UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2013.

¨ 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  x    NO  ¨

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

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

Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of May 3, 2013, there were 51,267,717 common shares, par value $0.001 per share, outstanding.

FIRST POTOMAC REALTY TRUST

FORM 10-Q

INDEX

		Page
Part I: Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Consolidated balance sheets as of March 31, 2013 (unaudited) and December 31, 2012		4
	Consolidated statements of operations (unaudited) for the three months ended March 31, 2013 and 2012		5
	Consolidated statements of comprehensive income (loss) (unaudited) for the three months ended March  31, 2013 and 2012		6
	Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2013 and 2012		7
	Notes to condensed consolidated financial statements (unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		55
Item 4.	Controls and Procedures		56
Part II: Other Information
Item 1.	Legal Proceedings		57
Item 1A.	Risk Factors		57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3.	Defaults Upon Senior Securities		57
Item 4.	Mine Safety Disclosures		57
Item 5.	Other Information		57
Item 6.	Exhibits		58
	Signatures		59

2

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, including statements regarding the potential sale of the Company’s industrial portfolio and the timing of such sale, 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 Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete acquisitions and, if applicable, dispositions on acceptable terms; the Company’s ability to manage its current debt levels and repay or refinance its indebtedness upon maturity or other required payment dates; the Company’s ability to maintain financial covenant compliance under its debt agreements; the Company’s ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; the impact of the recent internal investigation, including any remedial actions and enhancement measures implemented in response to the internal investigation; any impact of the informal inquiry initiated by the U.S. Securities and Exchange Commission (the “SEC”); the Company’s ability to obtain debt and/or financing on attractive terms, or at all; and other risks detailed under “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 and in the other documents the Company files with the SEC. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this discussion, or elsewhere, might not occur.

3

FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

	March 31, 2013			December 31, 2012
	(unaudited)
Assets:
Rental property, net	$	1,445,114		$	1,450,679
Assets held-for-sale		2,301			—
Cash and cash equivalents		17,794			9,374
Escrows and reserves		10,160			13,421
Accounts and other receivables, net of allowance for doubtful accounts of $1,954 and $1,799, respectively		14,290			15,271
Accrued straight-line rents, net of allowance for doubtful accounts of $568 and $530, respectively		30,862			28,133
Notes receivable, net		54,748			54,730
Investment in affiliates		50,072			50,596
Deferred costs, net		40,624			40,370
Prepaid expenses and other assets		8,219			8,597
Intangible assets, net		44,180			46,577
Total assets	$	1,718,364		$	1,717,748
Liabilities:
Mortgage loans	$	377,387		$	418,864
Secured term loans		47,500			10,000
Unsecured term loan		300,000			300,000
Unsecured revolving credit facility		230,000			205,000
Accounts payable and other liabilities		55,933			64,920
Accrued interest		2,531			2,653
Rents received in advance		6,394			9,948
Tenant security deposits		6,069			5,968
Deferred market rent, net		3,344			3,535
Total liabilities		1,029,158			1,020,888
Noncontrolling interests in the Operating Partnership		39,042			34,367
Equity:
Preferred Shares, $0.001 par value, 50,000 shares authorized;
Series A Preferred Shares, $25 per share liquidation preference, 6,400 shares issued and outstanding		160,000			160,000
Common shares, $0.001 par value, 150,000 shares authorized; 51,266 and 51,047 shares issued and outstanding, respectively		51			51
Additional paid-in capital		799,952			804,584
Noncontrolling interests in consolidated partnerships		3,723			3,728
Accumulated other comprehensive loss		(9,876	)		(10,917	)
Dividends in excess of accumulated earnings		(303,686	)		(294,953	)
Total equity		650,164			662,493
Total liabilities, noncontrolling interests and equity	$	1,718,364		$	1,717,748

See accompanying notes to condensed consolidated financial statements.

4

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended March 31,
	2013			2012
Revenues:
Rental	$	40,187		$	37,401
Tenant reimbursements and other		11,190			9,133
Total revenues		51,377			46,534
Operating expenses:
Property operating		12,905			11,608
Real estate taxes and insurance		5,403			4,574
General and administrative		5,267			4,897
Acquisition costs		—			17
Depreciation and amortization		16,885			16,018
Impairment of real estate assets		—			1,949
Total operating expenses		40,460			39,063
Operating income		10,917			7,471
Other expenses, net:
Interest expense		10,530			11,159
Interest and other income		(1,531	)		(1,508	)
Equity in (earnings) losses of affiliates		(28	)		46
Total other expenses, net		8,971			9,697
Income (loss) from continuing operations before income taxes		1,946			(2,226	)
Provision for income taxes		—			(61	)
Income (loss) from continuing operations		1,946			(2,287	)
Income (loss) from discontinued operations		17			(1,187	)
Net income (loss)		1,963			(3,474	)
Less: Net loss attributable to noncontrolling interests		59			318
Net income (loss) attributable to First Potomac Realty Trust		2,022			(3,156	)
Less: Dividends on preferred shares		(3,100	)		(2,664	)
Net loss attributable to common shareholders	$	(1,078	)	$	(5,820	)
Basic and diluted earnings per common share:
Loss from continuing operations	$	(0.02	)	$	(0.10	)
Income (loss) from discontinued operations		—			(0.02	)
Net loss	$	(0.02	)	$	(0.12	)
Weighted average common shares outstanding:
Basic and diluted		50,404			49,781

See accompanying notes to condensed consolidated financial statements.

5

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(Amounts in thousands)

	Three Months Ended March 31,
	2013			2012
Net income (loss)	$	1,963		$	(3,474	)
Unrealized gain on derivative instruments		1,093			742
Unrealized loss on derivative instruments		—			(15	)
Total comprehensive income (loss)		3,056			(2,747	)
Net loss attributable to noncontrolling interests		59			318
Net gain from derivative instruments attributable to noncontrolling interests		(52	)		(39	)
Comprehensive income (loss) attributable to First Potomac Realty Trust	$	3,063		$	(2,468	)

See accompanying notes to condensed consolidated financial statements.

6

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	1,963		$	(3,474	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Discontinued operations:
Depreciation and amortization		23			103
Impairment of real estate assets		—			270
Depreciation and amortization		17,127			16,264
Stock based compensation		771			696
Bad debt expense		261			69
Deferred income taxes		—			(100	)
Amortization of deferred market rent		(18	)		(20	)
Amortization of financing costs and discounts		748			1,277
Equity in losses of affiliates		(28	)		46
Distributions from investments in affiliates		850			122
Impairment of real estate assets		—			2,751
Changes in assets and liabilities:
Escrows and reserves		3,205			451
Accounts and other receivables		759			877
Accrued straight-line rents		(2,832	)		(2,596	)
Prepaid expenses and other assets		313			(213	)
Tenant security deposits		101			162
Accounts payable and accrued expenses		(2,541	)		2,635
Accrued interest		(123	)		983
Rents received in advance		(3,533	)		(253	)
Deferred costs		(2,196	)		(3,987	)
Total adjustments		12,887			19,537
Net cash provided by operating activities		14,850			16,063
Cash flows from investing activities:
Proceeds from sale of real estate assets		—			5,206
Change in escrow and reserve accounts		(25	)		15
Additions to rental property and furniture, fixtures and equipment		(10,504	)		(17,207	)
Additions to development and redevelopment		(5,266	)		(1,782	)
Investment in affiliates		(297	)		(949	)
Net cash used in investing activities		(16,092	)		(14,717	)
Cash flows from financing activities:
Financing costs		(309	)		(621	)
Issuance of preferred shares, net		—			43,562
Issuance of common shares, net		—			3,599
Issuance of debt		62,500			119,000
Repayments of debt		(41,470	)		(153,567	)
Dividends to common shareholders		(7,655	)		(10,108	)
Dividends to preferred shareholders		(3,100	)		(2,228	)
Distributions to noncontrolling interests		(390	)		(584	)
Stock option exercises		86			9
Net cash provided by (used in) financing activities		9,662			(938	)
Net increase in cash and cash equivalents		8,420			408
Cash and cash equivalents, beginning of period		9,374			16,749
Cash and cash equivalents, end of period	$	17,794		$	17,157

See accompanying notes to condensed consolidated financial statements.

7

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows – Continued

(unaudited)

Supplemental disclosure of cash flow information for the three months ended March 31 is as follows (amounts in thousands):

	2013			2012
Cash paid for interest, net	$	9,865		$	9,480
Non-cash investing and financing activities:
Settlements of common shares		448			507
Change in fair value of the outstanding common Operating Partnership units		5,067			942
Changes in accruals:
Additions to rental property and furniture, fixtures and equipment		(2,012	)		(2,136	)
Additions to development and redevelopment		(3,896	)		(39	)

Cash paid for interest on indebtedness is net of capitalized interest of $0.3 million and $0.8 million for the three months ended March 31, 2013 and 2012, respectively. For the three months ended March 31, 2013 and 2012, the Company did not pay any cash for franchise taxes levied by the city of Washington, D.C.

During the three months ended March 31, 2013 and 2012, certain of the Company’s employees surrendered common shares owned by them valued at $0.4 million and $0.5 million, respectively, to satisfy their statutory minimum federal income tax obligations associated with the vesting of restricted common shares of beneficial interest.

Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. The Company accounts for issuances of common Operating Partnership units individually, which could result in some portion of its noncontrolling interests being carried at fair value with the remainder being carried at historical cost. At March 31, 2013 and 2012, the Company recorded adjustments of $8.6 million and $3.1 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

During the three months ended March 31, 2013 and 2012, the Company had accrued $9.1 million and $9.8 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. During the three months ended March 31, 2013 and 2012, the Company had accrued $2.6 million and $0.7 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.

8

FIRST POTOMAC REALTY TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office, business park and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct reporting segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. 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 contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

References in these unaudited condensed consolidated financial statements to “we,” “our” or “First Potomac,” refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of March 31, 2013, owned a 95.2% interest in, the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers who contributed properties and other assets to the Company upon its formation, and the remainder of which are owned by other unrelated parties.

At March 31, 2013, the Company wholly-owned or had a controlling interest in properties totaling 13.6 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. The Company also owned land that can support approximately 2.4 million square feet of additional development. The Company’s consolidated properties were 83.9% occupied by 634 tenants at March 31, 2013. The Company did not include square footage that was in development or redevelopment, which totaled 0.1 million square feet at March 31, 2013, in its occupancy calculation. The Company derives substantially all of its revenue from leases of space within its properties. As of March 31, 2013, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for 23% of the Company’s total annualized cash basis rent. The U.S. Government accounted for 22% of the Company’s outstanding accounts receivable at March 31, 2013. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership and the subsidiaries in which the Company or Operating Partnership has a controlling interest, which includes First Potomac Management LLC, a wholly-owned subsidiary that manages the majority of 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 condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012 and as updated from time to time in other filings with the U.S. Securities and Exchange Commission (the “SEC”).

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly the Company’s financial position as of March 31, 2013 and the results of its operations, its comprehensive income (loss) and its cash flows for the three months ended March 31, 2013 and 2012. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year as well as the seasonality of certain operating expenses such as utilities expense and snow and ice removal costs.

9

(b) Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible; recoverability of notes receivable, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill; derivative valuations; market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.

(c) Rental Property

Rental property is initially recorded at fair value, if acquired in a business combination, or initial cost when constructed or acquired in an asset purchase, less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at fair value when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. 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 20 years
Furniture, fixtures and equipment	5 to 15 years
Lease related intangible assets	The term of the related lease
Tenant improvements	Shorter of the useful life of the asset or the term of the related lease

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the fair value of a property, an impairment analysis is performed. The Company assesses potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make estimates as to whether there are impairments in the carrying values of its investments in real estate. Further, the Company will record an impairment loss if it expects to dispose of a property, in the near term, at a price below carrying value. In such an event, the Company will record an impairment loss based on the difference between a property’s carrying value and its projected sales price less any estimated costs to sell.

The Company will classify a building as held-for-sale in accordance with GAAP in the period in which it has made the decision to dispose of the building, the Company’s Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will cease depreciation of the asset. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its consolidated statements of operations for all periods presented and classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in the period the held-for-sale criteria are met. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned 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.

10

The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include its investment in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. 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. The Company also capitalizes direct compensation costs of the Company’s construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. The Company does not capitalize any other general administrative costs such as office supplies, office rent expense or an overhead allocation to its development or redevelopment projects. Capitalized compensation costs were immaterial for the three months ended March 31, 2013 and 2012. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. The Company will also place redevelopment and development assets in service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(d) Notes Receivable

The Company provides loans to the owners of real estate properties, which can be collateralized by interest in the real estate property. The Company records these loans as “Notes receivable, net” in its consolidated balance sheets. The loans are recorded net of any discount or issuance costs, which are amortized over the life of the respective note receivable using the effective interest method. The Company records interest earned from notes receivable and amortization of any discount or issuance costs within “Interest and other income” in its consolidated statements of operations.

The Company will establish a provision for anticipated credit losses associated with its notes receivable and debt investments when it anticipates that it may be unable to collect any contractually due amounts. This determination is based upon such factors as delinquencies, loss experience, collateral quality and current economic or borrower conditions. The Company’s collectability of its notes receivable may be adversely impacted by the financial stability of the Washington, D.C. region and the ability of its underlying assets to keep current tenants or attract new tenants. Estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that the Company estimates to be adequate based on these factors. Based on the review of the above criteria, the Company did not record an allowance for credit losses for its notes receivable during the three months ended March 31, 2013 and 2012.

(e) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation, primarily as a result of reclassifying the operating results of several properties as discontinued operations. For more information, see footnote 7, Discontinued Operations.

(f) Application of New Accounting Standards

In January 2013, the FASB issued Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income (“ASU 2013-02”), which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income within the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about the reclassified amounts. The Company adopted the provisions of ASU 2013-02 on January 1, 2013, and the adoption of this update did not have a significant impact on its condensed consolidated financial statements or disclosures.

(3) Earnings Per Common Share

Basic earnings or loss per common share (“EPS”) is calculated by dividing net income or loss attributable to common shareholders by the weighted average common shares outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented, which include stock options, non-vested shares and preferred shares. The Company applies the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in total earnings attributable to common shareholders in the Company’s computation of EPS.

11

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

	Three Months Ended March 31,
	2013			2012
Numerator for basic and diluted earnings per common share:
Income (loss) from continuing operations	$	1,946		$	(2,287	)
Income (loss) from discontinued operations		17			(1,187	)
Net income (loss)		1,963			(3,474	)
Less: Net loss from continuing operations attributable to noncontrolling interests		60			253
Less: Net (income) loss from discontinued operations attributable to noncontrolling interests		(1	)		65
Net income (loss) attributable to First Potomac Realty Trust		2,022			(3,156	)
Less: Dividends on preferred shares		(3,100	)		(2,664	)
Net loss attributable to common shareholders		(1,078	)		(5,820	)
Less: Allocation to participating securities		(99	)		(141	)
Net loss attributable to common shareholders	$	(1,177	)	$	(5,961	)
Denominator for basic and diluted earnings per common share:
Weighted average shares outstanding – basic and diluted		50,404			49,781
Basic and diluted earnings per common share:
Loss from continuing operations	$	(0.02	)	$	(0.10	)
Income (loss) from discontinued operations		—			(0.02	)
Net loss	$	(0.02	)	$	(0.12	)

In accordance with GAAP regarding earnings per common share, the Company did not include the following potential weighted average common shares in its calculation of diluted earnings per common share as they are anti-dilutive for the periods presented (amounts in thousands):

	Three Months Ended March 31,
	2013		2012
Stock option awards		1,495		1,462
Non-vested share awards		533		521
Series A Preferred Shares(1)		11,643		9,218
		13,671		11,201

⁽¹⁾  In March 2012, the Company issued an additional 1.8 million Series A Preferred Shares. The Company’s Series A Preferred Shares are only convertible into the Company’s common shares upon certain changes in control of the Company. The dilutive shares are calculated as the daily average of the face value of the Series A Preferred Shares divided by the outstanding common share price.

