the performance award. The following assumptions were used in determining the value of the awards and the derived service period:


Risk-free interest rate	3.3	%
Volatility	43.5	%

On May 21, 2009, the Company also issued a total of 27,120 common shares to its non-employee trustees, all of which will vest on the anniversary of the award date. The trustee shares were valued based on the outstanding share price at the date of issuance.

The Company recognized compensation expense associated with all restricted share based awards of $0.7 million and $0.5 million for the three months ended June 30, 2009 and 2008, respectively, and $1.2 million and $0.8 million for the six months ended June 30, 2009 and 2008, respectively.

A summary of the Company’s non-vested share awards as of June 30, 2009 is as follows:


				Weighted
	Non-vested			Average Grant
	Shares			Date Fair Value
Non-vested at December 31, 2008		354,398		$	15.35
Granted		102,714			6.45
Vested		(2,500	)		17.05

Non-vested at March 31, 2009		454,612			13.33
Granted		335,262			9.51
Vested		(23,560	)		21.34

Non-vested at June 30, 2009		766,314		$	11.41

As of June 30, 2009, the Company had $5.3 million of unrecognized compensation cost related to non-vested shares. The Company anticipates this cost will be recognized over a weighted-average period of 2.2 years.

(p) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

(q) Application of New Accounting Standards

Effective January 1, 2009, the Company retrospectively adopted new accounting requirements regarding accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. These new requirements specify that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when the interest costs are recognized in subsequent periods. The Company compared the present value of its Exchangeable Senior Notes which were issued in December 2006 to the present value of hypothetical senior notes issued at the same time that do not have a conversion feature. The difference attributed to the conversion feature was retrospectively recorded as part of shareholders’ equity with a corresponding discount recorded to the Company’s Exchangeable Senior Notes. The discount is amortized over the estimated life of the Exchangeable Senior Notes as interest expense. During 2008 and through the first six months of 2009, the Company repurchased $66.0 million of principal of its Exchangeable Senior Notes at a discount. In accordance with the new accounting requirements, at the time of repurchase, the Company allocated a portion of the settlement consideration to the extinguishment of the liability component equal to the fair value of that component immediately prior to extinguishment. Any difference between the consideration attributed to the liability component and the sum of (a) the net carrying amount of the liability component and (b) any unamortized debt issuance costs is recognized in the statement of operations as a gain or loss on debt extinguishment. The Company will allocate any remaining settlement consideration to the reacquisition of the equity component and recognize that amount as a reduction of shareholders’ equity. In each of the Company’s 2008 and 2009 repurchases of its Exchangeable Senior

Notes, the consideration given was below the fair value immediately prior to extinguishment, therefore, the Company did not allocate any consideration to the repurchase of the equity component. The Company’s cash interest payments are unaffected by this implementation. The overall impact on the Company’s consolidated financial statements is summarized as follows:

	•		Contractual cash interest expense includes $0.6 million and $1.0 million for the three months ended June 30, 2009 and 2008, respectively, and $1.4 million and $2.2 million for the six months ended June 30, 2009 and 2008, respectively. Non-cash interest expense related to the amortization of discounts includes $0.3 million and $0.4 million for the three months ended June 30, 2009 and 2008, respectively, and $0.7 million and $1.0 million for the six months ended June 30, 2009 and 2008, respectively;

	•		Additional paid in capital increased by the total discount recorded of $8.7 million, with a shareholders’ equity increase of $3.4 million at December 31, 2008;

	•		The gain on the early retirement of debt previously reported was reduced by $1.0 million and $1.7 million for the three and six months ended June 30, 2008, respectively;

	•		The unamortized discount was $2.0 million and $3.4 million at June 30, 2009 and December 31, 2008, respectively; and

	•		The total impact of adoption of these new requirements was a reduction in net income attributable to common shareholders of $0.5 million, or $0.02 per diluted share, and $1.5 million, or $0.05 per diluted share, for the three and six months ended June 30, 2009, respectively, and $1.3 million, or $0.06 per diluted share, and $2.5 million, or $0.10 per diluted share, for the three and six months ended June 30, 2008, respectively.

The Company adopted new accounting requirements regarding disclosures about fair value of financial instruments. Companies are now required to disclose the fair value of financial instruments that are not reflected at fair value in the Company’s consolidated balance sheets for interim reporting periods as well as in annual financial statements. Previously, the Company only disclosed this information on an annual basis. The Company is required to disclose the methods and assumptions used to estimate the fair value of financial instruments and document any changes, if any, during each reporting period. See footnote 8, Fair Value of Financial Instruments. The Company’s adoption of these new requirements for the quarter ended June 30, 2009 did not have a material impact on its consolidated financial statements.

The Company adopted new accounting requirements regarding subsequent events. Companies are required to evaluate events that occurred subsequent to the balance sheet date through the date the financial statements are issued. The new requirements enhance the accounting and disclosures regarding recognized subsequent events that occurred at the balance sheet date (Type I) and non-recognized subsequent events that occurred after the balance sheet date (Type II). The Company applied the new requirements prospectively, effective for the quarter ended June 30, 2009. See footnote 2(a), Summary of Significant Account Policies. The Company’s adoption of this new accounting requirement did not have a material impact on its consolidated financial statements.

In June 2009, new accounting requirements were issued regarding amendments to previous guidance regarding consolidation of variable interest entities in the determination of whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The new requirements also involve ongoing assessments as to whether an enterprise is the primary beneficiary of a Variable Interest Entity (“VIE”), modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIEs. Also, a reporting entity will be required to disclose how its involvement with a VIE affects the reporting entity’s financial statements. These new requirements will be effective for fiscal years beginning after November 15, 2009. The Company is currently determining the effect that adoption of these requirements will have on its consolidated financial statements.

In July 2009, new guidance was issued regarding the codification of accounting standards. This new guidance requires companies to update their existing references and disclosures of GAAP in financial statements to a format categorized by topic, subtopic, section and/or paragraph. The codification of such financial information will become the sole authoritative reference for nongovernmental GAAP for use in financial statements and is effective for fiscal periods ending after September 15, 2009. The Company does not believe the adoption of this new requirement will have a material impact on its consolidated financial statements.

(3) Rental Property

Rental property represents the property, net of accumulated depreciation, and developable land, which are wholly owned by the Company or owned by the Company through a consolidated joint venture. All of the Company’s rental properties are

located in the Southern Mid-Atlantic region. Rental property is comprised of the following (amounts in thousands):


	June 30, 2009			December 31, 2008
Land	$	225,354		$	235,911
Buildings and improvements		771,500			786,401
Construction in process		13,344			12,687
Tenant improvements		71,613			61,674
Furniture, fixtures and equipment		9,898			9,898

		1,091,709			1,106,571
Less: accumulated depreciation		(125,898	)		(111,658	)

	$	965,811		$	994,913

(a) Development and Redevelopment Activity

The Company constructs industrial buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. At June 30, 2009, the Company had a total of approximately 0.1 million square feet under development, which consisted of 57 thousand square feet in its Northern Virginia region and 48 thousand square feet in its Southern Virginia region. At June 30, 2009, the Company had a total of approximately 0.2 million square feet under redevelopment, which consisted of 42 thousand square feet in its Maryland region, 57 thousand square feet in its Northern Virginia region and 71 thousand square feet in its Southern Virginia region. The Company anticipates that development and redevelopment efforts on the majority of these projects will be completed in 2009, with the remainder to be completed in early 2010.

At June 30, 2009, the Company owned land that can accommodate approximately 1.4 million square feet of building space, which includes 0.1 million square feet in its Maryland region, 0.6 million square feet in its Northern Virginia region and 0.7 million square feet in its Southern Virginia region.

(b) Acquisitions

The Company acquired the following buildings at an aggregate purchase cost of $46.4 million during 2008: four buildings at Triangle Business Center; and six buildings at RiversPark I and II. On December 12, 2008, the Company entered into a consolidated joint venture with a third party to own RiversPark I and II. The Company deconsolidated RiversPark II on March 17, 2009 as discussed below in footnote 4, Investment in Affiliate.

(4) Investment in Affiliate

On December 12, 2008, the Company entered into joint venture arrangements with a third party to own RiversPark I and II. As a condition of the joint ventures, the Company provided a guarantee to the joint venture for several lease agreements entered into by the former owner for certain vacancy at RiversPark I and rental payments in the event a specified tenant did not renew its lease at RiversPark II. On March 17, 2009, the specified tenant renewed its lease at RiversPark II, which effectively terminated the Company’s lease guarantee related to RiversPark II. As a result, the Company was no longer required to consolidate the joint venture and applied the equity accounting method to its investment in RiversPark II. The assets, liabilities and operating results of RiversPark II are no longer consolidated on the Company’s financial statements effective March 17, 2009. There was no significant gain or loss recognized upon the deconsolidation. The Company’s net investment in RiversPark II is recorded as “Investment in Affiliate” on the Company’s consolidated balance sheets. Since the Company is still guaranteeing the leases at RiversPark I, it consolidates all of RiversPark I’s assets, liabilities and operations within its financial statements. The Company will continue to consolidate RiversPark I until the lease guarantees expire or the underlying space is re-leased, at which time, the Company will no longer consolidate the assets, liabilities and operating results of RiversPark I on its financial statements and will account for its share of the investment using the equity accounting method.

As of June 30, 2009, the balance sheet of RiversPark II was as follows (amounts in thousands):


	June 30, 2009
Assets:
Rental property, net	$	25,391
Cash and cash equivalents		686
Other assets		2,036

Total assets	$	28,113


Liabilities:
Mortgage loan	$	18,147
Other liabilities		1,703

Total liabilities		19,850

Total equity		8,263

Total liabilities and equity	$	28,113

The following table summarizes the results of operations of RiversPark II for the period subsequent to its deconsolidation. The Company’s share of RiversPark II losses is recorded in its consolidated statements of operations as Equity in Losses of Affiliate (amounts in thousands):


				The period March 17,
	Three Months Ended			2009 through
	June 30, 2009			June 30, 2009
Total revenues	$	615		$	723
Total operating expenses		(112	)		(141	)

Net operating income		503			582
Depreciation and amortization		(391	)		(449	)
Interest expense		(301	)		(350	)

Net loss	$	(189	)	$	(217	)

(5) Discontinued Operations

Income from discontinued operations represents revenues and expenses associated with Alexandria Corporate Park, which was sold during the second quarter of 2008. The property was located in the Company’s Northern Virginia reporting segment. The Company reported a gain on the sale of $14.3 million in the second quarter of 2008. The Company has had no continuing involvement with this property subsequent to its disposal. The Company did not dispose of any other properties during the six months ended June 30, 2009 and 2008.