12

(4) Rental Property

Rental property represents buildings and related improvements, net of accumulated depreciation, and developable land that are wholly-owned or owned by an entity in which the Company has a controlling interest. All of the Company’s rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (amounts in thousands):

	March 31, 2013			December 31, 2012
Land and land improvements	$	386,907		$	387,047
Buildings and improvements		1,090,442			1,086,694
Construction in process		55,773			56,614
Tenant improvements		149,008			145,910
Furniture, fixtures and equipment		5,515			5,498
		1,687,645			1,681,763
Less: accumulated depreciation		(242,531	)		(231,084	)
	$	1,445,114		$	1,450,679

Development and Redevelopment Activity

The Company constructs office buildings, business parks and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 2.4 million square feet of additional building space. Below is a summary of the approximate building square footage that can be developed on the Company’s developable land and the Company’s current development and redevelopment activity as of March 31, 2013 (amounts in thousands):

Reporting Segment	Developable Square Feet		Square Feet Under Development		Cost to Date of Development Activities(1)		Square Feet Under Redevelopment		Cost to Date of Redevelopment Activities(1)
Washington, D.C.		712		—	$	—		138	$	19,494
Maryland		250		—		—		—		—
Northern Virginia		568		—		—		—		—
Southern Virginia		841		118		327		—		—
		2,371		118	$	327		138	$	19,494

⁽¹⁾  Costs to date amounts exclude tenant improvement and leasing commission costs, as well as the property’s original cost basis.

On December 28, 2010, the Company acquired 440 First Street, NW, a vacant eight-story office building in the Company’s Washington, D.C. reporting segment. In 2011, the Company purchased 30,000 square feet of transferable development rights for $0.3 million. The Company is in the process of redeveloping the entire property, including adding additional square footage. At March 31, 2013, the Company’s investment in the redevelopment project, including property basis, was $43.0 million.

During the first quarter of 2013, the Company did not place in-service any development or redevelopment efforts.

13

(5) Notes Receivable

Below is a summary of the Company’s notes receivable at March 31, 2013 (dollars in thousands):

	Balance at March 31, 2013
Issued	Face Amount		Unamortized Origination Fees			Balance		Interest Rate			Property
December 2010	$	25,000	$	(160	)	$	24,840		12.5	%		950 F Street, NW
April 2011		30,000		(92	)		29,908		9.0	%		America’s Square
	$	55,000	$	(252	)	$	54,748

	Balance at December 31, 2012
Issued	Face Amount		Unamortized Origination Fees			Balance		Interest Rate			Property
December 2010	$	25,000	$	(171	)	$	24,829		12.5	%		950 F Street, NW
April 2011		30,000		(99	)		29,901		9.0	%		America’s Square
	$	55,000	$	(270	)	$	54,730

During both the three months ended March 31, 2013 and 2012, the Company recorded interest income of $1.5 million, related to its notes receivable.

The notes require monthly payments of interest to the Company. The $25.0 million subordinated loan provided to the owners of 950 F Street, NW is repayable in full on or after December 21, 2013 and the $30.0 million subordinated loan provided to the owners of America’s Square is repayable in full at any time, subject to yield maintenance. During both the three months ended March 31, 2013 and 2012, the Company recorded income from the amortization of origination fees of $17 thousand within “Interest and other income” on its consolidated statements of operations.

(6) Investment in Affiliates

The Company owns an interest in several joint ventures that own properties. The Company does not control the activities that are most significant to the joint ventures. As a result, the assets, liabilities and operating results of these noncontrolled joint ventures are not consolidated within the Company’s consolidated financial statements. The Company’s investments in these joint ventures are recorded as “Investment in affiliates” in its consolidated balance sheets. The Company’s investment in affiliates consisted of the following (dollars in thousands):

	Reporting Segment	Ownership Interest	March 31, 2013		December 31, 2012
Prosperity Metro Plaza	Northern Virginia	51%	$	26,008	$	26,679
1750 H Street, NW	Washington, D.C.	50%		16,218		16,130
Aviation Business Park	Maryland	50%		4,977		4,713
RiversPark I and II	Maryland	25%		2,869		3,074
			$	50,072	$	50,596

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The net assets of the Company’s unconsolidated joint ventures consisted of the following (amounts in thousands):

	March 31, 2013		December 31, 2012
Assets:
Rental property, net	$	197,198	$	198,411
Cash and cash equivalents		5,653		6,224
Other assets		16,285		17,377
Total assets		219,136		222,012
Liabilities:
Mortgage loans(1)		108,666		109,427
Other liabilities		6,003		6,687
Total liabilities		114,669		116,114
Net assets	$	104,467	$	105,898

⁽¹⁾  Of the total mortgage debt that encumbers the Company’s unconsolidated properties, $7.0 million is recourse to the Company. Management believes the fair value of the potential liability to the Company is inconsequential as the likelihood of the Company’s need to perform under the debt agreement is remote.

The Company’s share of earnings or losses related to its unconsolidated joint ventures is recorded in its consolidated statements of operations as “Equity in (earnings) losses of affiliates.” The following table summarizes the results of operations of the Company’s unconsolidated joint ventures, which due to its varying ownership interests in the joint ventures and the varying operations of the joint ventures may or may not be reflective of the amounts recorded in its consolidated statements of operations (amounts in thousands):

	Three Months Ended March 31,
	2013			2012
Total revenues	$	6,052		$	6,080
Total operating expenses		(1,865	)		(1,768	)
Net operating income		4,187			4,312
Depreciation and amortization		(2,939	)		(3,168	)
Other expenses, net		(1,074	)		(1,082	)
Net income	$	174		$	62

The Company earns various fees from several of its joint ventures, which include management fees, leasing commissions and construction management fees. The Company recognizes fees only to the extent of the third party ownership interest in its unconsolidated joint ventures. The Company recognized $0.2 million and $0.1 million in fees from joint ventures during the three months ended March 31, 2013 and 2012, respectively, which are reflected within “Tenant reimbursements and other revenues” on its consolidated statements of operations.

(7) Discontinued Operations

In March 2013, the Company entered into a contract to sell a building at Lafayette Business Center, a six-building office park located in Chantilly, Virginia. The sale is expected to be completed in the second quarter of 2013. At March 31, 2013, the building met the Company’s held-for-sale criteria (described in footnote 2(c), Rental Property) and, therefore, the assets of the building were classified within “Assets held-for-sale” and the liabilities of the building were classified within “Accounts payable and other liabilities” in the Company’s consolidated balance sheets. The operations for the property for the periods presented on the Company’s statements of operations are reflected within discontinued operations. The Company did not record any impairment charges for the building classified as held-for-sale.

15

The following table is a summary of property dispositions whose operating results are reflected as discontinued operations in the Company’s consolidated statements of operations for the periods presented (dollars in thousands):

	Reporting Segment	Disposition Date	Property Type	Square Feet
Lafayette Business Center(1)	Northern Virginia	June 2013	Office		32,055
Owings Mills Business Park(1)	Maryland	11/7/2012	Business Park		38,779
Goldenrod Lane	Maryland	5/31/2012	Office		23,518
Woodlands Business Center	Maryland	5/8/2012	Office		37,887
Airpark Place Business Center	Maryland	3/22/2012	Business Park		82,429

⁽¹⁾  The Company is anticipating selling one building at the six-building Lafayette Business Center in June 2013 and the Company sold two buildings at the six-building Owings Mills Business Park in November 2012.

The Company has had, and will have, no continuing involvement with any of its disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes. The Company did not dispose of or enter into any binding agreements to sell any other properties during the three months ended March 31, 2013 and 2012. The Company did not record a gain or loss on the sale of property for the three months ended March 31, 2013 and March 31, 2012.

The following table summarizes the components of net income (loss) from discontinued operations for the three months ended March 31 (amounts in thousands):

	2013		2012
Revenues	$	79	$	446
Net income (loss), before taxes		17		(1,187	)

(8) Debt

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

	March 31, 2013		December 31, 2012
Mortgage loans, effective interest rates ranging from 4.40% to 7.29%, maturing at various dates through July 2022	$	377,387	$	418,864
Secured term loan, effective interest rate of LIBOR plus 5.50%, maturing in January 2014(1)		10,000		10,000
Unsecured term loan, effective interest rates ranging from LIBOR plus 2.15% to LIBOR plus 2.30%, with staggered maturity dates ranging from July 2016 to July 2018(1)(2)		300,000		300,000
Secured term loan, effective interest rate of LIBOR plus 2.15%, maturing in November 2013(1)(3)		37,500		—
Unsecured revolving credit facility, effective interest rate of LIBOR plus 2.50%, maturing January 2015(1)(2)(4)		230,000		205,000
	$	954,887	$	933,864

⁽¹⁾ At March 31, 2013, LIBOR was 0.20%.

⁽²⁾  The interest rate spread on the loans will increase by 25 basis points on June 1, 2013.

⁽³⁾  The loan matures in November 2013, with a three-month extension at the Company’s option.

⁽⁴⁾  The unsecured revolving credit facility matures in January 2014 with a one-year extension at the Company’s option, which it intends to exercise.

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(a) Mortgage Loans

The following table provides a summary of the Company’s mortgage debt at March 31, 2013 and December 31, 2012 (dollars in thousands):

Encumbered Property	Contractual Interest Rate	Effective Interest Rate	Maturity Date	March 31, 2013			December 31, 2012
Prosperity Business Center(1)	6.25%	5.75%	January 2013	$	—		$	3,242
Cedar Hill(2)	6.00%	6.58%	February 2013		—			15,404
Merrill Lynch Building(2)	6.00%	7.29%	February 2013		—			13,291
1434 Crossways Blvd Building I(2)	6.25%	5.38%	March 2013		—			7,650
Linden Business Center	6.01%	5.58%	October 2013		6,701			6,747
840 First Street, NE	5.18%	6.05%	October 2013		54,421			54,704
Annapolis Business Center	5.74%	6.25%	June 2014		8,185			8,223
Cloverleaf Center(3)	6.75%	6.75%	October 2014		16,508			16,595
1005 First Street, NE(4)	LIBOR + 2.75%	5.80%	October 2014		22,000			22,000
Jackson National Life Loan(5)	5.19%	5.19%	August 2015		95,732			96,132
Hanover Business Center Building D	8.88%	6.63%	August 2015		357			391
Chesterfield Business Center Buildings C,D,G and H	8.50%	6.63%	August 2015		950			1,036
Mercedes Center– Note 1(3)	4.67%	6.04%	January 2016		4,668			4,677
Mercedes Center – Note 2(3)	6.57%	6.30%	January 2016		9,442			9,498
Gateway Centre Manassas Building I	7.35%	5.88%	November 2016		785			833
Hillside Center	5.75%	4.62%	December 2016		13,641			13,741
Redland Corporate Center	4.20%	4.64%	November 2017		67,921			68,209
Hanover Business Center Building C	7.88%	6.63%	December 2017		757			791
500 First Street, NW	5.72%	5.79%	July 2020		37,588			37,730
Battlefield Corporate Center	4.26%	4.40%	November 2020		3,966			4,003
Chesterfield Business Center Buildings A,B,E and F	7.45%	6.63%	June 2021		2,014			2,060
Airpark Business Center	7.45%	6.63%	June 2021		1,099			1,123
1211 Connecticut Avenue, NW	4.22%	4.47%	July 2022		30,652			30,784
		5.38%(6)			377,387			418,864
Unamortized fair value adjustments					(689	)		(696	)
Total contractual principal balance				$	376,698		$	418,168

⁽¹⁾ The loan was repaid at maturity with borrowings under the Company’s unsecured revolving credit facility.

⁽²⁾ The loan was repaid in February 2013 with borrowings under a new secured term loan.

⁽³⁾  Of the mortgage loan totals, $3.5 million encumbering Cloverleaf Center and $5.0 million encumbering Mercedes Center are recourse to the Company.

⁽⁴⁾  The loan incurs interest at a variable rate of LIBOR plus a spread of 2.75% (with a floor of 5.0%) and matures in October 2014, with a one-year extension at the Company’s option. At March 31, 2013, LIBOR was 0.20%.

⁽⁵⁾  At March 31, 2013, the loan was secured by the following properties: Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center, Northridge and I-66 Commerce Center. The terms of the loan allow the Company to substitute collateral, as long as certain debt-service coverage and loan-to-value ratios are maintained, or to prepay a portion of the loan, with a prepayment penalty, subject to a debt service yield.

⁽⁶⁾  Weighted average interest rate on total mortgage debt.

(b) Term Loans

Unsecured Term Loan

The table below shows the outstanding balances and the interest rate of the three tranches of the $300.0 million unsecured term loan at March 31, 2013 (dollars in thousands):

	Maturity Date	Amount		Interest Rate(1)
Tranche A	July 2016	$	60,000	LIBOR, plus 215 basis points
Tranche B	July 2017		147,500	LIBOR, plus 225 basis points
Tranche C	July 2018		92,500	LIBOR, plus 230 basis points
		$	300,000

⁽¹⁾  The interest rate spread is subject to change based on the Company’s maximum total indebtedness ratio. For more information, see footnote 8(e) Debt – Financial Covenants.

17

The term loan agreement contains various restrictive covenants substantially similar to those contained in the Company’s unsecured revolving credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the agreement requires that the Company satisfy certain financial covenants that are also substantially similar to those contained in the Company’s unsecured revolving credit facility. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the agreement to be immediately due and payable. As of March 31, 2013, the Company was in compliance with all the financial covenants of the unsecured term loan.

Secured Term Loans

In February 2013, the Company entered into a senior secured multi-tranche term loan facility (the “Bridge Loan”) with KeyBank, National Association and borrowed $37.5 million to repay a $15.4 million mortgage loan that encumbered Cedar Hill, a $13.3 million mortgage loan that encumbered the Merrill Lynch Building and a $7.6 million mortgage loan that encumbered a building at Crossways Commerce Center. The Bridge Loan has a variable interest rate of LIBOR plus a spread of 2.15% and matures in November 2013, with a three-month extension at the Company’s option. The Company is required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the Bridge Loan. The Company can repay all or a portion of the Bridge Loan at any time during the term of the loan.

On December 29, 2009, the Company refinanced a $50.0 million secured term loan, issued in August 2007 (sometimes referred to herein as the “2007 secured term loan”), which resulted in the repayment of $10.0 million of the principal balance. The remaining balance was divided into four $10 million loans, with their maturities staggered in one-year intervals beginning January 15, 2011 and ending on January 15, 2014. The first two $10 million loans were paid on their respective maturity dates. On December 27, 2012, the Company prepaid the third $10.0 million loan, which was scheduled to mature on January 15, 2013. The loan’s applicable interest rate increased 100 basis points to LIBOR plus 550 basis points on January 1, 2013. Interest on the loan is payable on a monthly basis.

Each of the Company’s secured term loans contain several restrictive covenants, which in the event of non-compliance may cause the outstanding balance of the applicable loan and accrued interest to become immediately due and payable. As of March 31, 2013, the Company was in compliance with all of the financial covenants of the Bridge Loan and the 2007 secured term loan.