The following table summarizes the components of income from discontinued operations (amounts in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2008		June 30, 2008
Revenue	$	1,028	$	2,473
Income from operations of disposed property		651		1,335
Gain on sale of disposed property		14,274		14,274

(6) Debt

The Company’s borrowings consisted of the following (amounts in thousands):


	June 30,		December 31,
	2009		2008
			(as adjusted –
			see footnote
			2 (q))
Mortgage loans, effective interest rates ranging from 5.19% to 8.53%, maturing at various dates through June 2021⁽¹⁾	$	293,606	$	322,846
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing December 2011⁽²⁾		56,374		80,435
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 3.81%, maturing August 2011⁽³⁾⁽⁴⁾		50,000		50,000
Secured term loan, effective interest rate of 5.83%, maturing August 2011⁽⁴⁾⁽⁵⁾		35,000		35,000
Secured term loan, effective interest rate of LIBOR plus 2.50%, maturing August 2011⁽⁴⁾⁽⁵⁾		15,000		15,000
Unsecured revolving credit facility, effective interest rate of LIBOR plus 1.20%, maturing April 2011⁽⁴⁾⁽⁶⁾		99,400		75,500

	$	624,380	$	653,781


⁽¹⁾		Mortgage loans include a variable interest rate mortgage of $9.9 million for RiversPark I, which has an interest rate of LIBOR plus 2.50%. In September 2008, the Company entered into an interest rate swap agreement that fixed the underlying interest rate on the loan at 5.97%.

⁽²⁾		The principal balance of the Exchangeable Senior Notes was $59.0 million and $85.0 million at June 30, 2009 and December 31, 2008, respectively.

⁽³⁾		The term loan has a contractual interest rate of LIBOR plus 1.10%. In January 2008, the Company entered into an interest rate swap agreement that fixed the underlying interest rate on the loan at 2.71% plus a spread of 70 to 125 basis points.

⁽⁴⁾		The unsecured revolving credit facility and secured term loans mature in April 2010 and August 2010, respectively, and provide for a one-year extension of the maturity date at the Company’s option, which the Company intends to exercise. The table above assumes the exercise by the Company of the one-year extension, which is conditioned upon the payment of an extension fee, the absence of an existing default under the loan agreement and the continued accuracy of the representations and warranties contained in the loan agreement.

⁽⁵⁾		In August 2008, the Company entered into a $35.0 million variable-rate secured term loan and an interest rate swap agreement that fixed the underlying interest rate on the loan. In December 2008, the Company borrowed an additional $15.0 million under an amendment to the loan, which increased its total obligation to $50.0 million. The transaction increased the contractual interest rate on the entire loan balance by 0.25% to LIBOR plus 250 basis points. As of June 30, 2009, the initial term loan balance is fixed at 5.83%.

⁽⁶⁾		The unsecured revolving credit facility has a contractual interest rate of LIBOR plus a spread of 80 to 135 basis points.

(a) Mortgage Loans

At June 30, 2009 and December 31, 2008, the Company’s mortgage debt was as follows (dollars in thousands):


	Contractual			Effective			Maturity	June 30,		December 31,
Property	Interest Rate			Interest Rate			Date	2009		2008
Glenn Dale Business Center⁽¹⁾		7.83	%		5.13	%	May 2009	$	—	$	8,152
4200 Tech Court ⁽²⁾		8.07	%		8.07	%	October 2009		1,712		1,726
Park Central I		8.00	%		5.66	%	November 2009		4,628		4,754
4212 Tech Court		8.53	%		8.53	%	June 2010		1,677		1,689
Park Central II		8.32	%		5.66	%	November 2010		5,748		5,902
Enterprise Center ⁽²⁾		8.03	%		5.20	%	December 2010		17,752		18,102
Indian Creek Court ⁽²⁾		7.80	%		5.90	%	January 2011		12,618		12,818
403/405 Glenn Drive		7.60	%		5.50	%	July 2011		8,393		8,529
4612 Navistar Drive ⁽²⁾		7.48	%		5.20	%	July 2011		12,907		13,130
RiversPark I and II ⁽³⁾	LIBOR+2.50%				5.97	%	September 2011		9,856		28,000
Campus at Metro Park ⁽²⁾		7.11	%		5.25	%	February 2012		23,775		24,154
1434 Crossways Blvd Building II		7.05	%		5.38	%	August 2012		10,027		10,202
Crossways Commerce Center		6.70	%		6.70	%	October 2012		24,809		25,008
Newington Business Park Center		6.70	%		6.70	%	October 2012		15,649		15,775
Prosperity Business Center		6.25	%		5.75	%	January 2013		3,694		3,752
Aquia Commerce Center I		7.28	%		7.28	%	February 2013		549		610
1434 Crossways Blvd Building I		6.25	%		5.38	%	March 2013		8,621		8,749
Linden Business Center		6.01	%		5.58	%	October 2013		7,307		7,379
Owings Mills Business Center		5.85	%		5.75	%	March 2014		5,601		5,650
Annapolis Commerce Park East		5.74	%		6.25	%	June 2014		8,671		8,728
Plaza 500, Van Buren Business Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center, Northridge I & II and 15395 John Marshall Highway		5.19	%		5.19	%	August 2015		100,000		100,000
Hanover Business Center:
Building D		8.88	%		6.63	%	August 2015		809		862
Building C		7.88	%		6.63	%	December 2017		1,208		1,260
Chesterfield Business Center:
Buildings C,D,G and H		8.50	%		6.63	%	August 2015		2,111		2,245
Buildings A,B,E and F		7.45	%		6.63	%	June 2021		2,624		2,695
Gateway Centre Building I		7.35	%		5.88	%	November 2016		1,429		1,505
Airpark Business Center		7.45	%		6.63	%	June 2021		1,431		1,470

Total Mortgage Debt					5.64	%⁽⁴⁾		$	293,606	$	322,846


⁽¹⁾		The loan was repaid in May 2009.

⁽²⁾		The maturity date on these loans represents the anticipated repayment date of the loans, after which date the interest rates on the loans will increase to a predetermined amount identified in the debt agreement. The Company calculates interest expense using the effective interest method over the anticipated period during which it expects the debt to be outstanding.

⁽³⁾		On March 17, 2009, the Company deconsolidated RiversPark II and, therefore, the assets, liabilities and operating results of RiversPark II are no longer consolidated on the Company’s financial statements, which include $18.1 million of mortgage debt. For more information, see footnote 4, Investment in Affiliate.

⁽⁴⁾		Weighted average interest rate on total mortgage debt.

In May 2009, the Company repaid its $8.0 million mortgage loan encumbering Glenn Dale Business Center with a $6.0 million draw on its unsecured revolving credit facility and available cash.

(b) Exchangeable Senior Notes

During the second quarter of 2009, the Company used available cash and proceeds from common stock offerings to retire $9.0 million of its Exchangeable Senior Notes, at a weighted average discount of 20%. The transactions resulted in a gain of $1.4 million, net of deferred financing costs and discounts. The Company evaluated the fair value of the debt repurchased based on the fair value of the cash flows at the date of repurchase, discounted at risk-adjusted rates. Based on this calculation, the fair value of the debt repurchased was greater than the repurchase price; therefore, the Company did not allocate any of the

repurchase price to the conversion feature of the Exchangeable Senior Notes. At June 30, 2009, the Exchangeable Senior Notes were convertible into 28.039 shares for each $1,000 of principal amount for a total of approximately 1.7 million shares. The Company was in compliance with all the terms of its Exchangeable Senior Notes at June 30, 2009.

(c) Unsecured Revolving Credit Facility

During the second quarter of 2009, the Company borrowed $15.5 million on its unsecured revolving credit facility. Borrowings were used to retire a portion of the Company’s Exchangeable Senior Notes and to repay the outstanding balance on the Glenn Dale Business Center mortgage loan. During the quarter, the Company repaid $1.6 million of the outstanding balance on its unsecured revolving credit facility with proceeds from common shares issued under its controlled equity offering agreement. As of June 30, 2009, the effective underlying interest rate on the Company’s unsecured revolving credit facility was 1.5% and the Company was in compliance with all of the terms of its unsecured revolving credit facility. At June 30, 2009, the Company had available borrowings of $25.5 million under its unsecured revolving credit facility.

(7) Derivative Instruments and Comprehensive Income

The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage exposures that arise from business activities in which its future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

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

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

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

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

During 2008, the Company entered into three separate interest rate swap agreements to hedge its exposure on its variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements are effective over the life of the debt instrument that is being hedged. The table below summarizes the Company’s three interest rate swap agreements (dollars in thousands):

Transaction Date

Instrument

Amount

Contractual Interest Rate

Effective Interest Rate

January 2008

Term Loan

50,000

LIBOR plus variable spread⁽¹⁾

2.71% plus a variable spread⁽¹⁾

August 2008

Term Loan

35,000

LIBOR plus 250 basis points

5.83%

September 2008

Mortgage Loan⁽²⁾

9,856

LIBOR plus 250 basis points

5.97%

94,856


⁽¹⁾		At June 30, 2009, the contractual interest rate on the Company’s $50 million term loan was LIBOR plus 1.10% and the effective interest rate was 3.81%.