(c) Unsecured Revolving Credit Facility

During the first quarter of 2013, the Company borrowed $25.0 million under the unsecured revolving credit facility, which was used to repay the outstanding balance on a mortgage loan and for general corporate purposes. The weighted average borrowings outstanding under the unsecured revolving credit facility were $221.9 million with a weighted average interest rate of 2.9% for the three months ended March 31, 2013, compared with $161.0 million and 2.8%, respectively, for the three months ended March 31, 2012. The Company’s maximum outstanding borrowings were $230.0 million and $198.0 million during the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013, outstanding borrowings under the unsecured revolving credit facility were $230.0 million with a weighted average interest rate of 2.7%. The Company is required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility. At March 31, 2013, the available capacity under the unsecured revolving credit facility was $24.7 million. The Company’s ability to borrow under the credit facility is subject to its satisfaction of certain financial and restrictive covenants. At March 31, 2013, LIBOR was 0.20% and the applicable spread on the Company’s unsecured revolving credit facility was 250 basis points. Based on the Company’s leverage ratio at March 31, 2013, the spread will increase by 25 basis points on June 1, 2013. As of March 31, 2013, the Company was in compliance with all the financial covenants of the unsecured revolving credit facility.

(d) Interest Rate Swap Agreements

At March 31, 2013, the Company had fixed LIBOR, at a weighted average interest rate of 1.5%, on $350.0 million of its variable rate debt through twelve interest rate swap agreements. See footnote 9, Derivative Instruments, for more information about the Company’s interest rate swap agreements.

(e) 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 tangible net worth, fixed charge coverage and other financial metrics. As of March 31, 2013, the Company was in compliance with the covenants of its unsecured term loan, secured term loans (including the Bridge Loan) and unsecured revolving credit facility and any such financial covenants of its mortgage debt.

18

The Company’s continued ability to borrow under the unsecured revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility. These debt agreements also contain cross-default provisions that would be triggered if the Company is in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and the Company may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on the Company’s liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

The Company’s unsecured term loan and unsecured revolving credit facility are subject to interest rate spreads that float based on the quarterly measurement of the Company’s maximum consolidated total indebtedness ratio. The floating rate spreads can increase by an additional 25 basis points to the extent the Company’s leverage levels increase further or can decrease if the Company’s leverage ratio improves. As a result of the Company’s leverage ratio at December 31, 2012, the applicable interest rate spread on the Company’s unsecured revolving credit facility and unsecured term loan decreased by 25 basis points on March 1, 2013. Based on the Company’s leverage ratio at March 31, 2013, the applicable interest spread will increase by 25 basis points on June 1, 2013.

On February 8, 2013, the Company and its bank lenders amended its unsecured revolving credit facility and existing term loans to provide increased flexibility on a short-term basis under certain financial covenants, specifically extending the December 31, 2012 requirements under the consolidated total leverage, unencumbered pool leverage and consolidated debt yield covenants in the near term, and proactively addressing the impact that the potential industrial portfolio sale would have on the covenants relating to tangible net worth and dispositions as a percentage of gross asset value.

As previously disclosed, the Company and its bank lenders also amended its unsecured revolving credit facility and existing term loans in May 2012 to, among other things, revise certain financial and other covenants that provided additional operating flexibility for the Company to execute its business strategy and clarify the treatment of certain covenant compliance-related definitions. In connection with these May 2012 amendments, the unsecured revolving credit facility and the unsecured term loan were amended to give the lenders the right, at their option, to record mortgages on substantially all of the Company’s unencumbered properties, which they have not yet elected to do as of the date of this filing.

(9) Derivative Instruments

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. The Company does not use derivatives for trading or speculative purposes and intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate the Company from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect the Company or adversely affect it because, among other things:

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

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

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

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

The Company enters into interest rate swap agreements to hedge its exposure on its variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instrument’s applicable interest rate.

19

At March 31, 2013, the Company had fixed LIBOR at a weighted average interest rate of 1.5% on $350.0 million of its variable rate debt through twelve interest rate swap agreements that are summarized below (dollars in thousands):

Effective Date	Maturity Date	Notional Amount		Interest Rate Contractual Component	Fixed LIBOR Interest Rate
January 2011	January 2014	$	50,000	LIBOR	1.474%
July 2011	July 2016		35,000	LIBOR	1.754%
July 2011	July 2016		25,000	LIBOR	1.7625%
July 2011	July 2017		30,000	LIBOR	2.093%
July 2011	July 2017		30,000	LIBOR	2.093%
September 2011	July 2018		30,000	LIBOR	1.660%
January 2012	July 2018		25,000	LIBOR	1.394%
March 2012	July 2017		25,000	LIBOR	1.129%
March 2012	July 2017		12,500	LIBOR	1.129%
March 2012	July 2018		12,500	LIBOR	1.383%
June 2012	July 2017		50,000	LIBOR	0.955%
June 2012	July 2018		25,000	LIBOR	1.1349%
			$350,000

The Company’s interest rate swap agreements are designated as cash flow hedges and the Company records any unrealized gains associated with the change in fair value of the swap agreements within “Accumulated other comprehensive loss” and “Prepaid expenses and other assets” and any unrealized losses within “Accumulated other comprehensive loss” and “Accounts payable and other liabilities” on its consolidated balance sheets. The Company records its proportionate share of any unrealized gains or losses on its cash flow hedges associated with its unconsolidated joint ventures within “Accumulated other comprehensive loss” and “Investment in affiliates” on its consolidated balance sheets. The Company records any gains or losses incurred as a result of each interest rate swap agreement’s fixed rate deviating from its respective loan’s contractual rate within “Interest expense” in its consolidated statements of operations. The Company did not have any ineffectiveness associated with its cash flow hedges during the three months ended March 31, 2013 and 2012, which would have been recorded into earnings or losses, and does not expect any future ineffectiveness.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to “Interest expense” on the Company’s consolidated statements of operations as interest payments are made on the Company’s variable-rate debt. The Company reclassified accumulated other comprehensive loss as an increase to interest expense of $1.1 million and $0.9 million for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the Company estimates that $4.3 million of its accumulated other comprehensive loss will be reclassified as an increase to interest expense over the following twelve months.

(10) Fair Value Measurements

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

Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.

The three levels are as follows:

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

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

20

In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of the Company’s consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of March 31, 2013 and December 31, 2012 (amounts in thousands):

	Balance at March 31,  2013		Level 1		Level 2		Level 3
Recurring Measurements:
Derivative instrument-swap liabilities	$	10,371	$	—	$	10,371	$	—
	Balance at December 31, 2012		Level 1		Level 2		Level 3
Non-recurring Measurements:
Impaired real estate assets	$	15,955	$	—	$	15,955	$	—
Recurring Measurements:
Derivative instrument-swap liabilities		11,464		—		11,464		—

With the exception of its contingent consideration obligations, which totaled $2.3 million at both March 31, 2013 and December 31, 2012, the Company did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured on a recurring basis during the three months ended March 31, 2013 and 2012. Also, no transfers into and out of fair value measurements levels for assets or liabilities that are measured on a recurring basis occurred during the three months ended March 31, 2013 and 2012.

Impairment of Real Estate Assets

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of a property, an impairment analysis is performed.

In November 2012, the Company sold two of the six buildings at Owings Mills Business Park, which is located in the Company’s Maryland reporting segment. Based on the anticipated sales price of the two buildings that were subsequently sold, the Company recorded an impairment charge of $2.4 million on the four buildings that remained in the Company’s portfolio in the first quarter of 2012.

Interest Rate Derivatives

The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date and also take into consideration the credit valuation adjustment of the counter-party in determining the fair value of counterparty credit risk associated with the Company’s interest rate swap agreements. The Company uses a third party to assist in valuing its interest rate swap agreements. A daily “snapshot” of the market is taken to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are then compiled through a valuation process that generates daily valuations, which are used to value the Company’s interest rate swap agreements. The Company’s interest rate swap derivatives are effective cash flow hedges and any change in fair value is recorded in the equity section of the Company’s consolidated balance sheets as “Accumulated other comprehensive loss.”

Financial Instruments

The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and other liabilities, with the exception of any items listed above, approximate their fair values due to their short-term maturities. The Company determines the fair value of its notes receivable and debt instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. The Company deems the fair value measurement of its debt instruments as a Level 2 measurement as the Company uses quoted interest rates for similar debt instruments to value its debt instruments. The Company also uses quoted market interest rates to value its notes receivable, which the Company considers a Level 2 measurement as it does not believe notes receivable trade in an active market.

21

The carrying amount and estimated fair value of the Company’s notes receivable and debt instruments at March 31, 2013 and December 31, 2012 are as follows (amounts in thousands):

	March 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Notes receivable(1)	$	54,748	$	55,000	$	54,730	$	55,000
Financial Liabilities:
Mortgage debt	$	377,387	$	385,109	$	418,864	$	427,851
Secured term loans(2)		47,500		47,500		10,000		10,000
Unsecured term loan		300,000		300,000		300,000		300,000
Unsecured revolving credit facility		230,000		230,000		205,000		205,000
Total	$	954,887	$	962,609	$	933,864	$	942,851

⁽¹⁾  The face value of the Company’s notes receivable was $55.0 million at March 31, 2013 and December 31, 2012.

⁽²⁾  In February 2013, the Company entered into the Bridge Loan, and borrowed $37.5 million to repay a $15.4 million mortgage loan that encumbered Cedar Hill, a $13.3 million mortgage loan that encumbered the Merrill Lynch Building and a $7.6 million mortgage loan that encumbered a building at Crossways Commerce Center.

(11) Equity

On January 22, 2013, the Company declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend was paid on February 15, 2013 to common shareholders of record as of February 8, 2013. The Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The dividend was paid on February 15, 2013 to preferred shareholders of record as of February 8, 2013. On April 23, 2013, the Company declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend will be paid on May 15, 2013 to common shareholders of record as of May 6, 2013. The Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The dividend will be paid on May 15, 2013 to preferred shareholders of record as of May 6, 2013. Dividends on all non-vested share awards are recorded as a reduction of shareholders’ equity. For each dividend paid by the Company on its common and preferred shares, the Operating Partnership distributes an equivalent distribution on its common and preferred Operating Partnership units, respectively.

The Company’s unsecured revolving credit facility, unsecured term loan and secured term loans (including the Bridge Loan) contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit the Company’s ability to make distributions to its common and preferred shareholders. Further, distributions with respect to the Company’s common shares are subject to its ability to first satisfy its obligations to pay distributions to the holders of its Series A Preferred Shares.

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As a result of the redemption feature of the Operating Partnership units requiring delivery of registered shares of the Company, the noncontrolling interests associated with the Operating Partnerhsip are recorded outside of permanent equity. The Company’s equity and redeemable noncontrolling interests are as follows (amounts in thousands):

	First Potomac Realty Trust			Non- redeemable noncontrolling interests			Total Equity			Redeemable noncontrolling interests
Balance at December 31, 2012	$	658,765		$	3,728		$	662,493		$	34,367
Net income (loss)		2,022			(5	)		2,017			(54	)
Changes in ownership, net		(4,632	)		—			(4,632	)		5,067
Distributions to owners		(10,755	)		—			(10,755	)		(390	)
Other comprehensive income		1,041			—			1,041			52
Balance at March 31, 2013	$	646,441		$	3,723		$	650,164		$	39,042

	First Potomac Realty Trust			Non- redeemable noncontrolling interests		Total Equity			Redeemable noncontrolling interests
Balance at December 31, 2011	$	672,246		$	4,245	$	676,491		$	39,981
Net (loss) income		(3,156	)		17		(3,139	)		(335	)
Changes in ownership, net		46,262			8		46,270			942
Distributions to owners		(12,337	)		—		(12,337	)		(583	)
Other comprehensive income		688			—		688			39
Balance at March 31, 2012	$	703,703		$	4,270	$	707,973		$	40,044

A summary of the Company’s accumulated other comprehensive loss is as follows (amounts in thousands):

	2013			2012
Beginning balance at January1,	$	(10,917	)	$	(5,849	)
Net gain on derivative instruments		1,093			727
Net gain attributable to noncontrolling interests		(52	)		(39	)
Ending balance at March 31,	$	(9,876	)	$	(5,161	)

(12) Noncontrolling Interests

(a) Noncontrolling Interests in the Operating Partnership

Noncontrolling interests relate to the common 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 common 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 fair 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. Differences between amounts paid to redeem noncontrolling interests and their carrying values are charged or credited to equity. As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity.

Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. The Company accounts for issuances of common Operating Partnership units individually, which could result in some portion of its noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing share price of the Company’s common stock at March 31, 2013, the cost to acquire, through cash purchase or issuance of the Company’s common shares, all of the outstanding common Operating Partnership units not owned by the Company would be approximately $38.5 million. At March 31, 2013, the Company recorded an adjustment of $8.6 million to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At March 31, 2013 and December 31, 2012, 2,598,259 of the total common Operating Partnership units, or 4.8%, were not owned by the Company. There were no common Operating Partnership units redeemed for common shares or with available cash during the three months ended March 31, 2013 and 2012.

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(b) Noncontrolling Interests in the Consolidated Partnerships

When the Company is deemed to have a controlling interest in a partially-owned entity, it will consolidate all of the entity’s assets, liabilities and operating results within its condensed consolidated financial statements. The net assets contributed to the consolidated entity by the third party, if any, will be reflected within permanent equity in the Company’s consolidated balance sheets to the extent they are not mandatorily redeemable. The amount will be recorded based on the third party’s initial investment in the consolidated entity and will be adjusted to reflect the third party’s share of earnings or losses in the consolidated entity and any distributions received or additional contributions made by the third party. The earnings or losses from the entity attributable to the third party are recorded as a component of “Net loss attributable to noncontrolling interests” in the Company’s consolidated statements of operations.

At March 31, 2013, the Company’s consolidated joint ventures had a controlling interest in the following properties:

Property	Acquisition Date	Reporting Segment	First Potomac Controlling Interest			Square Footage
1005 First Street, NE	August 2011	Washington, D.C.		97	%		30,414	(1)
Redland Corporate Center	November 2010	Maryland		97	%		349,267

⁽¹⁾  The site is leased to Greyhound Lines, Inc., which has moved to Union Station and whose lease is scheduled to terminate in August 2013.

(13) Share-Based Compensation

The Company records costs related to its share-based compensation based on the grant-date fair value calculated in accordance with GAAP. The Company recognizes share-based compensation costs on a straight-line basis over the requisite service period for each award and these costs are recorded within “General and administrative expense” or “Property operating expense” in the Company’s consolidated statements of operations based on the employee’s job function.

Stock Options Summary

During the first quarter of 2013, the Company issued 124,250 stock options to its non-officer employees. The stock options vest ratably over a four-year service period. The stock options vest 25% on the first anniversary of the date of grant and 6.25% in each subsequent calendar quarter. Each award has a 10-year contractual life. The Company recognized compensation expense related to stock options of $143 thousand and $130 thousand during the three months ended March 31, 2013 and 2012, respectively.

A summary of the Company’s stock option activity during the three months ended March 31, 2013 is presented below:

	Options			Weighted Average Exercise  Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2012		1,384,006		$	15.91		5.9 years	$	174,763
Granted		124,250			12.73
Exercised		(8,015	)		10.74
Forfeited		(13,964	)		15.24
Outstanding at March 31, 2013		1,486,277		$	15.68		5.9 years	$	819,475
Exercisable at March 31, 2013		786,079		$	16.72		3.4 years	$	431,815
Options expected to vest, subsequent to March 31, 2013		668,486		$	14.57		8.8 years	$	331,364

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As of March 31, 2013, the Company had $2.2 million of unrecognized compensation cost, net of estimated forfeitures, related to stock option awards. The Company anticipates this cost will be recognized over a weighted-average period of approximately 5.2 years. The Company calculates the grant date fair value of option awards using a Black-Scholes option- pricing model. Expected volatility is based on an assessment of the Company’s realized volatility over the preceding period that is equivalent to the award’s expected life, which in management’s opinion, gives an accurate indication of future volatility. The expected term represents the period of time the options are anticipated to remain outstanding as well as the Company’s historical experience for groupings of employees that have similar behavior and are considered separately for valuation purposes. The risk-free rate is based on the U.S. Treasury rate at the time of grant for instruments of similar term.

The weighted average assumptions used in the fair value determination of stock options granted to employees in 2013 are summarized as follows:

Risk-free interest rate	0.76%
Expected volatility	49.7%
Expected dividend yield	4.92%
Weighted average expected life of options	5 years

The weighted average grant date fair value of the stock options issued during the three months ended March 31, 2013 was $3.61 per share.

Option Exercises

The Company received approximately $86 thousand and $9 thousand from the exercise of stock options during the three months ended March 31, 2013 and 2012, respectively. Shares issued as a result of stock option exercises are funded through the issuance of new shares. The total intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was $26 thousand and $3 thousand, respectively.

Non-Vested Share Awards

The Company issues non-vested share awards that either vest over a specific time period that is identified at the time of issuance or vest upon the achievement of specific performance goals that are identified at the time of issuance. The Company issues new shares, subject to restrictions, upon each grant of non-vested share awards. In February 2013, the Company granted a total of 287,214 non-vested common shares in two separate awards to its officers. The first award of 176,103 non-vested common shares, which was granted to all of the Company’s officers with the exception of its Chief Executive Officer, will vest ratably over a five-year term. The second award of 111,111 shares was a performance-based non-vested common share award granted to the Company’s Chief Executive Officer. The amount of shares associated with the second award that will vest will be determined at January 1, 2015 based upon the achievement of specified performance goals that were identified at the time of issuance. Any shares associated with the second award that do not vest on January 1, 2015 will be forfeited.

The Company recognized $0.6 million of compensation expense associated with its non-vested share awards during both the three months ended March 31, 2013 and 2012. Dividends on all non-vested share awards are recorded as a reduction of equity. The Company applies the two-class method for determining EPS as its outstanding non-vested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of dividends over earnings related to participating securities are shown as a reduction in net loss attributable to common shareholders in the Company’s computation of EPS.

A summary of the Company’s non-vested share awards at March 31, 2013 is as follows:

	Non-vested Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2012		673,828		$	12.83
Granted		287,214			11.92
Vested		(95,227	)		13.14
Expired		(45,049	)		11.42
Non-vested at March 31, 2013		820,766			12.56

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As of March 31, 2013, the Company had $7.6 million of unrecognized compensation cost related to non-vested shares. The Company anticipates this cost will be recognized over a weighted-average period of 3.5 years.

The Company values its non-vested time-based share awards at the grant date fair value. For the non-vested performance-based share awards issued in 2013, the Company used a Monte Carlo Simulation (risk-neutral approach) to determine the number of shares that may be issued pursuant to the award. The risk-free interest rate assumptions used in the Monte Carlo Simulation were determined based on the zero coupon risk-free rate for the time frame of 0.25 years to 3 years, which ranged from 0.11% to 0.4%, respectively. The volatility used for the Company’s common share price in the Monte Carlo Simulation varied between 24.31% and 29.11%.

(14) Segment Information

The Company’s reportable segments consist of four distinct reporting and operational segments within the greater Washington D.C, region in which it operates: Maryland, Washington, D.C., Northern Virginia and Southern Virginia. The Company evaluates the performance of its segments based on the operating results of the properties located within each segment, which excludes large non-recurring gains and losses, gains from sale of real estate assets, interest expense, general and administrative costs, acquisition costs or any other indirect corporate expense to the segments. In addition, the segments do not have significant non-cash items other than straight-line and deferred market rent amortization reported in their operating results. There are no inter-segment sales or transfers recorded between segments.

The results of operations for the Company’s four reporting segments for the three months ended March 31, 2013 and 2012 are as follows (dollars in thousands):

	Three Months Ended March 31, 2013
	Maryland			Washington, D.C.			Northern Virginia			Southern Virginia			Consolidated
Number of buildings		62			4	(1)		56			57			179
Square feet		3,779,047			670,066	(1)		3,653,645			5,484,597			13,587,355
Total revenues	$	14,170		$	7,616		$	16,707		$	12,884		$	51,377
Property operating expense		(3,629	)		(1,893	)		(3,503	)		(3,880	)		(12,905	)
Real estate taxes and insurance		(1,199	)		(1,349	)		(1,823	)		(1,032	)		(5,403	)
Total property operating income	$	9,342		$	4,374		$	11,381		$	7,972			33,069
Depreciation and amortization expense														(16,885	)
General and administrative														(5,267	)
Other expenses, net														(8,971	)
Income from discontinued operations														17
Net income													$	1,963
Total assets(2)(3)	$	487,545		$	324,064		$	460,996		$	362,239		$	1,718,364
Capital expenditures(4)	$	2,823		$	5,969		$	3,617		$	2,963		$	15,770

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	Three Months Ended March 31, 2012
	Maryland			Washington, D.C.			Northern Virginia			Southern Virginia			Consolidated
Number of buildings		66			4	(1)		55			57			182
Square feet		3,878,306			666,714	(1)		3,665,510			5,649,491			13,860,021
Total revenues	$	14,245		$	6,826		$	13,238		$	12,225		$	46,534
Property operating expense		(3,716	)		(1,335	)		(3,170	)		(3,387	)		(11,608	)
Real estate taxes and insurance		(1,187	)		(895	)		(1,455	)		(1,037	)		(4,574	)
Total property operating income	$	9,342		$	4,596		$	8,613		$	7,801			30,352
Depreciation and amortization expense														(16,018	)
General and administrative														(4,897	)
Acquisition costs														(17	)
Impairment of real estate assets														(1,949	)
Other expenses, net														(9,697	)
Provision for income taxes														(61	)
Loss from discontinued operations														(1,187	)
Net loss													$	(3,474	)
Total assets(2)(3)	$	497,880		$	331,971		$	458,094		$	366,192		$	1,738,610
Capital expenditures(4)	$	8,052		$	863		$	6,458		$	3,012		$	18,989

⁽¹⁾ Excludes 440 First Street, NW, which has been in redevelopment since its acquisition in December 2010.

⁽²⁾  Total assets include the Company’s investment in properties that are owned through joint ventures that are not consolidated within the Company’s condensed consolidated financial statements. For more information on the Company’s unconsolidated investments, including location within the Company’s reportable segments, see footnote 6, Investment in Affiliates.

⁽³⁾  Corporate assets not allocated to any of our reportable segments totaled $83,520 and $84,473 at March 31, 2013 and 2012, respectively.

⁽⁴⁾ Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $398 and $604 at March 31, 2013 and 2012, respectively.

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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 condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 and included elsewhere in this Quarterly Report on Form 10-Q. See “Special Note About Forward-Looking Statements” above.

Overview

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office, business park and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of March 31, 2013, owned a 95.2% interest in the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

At March 31, 2013, the Company wholly-owned or had a controlling interest in properties totaling 13.6 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. The Company also owned land that can accommodate approximately 2.4 million square feet of additional development. The Company’s consolidated properties were 83.9% occupied by 634 tenants. The Company does not include square footage that is in development or redevelopment in its occupancy calculation, which totaled 0.1 million square feet at March 31, 2013. The Company derives substantially all of its revenue from leases of space within its properties. As of March 31, 2013, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for 23% of the Company’s total annualized cash basis rent.

The primary source of the Company’s revenue and earnings is rent received from tenants under long-term (generally three to ten years) operating leases at its properties, including reimbursements from tenants 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 principally be driven by its ability to:

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

• sell assets to third parties, or contribute properties to joint ventures, at favorable prices;

• execute initiatives designed to increase balance sheet capacity and expand the sources of capital necessary to achieve investment-grade metrics over time; and

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

Executive Summary

For the three months ended March 31, 2013, the Company had net income of $2.0 million compared with a net loss of $3.5 million during the three months ended March 31, 2012.

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The Company’s funds from operations (“FFO”) available to common shareholders were $17.1 million, or $0.32 per diluted share, for the three months ended March 31, 2013 compared with FFO of $14.4 million, or $0.27 per diluted share, for the three months ended March 31, 2012. The increase in FFO for the three months ended March 31, 2013 compared with the same period in 2012 is due to an increase in the Company’s net operating income. The increase in net operating income in the first quarter of 2013 compared to the same period in 2012 was a result of higher occupancy in the Company’s portfolio, particularly at Redland Corporate Center, and an increase in termination fee income.

FFO is a non-GAAP financial measure. For a description of FFO, including why management believes its presentation is useful and a reconciliation of FFO to net income (loss) attributable to First Potomac Realty Trust, see “Funds From Operations.”

Significant Transactions

• Executed 563,000 square feet of leases, including 218,000 square feet of new leases;

• Delivered more than 177,000 square feet of positive net absorption and a tenant retention rate of 89%;

• Increased operating flexibility under credit facility and term loans by amending certain financial and other covenants; and

• Repaid $36.3 million of mortgage loans that encumbered Cedar Hill, the Merrill Lynch Building and a building at Crossways Commerce Center with proceeds from the Bridge Loan.

Updated Strategic and Capital Plan

In January 2013, the Company announced an updated strategic and capital plan. As previously disclosed, the Company is continuing to execute on its strategy of repositioning its portfolio to focus on high-quality office properties in the Washington, D.C. metropolitan region. Key aspects of the plan include:

• Exploring the potential disposition of the Company’s industrial properties, consisting of approximately 4.3 million square feet, approximately 2.6 million square feet of which is located in Southern Virginia;

• Implementing targeted portfolio management initiatives to drive operating efficiencies and improve occupancy;

• Executing steps designed to increase balance sheet capacity and expand the sources of capital necessary to achieve investment-grade credit metrics over time; and

• During the first quarter of 2013, the Company declared a quarterly dividend of $0.15 per common share, which equates to an annualized dividend of $0.60 per common share, representing a 25% decrease from its prior annualized dividend of $0.80 per common share.

The Company believes that the execution of these initiatives, which is already underway, will result in a portfolio with a greater concentration of high-quality office properties in the Washington, D.C. metropolitan region, improved occupancy and performance within the core portfolio, and additional financial flexibility. However, the Company can provide no assurances as to the outcome of certain initiatives set forth in its strategic and capital plan, primarily regarding the timing or pricing of the sale of its industrial properties, or that such sale will occur at all.

Informal SEC Inquiry

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, the Company has been informed that the SEC has initiated an informal inquiry relating to the matters that were the subject of the Audit Committee’s internal investigation regarding the material weakness previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The SEC staff has informed the Company that this inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, nor considered a reflection upon any person, entity or security. The Company has been, and intends to continue, voluntarily cooperating fully with the SEC. The scope and outcome of this matter cannot be determined at this time.

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Properties:

The following sets forth certain information for the Company’s consolidated properties by segment as of March 31, 2013 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON, D.C. REGION

Property	Buildings		Sub-Market(1)	Square Feet		Annualized Cash Basis Rent(2)		Leased at March 31, 2013(3)			Occupied at March  31, 2013(3)
Downtown DC-Office
500 First Street, NW		1	Capitol Hill		129,035	$	4,830		100.0	%		100.0	%
840 First Street, NE		1	NoMA		247,146		7,011		100.0	%		100.0	%
1005 First Street, NE(4)		1	NoMA		30,414		2,496		100.0	%		100.0	%
1211 Connecticut Avenue, NW		1	CBD		125,119		3,508		97.1	%		97.1	%
Total/Weighted Average		4			531,714		17,845		99.3	%		99.3	%
Redevelopment
440 First Street, NW		1	Capitol Hill		138,352		—
Joint Venture Property (unconsolidated)
1750 H Street, NW		1	CBD		111,373		3,822		93.9	%		93.9	%
Region Total/Weighted Average		6			781,439	$	21,667		98.4	%		98.4	%

⁽¹⁾ CBD = Central Business District; NoMA = North of Massachusetts Avenue.

⁽²⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽³⁾ Does not include space in development or redevelopment.

⁽⁴⁾  The property was acquired through a consolidated joint venture in which the Company has a 97% controlling economic interest.

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MARYLAND REGION

Region	Buildings		Location	Square Feet		Annualized Cash Basis Rent(1)		Leased at March 31, 2013(2)			Occupied at March  31, 2013(2)
SUBURBAN MD
Business Park
Ammendale Business Park(3)		7	Beltsville		312,846	$	4,027		100.0	%		97.0	%
Gateway 270 West		6	Clarksburg		255,917		2,346		67.6	%		64.8	%
Girard Business Center(4)		7	Gaithersburg		297,422		2,738		78.9	%		75.1	%
Rumsey Center		4	Columbia		134,689		1,377		94.9	%		86.7	%
Snowden Center		5	Columbia		145,180		2,142		98.6	%		98.6	%
Total Business Park		29			1,146,054		12,630		86.5	%		83.1	%
Office
Worman’s Mill Court		1	Frederick		40,099		381		87.6	%		87.6	%
Annapolis Business Center		2	Annapolis		102,374		1,686		98.8	%		94.7	%
Campus at Metro Park North		4	Rockville		190,720		3,600		89.6	%		89.6	%
Cloverleaf Center		4	Germantown		173,766		2,226		74.1	%		74.1	%
Gateway Center		2	Gaithersburg		44,010		508		67.1	%		65.5	%
Hillside Center		2	Columbia		85,631		893		74.4	%		74.4	%
Merrill Lynch Building		1	Columbia		137,058		1,685		81.4	%		77.8	%
Patrick Center		1	Frederick		66,269		968		77.1	%		77.1	%
Redland Corporate Center		2	Rockville		349,267		7,055		91.4	%		87.8	%
West Park		1	Frederick		28,390		267		81.7	%		81.7	%
Total Office		20			1,217,584		19,269		84.9	%		83.1	%
Industrial(5)
Frederick Industrial Park(6)		3	Frederick		550,576		3,900		86.0	%		86.0	%
Glenn Dale Business Center		1	Glenn Dale		314,923		1,750		94.6	%		87.2	%
Total Industrial		4			865,499		5,650		89.1	%		86.4	%
Total Suburban Maryland		53			3,229,137		37,549		86.6	%		84.0	%
BALTIMORE
Business Park
Owings Mills Business Park(7)		4	Owings Mills		180,475		1,441		57.4	%		57.4	%
Triangle Business Center		4	Baltimore		74,429		344		47.6	%		47.6	%
Total Business Park		8			254,904		1,785		54.5	%		54.5	%
Industrial(5)
Mercedes Center		1	Hanover		295,006		1,303		74.0	%		74.0	%
Total Baltimore		9			549,910		3,088		65.0	%		65.0	%
Total Consolidated		62			3,779,047		40,637		83.5	%		81.2	%
Joint Venture Property (Unconsolidated)
RiversPark I and II		6	Columbia		307,747		3,753		89.1	%		89.1	%
Aviation Business Park		3	Glen Burnie		120,285		746		42.3	%		37.9	%
Total Joint Ventures		9			428,032		4,499		75.9	%		74.7	%
Region Total/Weighted Average		71			4,207,079	$	45,136		82.7	%		80.6	%

⁽¹⁾ Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Does not include space in development or redevelopment.

⁽³⁾ Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court.

⁽⁴⁾ Girard Business Center consists of the following properties: Girard Business Center and Girard Place.

⁽⁵⁾  All of the Company’s industrial properties located in Maryland are included in its industrial portfolio that is currently being marketed for sale.

⁽⁶⁾ Frederick Industrial Park consists of the following properties: 4451 Georgia Pacific Boulevard, 4612 Navistar Drive, and 6900 English Muffin Way.

⁽⁷⁾ Owings Mills Business Park consists of the following properties: Owings Mills Business Center and Owings Mills Commerce Center. On November 7, 2012, the Company sold two buildings totaling 39,000 square feet at Owings Mills Business Park.