⁽²⁾		Excludes the $18.1 million mortgage loan for RiversPark II, which was deconsolidated with the assets, liabilities and operating results of RiversPark II on March 17, 2009. The swap agreement associated with the $18.1 million deconsolidated mortgage loan remains in effect and under the same terms as the consolidated mortgage loan.

The Company’s interest rate swap agreements qualify as effective cash flow hedges and the Company records any unrealized gains associated with the change in fair value of the swap agreements within shareholders’ equity and prepaid expenses and other assets and any unrealized losses within shareholders’ equity and other liabilities. Total comprehensive income is summarized as follows (amounts in thousands):


	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Net income	$	1,652		$	16,816		$	6,790		$	18,056
Unrealized gain on derivative instruments		12			978			631			682

Total comprehensive income		1,664			17,794			7,421			18,738
Comprehensive income attributable to noncontrolling interests in the Operating Partnership		(45	)		(549	)		(203	)		(579	)

Comprehensive income attributable to common shareholders	$	1,619		$	17,245		$	7,218		$	18,159

(8) Fair Value of Financial Instruments

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

The Company currently has three interest rate swap derivative instruments that are measured under the accounting provisions regarding fair value. The derivatives are valued based on the prevailing market yield curve on the measurement date. Financial assets and liabilities are measured using inputs from three levels of the fair value hierarchy.

The three levels are as follows:

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

Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that 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 Company’s assumptions about the pricing of an asset or liability.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value as of June 30, 2009. The derivative instruments in the table below are recorded on the Company’s consolidated balance sheets under “Accounts payable and other liabilities” (amounts in thousands):


	Balance at
	June 30, 2009		Level 1		Level 2		Level 3
Liabilities:
Derivative instrument-swap agreements	$	2,423	$	—	$	2,423	$	—

For the six months ended June 30, 2009, the Company did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured on a reoccurring basis.

The carrying amounts of cash, accounts and other receivables and accounts payable approximate their fair values due to their short-term maturities. The Company calculates fair value of its financial instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2009 and December 31, 2008 are as follows (amounts in thousands):


	June 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Mortgage debt	$	293,606	$	278,944	$	322,846	$	307,247
Exchangeable senior notes⁽¹⁾		56,374		48,354		80,435		60,350
Series A senior notes		37,500		34,613		37,500		28,199
Series B senior notes		37,500		32,500		37,500		24,239
Secured term loans		100,000		96,691		100,000		101,691
Unsecured revolving credit facility		99,400		96,042		75,500		76,739

Total	$	624,380	$	587,144	$	653,781	$	598,465


⁽¹⁾		During the second quarter of 2009, the Company repurchased $9.0 million of its Exchangeable Senior Notes at a discount.

(9) Shareholders’ Equity

During May and June 2009, the Company issued 508,100 common shares through its controlled equity offering agreement at a weighted average price of $10.86 per share. The offerings generated net proceeds of $5.4 million, which were used to retire a portion of the Company’s Exchangeable Senior Notes and to pay down a portion of the outstanding balance on the Company’s unsecured revolving credit facility. In July 2009, the Company issued an additional 344,300 common shares through its controlled equity offering agreement for net proceeds of $3.3 million.

As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity, and therefore, the Company does not allocate its equity to any noncontrolling interests. The Company’s equity is as follows (amounts in thousands):


				Redeemable
	First Potomac			noncontrolling
	Realty Trust			interests
Balance, December 31, 2008	$	365,293		$	10,627
Net income		6,604			186
Changes in ownership		7,291			22
Distributions to owners		(14,791	)		(417	)
Other comprehensive income		614			17

Balance, June 30, 2009	$	365,011		$	10,435

(10) Segment Information

The Company’s reportable segments consist of three distinct reporting and operational segments within the broader Southern Mid-Atlantic geographic area in which it operates: Maryland, Northern Virginia and Southern Virginia.

The Company evaluates the performance of its segments based on the operating results of the properties located within each segment, excluding large non-recurring gains and losses, gains from sale of assets, interest expense, general and administrative costs or any other indirect corporate expenses to the segments. In addition, the segments do not have significant non-cash items other than bad debt expense and straight-line rent reported in their operating results. There are no inter-segment sales or transfers recorded between segments.

The results of operations for the Company’s three reportable segments are as follows (dollars in thousands):


	Three Months Ended June 30, 2009
	Maryland⁽¹⁾			Northern Virginia			Southern Virginia			Consolidated
Number of buildings		72			47			54			173
Square feet		3,608,755			2,818,676			5,258,232			11,685,663

Total revenues	$	10,838		$	9,731		$	11,950		$	32,519
Property operating expense		(2,939	)		(2,122	)		(2,991	)		(8,052	)
Real estate taxes and insurance		(1,070	)		(1,111	)		(1,032	)		(3,213	)

Total property operating income	$	6,829		$	6,498		$	7,927			21,254

Depreciation and amortization expense											(10,005	)
General and administrative											(2,922	)
Other expenses, net											(6,675	)

Net income										$	1,652

Total assets⁽²⁾	$	394,561		$	293,106		$	316,685		$	1,039,458

Capital expenditures⁽³⁾	$	3,677		$	5,532		$	5,587		$	14,960


	Three Months Ended June 30, 2008
	Maryland			Northern Virginia			Southern Virginia			Consolidated
Number of buildings		63			47			53			163
Square feet		3,362,270			2,759,654			5,241,891			11,363,815

Total revenues	$	10,374		$	9,111		$	10,927		$	30,412
Property operating expense		(1,884	)		(1,861	)		(2,482	)		(6,227	)
Real estate taxes and insurance		(923	)		(1,074	)		(1,035	)		(3,032	)

Total property operating income	$	7,567		$	6,176		$	7,410			21,153

Depreciation and amortization expense											(9,022	)
General and administrative											(2,838	)
Other expenses, net											(7,402	)
Income from discontinued operations											14,925

Net income										$	16,816

Total assets⁽²⁾	$	384,289		$	279,744		$	312,691		$	1,020,231

Capital expenditures⁽³⁾	$	5,647		$	7,019		$	4,720		$	17,504


	Six Months Ended June 30, 2009
	Maryland⁽¹⁾			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	22,596		$	19,626		$	23,923		$	66,145
Property operating expense		(6,104	)		(4,540	)		(5,725	)		(16,369	)
Real estate taxes and insurance		(2,177	)		(2,233	)		(2,116	)		(6,526	)

Total property operating income	$	14,315		$	12,853		$	16,082			43,250

Depreciation and amortization expense											(20,051	)
General and administrative											(5,879	)
Other expenses, net											(10,530	)

Net income										$	6,790


	Six Months Ended June 30, 2008
	Maryland			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	20,666		$	17,868		$	22,019		$	60,553
Property operating expense		(4,175	)		(3,790	)		(4,966	)		(12,931	)
Real estate taxes and insurance		(1,886	)		(2,003	)		(2,060	)		(5,949	)

Total property operating income	$	14,605		$	12,075		$	14,993			41,673

Depreciation and amortization expense											(18,261	)
General and administrative											(5,539	)
Other expenses, net											(15,426	)
Income from discontinued operations											15,609

Net income										$	18,056


⁽¹⁾		Includes the results of a three-building, 160,470 square foot property that is owned by the Company through a consolidated joint venture.

⁽²⁾		Corporate assets not allocated to any of our reportable segments totaled $35,106 and $43,507 at June 30, 2009 and 2008, respectively.

⁽³⁾		Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $164 and $118 for the six months ended June 30, 2009 and 2008, respectively.

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

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the 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.

The primary source of the Company’s 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 Company’s long-term growth will be driven by its ability to:

	•		maintain and increase occupancy rates and/or increase rental rates at its properties;

	•		sell assets to third parties or contribute properties to joint ventures; and

	•		continue to grow its portfolio through acquisition of new properties, potentially through joint ventures.

As of June 30, 2009, the Company’s portfolio totaled approximately 12 million square feet and the Company’s properties were 86.5% occupied by 594 tenants. As of June 30, 2009, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for approximately 20% of the Company’s total annualized rental revenue. The Company derives substantially all of its revenue from leases of space within its properties. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

Executive Summary

The Company’s funds from operations (“FFO”) for the second quarter of 2009 were $11.6 million, or $0.42 per diluted share ($0.37 per diluted share, excluding gains on the retirement of debt), compared to $11.8 million, or $0.47 per diluted share ($0.41 per diluted share, excluding gains on the retirement of debt), during the second quarter of 2008. The Company’s net income attributable to common shareholders for the second quarter of 2009 was $1.6 million, or $0.06 per diluted share, compared with net income attributable to common shareholders of $16.3 million, or $0.67 per diluted share, for the second quarter of 2008. In June 2008, the Company sold its Alexandria Corporate Park property for a gain on sale of $14.3 million, or $0.57 per diluted share after noncontrolling interests.

The Company’s FFO for the first six months of 2009 increased 17% over the prior-year period to $26.4 million, or $0.95 per diluted share ($0.74 per diluted share, excluding gains on the retirement of debt), compared with $22.5 million, or $0.90 per diluted share ($0.78 per diluted share, excluding gains on the retirement of debt), for the first six months of 2008. The Company reported net income attributable to common shareholders for the first six months of 2009 of $6.6 million, or $0.24 per diluted share, compared with net income attributable to common shareholders of $17.5 million, or $0.72 per diluted share, for the first six months of 2008.

Significant Second Quarter Transactions

	•		During May and June 2009, the Company issued 508,100 common shares through its controlled equity offering agreement at a weighted average price of $10.86 per share. The offerings generated net proceeds of $5.4 million, which were used to retire a portion of the Company’s Exchangeable Senior Notes and to pay down a portion of the outstanding balance on the Company’s unsecured revolving credit facility. In July 2009, the Company issued an additional 344,300 common shares through its controlled equity offering agreement for net proceeds of $3.3 million;

	•		The Company retired $9.0 million of its Exchangeable Senior Notes, at a 20% discount, resulting in a gain of $1.4 million, or $0.05 per diluted share;

	•		The Company executed 108,000 square feet of new leases, including 45,000 square feet at 1400 Cavalier Boulevard and 22,000 square feet at Greenbrier Business Center, which are located in Southern Virginia. Rent is expected to commence for all new leases by the end of the fourth quarter of 2009; and

	•		The Company executed 288,000 square feet of renewal leases, representing an 88% retention rate. Renewal leases in the quarter include 65,000 square feet at Norfolk Commerce Park, 21,000 square feet at Reston Business Campus and 20,000 square feet at 1400 Cavalier Boulevard.

Development and Redevelopment Activity

As of June 30, 2009, the Company continued development of several parcels of land, including land adjacent to previously acquired properties and land acquired with the intent to develop. The Company intends to construct industrial buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. The Company also continued to redevelop several of its assets to attract new tenants.

As of June 30, 2009, the Company had incurred development and redevelopment expenditures for several buildings, of which the more significant projects are noted below:

Development

	•		Greenbrier Technology Center III — a 48,000 square foot three-story office building has been designed, all permits have been processed and construction is set to commence. Costs to date include civil, architectural, mechanical, electrical and plumbing design, as well as permit fees; and

	•		Sterling Park Business Center, Lot 7 — a 57,000 square foot office building, adjacent to a recently completed building, has been designed, all permits have been processed and construction is pending further leasing activity. Costs to date include civil site preparation work, architectural, mechanical, electrical and plumbing design as well as permit fees.

Redevelopment

	•		Enterprise Parkway — a 71,000 square foot multi-tenanted office redevelopment. Costs incurred to date include building, lobby and common corridor renovations; design documents and permit fees for major common area bathroom renovations as well as schematic architectural and engineering design for future tenant layouts;

	•		Gateway 270 — a 42,000 square foot business park redevelopment. The majority of the costs incurred to date include architectural and engineering design work; and

	•		Interstate Plaza — a 57,000 square foot multi-tenanted office and warehouse redevelopment. Costs incurred to date include architectural, engineering design and permitting, demolition, metal framing, plumbing, mechanical and electrical rough-in work.

The Company anticipates development and redevelopment efforts on these projects will continue throughout 2009 and into 2010. The Company will commence redevelopment efforts on unfinished vacant space through the investment of capital in electrical, plumbing and other capital improvements in order to expedite the leasing of the space. At June 30, 2009, the Company owned developable land that can accommodate approximately 1.4 million square feet of building space, which includes 0.1 million square feet in its Maryland region, 0.6 million square feet in its Northern Virginia region and 0.7 million square feet in its Southern Virginia region.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) that require the Company to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that the Company deems most important to the portrayal of its financial condition and results of operations. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in its consolidated financial statements. The Company’s critical accounting policies relate to revenue recognition, including evaluation of the collectability of accounts receivable, impairment of long-lived assets, purchase accounting for acquisitions of real estate and share-based compensation.

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

Revenue Recognition

Rental revenue under leases with scheduled rent increases or rent abatements is recognized using the straight-line method over the term of the leases. Accrued straight-line rents included in the Company’s consolidated balance sheets represent the aggregate excess of rental revenue recognized on a straight-line basis over contractual rent under applicable lease provisions. The Company’s leases generally contain provisions under which the tenants reimburse the Company for a portion of the Company’s property operating expenses and real estate taxes. Such reimbursements are recognized in the period that the expenses are incurred. Lease termination fees are recognized on the date of termination when the related leases are canceled and the Company has no continuing obligation to provide services to such former tenants.

The Company must make estimates of the collectability of its accounts receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and other income. The Company specifically analyzes accounts receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of its allowance for doubtful accounts receivable. These estimates have a direct impact on the Company’s net income as a higher required allowance for doubtful accounts receivable will result in lower net income. The uncollectible portion of the amounts due from tenants, including straight-line rents, is charged to property operating expense in the period in which the determination is made.

Investments in Real Estate and Real Estate Entities

Investments in real estate are recorded at cost. Improvements and replacements are capitalized at historical cost when they extend the useful life, increase capacity, or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred.

Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:


Buildings		39 years
Building improvements		5 to 15 years
Furniture, fixtures and equipment		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases
Lease related intangible assets		Term of related lease

amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will record an impairment loss if the fair value, less anticipated selling costs, is lower than the carrying amount of the property. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its statements of operations and classify the assets and related liabilities as held-for-sale on its consolidated balance sheets. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be transferred to another property owned by the Company after the disposition.

Purchase Accounting

	§		the value of leases in-place on the date of acquisition based on the leasing origination costs at the date of the acquisition, which approximates the market value of the lease origination costs had the in-place leases been originated on the date of acquisition; the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred;

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

	§		the intangible value of tenant or customer relationships.

Goodwill and Impairment Analysis

In conjunction with the Company’s initial public offering and related formation transactions, First Potomac Management, Inc. contributed all of the capital interests in First Potomac Management LLC, the entity that manages the Company’s properties, to the Operating Partnership. The $2.1 million fair value of the in-place workforce acquired has been classified as goodwill and is included as a component of intangible assets on the consolidated balance sheets. All acquired goodwill that relates to the operations of a reporting unit and is used in determining the fair value of a reporting unit is allocated to the Company’s appropriate reporting unit in a reasonable and consistent manner. The Company assesses goodwill for impairment annually at the end of its fiscal year and in interim periods if certain events occur indicating the carrying value may be impaired. The Company performs its analysis for potential impairment of goodwill, which requires that a two-step impairment test be performed on goodwill. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed in order to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value then an impairment loss is recorded equal to the difference. No impairment losses were recognized during the three and six months ended June 30, 2009 and 2008.

Investment in Affiliate

joint venture by the third party, if any, will be reflected in the liability section of the Company’s consolidated balance sheets under “Financing Obligation.” The amount will be recorded based on the third party’s initial investment in the consolidated joint venture and will be adjusted to reflect the third party’s share of earnings or losses in the consolidated joint venture and for any distributions received by the third party from the joint venture. The earnings or losses from the joint venture attributable to the third party are recorded as interest expense on the Financing Obligation within the Company’s consolidated statements of operations. All distributions received by the Company from the consolidated joint venture will be recorded as an increase in the Financing Obligation.

Derivative Instruments

Share-Based Compensation

The Company follows current accounting fair value recognition provisions, which require that the cost for all share-based payment transactions be recognized as a component of income from continuing operations. The provisions require a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period).

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2009 to the Three and Six Months Ended June 30, 2008

2008 Acquisitions

The Company acquired the following buildings at an aggregate purchase cost of $46.4 million during 2008: four buildings at Triangle Business Center; and six buildings at RiversPark I and II. In December 2008, the Company contributed the RiversPark I and II buildings to a newly formed joint venture, which it consolidated in its financial statements as a result of certain lease guarantees. On March 17, 2009, a tenant at RiversPark II renewed its lease, which effectively terminated the Company’s lease guarantee related to RiversPark II. As a result, the Company deconsolidated the assets, liabilities and operating results for RiversPark II effective March 17, 2009. Collectively, the properties are referred to as the “2008 Acquisitions.”

The balance of the portfolio is referred to as the “Remaining Portfolio.”

Total Revenues

Total revenues are summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Increase		Change			Increase		Change
Rental	$	26,709	$	25,160	$	53,736	$	49,826	$	1,549		6	%	$	3,910		8	%
Tenant reimbursements & other	$	5,810	$	5,252	$	12,409	$	10,727	$	558		11	%	$	1,682		16	%

Rental Revenue

Rental revenue is comprised of contractual rent, the impacts of straight-line revenue and the amortization of intangible assets and liabilities representing above and below market leases. Rental revenue increased $1.5 million and $3.9 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008. The increase in rental revenue was primarily due to the 2008 Acquisitions, which resulted in additional rental revenue of $0.4 million and $1.3 million for the three and six months ended June 30, 2009, respectively. The Remaining Portfolio contributed $1.1 million and $2.6 million of additional rental revenue for the three and six months ended June 30, 2009, respectively, compared to 2008 due to an increase in rental rates when compared to the prior year. The increase in rental rates was slightly offset by a decrease in occupancy as the Company’s portfolio occupancy was 86.5% at June 30, 2009 compared to 86.6% at June 30, 2008.

The increase in rental revenue for the three and six months ended June 30, 2009 compared to 2008 includes $0.4 million and $1.4 million, respectively, for the Company’s Maryland reporting segment, $0.4 million and $1.0 million, respectively, for the Northern Virginia reporting segment and $0.7 million and $1.5 million, respectively, for the Southern Virginia reporting segment. The increase in rental revenue for the Maryland reporting segment was due to the 2008 Acquisitions, which was offset by an increase in vacancy in the region. The increase in rental revenue in the Northern and Southern Virginia reporting segments was primarily due to higher market rental rates for the three and six months ended June 30, 2009 compared to 2008.

Tenant Reimbursements and Other Revenues

Tenant reimbursements and other revenues include operating and common area maintenance costs reimbursed by the Company’s tenants as well as other incidental revenues such as lease termination payments, construction management fees and late fees. Tenant reimbursements and other revenues increased $0.6 million and $1.7 million during the three and six months ended June 30, 2009, respectively, compared with the same period in 2008. The Remaining Portfolio contributed an increase in tenant reimbursements and other revenues of $0.5 million and $1.4 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008, due to an increase in recoverable property operating expenses and an increase in the number of triple-net tenants, which generally result in higher tenant reimbursements. The 2008 Acquisitions contributed $0.1 million and $0.3 million of additional tenant reimbursements and other revenues for the three and six months ended June 30, 2009, respectively.