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NORTHERN VIRGINIA REGION

Property	Buildings		Location	Square Feet		Annualized Cash Basis Rent(1)		Leased at March 31, 2013(2)			Occupied at March 31, 2013(2)
Business Park
Corporate Campus at Ashburn Center		3	Ashburn		194,184	$	2,532		100.0	%		100.0	%
Gateway Centre Manassas		3	Manassas		102,579		636		60.4	%		50.2	%
Linden Business Center		3	Manassas		109,787		1,053		97.4	%		70.5	%
Prosperity Business Center		1	Merrifield		71,343		912		100.0	%		100.0	%
Sterling Park Business Center(3)		7	Sterling		474,807		4,145		91.8	%		86.2	%
Total Business Park		17			952,700		9,278		91.3	%		84.4	%
Office
Atlantic Corporate Park		2	Sterling		221,118		1,487		40.3	%		29.9	%
Cedar Hill		2	Tyson’s Corner		102,632		2,165		100.0	%		100.0	%
Herndon Corporate Center		4	Herndon		128,063		1,785		89.3	%		89.3	%
Lafayette Business Center(4)		6	Chantilly		253,867		3,536		82.4	%		82.4	%
One Fair Oaks		1	Fairfax		214,214		5,150		100.0	%		100.0	%
Reston Business Campus		4	Reston		83,373		998		75.9	%		72.1	%
Three Flint Hill		1	Oakton		180,623		2,695		84.7	%		66.1	%
Van Buren Office Park		5	Herndon		106,954		1,365		97.3	%		75.8	%
Windsor at Battlefield		2	Manassas		155,511		1,975		90.3	%		90.3	%
Total Office		27			1,446,355		21,156		82.3	%		76.6	%
Industrial(5)
13129 Airpark Road		1	Culpeper		149,888		724		100.0	%		100.0	%
I-66 Commerce Center(6)		1	Haymarket		236,082		3,471		100.0	%		100.0	%
Interstate Plaza		1	Alexandria		109,029		1,141		98.9	%		98.9	%
Newington Business Park Center		7	Lorton		254,333		2,270		81.2	%		77.9	%
Plaza 500		2	Alexandria		505,258		4,924		74.5	%		74.5	%
Total Industrial		12			1,254,590		12,530		85.8	%		85.2	%
Total Consolidated		56			3,653,645		42,964		85.9	%		81.6	%
Joint Venture Property (Unconsolidated)
Prosperity Metro Plaza		2	Merrifield		325,645		6,057		86.1	%		86.1	%
Region Total/Weighted Average		58			3,979,290	$	49,021		85.9	%		81.9	%

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Does not include space in development or redevelopment.

⁽³⁾  Sterling Park Business Center consists of the following properties: 403/405 Glenn Drive, Davis Drive, and Sterling Park Business Center.

⁽⁴⁾  Lafayette Business Center consists of the following properties: Enterprise Center and Tech Court. The Company expects to sell a 32,000 square foot building at the property in the second quarter of 2013.

⁽⁵⁾  All of the Company’s industrial properties located in Northern Virginia, other than Newington Business Park Center and Plaza 500, are included in the industrial portfolio that is currently being marketed for sale.

⁽⁶⁾  Previously referred to as 15395 John Marshall Highway.

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SOUTHERN VIRGINIA REGION

Property	Buildings		Location	Square Feet		Annualized Cash Basis Rent(1)		Leased at March 31, 2013(2)			Occupied at March  31, 2013(2)
RICHMOND
Business Park
Chesterfield Business Center(3)		11	Richmond		320,308	$	1,857		87.9	%		87.9	%
Hanover Business Center		4	Ashland		183,669		778		68.2	%		66.4	%
Park Central		3	Richmond		204,762		1,903		81.8	%		81.8	%
Virginia Center Technology Park		1	Glen Allen		118,579		1,229		83.8	%		83.8	%
Total Business Park		19			827,318		5,767		81.4	%		81.0	%
Industrial(4)
Northridge		2	Ashland		139,346		778		82.9	%		82.9	%
River’s Bend Center(5)		6	Chester		795,143		4,741		100.0	%		100.0	%
Total Industrial		8			934,489		5,519		97.5	%		97.5	%
Total Richmond		27			1,761,807		11,286		89.9	%		89.7	%
NORFOLK
Business Park
Crossways Commerce Center(6)		9	Chesapeake		1,087,250		11,088		94.2	%		94.2	%
Battlefield Corporate Center		1	Chesapeake		96,720		795		100.0	%		100.0	%
Greenbrier Business Park(7)		4	Chesapeake		412,526		4,010		81.9	%		77.3	%
Norfolk Commerce Park(8)		3	Norfolk		262,917		2,595		89.4	%		67.8	%
Total Business Park		17			1,859,413		18,488		91.1	%		87.0	%
Office
Greenbrier Towers		2	Chesapeake		172,385		1,669		80.0	%		79.4	%
Total Office		2			172,385		1,669		80.0	%		79.4	%
Industrial(4)
Cavalier Industrial Park		4	Chesapeake		394,308		1,326		80.4	%		80.4	%
Diamond Hill Distribution Center		4	Chesapeake		712,339		2,846		95.1	%		95.1	%
Hampton Roads Center(9)		3	Hampton		584,345		2,810		63.5	%		63.5	%
Total Industrial		11			1,690,992		6,982		80.8	%		80.8	%
Total Norfolk		30			3,722,790		27,139		85.9	%		83.8	%
Region Total/Weighted Average		57			5,484,597	$	38,425		87.2	%		85.7	%

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Does not include space in development or redevelopment.

⁽³⁾  Chesterfield Business Center consists of the following properties: Airpark Business Center, Chesterfield Business Center, and Pine Glen.

⁽⁴⁾  All of the Company’s industrial properties located in Southern Virginia are included in its industrial portfolio that is currently being marketed for sale.

⁽⁵⁾  River’s Bend Center consists of the following properties: River’s Bend Center and River’s Bend Center II.

⁽⁶⁾  Crossways Commerce Center consists of the following properties: Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, 1434 Crossways Boulevard, and 1408 Stephanie Way.

⁽⁷⁾  Greenbrier Business Park consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II, and Greenbrier Circle Corporate Center.

⁽⁸⁾  Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II, and Gateway II.

⁽⁹⁾  Hampton Roads Center consists of the following properties: 1000 Lucas Way and Enterprise Parkway.

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Development and Redevelopment Activity

The Company constructs office buildings, business parks and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 2.4 million square feet of additional building space. Below is a summary of the approximate building square footage that can be developed on the Company’s developable land and the Company’s current development and redevelopment activity as of March 31, 2013 (amounts in thousands)

Reporting Segment	Developable Square Feet		Square Feet Under Development		Cost to Date of Development Activities(1)		Square Feet Under Redevelopment		Cost to Date of Redevelopment Activities(1)
Washington, D.C.		712		—	$	—		138	$	19,494
Maryland		250		—		—		—		—
Northern Virginia		568		—		—		—		—
Southern Virginia		841		118		327		—		—
		2,371		118	$	327		138	$	19,494

⁽¹⁾  Costs to date amounts exclude tenant improvement and leasing commission costs, as well as the property’s original cost basis.

On December 28, 2010, the Company acquired 440 First Street, NW, a vacant eight-story, 105,000 square foot office building in the Company’s Washington, D.C. reporting segment. In 2011, the Company purchased 30,000 square feet of transferable development rights for $0.3 million. The Company is in the process of redeveloping the entire property, including adding additional square footage. At March 31, 2013, the Company’s investment in the redevelopment project, including property basis, was $43.0 million.

During the first quarter of 2013, the Company did not place in-service any development or redevelopment efforts.

Lease Expirations

Approximately 9.8% of the Company’s annualized cash basis rent, excluding month-to-month leases (which represent 0.3% of the Company’s annualized cash basis rent), is scheduled to expire during the remainder of 2013. Current tenants are not obligated to renew their leases upon the expiration of their terms. If non-renewals or terminations occur, the Company may not be able to locate qualified replacement tenants and, as a result, could lose a significant source of revenue while remaining responsible for the payment of its financial obligations. Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to the Company than the current lease terms, or the Company may be forced to provide tenant improvements at its expense or provide other concessions or additional services to maintain or attract tenants. We continually strive to increase our portfolio occupancy, and the amount of vacant space in our portfolio at any given time may impact our willingness to reduce rental rates or provide greater concessions to retain existing tenants and attract new tenants. The Company’s management continually monitors its portfolio on a regional and per property basis to assess market trends, including vacancy, comparable deals and transactions, and other business and economic factors that may influence our leasing decisions. During the three months ended March 31, 2013, the Company had an 89% retention rate, based on square footage. After reflecting all the renewal leases on a triple-net basis to allow for comparability, the weighted average rental rate on the Company’s renewed leases for the three months ended March 31, 2013 increased 4.0% compared with the expiring leases. During the first quarter of 2013, the Company executed new leases for 0.2 million square feet, of which substantially all of the leases (based on square footage) contained rent escalations.

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The following table sets forth a summary schedule of the lease expirations at the Company’s consolidated properties for leases in place as of March 31, 2013 (dollars in thousands, except per square foot data):

Year of LeaseExpiration(1)	Number of Leases Expiring		Leased Square Feet		% of Leased Square Feet			Annualized Cash Basis Rent(2)		% of Annualized Cash Basis Rent			Average Base Rent per Square Foot(2)(3)
MTM		4		28,203		0.2	%	$	375		0.3	%	$	13.32
2013		81		868,579		7.5	%		13,840		9.8	%		13.53	(4)
2014		149		1,625,023		14.0	%		16,158		11.7	%		9.94
2015		121		1,309,927		11.3	%		12,426		8.9	%		9.49
2016		104		1,680,663		14.5	%		17,958		12.8	%		10.69
2017		99		1,477,718		12.7	%		18,990		13.6	%		12.85
2018		80		1,260,933		10.9	%		12,581		9.0	%		9.98
2019		53		716,481		6.2	%		9,380		6.7	%		13.09
2020		43		743,015		6.4	%		11,511		8.2	%		15.49
2021		23		484,360		4.2	%		5,236		3.7	%		10.81
2022		23		420,608		3.6	%		3,985		2.8	%		9.47
Thereafter		30		985,274		8.5	%		17,431		12.5	%		17.69
Total /Weighted Average		810		11,600,784		100.0	%	$	139,871		100.0	%	$	11.87

⁽¹⁾  The Company classifies leases that expired or were terminated on the last day of the quarter as leased square footage since the tenant is contractually entitled to the space.

⁽²⁾  Annualized Cash Basis Rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽³⁾  Represents Annualized Cash Basis Rent at March 31, 2013 divided by the square footage of the expiring leases.

⁽⁴⁾  Does not include the Greyhound Lines, Inc. lease at 1005 First Street, NE, which is scheduled to terminate in August 2013, as the terms of the lease were negotiated as part of the Company’s acquisitions of 1005 First Street, NE and do not reflect a comparable market rate for leases.

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, results of operations and cash flows. 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 and estimates relate to revenue recognition, including evaluation of the collectability of accounts and notes receivable, impairment of long-lived assets, purchase accounting for acquisitions of real estate, derivative instruments and share-based compensation.

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

Revenue Recognition

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

35

Tenant leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred by the Company. Such reimbursements are recognized in the period in which the expenses are incurred. The Company records a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably assured and the Company has possession of the terminated space.

Accounts and Notes Receivable

The Company must make estimates of the collectability of its accounts and notes receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and interest 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. The Company considers similar criteria in assessing impairment associated with outstanding loans or notes receivable and whether any allowance for anticipated credit loss is appropriate.

Investments in Real Estate and Real Estate Entities

Investments in real estate and real estate entities are initially recorded at fair value if acquired in a business combination or carried at initial cost when constructed or acquired in an asset purchase, less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:

Buildings	39 years
Building improvements	5 to 20 years
Furniture, fixtures and equipment	5 to 15 years
Lease related intangible assets	The term of the related lease
Tenant improvements	Shorter of the useful life of the asset or the term of the related lease

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the fair value of a property, an impairment analysis is performed. The Company assesses potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make estimates as to whether there are impairments in the carrying values of its investments in real estate. Further, the Company will record an impairment loss if it expects to dispose of a property, in the near term, at a price below carrying value. In such an event, the Company will record an impairment loss based on the difference between a property’s carrying value and its projected sales price, less any estimated costs to sell.

The Company will classify a building as held-for-sale in accordance with GAAP in the period in which it has made the decision to dispose of the building, the Company’s Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies will exist that could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will cease depreciation of the asset. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its consolidated statements of operations for all periods presented and classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in the period the held-for-sale criteria are met. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by the Company after the disposition.

36

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, which include its investments in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. 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. The Company also capitalizes direct compensation costs of the Company’s construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. The Company does not capitalize any other general administrative costs such as office supplies, office rent expense or an overhead allocation to its development or redevelopment projects. Capitalized compensation costs were immaterial during the three months ended March 31, 2013 and 2012. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. The Company will also place redevelopment and development assets in service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

Purchase Accounting

Acquisitions of rental property, including any associated intangible assets, are measured at fair value at the date of acquisition. Any liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The fair value of the acquired property is allocated between land and building (on an as-if vacant basis) based on 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 fair value of the in-place leases is recorded as follows:

• the fair value of leases in-place on the date of acquisition is based on absorption costs for the estimated lease-up period in which vacancy and foregone revenue are avoided due to the presence of the acquired leases;

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

• the fair value of intangible tenant or customer relationships.

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

Derivative Instruments

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. The Company does not use derivatives for trading or speculative purposes and intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate the Company from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect the Company or adversely affect it because, among other things:

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

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

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

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

37

The Company may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair value. For effective hedging relationships, the change in the fair value of the assets or liabilities is recorded within equity (cash flow hedge) or through earnings (fair value hedge). Ineffective portions of derivative transactions will result in changes in fair value recognized in earnings. For a cash flow hedge, the Company records its proportionate share of unrealized gains or losses on its derivative instruments associated with its unconsolidated joint ventures within equity and “Investment in affiliates.” The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective 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.

Share-Based Payments

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. For options awards, the Company uses a Black-Scholes option-pricing model. Expected volatility is based on an assessment of the Company’s realized volatility over the preceding period that is equivalent to the award’s expected life. The expected term represents the period of time the options are anticipated to remain outstanding as well as the Company’s historical experience for groupings of employees that have similar behavior and considered separately for valuation purposes. For non-vested share awards that vest over a predetermined time period, the Company uses the outstanding share price at the date of issuance to fair value the awards. For non-vested shares awards that vest based on performance conditions, the Company uses a Monte Carlo simulation (risk-neutral approach) to determine the value and derived service period of each tranche. The expense associated with the share-based awards will be recognized over the period during which an employee is required to provide services in exchange for the award – the requisite service period (usually the vesting period). The fair value for all share-based payment transactions are recognized as a component of income or loss from continuing operations.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 with the Three Months Ended March 31, 2012

As of March 31, 2013, the Company had not acquired any properties in 2013. The Company did not acquire any properties in 2012.

The term “Comparable Portfolio” refers to all consolidated properties owned by the Company, with operating results reflected in the Company’s continuing operations, for the entirety of the periods presented, with the exception of Three Flint Hill, Davis Drive, and 440 Street, NW, which have not been placed in service for the entirety of the periods presented, and therefore excluded from the “Comparable Portfolio”.

In the period-over-period discussion of operating results below, all properties that have been excluded during either of the periods being compared are referred to as the “Non-comparable Properties”.

For discussion of the operating results of the Company’s reporting segments, the terms “Washington, D.C.”, “Maryland”, “Northern Virginia” and “Southern Virginia” will be used to describe the respective reporting segments.

During 2013, the Company began marketing the majority of its industrial properties in a portfolio sale. The industrial portfolio represents approximately 4.3 million square feet, 2.6 million square feet of which are located in Southern Virginia. The Company anticipates that the sale of the portfolio will be completed in 2013 and, as a result, expects its revenues, property operating expenses, depreciation expense and interest expense to decline in 2013 compared with 2012. However, the Company can provide no assurances regarding the timing or pricing of the sale of the industrial properties, or that such sale will occur at all.

In the tables below, the designation “NM” is used to refer to a percentage that is not meaningful.

38

Total Revenues

Total revenues are summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
Rental	$	40,187	$	37,401	$	2,786		7	%
Tenant reimbursements and other	$	11,190	$	9,133	$	2,057		23	%

Rental Revenue

Rental revenue is comprised of contractual rent, the impact of straight-line revenue and the amortization of deferred market rent assets and liabilities representing above and below market rate leases at acquisition. Rental revenue increased $2.8 million for the three months ended March 31, 2013 compared with the same period in 2012. The Comparable Portfolio contributed $2.1 million of additional rental revenue during the three months ended March 31, 2013 compared with the same period in 2012, which was primarily due to a $1.5 million increase in straight-line rent amortization associated with an early lease termination from a tenant at I-66 Commerce Center. The tenant terminated its lease at the end of March 2013. The remainder of the increase in rental revenue associated with the Comparable Portfolio was primarily attributable to an increase in occupancy. Rental revenue for the Non-comparable Properties increased $0.7 million for the three months ended March 31, 2013 compared with the same period in 2012. The increase in rental revenue for the three months ended March 31, 2013 compared with same period in 2012 includes $2.5 million for Northern Virginia and $0.3 million for Southern Virginia. Rental revenues remained relatively flat in Maryland and Washington, D.C. for the three months ended March 31, 2013 compared with the same period in 2012.

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, parking revenue and joint venture and construction related management fees. Tenant reimbursements and other revenues increased $2.1 million for the three months ended March 31, 2013 compared with the same period in 2012. For the Comparable Portfolio, tenant reimbursements and other revenues increased $1.9 million for the three months ended March 31, 2013 compared with the same period in 2012 due to an increase in termination fee income and higher recoverable property operating expenses. The Non-comparable Properties contributed an increase in tenant reimbursements and other revenue of $0.2 million for the three months ended March 31, 2013 compared with the same period in 2012. The increase in tenant reimbursements and other revenues for the three months ended March 31, 2013 compared with the same period in 2012 includes $0.8 million for Washington, D.C., $1.0 million for Northern Virginia, and $0.3 million for Southern Virginia. Tenant reimbursements and other revenues remained relatively flat in Maryland for the three months ended March 31, 2013 compared with the same period in 2012.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
Property operating	$	12,905	$	11,608	$	1,297		11	%
Real estate taxes and insurance	$	5,403	$	4,574	$	829		18	%

39

Property operating expenses increased $1.3 million for the three months ended March 31, 2013 compared with the same period in 2012. For the Comparable Portfolio, property operating expenses increased $1.2 million for the three months ended March 31, 2013 compared with 2012 primarily due to an increase in snow and ice removal costs. The Non-comparable Properties contributed an increase in property operating expenses of $0.1 million for the three months ended March 31, 2013 compared with 2012. The increase in property operating expenses for the three months ended March 31, 2013 compared with the same period in 2012 includes $0.6 million for Washington, D.C., $0.3 million for Northern Virginia and $0.5 million for Southern Virginia. Property operating expenses for Maryland decreased $0.1 million for the three months ended March 31, 2013 compared with the same period in 2012.

Real estate taxes and insurance expense increased $0.8 million for the three months ended March 31, 2013 compared with the same period in 2012. For the Comparable Portfolio, real estate taxes and insurance expense increased $0.7 million for the three months ended March 31, 2013 compared with the same period in 2012 due to higher real estate tax assessments. The Non-comparable Properties contributed an increase in real estate taxes and insurance expense of $0.1 million for the three months ended March 31, 2013 compared with the same period in 2012. The increase in real estate taxes and insurance expense for the three months ended March 31, 2013 compared with the same period in 2012 includes $0.4 million for Washington, D.C. and $0.4 million for Northern Virginia. Property operating expenses remained relatively flat in Maryland and Southern Virginia for the three months ended March 31, 2013 compared with the same period in 2012.

Other Operating Expenses

General and administrative expenses are summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	5,267	$	4,897	$	370		8	%

General and administrative expenses increased $0.4 million during the three months ended March 31, 2013 compared with the same period in 2012. For the three months ended March 31, 2013, the Company incurred $0.3 million in legal fees associated with the informal inquiry initiated by the SEC. General and administrative expenses also increased due to higher rent expense associated with the Company expanding its corporate headquarters in late 2012. The Company currently anticipates general and administrative expenses will decrease in 2013 compared with 2012 as it expects to experience a decline in legal and accounting fees and personnel separation costs in 2013 compared with 2012. However, the informal inquiry initiated by the SEC could result in increased legal and/or accounting fees in 2013. Any reduction in general and administrative expenses in 2013 will be partially offset by an expected increase in employee compensation costs, as the result of a larger workforce, and a full year impact of the expansion of the Company’s corporate offices.

Acquisition costs are summarized as follows:

	Three Months Ended March 31,				Change			Percent Change
(dollars in thousands)	2013		2012
	$	—	$	17	$	(17	)		(100	)%

The Company did not acquire any properties during the first quarter of 2013 or 2012.

Depreciation and amortization expense is summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	16,885	$	16,018	$	867		5	%

Depreciation and amortization expense includes depreciation of real estate assets and amortization of intangible assets and leasing commissions. Depreciation and amortization expense increased $0.9 million for the three months ended March 31, 2013 compared with the same period in 2012. The Non-comparable Properties contributed additional depreciation and amortization expense of $0.6 million for the three months ended March 31, 2013 compared with the same period in 2012. Depreciation and amortization expense attributable to the Comparable Portfolio increased $0.3 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to additional leasing costs incurred plus the placing in service of additional tenant and construction improvements.

40

Impairment of real estate assets are summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	—	$	1,949	$	(1,949)		(100	)%

During the first quarter of 2012, the Company reduced its holding period for its Owings Mills Business Park property and recorded an impairment charge of $2.8 million. A portion of the impairment charge related to buildings that were subsequently disposed of during 2012 was reclassified to discontinued operations. For the three months ended March 31, 2013, the Company did not record any impairment charges.

Other Expenses, net

Interest expense is summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	10,530	$	11,159	$	(629)		(6	)%

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

At March 31, 2013, the Company had $954.9 million of debt outstanding with a weighted average interest rate of 4.2% compared with $910.2 million of debt outstanding with a weighted average interest rate of 4.9% at March 31, 2012.

Interest expense decreased $0.6 million for the three months ended March 31, 2012 compared with the three months ended March 31, 2012, primarily as a result of the Company refinancing debt obligations at lower rates. During 2012, the Company early extinguished its $37.5 million Series A senior notes and its $37.5 million Series B senior notes, which had interest rates of 6.4% and 6.6%, respectively, with borrowings under its unsecured revolving credit facility, which had a weighted average interest rate of 2.9% during the three months ended March 31, 2013. The Company also repaid $126.2 million of mortgage debt in 2012 that had a weighted average interest rate of 6.6% with borrowings under its unsecured revolving credit facility or with proceeds from new mortgage debt that was issued at significantly lower rates. During the first quarter of 2013, the Company repaid $39.5 million of mortgage debt with a weighted average interest rate of 6.1% with the proceeds from a $37.5 million Bridge Loan with an applicable interest rate of LIBOR plus 2.15% and borrowings under its unsecured revolving credit facility.

The Company believes interest expense will continue to decline in 2013 compared with 2012 as a result of the Company refinancing over $240 million of debt during 2012 and the first quarter of 2013 at lower interest rates and due to an anticipated reduction of debt associated with proceeds from the potential sale of its industrial portfolio.

Interest and other income are summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	1,531	$	1,508	$	23		2	%

41

In December 2010, the Company provided a $25.0 million subordinated loan to the owners of 950 F Street, NW, a 287,000 square-foot office building in Washington, D.C. The loan has a fixed interest rate of 12.5%. In April 2011, the Company provided a $30.0 million subordinated loan to the owners of America’s Square, a 461,000 square foot, office complex in Washington, D.C. The loan has a fixed interest rate of 9.0%. The Company recorded interest income related to these loans of $1.5 million during each of the three months ended March 31, 2013 and 2012. In January 2013, the Company subleased 5,000 square feet of its corporate headquarters. For the three months ended March 31, 2013, the Company recognized $42 thousand of income associated with its sublease, which is reflected within “Interest and other income” on its consolidated statements of operations. The Company did not recognize any sublease income in 2012.

The Company anticipates interest and other income will increase in 2013 compared with 2012 due to the income provided by the Company’s sublease.

Equity in (earnings) losses of affiliates is summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	(28)	$	46	$	74		NM

Equity in (earnings) losses of affiliates reflects the Company’s ownership interest in the operating results of the properties, in which it does not have a controlling interest. The increase in equity in (earnings) losses of affiliates during the three months ended March 31, 2013 compared with the same period in 2012 reflects aggregate income generated by the properties owned by these ventures in 2013 compared to an aggregate loss generated in the same period in 2012.

Provision for Income Taxes

Provision for income taxes is summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	—	$	(61)	$	61		100	%

The Company owns properties in Washington, D.C. that are subject to income-based franchise taxes as a result of conducting business in Washington, D.C. Provision for income taxes decreased $0.1 million for the three months ended March 31, 2013 due to a third quarter 2012 change in tax regulations in the District of Columbia that requires the Company to file a unitary tax return, which allows for a deduction for dividends paid to shareholders. The change in tax regulations resulted in the Company prospectively measuring all of its deferred tax assets and deferred tax liabilities using the effective tax rate (0%) expected to be in effect as these timing differences reverse; therefore, the Company did not record a provision for income taxes for the three months ended March 31, 2013.

Income (loss) from Discontinued Operations

Income (loss) from discontinued operations is summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	17	$	(1,187)	$	1,204		NM

42

Discontinued operations reflect the operating results of the Company’s disposed property or property classified as held-for-sale at March 31, 2013. The Company did not dispose of any property during the three months ended March 31, 2013. For more information on the Company’s discontinued operations, see footnote 7 – Discontinued Operations.

Net loss attributable to noncontrolling interests

Net loss attributable to noncontrolling interests is summarized as follows:

	Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2013		2012
	$	59	$	318	$	(259)		(81	)%

Net loss attributable to noncontrolling interests reflects the ownership interests in the Company’s net income or loss attributable to parties other than the Company. During the three months ended March 31, 2013 and 2012, the Company recognized net loss attributable to common shareholders of $1.1 million and $5.8 million, respectively. As of March 31, 2013 and 2012, the Company consolidated two joint ventures in which it had a controlling interest. The Company consolidates the operating results of its consolidated joint ventures and recognizes its joint venture partner’s percentage of earnings or losses within net loss attributable to noncontrolling interests. For the three months ended March 31, 2013, the Company’s consolidated joint venture’s had an aggregate loss compared with and aggregated earnings for the three months ended March 31, 2012.

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 whose period-over-period operations can be viewed on a comparative basis, is a primary performance measure the Company uses to assess the results of operations at its properties. Same Property NOI is a non-GAAP measure. As an indication of the 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 and thus impact trends and comparability. Also, the Company eliminates depreciation and amortization expense, which are property level expenses, in computing Same Property NOI because these are non-cash expenses that are based on historical cost accounting assumptions and management believes these expenses do not offer the investor significant insight into the operations of the property. This presentation allows management and investors to distinguish whether growth or declines in net operating income are a result of increases or decreases in property operations or the acquisition of additional properties. While this presentation provides useful information to management and investors, the results below should be read in conjunction with the results from the consolidated statements of operations to provide a complete depiction of total Company performance.

43

Comparison of the Three Months Ended March 31, 2013 with the Three Months Ended March 31, 2012

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

(dollars in thousands)	Three Months Ended March 31,
	2013			2012			$ Change		% Change
Number of buildings(1)		170			170			—		—
Same property revenues
Rental	$	37,827		$	37,266		$	561		1.5
Tenant reimbursements and other		10,060			8,680			1,380		15.9
Total same property revenues		47,887			45,946			1,941		4.2
Same property operating expenses
Property		11,923			11,179			744		6.7
Real estate taxes and insurance		5,259			4,495			764		17.0
Total same property operating expenses		17,182			15,674			1,508		9.6
Same property net operating income(2)	$	30,705		$	30,272		$	433		1.4
Reconciliation to net income (loss):
Same property net operating income(2)	$	30,705		$	30,272
Non-comparable net operating income(3)(4)		2,364			80
General and administrative expenses		(5,267	)		(4,897	)
Depreciation and amortization		(16,885	)		(16,018	)
Other(5)		(8,971	)		(11,724	)
Discontinued operations		17			(1,187	)
Net income (loss)	$	1,963		$	(3,474	)

	Weighted Average Occupancy For Three Months Ended March 31,
	2013			2012
Same Properties		83.9	%		82.8	%

⁽¹⁾ Represents properties owned or in-service for the entirety of the periods presented.

⁽²⁾  Same-property comparisons do not include the $1.5 million straight-line rent amortization impact associated with Engineering Solutions at I-66 Commerce Center.

⁽³⁾  Non-comparable Properties include: Three Flint Hill, NW, 440 First Street, NW, Davis Drive and a building at Lafayette Business Center.

⁽⁴⁾  Non-comparable Property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

⁽⁵⁾ Combines acquisition costs, impairment of real estate assets, total other expenses, net and provision for income taxes from the Company’s consolidated statements of operations.

Same Property NOI increased $0.4 million for the three months ended March 31, 2013 compared with the same period in 2012. Total same property revenues increased $1.9 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to an increase in recoverable property operating expenses and an increase in occupancy. Total same property operating expenses increased $1.5 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to higher real estate tax assessments and an increase in snow and ice removal costs.

44

Maryland

(dollars in thousands)	Three Months Ended March 31,
	2013		2012		$ Change			% Change
Number of buildings(1)		62		62		—			—
Same property revenues
Rental	$	11,631	$	11,653	$	(22	)		(0.2	)
Tenant reimbursements and other		2,384		2,203		181			8.2
Total same property revenues		14,015		13,856		159			1.1
Same property operating expenses
Property		3,598		3,554		44			1.2
Real estate taxes and insurance		1,146		1,129		17			1.5
Total same property operating expenses		4,744		4,683		61			1.3
Same property net operating income	$	9,271	$	9,173	$	98			1.1
Reconciliation to total property operating income:
Same property net operating income	$	9,271	$	9,173
Non-comparable net operating income(2)		71		169
Total property operating income	$	9,342	$	9,342

	Weighted Average Occupancy For  Three Months Ended March 31,
	2013			2012
Same Properties		81.1	%		81.2	%

⁽¹⁾ Same-property comparisons are based upon those consolidated properties owned or in-service for the entirety of the periods presented. Same-property results do not exclude the results of any non same-properties.

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

Same Property NOI for the Maryland properties increased $0.1 million for the three months ended March 31, 2013 compared with the same period in 2012. Total same property revenues increased $0.2 million for the three months ended March 31, 2013 compared with the same period in 2012 due to an increase in recoverable property operating expenses and partially offset by a slight decrease in rental revenue. Total same property operating expenses increased $0.1 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to an increase in snow and ice removal costs.