The increases in tenant reimbursements and other revenues for the three and six months ended June 30, 2009 compared to 2008 include $0.1 million and $0.5 million, respectively, for the Company’s Maryland reporting segment, $0.2 million and $0.7 million, respectively, for the Northern Virginia reporting segment and $0.4 million and $0.5 million, respectively, for the Southern Virginia reporting segment.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Increase		Change			Increase		Change
Property operating	$	8,052	$	6,227	$	16,369	$	12,931	$	1,825		29	%	$	3,438		27	%
Real estate taxes & insurance	$	3,213	$	3,032	$	6,526	$	5,949	$	181		6	%	$	577		10	%

Property operating expenses increased $1.8 million and $3.4 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008. Property operating expenses for the Remaining Portfolio increased $1.6 million and $2.9 million during the three and six months ended June 30, 2009, respectively, compared to the same period in 2008, primarily due to higher bad debt expense, snow and ice removal costs and utility expense. The Company’s 2008 Acquisitions contributed $0.2 million and $0.5 million of additional property operating expenses for the three and six months ended June 30, 2009, respectively. In anticipation of higher tenant credit losses, the Company increased its reserves for bad debt expense in the second quarter of 2009, which contributed bad debt expense of $1.0 and $1.4 million for the three and six months ended June 30, 2009, respectively.

The increase in total property operating expenses for the three and six months ended June 30, 2009 compared to 2008 include $1.0 million and $1.9 million, respectively, for the Company’s Maryland reporting segment, $0.3 million and $0.7 million, respectively, for the Northern Virginia reporting segment and $0.5 million and $0.8 million, respectively, for the Southern Virginia reporting segment. A significant portion of the Company’s increase in bad debt reserves were associated with tenants in its Maryland reporting segment, specifically tenants in the Baltimore sub-market, which incurred $0.4 million and $0.6 million of additional bad debt expense for the three and six months ended June 30, 2009, respectively.

Real estate taxes and insurance expense increased $0.2 million and $0.6 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008. The Remaining Portfolio contributed an increase in real estate taxes and insurance expense of $0.1 million and $0.4 million for the three and six months ended June 30, 2009, respectively, compared to 2008. The remaining $0.1 million and $0.2 million increase in real estate taxes and insurance for the three and six months ended June 30, 2009, respectively, can be attributed to the 2008 Acquisitions.

Real estate taxes and insurance for the three and six months ended June 30, 2009 compared to 2008 increased $0.2 million and $0.3 million, respectively, for the Company’s Maryland reporting segment as a result of the 2008 Acquisitions. For the Northern and Southern Virginia reporting segments, real estate taxes and insurance remained relatively flat for the three months ended June 30, 2009 and increased $0.2 million and $0.1 million, respectively, for the six months ended June 30, 2009.

Other Operating Expenses

General and administrative expenses are summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Increase		Change			Increase		Change
General and administrative	$	2,922	$	2,838	$	5,879	$	5,539	$	84		3	%	$	340		6	%

General and administrative expenses increased $0.1 million and $0.3 million for the three and six months ended June 30, 2009, respectively, compared to 2008, primarily due to increased share-based compensation expense as a result of restricted shares issued to the Company’s executives in February and May 2009.

Depreciation and amortization expenses are summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Increase		Change			Increase		Change
Depreciation and amortization	$	10,005	$	9,022	$	20,051	$	18,261	$	983		11	%	$	1,790		10	%

Depreciation and amortization expense includes depreciation of real estate assets and amortization of intangible assets and leasing commissions. For the three and six months ended June 30, 2009, depreciation and amortization expense increased $1.0 million and $1.8 million, respectively, of which, the 2008 Acquisitions generated additional depreciation and amortization expense of $0.2 million and $0.8 million, respectively. The remaining increase in depreciation and amortization expense for the three and six months ended June 30, 2009 was attributed to the Remaining Portfolio, which incurred an increase in expense related to the disposal of assets from tenants that vacated during the year.

Other Expenses (Income)

Interest expense is summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Decrease		Change			Decrease		Change
Interest expense	$	8,113	$	9,117	$	16,439	$	18,667	$	1,004		11	%	$	2,228		12	%

The Company seeks to employ cost-effective financing methods to fund its acquisitions and development projects and to refinance its existing debt to provide greater balance sheet flexibility or to take advantage of lower interest rates. The methods used to fund the Company’s activities impact the period over period comparisons of interest expense.

Interest expense decreased $1.0 million and $2.2 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008, primarily due to the Company’s efforts in refinancing its existing debt at lower interest rates as well as reducing its outstanding debt level. At June 30, 2009, the Company had $624.4 million of debt outstanding at a weighted average interest rate of 4.9% compared to $639.3 million of debt outstanding at a weighted average interest rate of 5.2% at June 30, 2008.

For the three and six months ended June 30, 2009, the Company’s mortgage interest expense decreased $1.1 million and $2.0 million, respectively, as the Company retired $87.6 million of mortgage debt encumbering Herndon Corporate Center, Norfolk Commerce Park II and the Suburban Maryland Portfolio in 2008. The prepayment of the $72.1 million Suburban Maryland Portfolio mortgage loan, in the third quarter of 2008, was partially financed through the issuance of a $35.0 million term loan, later amended to increase the total commitment to $50.0 million, which resulted in an additional $0.6 million and $1.2 million of interest expense during the three and six months ended June 30, 2009, respectively. The remainder was financed with a draw on the Company’s unsecured revolving credit facility. The Company also used its unsecured revolving credit facility to primarily fund the partial repurchase its Exchangeable Senior Notes. Since the beginning of 2008, the Company has repurchased $66.0 million of its Exchangeable Senior Notes at a discount, which resulted in a $0.5 million and $1.2 million decrease of interest expense and discount amortization for the three and six months ended June 30, 2009, respectively, compared to 2008. The increased borrowings on the unsecured revolving credit facility were offset by a lower weighted average interest rate. For the three and six months ended June 30, 2009, the Company’s average balance on its unsecured revolving credit facility was $93.8 million and $85.3 million, respectively, with a weighted average interest rate of 1.6% and 1.7%, respectively, compared to $75.6 million and $61.3 million with a weighted average interest rate of 4.0% and 4.4% for the three and six months ended June 30, 2008, respectively. The lower weighted average interest rate on the unsecured revolving credit facility resulted in a $0.4 million and $0.7 million decrease of interest expense during the three and six months ended June 30, 2009, respectively.

The decrease in the Company’s interest expense was partially offset by a $0.3 million and $0.6 million decrease in capitalized interest for the three and six months ended June 30, 2009 due to a decline in development and redevelopment activity in 2009 compared to 2008. Also, the Company recorded Financing Obligation income of $29 thousand and $0.2 million for the three and six months ended June 30, 2009, respectively, compared to 2008 as the Company’s consolidated joint venture, which was entered into during December 2008, incurred a loss during the first and second quarters of 2009.

Interest and other income are summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Increase		Change			Increase		Change
Interest and other income	$	118	$	104	$	257	$	235	$	14		13	%	$	22		9	%

Interest and other income include amounts earned on the Company’s funds held in various cash operating and escrow accounts. Interest and other income increased for the three and six months ended June 30, 2009 primarily due to higher average cash balances. The Company earned a weighted average interest rate of 3.47% and 3.48% on average cash balances of $4.8 million and $6.2 million for the three and six months ended June 30, 2009, respectively, compared to a weighted average interest rate of 3.34% and 3.77% on average cash balances of $4.2 million and $3.9 million during the three and six months ended June 30, 2008, respectively.

Equity in losses of affiliate is summarized as follows:


									Three Months				Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent				Percent
(amounts in thousands)	2009		2008		2009		2008		Increase		Change		Increase		Change
Equity in losses of affiliate	$	47	$	—	$	54	$	—	$	47		—	$	54		—

Gain on early retirement of debt is summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Decrease		Change			Increase		Change
Gain on early retirement of debt	$	1,367	$	1,611	$	5,706	$	3,006	$	244		15	%	$	2,700		90	%

During the second quarter of 2009, the Company used available cash and a draw on its unsecured revolving credit facility, totaling $7.2 million, to retire $9.0 million of its Exchangeable Senior Notes at a discount, which resulted in a gain of $1.4 million, net of deferred financing costs and discounts. During the second quarter of 2008, the Company used available cash and a draw on its unsecured revolving credit facility to retire $13.75 million of its Exchangeable Senior Notes at a discount, which resulted in a gain of $1.6 million, net of deferred financing costs and discounts.

During the first six months of 2009, the Company used available cash and draws on its unsecured revolving credit facility to retire $26.0 million of its Exchangeable Senior Notes at a discount, which resulted in a gain of $5.7 million, net of deferred financing costs and discounts. During the six months of 2008, the Company used available cash and draws on its unsecured revolving credit facility to retire $20.25 million of its Exchangeable Senior Notes at a discount, which resulted in a gain of $3.0 million, net of deferred financing costs and discounts.

Noncontrolling Interests

Noncontrolling interests are summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Decrease		Change			Decrease		Change
Noncontrolling interests	$	45	$	518	$	186	$	557	$	473		91	%	$	371		67	%

Noncontrolling interests reflect the ownership interests of the Operating Partnership held by parties other than the Company. The decrease in noncontrolling interests for the periods presented can be attributed to a $14.9 million and $15.6 million decrease in income from discontinued operations for the three and six months ended June 30, 2009, respectively, compared to 2008. Income from discontinued operations was higher in the prior year periods as the Company sold its Alexandria Corporate Park property in June 2008 for a $14.3 million gain. Operating results of the property and the gain on sale for the property are reflected as discontinued operations in the Company’s consolidated statements of operations. The Company did not dispose of any properties during the six months ended June 30, 2009. The noncontrolling interests owned by limited partners was 2.7% as of June 30, 2009 compared to 3.1% as of June 30, 2008. The decrease in the noncontrolling ownership percentage for the periods presented is primarily attributable to the Company’s common stock offering of 2.9 million common shares in the second half of 2008.

Income from Discontinued Operations

Income from discontinued operations is summarized as follows:


									Three Months					Six Months
	Three Months Ended June 30,				Six Months Ended June 30,						Percent					Percent
(amounts in thousands)	2009		2008		2009		2008		Decrease		Change			Decrease		Change
Income from discontinued operations	$	—	$	14,925	$	—	$	15,609	$	14,925		100	%	$	15,609		100	%

Income from discontinued operations represents revenues and expenses from Alexandria Corporate Park, formerly in the Company’s Northern Virginia reporting segment. In June 2008, the Company sold its Alexandria Corporate Park property in Alexandria, Virginia, and recognized a gain on sale of $14.3 million. Operating results of the property and the gain on sale for the property are reflected as discontinued operations in the Company’s consolidated statements of operations. The Company has had no continuing involvement with the property subsequent to its disposal. The Company had not committed to a disposition plan nor had it disposed of any additional real estate assets as of June 30, 2009.