45

Northern Virginia

(dollars in thousands)	Three Months Ended March 31,
	2013		2012			$ Change		% Change
Number of buildings(1)		53		53			—		—
Same property revenues
Rental	$	10,740	$	10,456		$	284		2.7
Tenant reimbursements and other		2,978		2,623			355		13.5
Total same property revenues		13,718		13,079			639		4.9
Same property operating expenses
Property		3,077		2,971			106		3.6
Real estate taxes and insurance		1,739		1,437			302		21.0
Total same property operating expenses		4,816		4,408			408		9.3
Same property net operating income(2)	$	8,902	$	8,671		$	231		2.7
Reconciliation to total property operating income:
Same property net operating income(2)	$	8,902	$	8,671
Non-comparable net operating income (loss)(3)		2,479		(58	)
Total property operating income	$	11,381	$	8,613

	Weighted Average Occupancy For  Three Months Ended March 31,
	2013			2012
Same Properties		82.0	%		80.9	%

⁽¹⁾ Same-property comparisons are based upon those consolidated properties owned or in-service for the entirety of the periods presented. Same-property results exclude the results of the following non same-properties: Three Flint Hill, Davis Drive, and a building at Lafayette Business Center.

⁽²⁾ Same-property comparisons do not include the $1.5 million straight-line rent amortization impact associated with Engineering Solutions at I-66 Commerce Center.

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

Same Property NOI for the Northern Virginia properties increased $0.2 million for the three months ended March 31, 2013 compared with the same period in 2012. Total same property revenues increased $0.6 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to an increase in recoverable operating expenses and an increase in occupancy. Total same property operating expenses also increased $0.4 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to an increase in real estate tax assessments and snow and ice removal costs.

46

Southern Virginia

(dollars in thousands)	Three Months Ended March 31,
	2013			2012			$ Change			% Change
Number of buildings(1)		57			57			—			—
Same property revenues
Rental	$	10,433		$	10,138		$	295			2.9
Tenant reimbursements and other		2,340			2,047			293			14.3
Total same property revenues		12,773			12,185			588			4.8
Same property operating expenses
Property		3,650			3,142			508			16.2
Real estate taxes and insurance		1,025			1,034			(9	)		(0.9	)
Total same property operating expenses		4,675			4,176			499			11.9
Same property net operating income	$	8,098		$	8,009		$	89			1.1
Reconciliation to total property operating income:
Same property net operating income	$	8,098		$	8,009
Non-comparable net operating loss(2)		(126	)		(208	)
Total property operating income	$	7,972		$	7,801

	Weighted Average Occupancy For  Three Months Ended March 31,
	2013			2012
Same Properties		85.5	%		83.4	%

⁽¹⁾ Same-property comparisons are based upon those consolidated properties owned or in-service for the entirety of the periods presented. Same-property results do not exclude the results of any non same-properties.

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

Same Property NOI for the Southern Virginia properties increased $0.1 million for the three months ended March 31, 2013 compared with the same period in 2012. Total same property revenues increased $0.6 million for the three months ended March 31, 2013 compared with 2012 as a result of an increase in occupancy. Total same property operating expenses increased $0.5 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to an increase in reserves for anticipated bad debt expense and an increase in snow and ice removal costs.

47

Washington, D.C.

(dollars in thousands)	Three Months Ended March 31,
	2013			2012		$ Change		% Change
Number of buildings(1)		4			4		—		—
Same property revenues
Rental	$	5,023		$	5,019	$	4		0.1
Tenant reimbursements and other		2,358			1,807		551		30.5
Total same property revenues		7,381			6,826		555		8.1
Same property operating expenses
Property		1,598			1,512		86		5.7
Real estate taxes and insurance		1,349			895		454		50.7
Total same property operating expenses		2,947			2,407		540		22.4
Same property net operating income:	$	4,434		$	4,419	$	15		0.3
Reconciliation to total property operating income
Same property net operating income	$	4,434		$	4,419
Non-comparable net operating (loss) income(2)		(60	)		177
Total property operating income	$	4,374		$	4,596

	Weighted Average Occupancy For  Three Months Ended March 31,
	2013			2012
Same Properties		99.3	%		99.6	%

⁽¹⁾ Same-property comparisons are based upon those consolidated properties owned or in-service for the entirety of the periods presented. Same-property results exclude the results of the following non same-property: 440 First Street, NW.

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

Same Property NOI for the Washington, D.C. properties increased slightly for the three months ended March 31, 2013 compared with the same period in 2012. Total same property revenues increased $0.6 million for the three months ended March 31, 2013 compared with the same period in 2012 as a result of an increase in recoverable property operating expenses. Total same property operating expenses increased $0.5 million for the three months ended March 31, 2013 compared with the same period in 2012 primarily due to an increase in real estate tax assessments.

48

Liquidity and Capital Resources

Overview

The Company seeks to maintain a flexible balance sheet, with an appropriate balance of cash, debt, equity and available funds under its unsecured revolving credit facility, to readily provide access to capital given the volatility of the market and to position itself to take advantage of potential growth opportunities. In January 2013, the Company provided an updated Strategic and Capital Plan, which included the marketing of its industrial properties, the execution of steps designed to increase balance sheet flexibility, reduce leverage and a rightsizing of its quarterly dividend. 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 obligations consist primarily of the lease for its corporate headquarters, normal recurring operating expenses, regular debt payments, recurring expenditures for corporate and administrative needs, non-recurring expenditures such as capital improvements, tenant improvements and redevelopments, leasing commissions and dividends to preferred and common shareholders.

At March 31, 2013 and through the date of this filing, the Company had $230.0 million outstanding and $24.7 million of availability under its unsecured revolving credit facility. The Company has $60.5 million of mortgage debt maturing in the second half of 2013. Consistent with the Company’s updated Strategic and Capital Plan, the Company is exploring several opportunities to address its near-term debt maturities and increase the capacity under its unsecured revolving credit facility, including selling properties or interests in properties that do not fit the Company’s long-term goals or can be sold at advantageous prices to the Company (including the Company’s industrial portfolio, which is currently being marketed for sale), placing mortgage debt on unencumbered properties, refinancing existing mortgage debt or amending and expanding its existing unsecured revolving credit facility. The Company anticipates that it will meet all the debt obligations mentioned above, as well as increase its availability under its unsecured revolving credit facility. In the process of exploring different financing options, the Company actively monitors the impact that each potential financing decision will have on its financial covenants in order to avoid any issues of non-compliance with the terms of its existing financial covenants.

Over the next twelve months, the Company believes that it will generate sufficient cash flow from operations and have access to the capital resources, through debt and equity markets, necessary to expand and develop its business, to fund its operating and administrative expenses, to continue to meet its debt service obligations and to pay distributions in accordance with REIT requirements. However, the Company’s cash flow from operations and ability to access the debt and equity markets could be adversely affected due to uncertain economic factors and volatility in the financial and credit markets. In particular, the Company cannot assure that its tenants will not default on their leases or fail to make full rental payments if their businesses are challenged due to, among other things, the economic conditions (particularly if the tenants are unable to secure financing to operate their businesses). This may be particularly true for the Company’s tenants that are smaller companies. Further, approximately 12.4% of the Company’s annualized cash basis rent (excluding month-to-month leases) is scheduled to expire during the next twelve months and, if it is unable to renew these leases or re-lease the space, its cash flow could be negatively impacted.

Until the Company completes its previously discussed potential disposition of the industrial portfolio and financing transactions, the Company will be limited in its ability to pursue additional developments, redevelopments or acquisitions in the near future without accessing capital from other sources, such as additional financings or equity issuances.

The Company also believes, based on its historical experience and forecasted operations, that it will have sufficient cash flow or access to capital to meet its obligations over the next five years. The Company intends to meet long-term funding requirements for property acquisitions, development, redevelopment and other non-recurring capital improvements through net cash provided from operations, long-term secured and unsecured indebtedness, including borrowings under its unsecured revolving credit facility, unsecured term loan and secured term loans, proceeds from disposal of strategically identified assets (outright or through joint ventures) and the issuance of equity and debt securities.

The Company’s ability to raise funds through sales of debt and equity securities and access other third party sources of capital in the future will be dependent on, among other things, general economic conditions, general market conditions for REITs, rental rates, occupancy levels, market perceptions and the trading price of the 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, or at all.

Financing Activity

On January 2, 2013, the Company repaid a $3.2 million mortgage loan that encumbered Prosperity Business Center with proceeds from a draw under its unsecured revolving credit facility.

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In February 2013, the Company entered into a senior secured multi-tranche term loan facility (the “Bridge Loan”) with KeyBank, National Association and borrowed $37.5 million to repay a $15.4 million mortgage loan that encumbered Cedar Hill, a $13.3 million mortgage loan that encumbered the Merrill Lynch Building and a $7.6 million mortgage loan that encumbered a building at Crossways Commerce Center. The Bridge Loan has a variable interest rate of LIBOR plus a spread of 2.15% and matures in November 2013, with a three-month extension at the Company’s option. The Company can repay all or a portion of the Bridge Loan at any time during the term of the loan.

Amendments to Unsecured Revolving Credit Facility, Unsecured Term Loan and 2007 Secured Term Loan

As previously disclosed, on February 8, 2013, the Company and the lenders under its unsecured revolving credit facility, unsecured term loan and 2007 secured term loan (collectively, the “Bank Debt”) amended the Bank Debt agreements to provide, among other things, increased flexibility on a short-term basis under certain financial covenants, specifically by extending the December 31, 2012 ratios for such covenants, and proactively address the impact that the potential sale of the Company’s industrial portfolio would have on the covenants relating to tangible net worth and dispositions as a percentage of gross asset value covenants. Specifically, the following financial covenants of each of the Bank Debt agreements were amended as follows:

• The maximum consolidated total leverage ratio was increased to 65% for each quarter ending on or after March 31, 2013 through the quarter ending September 30, 2013 (from 62.5% for the quarters ending on or after March 31, 2013 and June 30, 2013, and 60.0% for the quarter ending September 30, 2013), and then will decrease to 60.0% for the quarter ending December 31, 2013 and for all quarters thereafter;

• The minimum consolidated debt yield was reduced to 10.0% for each quarter ending on or after March 31, 2013 through the quarter ending September 30, 2013 (from 10.5% for the quarters ending on or after March 31, 2013 and June 30, 2013, and 11.0% for the quarter ending September 30, 2013), and then will increase to 11.0% for the quarter ending December 31, 2013 and for all quarters thereafter;

• The maximum unencumbered pool leverage ratio was increased to 65% for each quarter ending on or after March 31, 2013 through the quarter ending September 30, 2013 (from 62.5% for the quarters ending on or after March 31, 2013 and June 30, 2013, and 60.0% for the quarter ending September 30, 2013), and then will decrease to 60.0% for the quarter ending December 31, 2013 and for all quarters thereafter; and

• The minimum tangible net worth covenant was revised to provide that the minimum tangible net worth will be reduced by an amount equal to 65% of the net sales proceeds received from the sale of any properties included in the industrial portfolio, subject to the completion of such sales.

The lenders under the Bank Debt also consented to the exclusion of the potential sale of the Company’s industrial portfolio from the calculation of the net sales price that is used in determining the 20% limitation on properties sold in any four-quarter period under Section 9.4(b) of each of the Bank Debt agreements; provided that, for any period of time during which the sale of the industrial portfolio is excluded from such calculation, the net sales price of the sale of other properties shall not exceed 10% (rather than 20%) of the most recently reported consolidated gross asset value.

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 tangible net worth, fixed charge coverage and other financial metrics. As of March 31, 2013, the Company was in compliance with the covenants of its unsecured term loan, secured term loans (including the Bridge Loan) and unsecured revolving credit facility.

The Company’s continued ability to borrow under the unsecured revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility. These debt agreements also contain cross-default provisions that would be triggered if the Company is in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and the Company may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on the Company’s liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

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Below is a summary of certain financial covenants associated with these debt agreements at March 31, 2013 (dollars in thousands), each of which reflects the amendments described above:

Unsecured Revolving Credit Facility, Unsecured Term Loan, Bridge Loan and 2007 Secured Term Loan

	Quarter Ending March 31, 2013	Covenant
Consolidated Total Leverage Ratio	56.6%	< 65.0%
Net Worth	$784,020	> $ 650,000
Fixed Charge Coverage Ratio	1.87x	> 1.50x
Consolidated Debt Yield	12.4%	> 10.0%
Maximum Dividend Payout Ratio	64.8%	< 95%
Restricted Investments:
Joint Ventures	5.4%	< 10%
Real Estate Assets Under Development	4.1%	< 15%
Undeveloped Land	1.9%	< 5%
Structured Finance Investments	3.0%	< 5%
Total Restricted Investments	14.4%	< 25%
Restricted Indebtedness:
Unhedged Variable Rate Debt	14.2%	< 25%
Maximum Secured Debt	26.6%	< 40%
Maximum Secured Recourse Debt	3.5%	< 15%
Credit Facility and Unsecured Term Loan Only:
Unencumbered Pool Leverage	62.2%	< 65%
Unencumbered Pool Interest Coverage Ratio	3.55x	> 1.75x
Secured Term Loan Only:
Borrowing Base Pool Leverage	59.6%	< 65%
Borrowing Base Pool Debt Service Coverage Ratio	1.74x	> 1.55x
Bridge Loan Only:
Borrowing Base Pool Leverage	61.2%	< 65%
Borrowing Base Pool Interest Coverage Ratio	1.82x	> 1.50x

Cash Flows

Due to the nature of the Company’s business, it relies on working capital and net cash provided by operations and, if necessary, borrowings under its unsecured revolving credit facility 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 ability of tenants 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, could affect the Company’s cash available for short-term liquidity needs. The Company intends to meet short and long term funding requirements for debt maturities, interest payments, dividend distributions and capital expenditures through cash flow provided by operations, long-term secured and unsecured indebtedness, including borrowings under its unsecured revolving credit facility, proceeds from asset disposals and the issuance of equity and debt securities. However, the Company may not be able to obtain capital from such sources on favorable terms, in the time period it desires, or at all. In addition, the Company’s continued ability to borrow under its existing debt instruments is subject to compliance with their financial and operating covenants and a failure to comply with such covenants could cause a default under the applicable debt agreement. In the event of a default, the Company may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all.

The Company may also fund building acquisitions, development, redevelopment and other non-recurring capital improvements through additional borrowings, issuance of common Operating Partnership units or sales of assets, outright or through joint ventures.

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Consolidated cash flow information is summarized as follows:

	Three Months Ended March 31,
(amounts in thousands)	2013			2012			Change
Cash provided by operating activities	$	14,850		$	16,063		$	(1,213	)
Cash used in investing activities		(16,092	)		(14,717	)		(1,375	)
Cash provided by (used in) financing activities		9,662			(938	)		10,600

Net cash provided by operating activities decreased $1.2 million for the three months ended March 31, 2013 compared with 2012, which was primarily attributable to decreases in accounts payable and accrued expenses, and rents received in advance. The decrease in cash provided by operating activities was partially offset by a decrease in escrows and reserves for the three months ended March 31, 2013 compared with the same period in 2012.

Net cash used in investing activities increased $1.4 million for the three months ended March 31, 2013 compared with the same period in 2012. The increase in cash used in investing activities was primarily due to proceeds received during the three months ended March 31, 2012 from the sale of a property. The Company did not sell any properties during the three months ended March 31, 2013. Cash used for investing activities also increased by $3.5 million due to development and redevelopment activities as the Company continued work on its redevelopment activities at 440 First Street, NW. The increase in cash used in investing activities was partial offset by a $6.7 million reduction in additions to rental property and furniture, fixture and equipment as the Company spent $5.3 million during the three months ended March 31, 2012 on tenant improvement associated with two tenants at Redland Corporate Center.

Net cash provided by financing activities was $9.7 million for the three months ended March 31, 2013 compared with cash used in financing activities of $0.9 million for the three months ended March 31, 2012. During the three months ended March 31, 2013, the Company issued $62.5 million of debt and repaid $41.5 million of its outstanding debt compared with the issuance of $119.0 million of debt and the repayment of $153.6 million of outstanding debt during the three months ended March 31, 2012. During the three months ended March 31, 2012, the Company issued preferred shares and common shares through its controlled equity offering program for net proceeds of $43.6 million and $3.6 million, respectively. The Company did not issue any preferred or common shares during the three months ended March 31, 2013.

Contractual Obligations

On August 4, 2011, the Company formed a joint venture with an affiliate of Perseus Realty, LLC to acquire 1005 First Street, NE in Washington, D.C. for $46.8 million, of which $38.4 million was paid at closing and the remaining $8.4 million will be paid in August 2013. The Company recorded the $8.4 million deferred purchase price obligation at its fair value at the time of acquisition within “Accounts payable and other liabilities” in its consolidated balance sheets. The Company determined the fair value of the deferred purchase price by calculating the present value of the obligation that is due in August 2013 using a discount rate for comparable transactions.

On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable in common Operating Partnership units upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property through November 2013. Based on an assessment of the probability of renewal and anticipated lease rates, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease through August 2023 on the entire building with the exception of two floors. As a result, the Company issued 544,673 common Operating Partnership units to satisfy $7.1 million of its contingent consideration obligation. The Company recognized a $1.5 million gain associated with the issuance of the additional units, which represented the difference between the contractual value of the units and the fair value of the units at the date of issuance. At March 31, 2013, the remaining contingent consideration obligation was $0.7 million, which may result in the issuance of additional units depending upon the leasing of any of the vacant space.

In connection with the Company’s 2009 acquisition of Corporate Campus at Ashburn Center, the Company entered into a contingent consideration fee agreement with the seller under which the Company will be obligated to pay additional consideration upon the property achieving stabilization per specified terms of the agreement. During the first quarter of 2010, the Company leased the remaining vacant space at the property and recorded a contingent consideration charge of $0.7 million, which reflected an increase in the anticipated fee to the seller. In 2012 and 2011, the Company recorded an increase of $152 thousand and $50 thousand, respectively, in its contingent consideration liability related to Corporate Campus at Ashburn Center that reflected a reduction of the period to reach stabilization. At March 31, 2013, the Company’s total contingent consideration obligation to the former owner of Corporate Campus at Ashburn Center was approximately $1.6 million. The Company anticipates achieving stabilization per the terms of the agreement in June 2013.

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On December 29, 2010, the Company entered into an unconsolidated joint venture with AEW Capital Management, L.P. and acquired Aviation Business Park, a three-building, single-story, office park totaling 121,000 square feet in Glen Burnie, Maryland. During the third quarter of 2010, the Company used available cash to acquire a $10.6 million first mortgage loan collateralized by the property for $8.0 million. The property was acquired by the joint venture through a deed-in-lieu of foreclosure in return for additional consideration to the owner if certain future leasing hurdles are met. At March 31, 2013, the Company’s total contingent consideration obligation to the former owner of Aviation Business Park was approximately $0.1 million, which is not reflected on the Company’s condensed consolidated financial statements.

As of March 31, 2013, the Company had development and redevelopment contractual obligations, which include amounts accrued at March 31, 2013, of $9.8 million outstanding, primarily related to redevelopment activities at 440 First Street, NW, located in the Company’s Washington, D.C. reporting segment. As of March 31, 2013, the Company had capital improvement obligations of $3.9 million outstanding. Capital improvement obligations represent commitments for roof, asphalt, HVAC and common area replacements contractually obligated as of March 31, 2013. Also, as of March 31, 2013, the Company had $5.2 million of tenant improvement obligations. The Company anticipates meeting its contractual obligations related to its construction activities with cash from its operating activities. In the event cash from the Company’s operating activities is not sufficient to meet its contractual obligations, the Company can access additional capital through its unsecured revolving credit facility.

The Company remains liable, for its proportionate ownership percentage, to fund any capital shortfalls or commitments from properties owned through unconsolidated joint ventures.

The Company has various obligations to certain local municipalities associated with its development projects that will require completion of specified site improvements, such as sewer and road maintenance, grading and other general landscaping work. As of March 31, 2013, the Company remained liable to those local municipalities for $1.3 million in the event that it does not complete the specified work. The Company intends to complete the improvements in satisfaction of these obligations.

The Company had no other material contractual obligations as of March 31, 2013.

Distributions

The Company is required to distribute to its shareholders at least 90% of its REIT taxable income in order to qualify as a REIT, including some types of taxable income it recognizes for tax purposes but with regard to which it does not receive corresponding cash. In addition, the Company must distribute to its shareholders 100% of its taxable income to eliminate its U.S. federal income tax liability. Funds used by the Company to pay dividends on its common shares are provided through distributions from the Operating Partnership. For every common share of the Company, the Operating Partnership has issued to the Company a corresponding common unit. The Company is the sole general partner of and, as of March 31, 2013, owned 95.2% interest in, the Operating Partnership’s units. The remaining interests in the Operating Partnership are limited partnership interests, some of which are owned by several of the Company’s executive officers who contributed properties and other assets to the Company upon its formation, and the remainder of which are owned by other unrelated parties. The Operating Partnership is required to make cash distributions to the Company in an amount sufficient to meet its distribution requirements. The cash distributions by the Operating Partnership reduce the amount of cash that is available for general corporate purposes, which includes repayment of debt, funding acquisitions or construction activities, and for other corporate operating activities.

On a quarterly basis, the Company’s management team recommends a distribution amount that must then be approved by the Company’s Board of Trustees in its sole discretion. The amount of future distributions will be at the discretion of the Company’s Board of Trustees and will be based on, among other things: (i) the taxable income and cash flow generated from Company’s operating activities; (ii) cash generated or used by the Company’s financing and investing activities; (iii) the annual distribution requirements under the REIT provisions of the Internal Revenue Code; and (iv) such other factors as the Board of Trustees deems relevant. The Company’s ability to make cash distributions will also be limited by the covenants contained in our Operating Partnership agreement and our financing arrangements as well as limitations imposed by state law and the agreements governing any future indebtedness. See “—Financial Covenants” above and “Item 1A – Risk Factors – Risks Related to Our Business and Properties – Covenants in our debt agreements could adversely affect our liquidity and financial condition” in Part I, Item 1A in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2012 for additional information regarding the financial covenants.

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Dividends

On April 23, 2013, the Company declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend will be paid on May 15, 2013 to common shareholders of record as of May 6, 2013. The Company also declared a dividend of $0.484375 per share on its Series A Preferred Shares. The dividend will be paid on May 15, 2013 to preferred shareholders of record as of May 6, 2013.

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. The Company 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.

FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairments of real estate assets, 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. Historically, the Company did not exclude impairments in its computation of FFO. However, on October 31, 2011, NAREIT clarified that the exclusion of impairment write-downs of depreciable assets in reported FFO was always intended and appropriate. As a result, the Company began excluding impairments from FFO in the fourth quarter of 2011 consistent with NAREIT’s guidance. In addition, the Company’s methodology for computing FFO adds back noncontrolling interests in the income from its Operating Partnership in determining FFO. The Company believes this is appropriate as common Operating Partnership units are presented on an as-converted, one-for-one basis for shares of stock in determining FFO per diluted share.

FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties, nor is it indicative of funds available to fund the Company’s cash needs, including its ability to make distributions. The Company presents FFO per diluted share calculations that are based on the outstanding dilutive common shares plus the outstanding common Operating Partnership units for the periods presented. The Company’s presentation of FFO in accordance with NAREIT’s definition, or as adjusted by the Company, should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of the Company’s financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of its liquidity.

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The following table presents a reconciliation of net loss attributable to common shareholders to FFO available to common shareholders and unitholders (amounts in thousands):

	Three Months Ended March 31,
	2013			2012
Net income (loss) attributable to First Potomac Realty Trust	$	2,022		$	(3,156)
Less: Dividends on preferred shares		(3,100	)		(2,664	)
Net loss attributable to common shareholders		(1,078	)		(5,820	)
Add: Depreciation and amortization:
Real estate assets		16,885			16,018
Discontinued operations		23			103
Unconsolidated joint ventures		1,352			1,484
Consolidated joint ventures		(51	)		(38	)
Impairment of real estate assets(1)		—			3,021
Net loss attributable to noncontrolling interests in the Operating Partnership		(54	)		(335	)
FFO available to common shareholders and unitholders		17,077			14,433
Dividends on preferred shares		3,100			2,664
FFO	$	20,177		$	17,097
Weighted average common shares and Operating Partnership units outstanding – diluted		53,106			52,805

⁽¹⁾  Impairment charges of $1.9 million are included in continuing operations in the Company’s consolidated statements of operations for the three months ended March 31, 2012. The remaining impairment charges for the three months ended March 31, 2012 are included in discontinued operations in the Company’s consolidated statements of operations.

Off-Balance Sheet Arrangements

The Company is secondarily liable for $7.0 million of mortgage debt, which represents its proportionate share of the mortgage debt that is secured by two properties it owns through unconsolidated joint ventures. Management believes the fair value of the potential liability to the Company is inconsequential as the likelihood of the Company’s need to perform under the debt agreement is remote. During the fourth quarter 2010, the Company entered into separate unconsolidated joint ventures with a third party to acquire 1750 H Street, NW and Aviation Business Park. During the fourth quarter of 2011, the Company entered into separate unconsolidated joint ventures to acquire Prosperity Metro Plaza and 1200 17^th Street, NW. The Company sold its 95% interest in 1200 17^th Street, NW during the third quarter of 2012. See footnote 6, Investment in Affiliates, in the notes to the Company’s condensed consolidated financial statements for more information.

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. In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company has historically entered into derivative agreements to mitigate exposure to unexpected changes in interest. Market risk refers to the risk of loss from adverse changes in market interest rates. The Company periodically uses derivative financial instruments to seek to manage, or hedge, interest rate risks related to its borrowings. The Company does not use derivatives for trading or speculative purposes and only enters into contracts with major financial institutions based on their credit rating and other factors. The Company intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency.

The Company had $954.9 million of debt outstanding at March 31, 2013. Of the total debt outstanding, $355.4 million was fixed rate debt and $350.0 million was variable rate debt that had been swapped to a fixed interest rate. The balance of the Company’s debt, $249.5 million, was variable rate debt consisting of borrowings under secured term loans, the unsecured revolving credit facility and a $22.0 million mortgage loan. The mortgage loan has a contractual interest rate of LIBOR plus 2.75%, with a 5.0% floor. LIBOR was 0.2% at March 31, 2013. A change in interest rates of 1% would result in an increase or decrease of $2.3 million in interest expense on its unhedged variable rate debt on an annualized basis.

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The table below summarizes the Company’s interest rate swap agreements as of March 31, 2013 (dollars in thousands):

Effective Date	Maturity Date	Notional Amount		Interest Rate Contractual Component	Fixed LIBOR Interest Rate
January 2011	January 2014	$	50,000	LIBOR		1.474	%
July 2011	July 2016		35,000	LIBOR		1.754	%
July 2011	July 2016		25,000	LIBOR		1.7625	%
July 2011	July 2017		30,000	LIBOR		2.093	%
July 2011	July 2017		30,000	LIBOR		2.093	%
September 2011	July 2018		30,000	LIBOR		1.660	%
January 2012	July 2018		25,000	LIBOR		1.394	%
March 2012	July 2017		25,000	LIBOR		1.129	%
March 2012	July 2017		12,500	LIBOR		1.129	%
March 2012	July 2018		12,500	LIBOR		1.383	%
June 2012	July 2017		50,000	LIBOR		0.955	%
June 2012	July 2018		25,000	LIBOR		1.1349	%
		$	350,000

For fixed rate debt, changes in interest rates generally affect the fair value of debt but not the earnings or cash flow of the Company. See footnote 10, Fair Value Measurements, in the notes to the Company’s condensed consolidated financial statements for more information on the fair value of the Company’s debt.

ITEM 4:    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its periodic reports pursuant to 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 our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

The Company carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a – 15(e) as of the end of the period covered by this report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1.    Legal Proceedings

The Company is subject to legal proceedings and claims arising in the ordinary course of its business. In the opinion of the Company’s management, as of March 31, 2013, the Company was not involved in any material litigation, nor, to management’s knowledge, is any material litigation threatened against the Company or the Operating Partnership.

Item 1A.    Risk Factors

As of March 31, 2013, 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, 2012.

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

Unregistered Sales of Equity Securities

The Company did not sell any unregistered equity securities during the three months ended March 31, 2013. During the three months ended March 31, 2013, no common Operating Partnership units were redeemed for either an equivalent number of the Company’s common shares or available cash.

Issuer Purchases of Equity Securities

During the three months ended March 31, 2013, certain of our employees surrendered common shares owned by them to satisfy their statutory minimum federal income tax obligations associated with the vesting of restricted common shares of beneficial interest issued under our 2003 Equity Compensation Plan, as amended, and our 2009 Equity Compensation Plan, as amended.

The following table summarizes all of these repurchases during the three months ended March 31, 2013.

Period	Total Number of Shares Purchased		Average Price Paid Per Share(1)		Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs		Maximum Number Of Shares That May Yet Be Purchased Under The Plans Or Programs
January 1, 2013 through January 31, 2013		—	$	—		N/A		N/A
February 1, 2013 through February 28, 2013		33,201		13.50		N/A		N/A
March 1, 2013 through March 31, 2013		—		—		N/A		N/A
Total		33,201		13.50		N/A		N/A

⁽¹⁾  The price paid per share is based on the closing price of the Company’s common shares as of the date of the determination of the statutory minimum federal income tax.

Item 3.    Defaults Upon Senior Securities

Not applicable.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

Not applicable.

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Item 6.    Exhibits

No.	Description
10.1	Amendment No. 2, dated as of February 8, 2013, to the Third Amended and Restated Revolving Credit Agreement, dated as of June 16, 2011, by and among First Potomac Realty Investment Limited Partnership, certain of its subsidiaries (as guarantors), KeyBank National Association, as a lender and administrative agent, and the other lenders and agents party thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 13, 2013).
10.2	Amendment No. 3, dated as of February 8, 2013, to the Term Loan Agreement, dated as of July 18, 2011, as amended, by and among First Potomac Realty Investment Limited Partnership, certain of its subsidiaries party thereto, KeyBank National Association, as a lender and administrative agent, and the other lenders and agents party thereto (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 13, 2013).
10.3*	Summary of Long-Term Incentive Compensation Program.
31.1*	Section 302 Certification of Chief Executive Officer.
31.2*	Section 302 Certification of Chief Financial Officer.
32.1*	Section 906 Certification of Chief Executive Officer.
32.2*	Section 906 Certification of Chief Financial Officer.
101	XBRL (Extensible Business Reporting Language). The following materials from the First Potomac Realty Trust’s Quarterly Report on Form 10-Q for the period ended March 31, 2013, formatted in XBRL: (i) Consolidated balance sheets as of March 31, 2013 (unaudited) and December 31, 2012; (ii) Consolidated statements of operations (unaudited) for the three months ended March 31, 2013 and 2012; (iii) Consolidated statements of comprehensive loss (unaudited) for the three months ended March 31, 2013 and 2012; (iv) Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2013 and 2012; and (v) Notes to condensed consolidated financial statements (unaudited). As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST POTOMAC REALTY TRUST
Date: May 6, 2013	/s/ Douglas J. Donatelli
	Douglas J. Donatelli
	Chairman of the Board and Chief Executive Officer
Date: May 6, 2013	/s/ Andrew P. Blocher
	Andrew P. Blocher
	Executive Vice President and Chief Financial Officer

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