Liquidity and Capital Resources

The Company expects to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on its unsecured revolving credit facility. The Company’s short-term liquidity requirements consist primarily of obligations under the lease for its corporate headquarters, normal recurring operating expenses, regular debt service requirements, recurring expenditures, non-recurring expenditures (such as capital improvements, tenant improvements and redevelopments), leasing commissions, and related costs, and dividends to common shareholders. As a REIT, the Company is required to distribute at least 90% of its taxable income to its shareholders on an annual basis.

The Company intends to meet long-term funding requirements for property acquisitions, development, redevelopment and other non-recurring capital improvements through net cash from operations, long-term secured and unsecured indebtedness, including borrowings under its unsecured revolving credit facility, secured term loans, unsecured senior notes, proceeds from sales of strategically identified assets and potential joint ventures, and the issuance of equity and debt securities. The Company’s ability to raise funds through sales of debt and equity securities is dependent on, among other things, general economic conditions, general market conditions for REITs, rental rates, occupancy levels, market perceptions and the trading price of the Company’s 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.

Due to the nature of the Company’s 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 Company’s tenants. The recent economic downturn may affect tenants’ ability to meet their obligations, including the payment of rent contractually owed to the Company, and the Company’s ability to lease space to new or replacement tenants on favorable terms, all of which could effect the Company’s cash available for short-term liquidity needs. Although the recent economic downturn and uncertainty in the global credit markets has had varying impacts that have negatively impacted debt financing and the availability of capital across many industries, the Company anticipates that its available cash flow from operating activities, and available cash from borrowings and other sources, will be adequate to meet its capital and liquidity needs in both the short and long term. The Company’s unsecured revolving credit facility and secured term loans mature in April 2010 and August 2010, respectively, and provide for a one-year extension of the maturity date at the Company’s option, which it intends to exercise. Assuming the one-year extensions are exercised, the Company has approximately $30 million, or 5.0% of its principal debt maturing prior to January 1, 2011. Of the maturing amount, $6 million matures in 2009 and $24 million matures in late 2010. At June 30, 2009, the Company had $25.5 million of additional capacity available on its unsecured revolving credit facility.

On July 21, 2009, the Company declared a dividend of $0.20 per common share. The Company reduced its dividend in the first quarter of 2009 in order to further enhance its financial flexibility and in light of the recent change in the tax laws relative to recognition of gains on cancellation of debt. The reduction in the dividend will also provide additional financial capacity and balance sheet flexibility in the event the capital markets remain challenging for an extended period.

The Company could also fund building acquisitions, development, redevelopment and other non-recurring capital improvements through additional borrowings, sales of assets or joint ventures. The Company could also issue Operating Partnership units to fund a portion of the purchase price for some of its future building acquisitions.

Cash Flows

Consolidated cash flow information is summarized as follows:


	Six Months Ended
	June 30,
(amounts in thousands)	2009			2008			Change
Cash provided by operating activities	$	20,513		$	18,223		$	2,290
Cash (used in) provided by investing activities		(14,960	)		33,069			(48,029	)
Cash used in financing activities		(16,026	)		(50,092	)		34,066

Net cash provided by operating activities increased $2.3 million for the six months ended June 30, 2009 compared to the same period in 2008. The increase in operating activities was the result of greater income from continuing operations, excluding gains on early retirement of debt, for the six months ended June 30, 2009. This was primarily attributable to a decline in cash interest expense generally as a result of lower weighted average interest rates on variable rate debt outstanding during the comparative periods. The increase was also attributed to a decrease in cash used to reduce accounts payable and accrued expenses, and an increase in cash for rents received in advance during the six months ended June 30, 2009 compared to the same period in 2008. The increase in cash received from operating activities was partially offset by an increase in escrows and reserves, as a result of timing of real estate tax payments, and accounts and other receivables.

Net cash used in investing activities was $15.0 million for the six months ended June 30, 2009 compared to cash provided by investing activities of $33.1 million for the six months ended June 30, 2008. The Company sold its Alexandria Corporate Park property for net proceeds of $50.6 million in the second quarter of 2008. The Company did not dispose of any properties during the six months ended June 30, 2009. The Company increased its additions to rental property by $4.4 million for the six months ended June 30, 2009 compared to the same period in 2008. During the six months ended June 30, 2009, there was a reduction of $6.9 million in cash used for development and redevelopment activities as the Company completed several large development and redevelopment projects in 2008.

Net cash used in financing activities decreased $34.1 million for the six months ended June 30, 2009 compared to the same period in 2008. The change is primarily due to a decrease in debt repayments during 2009 compared to 2008. During the six months ended June 30, 2009, the Company retired $26.0 million of its Exchangeable Senior Notes for $19.0 million and repaid the $8.0 million mortgage loan encumbering its Glenn Dale Business Center property. The debt retirements were primarily financed with draws on the Company’s unsecured revolving credit facility and a portion of the $5.4 million of proceeds received from the issuance of common stock through the Company’s controlled equity offering agreement. During the first half of 2008, the Company repurchased $34.0 million of its outstanding Exchangeable Senior Notes for $28.6 million, which was financed through borrowings on its unsecured revolving credit facility. Subsequently, the Company used the majority of the $50.6 million of proceeds from its second quarter 2008 property disposition to repay a portion of the outstanding balance on its unsecured revolving credit facility. The Company also repaid the $8.5 million mortgage loan that encumbered Herndon Corporate Center during the six months ended June 30, 2008. The Company paid a dividend in the second quarter of 2009 to $0.20 per common share as compared to $0.34 per common share paid in the first quarter of 2009 and throughout 2008. The decline in the dividend rate resulted in a total reduction of dividends paid to shareholders and distributions paid to unitholders of $1.9 million for the six months ended June 30, 2009 compared to the same period in 2008.

Same Property Net Operating Income

Same Property Net Operating Income (“Same Property NOI”), defined as operating revenues (rental, tenant reimbursements and other revenues) less operating expenses (property operating expenses, real estate taxes and insurance) from the properties owned by the Company for the entirety of the periods presented, is a primary performance measure the Company uses to assess the results of operations at its properties. As an indication of the 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.

Comparison of the Three and Six Months Ended June 30, 2009 to the Three and Six Months Ended June 30, 2008

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


	Three Months Ended												Six Months Ended
	June 30,												June 30,
							$			%									$		%
(dollars in thousands)	2009			2008			Change			Change			2009			2008			Change		Change
Number of buildings ⁽¹⁾		165			165			—			—			165			165			—		—

Same property revenue
Rental	$	26,001		$	25,160		$	841			3.3		$	51,880		$	49,826		$	2,054		4.1
Tenant reimbursements		5,635			4,922			713			14.5			11,684			9,820			1,864		19.0

Total same property revenue		31,636			30,082			1,554			5.2			63,564			59,646			3,918		6.6


Same property operating expenses
Property		7,477			5,846			1,631			27.9			15,030			12,244			2,786		22.8
Real estate taxes and insurance		3,137			3,029			108			3.6			6,358			5,942			416		7.0

Total same property operating expenses		10,614			8,875			1,739			19.6			21,388			18,186			3,202		17.6


Same property net operating income	$	21,022		$	21,207		$	(185	)		(0.9	)	$	42,176		$	41,460		$	716		1.7


Reconciliation to net income
Same property net operating income	$	21,022		$	21,207								$	42,176		$	41,460
Non-comparable net operating income (loss) ^{(2) (3)}		232			(54	)								1,074			213
General and administrative expenses		(2,922	)		(2,838	)								(5,879	)		(5,539	)
Depreciation and amortization		(10,005	)		(9,022	)								(20,051	)		(18,261	)
Other expenses, net		(6,675	)		(7,402	)								(10,530	)		(15,426	)
Discontinued operations ⁽⁵⁾		—			14,925									—			15,609

Net income	$	1,652		$	16,816								$	6,790		$	18,056


	Weighted Average						Weighted Average
	Occupancy at June 30,						Occupancy at June 30,
	2009			2008			2009			2008
Same Properties		86.6	%		86.4	%		86.7	%		86.5	%
Total		86.5	%		86.1	%		86.6	%		86.2	%


⁽¹⁾		Represents properties owned for the entirety of the periods presented.

⁽²⁾		Non-comparable Properties include: Alexandria Corporate Park, Triangle Business Center and Rivers Park I and II.

⁽³⁾		Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

⁽⁴⁾		Excludes a 76,000 square foot redevelopment building at Ammendale Commerce Center, which was placed in-service during the fourth quarter of 2008, and a 57,000 square foot space at Interstate Plaza that is currently under redevelopment.

⁽⁵⁾		Discontinued operations represent income and the gain on sale related to Alexandria Corporate Park, which was sold in June 2008.

Same Property NOI decreased $0.2 million, or 0.9%, for the three months ended June 30, 2009 and increased $0.7 million, or 1.7%, for the six months ended June 30, 2009 compared to the same periods in 2008. Rental revenue increased $1.6 million and $3.9 million for the three and six months ended June 30, 2009, respectively, as a result of higher rental rates. Total same property operating expenses increased $1.7 million and $3.2 million for the three and six months ended June 30, 2009, respectively, due to increases in non-controllable costs, primarily for bad debt expense, utilities and real estate taxes. In anticipation of higher tenant credit losses, the Company recorded an additional $0.9 million and $1.1 million of bad debt expense for its same property portfolio during the three and six months ended June 30, 2009, respectively.

Maryland


	Three Months Ended										Six Months Ended
	June 30,										June 30,
					$			%							$			%
(dollars in thousands)	2009		2008		Change			Change			2009		2008		Change			Change
Number of buildings ⁽¹⁾		64		64		—			—			64		64		—			—

Same property revenue
Rental	$	8,345	$	8,618	$	(273	)		(3.2	)	$	16,727	$	17,163	$	(436	)		(2.5	)
Tenant reimbursements		1,572		1,512		60			4.0			3,448		3,258		190			5.8

Total same property revenue		9,917		10,130		(213	)		(2.1	)		20,175		20,421		(246	)		(1.2	)


Same property operating expenses
Property		2,584		1,764		820			46.5			5,181		3,964		1,217			30.7
Real estate taxes and insurance		1,015		943		72			7.6			2,031		1,924		107			5.6

Total same property operating expenses		3,599		2,707		892			33.0			7,212		5,888		1,324			22.5


Same property net operating income	$	6,318	$	7,423	$	(1,105	)		(14.9	)	$	12,963	$	14,533	$	(1,570	)		(10.8	)


Reconciliation to total property operating income:
Same property net operating income	$	6,318	$	7,423							$	12,963	$	14,533
Non-comparable net operating income^{(2) (3)}		511		144								1,352		72

Total property operating income	$	6,829	$	7,567							$	14,315	$	14,605


	Weighted Average						Weighted Average
	Occupancy at June 30,						Occupancy at June 30,
	2009			2008			2009			2008
Same Properties		84.0	%		89.2	%		85.2	%		89.3	%
Total		84.1	%		89.2	%		85.1	%		89.3	%


⁽¹⁾		Represents properties owned for the entirety of the periods presented.

⁽²⁾		Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

⁽³⁾		Non-comparable Properties include: Triangle Business Center, Rivers Park I and II, and a 76,000 square foot redevelopment building at Ammendale Commerce Center.

Same Property NOI for the Maryland properties decreased $1.1 million and $1.6 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008. Rental revenue decreased by $0.2 million for both the three and six months ended June 30, 2009 as a result of a decrease in occupancy. Total same property operating expenses for the Maryland properties increased $0.9 million and $1.3 million for the three and six months ended June 30, 2009, respectively, due to higher bad debt expense. During the three and six months ended June 30, 2009, the Company incurred $0.6 million and $0.7 million, respectively, of additional bad debt expense, of which, the Baltimore sub-market disproportionately incurred $0.4 million and $0.6 million, respectively.

Northern Virginia


	Three Months Ended										Six Months Ended
	June 30,										June 30,
							$		%								$		%
(dollars in thousands)	2009			2008			Change		Change		2009			2008			Change		Change
Number of buildings ⁽¹⁾		47			47			—		—		47			47			—		—

Same property revenue
Rental	$	7,931		$	7,509		$	422		5.6	$	15,847		$	14,805		$	1,042		7.0
Tenant reimbursements		1,800			1,579			221		14.0		3,779			3,040			739		24.3

Total same property revenue		9,731			9,088			643		7.1		19,626			17,845			1,781		10.0


Same property operating expenses
Property		2,055			1,768			287		16.2		4,402			3,619			783		21.6
Real estate taxes and insurance		1,097			1,053			44		4.2		2,220			1,961			259		13.2

Total same property operating expenses		3,152			2,821			331		11.7		6,622			5,580			1,042		18.7


Same property net operating income	$	6,579		$	6,267		$	312		5.0	$	13,004		$	12,265		$	739		6.0


Reconciliation to total property operating income
Same property net operating income	$	6,579		$	6,267						$	13,004		$	12,265
Non-comparable net operating loss^{(2) (3)}		(81	)		(91	)						(151	)		(190	)

Total property operating income	$	6,498		$	6,176						$	12,853		$	12,075


	Weighted Average						Weighted Average
	Occupancy at June 30,						Occupancy at June 30,
	2009			2008			2009			2008
Same Properties		88.9	%		87.6	%		89.4	%		87.5	%
Total		88.9	%		86.2	%		89.4	%		86.1	%


⁽¹⁾		Represents properties owned for the entirety of the periods presented.

⁽²⁾		Non-comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

⁽³⁾		Non-comparable Properties include: Alexandria Corporate Park and a 57,000 square foot space at Interstate Plaza that is currently under redevelopment.

Same Property NOI for the Northern Virginia properties increased $0.3 million and $0.7 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008. Total same property rental revenues increased $0.6 million and $1.8 million for the three and six months ended June 30, 2009, respectively, as a result of higher occupancy and an increase in rental rates. Total same property operating expenses increased $0.3 million and $1.0 million for the three and six months ended June 30, 2008, respectively, due to an increase in bad debt expense and utility costs. Also, real estate taxes increased due to higher property assessments and real estate tax rates.

Southern Virginia


	Three Months Ended												Six Months Ended
	June 30,												June 30,
							$			%								$		%
(dollars in thousands)	2009			2008			Change			Change			2009			2008		Change		Change
Number of buildings ⁽¹⁾		54			54			—			—			54			54		—		—

Same property revenue
Rental	$	9,725		$	9,033		$	692			7.7		$	19,306		$	17,858	$	1,448		8.1
Tenant reimbursements		2,263			1,831			432			23.6			4,457			3,522		935		26.5

Total same property revenue		11,988			10,864			1,124			10.3			23,763			21,380		2,383		11.1


Same property operating expenses
Property		2,838			2,314			524			22.6			5,447			4,661		786		16.9
Real estate taxes and insurance		1,025			1,033			(8	)		(0.8	)		2,107			2,057		50		2.4

Total same property operating expenses		3,863			3,347			516			15.4			7,554			6,718		836		12.4


Same property net operating income	$	8,125		$	7,517		$	608			8.1		$	16,209		$	14,662	$	1,547		10.6


Reconciliation to total property operating income
Same property net operating income	$	8,125		$	7,517								$	16,209		$	14,662
Non-comparable net operating (loss)income ⁽²⁾		(198	)		(107	)								(127	)		331

Total property operating income	$	7,927		$	7,410								$	16,082		$	14,993


	Weighted Average						Weighted Average
	Occupancy at June 30,						Occupancy at June 30,
	2009			2008			2009			2008
Same Properties		86.9	%		84.0	%		86.2	%		84.2	%
Total		86.9	%		84.0	%		86.2	%		84.2	%


⁽¹⁾		Represents properties owned for the entirety of the periods presented.

⁽²⁾		Non-Comparable net operating income has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes

Same Property NOI for the Southern Virginia properties increased $0.6 million and $1.5 million for the three and six months ended June 30, 2009, respectively, compared to the same period in 2008. Same property rental revenues increased $1.1 million and $2.4 million for the three and six months ended June 30, 2009, respectively, due to an increase in occupancy and higher rental rates. Total same property operating expenses increased $0.5 million and $0.8 million for the three and six months ended June 30, 2009, respectively, due to an increase in utility costs, bad debt expense and snow and ice removal costs.

Contractual Obligations

On December 12, 2008, the Company entered into joint venture arrangements with a third party to own RiversPark I and II. The Company has guaranteed to the joint ventures the rental payments associated with a three-year master lease with the former owner of RiversPark I. This guarantee will expire in September 2011 or earlier if the space is re-leased. The Company also provided a guarantee to the joint venture in connection with a specified tenant lease at RiversPark II that will guarantee rental payments for an 18-month period in the event the tenant did not renew its lease by the end of the third quarter of 2009. On March 17, 2009, the specified tenant renewed its lease at RiversPark II, effectively terminating the lease guarantee related to RiversPark II. The maximum potential amount of future payments the Company could be required to make related to the rent guarantees at RiversPark I is $0.7 million as of June 30, 2009.

As of June 30, 2009, the Company had development and redevelopment contractual obligations of $45 thousand outstanding and capital improvement obligations of $0.6 million outstanding. Development and redevelopment contractual obligations include commitments primarily related to the Sterling Park Business Center, Plaza 500, Gateway 270 and Greenbrier Business Center projects. Capital expenditure obligations represent commitments for roof, asphalt, HVAC and common area replacements contractually obligated as of June 30, 2009. Also, as of June 30, 2009, the Company had $2.5 million of tenant improvement obligations which it expects to incur on its in-place leases. The Company had no other material contractual obligations as of June 30, 2009.

Dividends and Distributions

The Company is required to distribute to its shareholders at least 90% of its taxable income in order to qualify as a REIT, including taxable income it recognizes for tax purposes but with regard to which it does not receive corresponding cash. Funds used by the Company to pay dividends on its common shares are provided through distributions from the Operating Partnership. For every common share of the Company, the Operating Partnership has issued to the Company a corresponding common unit. At June 30, 2009, the Company was the sole general partner of and owns 97.3% of the Operating Partnership’s units. The remaining interests in the Operating Partnership are limited partnership interests, some of which are owned by certain of the Company’s executive officers, trustees and unrelated parties who contributed properties and other assets to the Company upon its formation. As a general rule, when the Company pays a common dividend, the Operating Partnership pays an equivalent per unit distribution on all common units.

On July 21, 2009, the Company declared a dividend of $0.20 per common share. The dividend will be paid on August 14, 2009, to common shareholders of record as of August 7, 2009.

Funds From Operations

Funds from operations (“FFO”) is a non-GAAP measure used by many investors and analysts that follow the real estate industry. The Company considers FFO a useful measure of performance for an equity REIT because it facilitates an understanding of the operating performance of its properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, the Company believes that FFO provides a meaningful indication of its performance. Management also considers FFO an appropriate supplemental performance measure given its wide use by and relevance to investors and analysts. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume that the value of real estate diminishes predictably over time.

As defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in its March 1995 White Paper (as amended in November 1999 and April 2002), FFO represents net income (computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company computes FFO in accordance with NAREIT’s 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 Company’s methodology for computing FFO adds back noncontrolling interest in the income from its Operating Partnership in determining FFO. The Company believes this is appropriate as Operating Partnership units are presented on an as-converted, one-for-one basis for shares of stock in determining FFO per fully diluted share.

Further, FFO does not represent amounts available for 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’s presentation of FFO 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 following table presents a reconciliation of net income attributable to common shareholders to FFO available to common shareholders and unitholders (amounts in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net income attributable to common shareholders	$	1,607		$	16,298		$	6,604		$	17,499
Add: Depreciation and amortization:
Real estate assets		10,005			9,022			20,051			18,261
Discontinued operations		—			197			—			478
Unconsolidated joint venture		96			—			111			—
Consolidated joint venture		(129	)		—			(503	)		—
Gain on sale of disposed property		—			(14,274	)		—			(14,274	)
Net income attributable to noncontrolling interests		45			518			186			557


FFO available to common shareholders and unitholders	$	11,624		$	11,761		$	26,449		$	22,521


Weighted average common shares and Operating Partnership units outstanding — diluted		28,002			24,953			27,904			24,937

Off-Balance Sheet Arrangements

On March 17, 2009, the Company deconsolidated a joint venture that owned RiversPark II. For more information see footnote 4, Investment in Affiliate.

Forward Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the length and severity of the recent economic downturn; 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 current and future acquisitions; the Company’s ability to obtain additional financing and other risks detailed under sell additional common shares; and other risks disclosed herein and in Part I, Item 1A, “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2008. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these uncertainties, you should keep in mind that any forward-looking statement made in this discussion, or elsewhere, might not occur.

ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market interest rates. The Company periodically uses derivative financial instruments to seek to manage, or hedge, interest rate risks related to its borrowings. The Company does not use derivatives for trading or speculative purposes and only enters into contracts with major financial institutions based on their credit rating and other factors.

At June 30, 2009, the Company’s exposure to variable interest rates consisted of $99.4 million of borrowings on its unsecured revolving credit facility and $15.0 million on a secured term loan. A change in interest rates of 1% would result in an increase or decrease of $1.0 million in interest expense on an annualized basis. As of June 30, 2009, the Company had $94.9 million of variable-rate term debt, comprised of a $50.0 million secured term loan, a $35.0 million secured term loan and a $9.9 million variable-rate mortgage loan, which were hedged through various interest rate swap agreements that fixed the loans’ respective interest rates.

For fixed rate debt, changes in interest rates generally affect the fair value of debt but not the earnings or cash flow of the Company. See footnote 8, Fair Value of Financial Instruments for more information on the Company’s current accounting treatment on exposure to fixed interest rates.

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company has historically entered into derivative agreements to mitigate exposure to unexpected changes in interest. The Company intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency.

Financial Covenants

The Company’s 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 Company’s allowable leverage, minimum net worth, fixed debt coverage and other financial metrics. As of June 30, 2009, the Company was in compliance with all of the covenants of its outstanding debt instruments. Below is a summary of certain covenants associated with the Company’s outstanding debt for the quarter ended June 30, 2009 (numbers in thousands):

Unsecured Revolving Credit Facility and Term Loans


	Unsecured
	Revolving Credit
	Facility and 2007			2008 Secured
	Secured Term Loan			Term Loan			Covenant
Unencumbered Pool Leverage⁽¹⁾		52.8	%		—			£ 65	%
Unencumbered Pool Debt Service Coverage Ratio⁽¹⁾		3.19	x		—			³ 1.75	x
Maximum Consolidated Total Indebtedness		56.6	%		57.1	%		£ 60	%⁽²⁾
Minimum Tangible Net Worth	$	490,438		$	480,643			³ $359,685
Fixed Charge Coverage Ratio		1.90	x		1.88	x		³ 1.50	x
Maximum Dividend Payout Ratio⁽¹⁾		60.3	%		—			£ 95	%


⁽¹⁾		Covenant does not apply to the Company’s 2007 secured term loan.

⁽²⁾		Company has a one time right to increase indebtedness to 65% for three consecutive quarters.

Senior Notes


	Senior Notes			Covenant
Maximum Consolidated Total Indebtedness		58.3	%		£ 65	%
Minimum Tangible Net Worth	$	457,516			³ $359,685
Fixed Charge Coverage Ratio		1.90	x		³ 1.50	x
Maximum Dividend Payout Ratio		60.3	%		£ 95	%

ITEM 4: CONTROLS AND PROCEDURES

The Company carried out an evaluation with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s 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 Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s 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 SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s 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 Company’s internal control over financial reporting during the quarter ended June 30, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

As of June 30, 2009, the Company was not subject to any material pending legal proceedings, nor, to its knowledge, was any legal proceeding threatened against it, which would be reasonably likely to have a material adverse effect on its liquidity or results of operations.

Item 1A. Risk Factors

As of June 30, 2009, there were no material changes to the Company’s risk factors previously disclosed in Item 1A, “Risk Factors” in its Annual Report on Form 10-K for the year ended December 31, 2008, except as set forth below.

Recent disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our common shares.

The United States stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the unavailability of certain types of financing. Continued uncertainty in the stock and credit markets may negatively affect our ability to make acquisitions. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of financing or difficulties in obtaining financing. These events in the stock and credit markets may make it more difficult or costly for us to raise capital through the issuance of our common shares or preferred shares. These disruptions in the financial markets also may have a material adverse effect on the market value of our common shares and other adverse effects on us or the economy generally.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

Results of 2009 Annual Meeting of Shareholders

The Company’s 2009 Annual Meeting of Shareholders (the “Annual Meeting”) was held at its corporate headquarters in Bethesda, Maryland on Thursday, May 21, 2009. The information below is a summary of the voting results on four proposals considered and voted upon at the meeting.

Election of Trustees

Each of the individuals listed below was duly elected as a trustee of the Company to serve until the 2010 Annual Meeting of Shareholders or until his successor is duly elected and qualified. Set forth below are the results of the vote for the election of trustees:


			Votes
Name	Votes For		Withheld
Robert H. Arnold		24,209,436		285,179
Richard B. Chess		17,309,769		7,184,846
Douglas J. Donatelli		24,131,375		363,239
J. Roderick Heller		24,199,490		295,125
R. Michael McCullough		17,302,318		7,192,297
Alan G. Merten		17,295,674		7,198,941
Terry L. Stevens		24,226,437		268,178

Other Business

At the Annual Meeting, the Company’s shareholders approved the 2009 Equity Compensation Plan and the 2009 Employee Share Purchase Plan and ratified the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009. A complete description of each of these proposals is included in the Company’s definitive proxy statement filed with the SEC on April 8, 2009. Set forth below are the results of the shareholder vote on these proposals.


							Broker
Proposal	Votes For		Against		Abstentions		Non-Votes
2009 Equity Compensation Plan		17,979,997		1,082,824		319,480		5,112,313
2009 Employee Share Purchase Plan		19,109,801		184,674		88,094		5,112,045
Ratification of Accountants for 2009		24,154,927		300,790		38,897		—

Item 5. Other Information

None.

Item 6. Exhibits


No.		Description

3.1		Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003).

3.2		Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s 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 Registrant’s Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003).

4.2		Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K as filed with the SEC on June 23, 2006).

4.3		Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K as filed with the SEC on June 23, 2006).

4.4		Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on June 23, 2006).

4.5		Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed on June 23, 2006).

4.6		Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K filed on June 23, 2006).

4.7		Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 12, 2006).

4.8		Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on December 12, 2006).

10.1		2009 Short-Term Incentive Award Plan.

10.2		2009 Equity Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 8, 2009).

10.3		2009 Employee Share Purchase Plan (incorporated by reference to Exhibit B to the Registrant’s Definitive Proxy Statement filed on April 8, 2009).

10.4		Form of Restricted Common Share Award Agreement for Officers (Time-Vesting) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 27, 2009).

10.5		Form of Restricted Common Share Award Agreement for Officers (Performance-Based) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 27, 2009).


No.		Description

10.6		Form of Restricted Common Share Award Agreement for Trustees (Time-Vesting) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 28, 2008).

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.)

EXHIBIT INDEX


No.		Description

3.1		Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003).

3.2		Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s 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 Registrant’s Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003).

4.2		Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K as filed with the SEC on June 23, 2006).

4.3		Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K as filed with the SEC on June 23, 2006).

4.4		Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on June 23, 2006).

4.5		Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed on June 23, 2006).

4.6		Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K filed on June 23, 2006).

4.7		Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 12, 2006).

4.8		Form of First Potomac Realty Investment Limited Partnership 4.0% Exchangeable Senior Note due 2011 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on December 12, 2006).

10.1		2009 Short-Term Incentive Award Plan.

10.2		2009 Equity Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 8, 2009).

10.3		2009 Employee Share Purchase Plan (incorporated by reference to Exhibit B to the Registrant’s Definitive Proxy Statement filed on April 8, 2009).

10.4		Form of Restricted Common Share Award Agreement for Officers (Time-Vesting) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 27, 2009).

10.5		Form of Restricted Common Share Award Agreement for Officers (Performance-Based) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 27, 2009).

10.6		Form of Restricted Common Share Award Agreement for Trustees (Time-Vesting) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 28, 2008).

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.)


	2009		2008
Cash paid for interest, net	$	16,950	$	17,829
Non-cash investing and financing activities:
Conversion of Operating Partnership units into common shares		—		358


	Page
Part I: Financial Information

Item 1. Financial Statements
Consolidated balance sheets as of June 30, 2009 (unaudited) and December 31, 2008 (as adjusted – see footnote 2 (q))		3
Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2009 and 2008 (as adjusted – see footnote 2 (q))		4
Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2009 and 2008 (as adjusted – see footnote 2 (q))		5
Notes to consolidated financial statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures about Market Risk		40
Item 4. Controls and Procedures		41

Part II: Other Information

Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults Upon Senior Securities		42
Item 4. Submission of Matters to a Vote of Security Holders		42
Item 5. Other Information		43
Item 6. Exhibits		43
Signatures		45


	FIRST POTOMAC REALTY TRUST
Date: August 7, 2009	/s/ Douglas J. Donatelli
	Douglas J. Donatelli
	Chairman of the Board and Chief Executive Officer


Date: August 7, 2009	/s/ Barry H. Bass
	Barry H. Bass
	Executive Vice President and Chief Financial Officer